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Economy of Norway

From Academic Kids

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GDP_Norway_1979_2004.JPG
Source: Central Bureau of Statistics, Norway

Although sensitive to global business cycles, the economy of Norway has shown robust growth since the start of the industrial era. Shipping has long been a mainstay of Norway's export sector, but much of Norway's economic growth has been fueled by an abundance of natural resources, including petroleum exploration and production, hydroelectric power, and fisheries. Agriculture and traditional heavy manufacturing have suffered relative decline compared to services and oil-related industries, and the public sector is among the largest in the world as a percentage of the overall gross domestic product.

Contents

History

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GDP_Norway_1865_to_2004.PNG
Source: Central Bureau of Statistics

Pre-industrial revolution

Prior to the industrial revolution, Norway's economy was largely based on agriculture and fishing. Norwegians typically lived under conditions of considerable scarcity, though famine was rare. Except for certain fertile areas in Hedemarken and stfold, crops were limited to hardy grains, such as oats, rye, and barley; and livestock to sheep, goats, cattle, pigs, and some poultry; in places this was complimented with hunting. In areas of Northern Norway, the Sami subsisted on nomadic herding of reindeer. Fishing all around the coast was dangerous work, though fish such as herring, cod, halibut, and other cold water species was found in abundance. The introduction of the potato to Norway provided considerable relief for Norwegians.

The economic conditions in Norway did not lend themselves to the formation of feudal system, though several kings did reward land to loyal subjects who became knights. Self-owning farmers were - and continue to be - the main unit of work in Norwegian agriculture, but leading up to the 19th century farmers ran out of land available for farming. Many agricultural families were reduced to poverty as tenant farmers, and served as the impetus for emigration to North America.

Merchant and civil servant classes were small in Norway. In some cities, notably Bergen, Norway, trading centers grew up around import and export of various goods. Centers for shipping grew along the coast, and a small number of shipping magnates were among the first truly wealthy people in Norway.

Industrial revolution

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Capital_formation_Norway_1865_2003.PNG
Source: Norwegian Central Bureau of Statistics

Aside from mining in Kongsberg and Rros, industrialization came with the first textile mills that were built in Norway in the middle of the 19th century. But the first large industrial enterprises came into formation when entrepreneurs built plants around sources of hydroelectric energy. Norsk Hydro was founded by Sam Eyde, and industrial communities arose in such places as Rjukan, Odda, and elsewhere.

In 1910, the industrial output exceeded agricultural output in Norway. As the benefits became apparent and capital available, manufacturing facilities such as dairies, fish refineries, paper mills, metal refineries, furniture, etc., grew up. To a great extent, industrialization became a matter of regional politics, leading to the founding of banks to serve those needs.

Industries also offered employment for a large number of individuals who were displaced from the agricultural sector. As wages from industry exceeded those from agriculture, the shift started a long-term trend of reduction in cultivated land and rural population patterns. The working class became a distinct phenomenon in Norway, with its own neighborhoods, culture, and politics.

Social democratic reforms and the welfare state

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Public_vs_private_consumption_Norway.PNG
Source: Norwegian Central Bureau of Statistics

The radical roots of the Socialist movement in Norway were based on dangerous working conditions, exploitive labor relations policies, and the demand for collective bargaining. As socialism became part of the mainstream labor movement, it also became part of the mainstream political discourse.

After World War II, the Norwegian Labour Party, with Einar Gerhardsen as prime minister, embarked on a number of social democratic reforms aimed at flattening the income distribution, eliminating poverty, ensuring social services such as retirement, medical care, and disability benefits to all, and putting more of the capital into the public trust.

As a result, the public sector grew as a percentage of the overall economy. Highly progressive income taxes, the introduction of value-added tax, and a large number of special surcharges and taxes made Norway one of the heavily taxed economies in the world. Authorities were particularly inclined to tax discretionary spending, applying special taxes on automobiles, tobacco, alcohol, cosmetic items, etc. Since assets were also subject to taxation, there were individuals who ended up with tax liabilities well in excess of their gross income.

Norway's long-term social democratic policies, extensive governmental tracking of information, and the homogeneity of its population lent themselves particularly well for economic study, and academic research from Norway proved to made significant contributions to the field of macroeconomics during this era. When Norway became a petroleum-exporting country, the economic effects came under further study.

Petroleum and post-industrialism

Oil-exporting country

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Oil_production_Norwegian_North_Sea.PNG
Source: Norwegian Central Bureau of Statistics

In May of 1963, Norway asserted sovereign rights over natural resources in its sector of the North Sea. Exploration started on July 19, 1966, when Ocean Traveler drilled its first hole. Initial exploration was fruitless, until Ocean Viking found oil on August 21, 1969. By the end of 1969, it was clear that there were large oil and gas reserves in the North Sea. The first oil field was Ekofisk, produced 427,442 barrels of crude in 1980. Since then, large natural gas reserves have also been discovered.

Against the backdrop of the Norwegian referendum to not join the European Union, the Norwegian Ministry of Industry, headed by Ola Skjk-Brk moved quickly to establish a national energy policy. Norway decided to stay out of OPEC, keep its own energy prices in line with world markets, and spend the revenue - known as the "currency gift" - wisely. The Norwegian government established its own oil company, Statoil, and awarded drilling and production rights to Norsk Hydro and the newly formed Saga Petroleum.

The North Sea turned out to present many technological challenges for production and exploration, and Norwegian companies invested in building capabilities to meet these challenges. A number of engineering and construction companies emerged from the remnants of the largely lost shipbuilding industry, creating centers of competence in Stavanger and the western suburbs of Oslo. Stavanger also became the land-based staging area for the offshore drilling industry.

Reservations about the European Union

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Exports_and_imports_as_pc_of_GDP_1865_2003.PNG
Source: Norwegian Central Bureau of Statistics

On September 24 and 25, 1972, the Norwegian parliament put to a referendum the question whether Norway should join the European Union. The proposal was turned down with a slim margin. The Norwegian government proceeded to negotiate a trade agreement with the EU that would give Norwegian companies access to European markets. Over time, Norway renegotiated and refined this agreement, ultimately joining the European Free Trade Association and the European Economic Area.

Although Norway's trade policies have long aimed at harmonizing its industrial and trade policy with the EU's, a new referendum in 1994 gave the same result as in 1972, and Norway remains the only Scandinavian country outside of the EU.

Although much of the highly divisive public debate about EU membership turned on political rather than economic issues, it formed economic policy in several important ways:

  • Both politicians and the public came to terms with the fact that Norway's economic development was dependent on taking advantage of its comparative advantage by specializing in certain areas for export and relying on import for everything else. This has had a significant effect on Norway's agricultural policy, which has been reshaped to address population patterns rather than self-sufficiency.
  • The proceeds from oil revenue could not fuel private or public consumption if Norway were to sustain its prosperity when oil reserves run out.
  • In order to participate in European markets, Norway has had to open its domestic markets to European imports. Although some pricing and distribution issues (e.g., alcohol and automobiles) remain unresolved, Norway's consumer, capital, and employment markets are increasingly approaching those of Europe in general.

Most Norwegian politicians and the public agree that Norway's economic policy should be based on a de facto membership in the European Union. Norwegians have sought accommodations on a range of specific issues, such as products from fish farms, agricultural products, emission standards, etc., but these do not appear to differ substantially from those sought by bona fide EU members. It is expected that the issue of membership will be brought to a referendum again at some point.

Post-industrial economic developments

Several issues have dominated the debate on Norway's economy since the 1970s:

  • Cost of living - Norway is among the most expensive countries in the world, as reflected in the Big Mac index and other indexes. Historically, transportation costs and barriers to free trade had caused the disparity, but in recent years, Norwegian policy with respect to labor relations, taxation, etc., have contributed signficantly.
  • Competitiveness of "mainland" industries - the high cost of labor and other structural features of the Norwegian environment have caused concern about Norway's ability to maintain its cost of living in a post-petroleum era. There is a clear trend toward ending the practice of "protecting" certain industries (vernede industrier) and making more of them "exposed to competition" (konkurranseutsatte). In addition to interest in information technology, a number of small- to medium-sized companies have been formed to develop and market highly specialized technology solutions.
  • The role of the public sector - the ideological divide between socialist and non-socialist views on public ownership has decreased over time. The Norwegian government has sought to reduce its ownership over companies that require access to private capital markets, and there is an increasing emphasis on government facilitating entrepreneurship rather than controlling (or restricting) capital formation. A residual distrust of the "profit motive" persists, and Norwegian companies are heavily regulated, especially with respect to labor relations.
  • The future of the welfare state - since World War II, successive Norwegian governments have sought to broaden and extend public benefits to its citizens, in the form of sickness and disability benefits, minimum guaranteed pensions, heavily subsidized or free universal health care, unemployment insurance, etc. Public policy still favors the provision of such benefits, but there is increasing debate on making them more equitable and needs-based.
  • Urbanization - for several decades, agricultural policy in Norway was based on the premise of minimal self-sufficiency. In later years, this has given way to a greater emphasis on maintaining population patterns outside of major urban areas. The term "district policy" (distriktspolikk) has come to mean the demand that old and largely rural population centers should be allowed to persist, ideally by providing them with a sustainable economic basis.
  • Taxation - the primary purpose of the Norwegian tax system has been to raise revenue for public expenditures; but it is also viewed as a means to achieve social objectives, such as redistribution of income, reduction in vices such as alcohol and tobacco consumption, and as a disincentive against certain behaviors. Three elements of the tax system seem to attract the most debate:
    • Progressive taxation. At one time one of the most aggressive in the world, the top marginal tax rate on income has been decreased over time. In addition, Norwegians are taxed for their stated net worth, which some have argued discourages savings.
    • Value-added tax. The largest source of government revenue. The current standard rate is 25%, food and drink is 11%, and movie theater tickets and public transportation 7%.
    • Special surcharges and taxes. The government has established a number of taxes related to specific purchases, including cars, alcohol, tobacco, and various kinds of benefits.

Economic structure

Issues for future growth

Statistics

GDP: purchasing power parity - $171.6 billion (2003 est.)
GDP - real growth rate: 0.5% (2003 est.)
GDP - per capita: purchasing power parity - $37,700 (2003 est.)
GDP - composition by sector:
agriculture: 1.7%
industry: 34%
services: 64.3% (2002)
Population below poverty line: NA%
Household income or consumption by percentage share:
lowest 10%: 4.1%
highest 10%: 21.2% (1991)
Inflation rate (consumer prices): 2.6% (2003 est.)
Labor force: 2.4 million (2000 est.)
Labor force - by occupation: services 74%, industry 22%, agriculture, forestry, and fishing 4% (1995)
Unemployment rate: 4.5% (2003 est.)
Budget:
revenues: $71.7 billion
expenditures: $57.6 billion, including capital expenditures of $NA (2000 est.)
Industries: petroleum and gas, food processing, shipbuilding, pulp and paper products, metals, chemical, timber, mining, textiles, fishing
Industrial production growth rate: -1% (2003 est.)
Electricity - production: 120,100 GWh (2001 est)
Electricity - production by source:
fossil fuel: 0.4%
hydro: 99.3%
nuclear: 0%
other: 0.4% (2001)
Electricity - consumption: 115,300 GWh (2001)
Electricity - exports: 7,162 GWh(2001)
Electricity - imports: 10,760 GWh (2001)
Agriculture - products: barley, other grains, potatoes; beef, milk; fish
Exports: $67.27 billion (f.o.b., 2003 est.)
Exports - commodities: petroleum and petroleum products, machinery and equipment, metals, chemicals, ships, fish
Exports - partners: United Kingdom 19.4%, Germany 12.4%, France 11.5%, Netherlands 9.3%, United States 8.6%, Sweden 7.3% (2002)
Imports: $40.19 billion (f.o.b., 2003 est.)
Imports - commodities: machinery and equipment, chemicals, metals, foodstuffs
Imports - partners: Sweden 15.7%, Germany 13.4%, Denmark 8.1%, United Kingdom 7.4%, United States 6.2%%, France 4.8%, Netherlands 4.14% (2002)
Debt - external: $0 (Norway is a net external creditor)
Economic aid - donor: ODA, $2.1 billion (2003)
Currency: 1 Norwegian Krone (NOK) = 100 re
Exchange rates: Norwegian kroner (NKr) per US$1 - 6.7256 (May 2004), 8.0129 (January 2000), 7.7992 (1999), 7.5451 (1998), 7.0734 (1997), 6.4498 (1996), 6.3352 (1995)
Fiscal year: calendar year

See Also

External links

  • OSE ALL SHARE GI (http://finance.yahoo.com/q/bc?s=%5EOSEAX&t=5y&l=off&z=m&q=l&c=%5EGSPC)
  • A substantial part of this article has been copied from the Bureau of Public Affairs, U.S. Department of State, country overview for Norway (http://www.state.gov/r/pa/ei/bgn/3421.htm).


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