A sideways look at economics
“Its typically Norwegian to be good” is the somewhat awkward direct translation of a quote from Gro Harlem Brundtland, the former Norwegian prime minister. ‘Good’ in this case should be read in the same way as ‘being good at something’ rather than being especially moral.[1] Brundtland originally made this remark in her 1992 New Year’s Eve speech, when comparing Norwegian international sporting achievements with her ambitions for Norwegian businesses struggling with the ongoing recession. It has since become a piece of folk wisdom, half self-deprecating, half boastful, that we Norwegians say on warranted occasions — which can be anything from Norway winning the most medals in the Winter Olympics, to when we get beyond drunk while on holiday in Spain, to the horror of everyone except the British who are probably even drunker.
By most of the metrics we use to measure these types of things (life expectancy, health, GDP per capita, gini coefficients and self-evaluated happiness) Brundtland was correct: it is typical of Norway ‘to be good’. Whether this is due to some innate superiority in Norwegians however, is highly doubtful.[2] Rather, we’ve been blessed with pretty extraordinary circumstances, such as vast amounts of natural resources: oil, of course, but also water, which has been harnessed into cheap and plentiful hydro-electric power since the early 20th century — allowing Norway (ironically, given our oil wealth) to also rank highly on measures of ‘greenness’. We also have a broadly temperate climate, even if we could use a bit more sun in winter; and we have good institutions, a factor which can’t necessarily be termed pure luck but is still affected by exogenous factors such as geography.[3]
That being said, while Norwegians overall can’t be said to be more typically ‘good’ or ‘less good’ than anyone else, we’ve had some pretty good policymakers and even politicians (credit where credit’s due, after all), whose policies have played a large part in allowing us to benefit from all our luck.
The start of what we in Norway call the ‘Oil Adventure’ began when natural gas was discovered in the Groningen field off the coast of the Netherlands in 1959. This find held out the prospect of possible oil and gas reserves in other areas of the North Sea, much to the interest of other North Sea countries and international oil and gas companies. Step one, however, was delineating jurisdictions and in 1965 an agreement was reached between the UK, Norway, Denmark, and the Netherlands to observe the median line principle enshrined in the 1958 Geneva Convention on the Continental Shelf. Already here we see luck and circumstance at play as, while the Norwegian authorities unilaterally laid claim to territories covered by the median line principle in 1963, this claim might have been less easily accepted by the other countries were there more belief in oil reserves being present in the area.[4] There is also a story that Norway owes its great oil wealth to the former Danish foreign minister Per Hækkerup’s over-fondness for whisky; and that if it hadn’t been for his drunken generosity when meeting his Norwegian counterpart to discuss the borders, Ekofisk (the vast oil field discovered in 1969) would have fallen into Danish hands. This, however, is a myth — although an enduring one, helped by Hækkerup’s reputation as a man “not averse to a drink”.[5]
With jurisdictions drawn up, the international oil companies were invited in and the search for oil began. Terms for the companies were favourable at this initial stage, with lower tax rates than for other foreign investments and a lower royalty rate than used elsewhere — the idea being that it was important to attract as much interest as possible, to maximise the chances of finding anything. While lenient, the rights given to the oil companies had covenants securing Norwegian public ownership to the potential resource, with a quarter of the initial area reverting to the state three years into the six year concession. A further quarter was to be ceded three years after the end of the six-year concession period if the firm chose to keep the area. This system was similar to how the hydrological resources had been managed at the start of the century, when resources were to be returned to the government free of charge after the concessional rights had terminated, and were set up in this way to ensure that Norwegian resources would not fall into the hands of private ownership, but rather benefit the Norwegian state and by extension its people.
In the early years developing North Sea oil was mostly a foreign venture, in part by design as Norwegian participation in the first licencing rounds was not encouraged;[6] but the idea was always to build a home-grown petroleum industry. The discovery of Ekofisk and the dawning reality that there were indeed large Norwegian petroleum resources, further supported this; and we see through the 1970s the outlines taking form of the policies which would define the Norwegian oil experience. The parliamentary notice 25 from 1974 constitutes a good summary laying out six guiding principles for the role of the petroleum sector in Norwegian society:[7]
i) That the largest possible share of incomes or “rents” from the oil should go to the state and through the state be redistributed to all of Norwegian society
ii) Establishment of a state-owned petroleum company (this had already happened two years prior with the creation of Statoil, now Equinor)
iii) Establishment of a strong national supply industry
iv) Establishment of government regulatory authorities responsible for both societally defensible resource administration and that extraction was done in a safe and environmentally secure manner
v) That the industry, which generally was known for its opposition to labour unions, set up the same type of cooperation between employers, unionised employees and the state which characterised other parts of Norwegian industry
vi) An ambition that extraction and investment pace should be “moderate”, to avoid crowding out of other industries and ensure the resources would last for a long time
Seen like this it all seems quite obvious; that a natural resource should benefit society as a whole, that ensuring this requires national control which in turn means developing national capabilities, that the resource should be managed securely and fairly, and that steps should be taken to avoid negative side effects like ‘Dutch disease’ dynamics, where the rapid rise of one sector causes other sectors to shrink. However, Norway’s diverging experience from other countries who’ve discovered natural resources would indicate that this is all easier said than done, and perhaps that saying it in the first place is not a given.
Its hard to say whether Norway actually has avoided Dutch disease: some symptoms may be there, like a high real exchange rate relative to fundamentals, at least prior to 2014 when oil prices fell.[8] Domestic costs also lie above that of trading partners, although the gap has gradually narrowed since 2012. However, going back to the early 90’s, evidence seems unclear on whether non-oil manufacturing activity has declined. Its also tricky to know whether things that look like Dutch disease symptoms are that in actuality, or whether they are developments driven by other factors. Manufacturing’s lower share of overall economic activity is, after all, not a Norwegian phenomena alone. There’s also research positing that rather than a crowding-out from increased oil activity, there’s been a crowding-in, with productivity also improving for non-oil manufacturing industries.[9]
However, while the jury might still be out on whether Norway’s managed to escape Dutch disease completely, it seems to have done pretty well at escaping it so far, some mild symptoms notwithstanding. Two policies have probably contributed to this: one is the Norwegian system for wage settlement, ‘frontfagsmodellen’,[10] and the second is point six in the above list, which in the 1990’s was further formalised by the creation of the sovereign wealth fund and in 2001 by the introduction of the Budgetary Rule ‘Handlingsregelen’.
The sovereign wealth fund, formally known as the Government Pension Fund Global[11] aims to ensure the long-term management of revenue from Norway’s oil and gas resources so that this wealth may benefit both future and current generations, as well as avoiding an overheating of the Norwegian economy by investing oil revenues in global equity markets. This is complemented by the Budgetary Rule, which limits annual government spending of the fund to 3 per cent of the fund’s beginning-of-year value, although high returns often mean that less than the limit is spent.[12] A clever rule to curb spending temptations, it might be further improved if there were also clear directives on what the money could be spent on (long-term investments seem the obvious candidate). As it stands, spending largely gets spread out over the general government budget, which is useful when reaching inter-coalition budget agreements, but less helpful in, for example, motivating the reforms needed to fund the coming rise in dependency ratios. A favourite pastime of Norwegian political parties is to accuse one another of budgetary profligacy, describing one side’s spending as irresponsible, while explaining how their own oil-money spending was warranted and necessary. Regardless of one’s position, the thing that seems clear from the continuously rising (at least until very recent years), structural, oil-corrected budgetary deficit is that it’s hard not to spend money when you have it.
Overall, so far so good, it seems, but will it continue to be ‘typically Norwegian to be good’? The vision shown by politicians and policy-makers in the 1970s seems sadly lacking, but perhaps I’m a simply falling into the nostalgia expressed in the Norwegian saying ‘alt var bedre før’ — similar to English yearning for the ‘good old days’. One thing is certain: whether or not it is ‘typically Norwegian to be good ’ it has certainly been typically Norwegian to be lucky, and we Norwegians should hope it stays that way.
Pic: Knudsens Fotosenter / DEXTRA Photo
[1] Although Norwegian propaganda would probably also tell you that ‘good’ in the moral sense of the word is also something typical of Norwegians.
[2] Just to be clear, I do not think Brundtland thinks this either.
[3] This literature review by the European Bank for Reconstruction and Development includes several studies that show that countries with ample sea borders and the opportunity for diversified trade tend to develop stronger economic institutions. https://www.ebrd.com/documents/oce/what-determines-the-quality-of-economic-institutions.pdf
[4] https://ekofisk.industriminne.no/en/continental-shelf-divided-up/
[5] https://danmarkshistorien.dk/vis/materiale/myte-foraerede-haekkerup-nordsoeolien-vaek-pga-fuldskab
[6] This was motivated by wanting to protect foreign currency reserves; if Norwegian firms were to be the main players they would, at least to begin with, need to hire foreign specialist firms with knowledge of the petroleum sector, leading foreign currency to leak out of the economy rather than come in.
[7] https://snl.no/Norsk_oljehistorie
[8] Causing a local recession in Norway’s western municipalities where oil was the main industry. Oil prices have since picked up, but the NOK has not.
[9] https://www.sciencedirect.com/science/article/pii/S001429211930145X
[10] Where export-dependent industries negotiate their wages first, and this becomes the ceiling for wage negotiations in the rest of the economy. This system allows non-oil export industries to remain competitive, as well as ensuring a fairly compressed wage distribution — this is one of the factors behind Norway’s reasonably low income inequality. Denmark and Sweden have a similar system to Norway, with industry setting the wage standard.
[11] Currently valued at around 17.6 trillion NOK or USD 1.6 trillion, see the real-time counter at https://www.nbim.no/
[12] The limit has been chosen to equal the expected minimum annual return of the fund, with the idea that by not spending more than this, the fund will never be depleted and can thereby benefit all future generations.
[13] Although the government has so far declined to make a phase-out strategy, despite this being recommended by their own climate commission last year.
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