Norwegian economic growth is really outstanding, first, the country was a very poor backwater then they happen a miracle in the North Sea, and start to chase their wildest dreams.
The journey to Norway is seriously noticeable, but also entirely untrue. The reality is that Norway was among the richer countries on the planet early on. No, Norway could not match American or British prosperity, but compared to the majority of countries in the world, Norway has long been among the richer and more developed ones. Don’t believe me? Here are some graphs showing historical economic development.
GDP per capita data for 1820 to 1940
You can see Norway could not match Britain, the US, and the more advanced great powers such as France. However, you may notice that Norway had moved past most southern and eastern European countries around 1900. By the start of WWII, Norway had almost caught up with France.
Let us compare Norwegian development relative to eastern European countries. Remember this was long before communism held back Eastern Europe, yet Norway has been ahead of most eastern European countries since the 1820s.
For southern Europe, the picture is a bit different. Keep in mind that Portugal and Spain had large colonial empires supplying them with sugar, spices, silver, and gold. It would have been strange if this did not give them any kind of economic advantage. What about Italy? Italy was the epicenter of the European renaissance from the 1400s, with well-known centers of arts, crafts, silk production, and trade in cities such as Florence, Milan, Bologna, and Venice. Greece was not just the center of science, culture, and trade in ancient times, but also at the heart of the Byzantine empire that lasted over a thousand years.
The Mystery of Norwegian Prosperity
The fact that by 1900 Norway should outcompete all these old civilizations with long and proud histories is a bit of a mystery. Let me clarify why: Throughout most of human history wealth and prosperity have been almost exclusively tied to the abundance of fertile land and favourable climate.
The situation changed in 1969 when the first drops of North sea oil become extracted hugely. There is a black gold rush that ensued soon In less than a decade Norway that’s generating more oil than any other country on this planet, slowly the oil centre become a Titan, Thousands of high-paying jobs got opened, on the sleepy fishing house become petroleum powerhouse, and that starts a billion dollar business
Norway had none of these advantages. Instead, the inhabitants of Norway had, at first glance, everything stacked against them:
- Norway is a pile of rock. Only around 2.7% of the land is suitable for agriculture, compared to around half of the area of the US. In Denmark, almost 70% of the land is agricultural.
- The topsoil is thin. Travel around farm fields shortly after planting and it looks like they are growing rocks rather than vegetables.
- The jagged terrain of mountains and deep valleys means arable land is scattered around, making it hard to create large efficient farms. The average farm in the US is 9 times larger than a regular Norwegian farm.
Thus, when the British economist Thomas Robert Malthus visited Norway in 1799, he did not expect to find a prosperous country. However, what surprised him was that such a barren northern country like Norway was not further behind Great Britain. He had expected to find destitution and poverty.
Sure, he found a country that lacked what you found in sophisticated well-developed economies, but he was surprised to find that average citizens in Norway actually looked stronger and better fed than those back in Britain. To Malthus, this was a puzzle as Norway completely lacked the foundation for a rich agricultural sector.
Why Was Norway Not As Backwards As It Should Have Been?
Interestingly, neither Norway nor the Netherlands could actually survive on domestic food production, but for entirely different reasons. The Netherlands is below sea level, making the soil wet and unsuitable for growing grain. For Norway, the problem was more the climate and thin topsoil, which made most of the country unsuitable for growing grain or potatoes.
For both countries, imports became the solution, namely large imports of grain. However, to be able to sustain large imports you also need large exports. The Dutch solution became animal husbandry. The lands were perhaps not suitable for grains but it was well suited to grow grass. Thus the Dutch would raise cows and sheep. The solution was thus to specialize in dairy products such as cheese. The Dutch would sell cheese and import grain from the Baltic.
A related strategy was followed in Norway. Sheep, goats, and reindeer could utilize Norwegian vegetation. However, it was not enough for Norway to become some kind of cheese-exporting powerhouse like the Netherlands. Instead, there were three other activities that were key to Norwegian prosperity:
- Fishing
- Timber and lumber
- Mining
These activities had the advantage that they could be carried out in the winter when there was nothing to do on the farm anyway. With this, the fortunes of Norway and the Netherlands got strangely interwoven. The Netherlands emerged as a major maritime trading nation and colonial empire builder. This required tons of lumber to build ships that could be sent around the world to get silk, spices, and porcelain. However, the Netherlands had very little forest. The solution became to import lumber from Norway.
And the Netherlands was not alone. Forest was getting depleted all over Europe in the age of sail. Britain also needs large quantities of lumber. Spain had almost cut down all its forests building the Spanish Armada to invade Britain.
It is important to note here that lumber was really the most important export in economic terms. Fishing was a good second. Fish would get dried or salted for export abroad.
While mining was important it was not nearly as important as in neighboring Sweden, which had substantial mineral resources — especially high-quality iron ore. It is important to note here that neither Sweden nor Norway necessarily had more minerals than many other countries. What made both countries capable of exporting metals was the abundance of the forest. Why does forest matter?
Because mineral coal from mines could not be utilized for metal smelting until far into the 1800s. Mineral coal simply has a lot of impurities that lead to low-quality iron when used for smelting. Thus for hundreds of years, iron smelting relied on charcoal that was obtained from burning wood under low oxygen conditions.
Why Did Norway Profit More Than Others From Lumber Exports?
There are some missing pieces in this story. Norway is hardly alone in having forests. In fact, Sweden, Finland, and Russia actually have much larger forests. Yet in terms of export value, these countries were long behind Norway. Why?
To understand that, we need to understand just how important water-based transport was before railroads came to dominate transportation. Shipping a sack of sugar from Havana, Cuba to Oslo, Norway cost less money than shipping the same sack about 50 km inland on horse and carriage from Oslo to Eidsvoll (“Nasjonens Velstand” page 69).
Thus the mountains and fords that sabotaged Norwegian agriculture gave an advantage in timber transport. Timber could be moved down numerous rivers. In the end, one could build sawmills powered by water wheels that could turn the timber into lumber for export. The fjords gave access points to a lot of the interior of the country for ships. Thus a lot of Norwegian forests became accessible by water allowing highly efficient ship transport to send lumber cheaply to the Netherlands and Britain.
Thus, despite having vastly more forest, Russia could not compete. It did not have mountains that could help move the timber, nor fjords that would allow easy access for ships. Without waterfalls, Russians could not power sawmills cheaply.
Sweden could in theory compete as it has more mountains and streams. However, Norway offers more ice-free harbours and shorter ocean travel to the Netherlands and Great Britain. Thus lumber export from Norway got much bigger than from Sweden. For Sweden, iron and iron-based products became far more important.
Synergy Effects
Norwegian economist Erik S. Reinert, author of How Rich Countries Got Rich and Why Poor Countries Stay Poor, makes some strong arguments about the importance of synergies in industrial development.
His point is that industries don’t just develop in isolation. They emerge as a result of other industries. One of his examples is from Delft, the Netherlands, in the 1600s. It supplied the merchant marine with various products such as canvas for sails, linseed oil (varnishing wood), and binoculars. One needed brass instrument makers for things like sextants, compasses, etc.
These industries created a foundation for the arts and science. Lens-making led to the Camera obscura, used by artists.
You can view the camera obscura as a very primitive form of camera. In a regular camera, light is projected onto a film through a lens, but a camera obscure would project an image with a lens onto a canvas. An artist would then have to trace out the image and color it by hand. However, being able to follow a projection made it much easier to produce photorealistic art.
Economic Structure of Norway
A lot of the unique economic structures that developed in Norway with aspects reminiscent of socialism, developed in large part due to how the population was so spread out and lacked concentration. The way that farmland was scattered around, fishing, forestry, etc., meant that people were scattered around in tiny towns all over the country and close to various natural resources.
It not only meant specialization was hard but that it was also hard for concentrated wealth to emerge. In larger cities in continental Europe, one can see how whole families of rich capitalists could develop in larger population-dense cities. In tiny towns, this is harder.
Thus cooperation between many people was always important in Norway. Things like cooperatives and joint ventures with the state often played an important role. For example, small communities all along the Norwegian coast would build ships to join in shipping as this was very profitable. The whole town might get involved in financing and building a ship at a small local shipyard.
Farmers might deliver the timber to build the ship in exchange for partial ownership. Seamen and captains would sign up in exchange for partial ownership. Owners of sawmills might cut the timber in exchange for ownership of the ship. Thus, when looking at tax records of this time period, it will in certain places look as if pretty much everybody is a partial owner of a ship.
This was an industry that put a mark on the whole country, not just because of the economic investment but also due to the large number of Norwegians who worked as sailors. I remember growing up with stories from my grandparents about their brothers and fathers who had all sailed the seven seas. It was a common thing. Everybody had seamen in their family.
Banking was another sector that developed differently in Norway. The lack of big capitalists caused credit union-style banks to dominate Norway.
Hydropower plants in Norway often got built through dugnad. The people in a community would contribute labour to help build a power station together with municipal and state investments. The idea was that by contributing, you and your town would benefit from getting electric power.
This is also how phone networks were built later in many Nordic countries. This has been attributed to one of the reasons why phone networks spread so much faster in Nordic countries than in many other European countries.
In many ways, technologies such as the railroad and steamships that had helped Norway eventually ended up undermining the Norwegian economy.
1920s Postwar Crisis
During the war years, the Norwegian government began spending like a drunken sailor on infrastructure, hydropower plants, and many other things. Ironically Norway got itself into more trouble than many of the countries which were actually at war.
At the end of the war, the countries which had been at war could resume selling their goods and thus improve their economy. For Norway, it became the opposite. Suddenly massive profits gained from the war were gone. Prices of Norwegian exports dropped like a stone. Meanwhile, Norwegians began importing massive quantities of products they had been denied during the war such as sugar and coffee. The result was a perfect storm. Companies and municipalities had borrowed too much. People could not repay debts to the banks and Norway developed one of the biggest financial crises in its history.
Unemployed rose rapidly and Norway got politically radicalized which makes me angry at the hedonistic lifestyle of the rich during the war years while regular people had suffered. There was also a fall in agricultural prices, causing widespread bankruptcy among farmers.
Labour Crisis
All the problems and radicalization led to countless labor conflicts. Both employers and employees suffered from repeated conflicts. The top came in 1931 with a lockout involving 60 000 employees. 7.5 million workdays lost. It would take more than 50 years combined for that many days to get lost in strikes and lockouts.
Both sides wanted peace and in 1935 the confederation of unions (LO) and confederation of employers (NHO) created an agreement that we see as the constitution of the work-life. It outlined the rules of engagement and a system for how each party would negotiate in the future and handle disputes. This brought peace and prosperity to the labor market.
A Bright Spot — Shipping
Everything seemed to go to hell but there were some bright spots. Norwegian shipping strengthened its position, thanks to the kickstart from WWI. Former foreign shipping cartels had been broken due to the war giving Norway access to bigger markets.
That oil company began letting third parties take care of oil transport began to benefit Norway. Oil tankers were easier than other shipping markets as they required less elaborate networks to coordinate trade. This benefitted Norwegian conditions which often operated fairly small companies.
When WWI began Norway had one of the oldest most outdated merchant fleets. When WWII broke out Norway had the world’s most modern merchant fleet. Norway had gone from having 3% of the world’s merchant fleet in 1919 to 7% in 1939.
This meant that shipping became an important part of the economy, making up 12% of Norwegian GDP. To get a sense of how much that is, we can compare it with the Norwegian oil industry today. In 2019 it constituted 14% of Norwegian GDP.
Problems in Electrochemical Industry
Yet the power-hungry industry still probably played a larger role in the economy. Few ships got built in Norwegian shipyards. Only 2%. Labour disputes and high Norwegian salaries made shipbuilding in Norway unattractive.
Power-hungry industries such as the electrochemical industry drove more local employment and business. A whole 25% of Norwegian exports came from power-hungry heavy industry in 1939. Again we can compare with the oil industry today which made up 33% of Norwegian exports in 2019.
Yet the postwar period was not great for this industry because the Haber–Bosch process developed by German chemist Fritz Haber, made it possible for countries without large amounts of cheap electric power like Norway to produce fertilizer.
Norway Falls Behind Sweden
Despite Sweden in many ways being a more developed country with a strong capitalist class, Norway did for a long time keep up well with Sweden in economic development.
However, the 1920s crisis as you can see on the GDP per capita plot below, led to Norway falling behind Sweden for many decades to come.
1935 — The Rise of Social Democracy
The crisis of the 1920s eventually get under control. By 1933 the economy is getting back on track. In 1933 investments in schools, roads, and power stations started picking up again.
But in 1935 something highly unusual happened: The Norwegian Labour party ceases power after reaching an agreement with the Farmer’s party. Today such coalitions are not usual, so what made this unusual?
The Labour party and the Farmer’s party were bitter enemies. The Norwegian Labour party had long been a revolutionary party, which for a period had been part of Comintern. Most Norwegian farmers owned their land and were naturally fearful of a party with a political goal of ending private property. Meanwhile, the labor party did not trust the farmers seeing them as reactionaries supporting the Burgess.
However, the ideas of economist John Maynard Keynes had spread and farmers saw themselves getting squeezed by whole sellers in the cities. Both the Labour party and Farmers saw the benefits of more state power to benefit farmers and workers. Thus they joined forces, giving farmers guaranteed minimum prices for their products.
Ironically the cooperation which brought farmers and workers together did not last very long. A year later, Labour stayed in power through cooperation with Norwegian Liberals. Ironically they were also old enemies. Labour had earlier tried to knock over a government led by the liberals.
The significance of 1935 is that it was the beginning of decades of Labour party rule in Norway, which would come to define and shape Norwegian society, culture, and economy.
The Labour party government took pride today in running balanced budgets. The opposition had always tried to paint them as reckless. Thus labor sought to always balance budgets. They achieved their goal of expanding the welfare system without increasing loans by increasing taxes. A number of areas got improved and expanded under the labour rule:
- Health insurance got expanded to cover a large section of the population. It was not a full government coverage today but a combination of government, municipalities, employers, and employees which had to pay.
- Welfare benefits to the blind and disabled.
- Means-tested pensions to the elderly.
- Unemployment benefits for all unemployed workers.
The end result was the beginning of the famous Nordic welfare state was starting to take shape. The lesser-off people were starting to see a lot of improvements in their lives.
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