How Norway Got Insanely Rich

How Norway Got Insanely Rich- Economics Lessons
Norway is one of the Richest Nations on Earth, but its not exactly obvious why. Its large quantities of oil may be your first conclusion, but most oil rich small nations suffer from severe economic and social issues. How did Norway avoid the oil curse to become the economic powerhouse it is today and does Norway possess the perfect economy?

In the late 18th Century one of the great historical economists Thomas Malthus toured
the picturesque but climatically harsh Danish controlled Norway.
The tiny population that resided lived a meager existence subsisting off of their small farms
and whatever they could catch in the sea.
The winters shrouded the country in near darkness for half the year and the amount of land suitable
for agriculture was minute at best.
Efficient Travel in this mountainous country was almost impossible, Towns were remote and
isolated, and its citizens were poorly educated if at all.
Long gone was the age of viking conquests bringing their riches and plunders back with
them.
Norway was not rich but in fact very poor.
In the decades after the visit things got even worse, plagued with wars, blockades and
embargos.
Norway’s economy was in ruins and famines spread across the land, Norway in a lot of
ways was destined to remain undeveloped and unimportant.
Yet Today if you don’t include micronations, Norway is the second richest country on earth.
One of the happiest, the 7th healthiest and it’s ranked the most democratic nation.
In almost every metric that measures the prosperity of a nation, Norway is near the top, and all
of its citizens are technically quarter millionaires.
But how?
Many countries have tried to do what Norway has done and ended up even more impoverished
than before.
How did Norway become so Insanely rich, while other nations failed, and is Norway’s economy
just too good to be true?
These
are the counties with the world’s largest reserves of oil.
Collectively they account for 84.9% of the remaining supply yet they only make up 7.9%
of the world’s GDP.
Venezuelahas almost a fifth of the total yet it’s the poorest country in the western hemisphere.
In Fact most countries on this list have severe economic or social issues.
Saudi Arabia, Iran, Iraq, Kuwait, and the UAE all suffer from Human Rights abuses and
extreme inequality, Russia has been in decline for decades and Libya has been in a state
of anarchy since Gaddafi was overthrown in 2011.
In fact, there appears to be a trend between how much oil there is per citizen and how
undemocratic the country is.
This is what many economists call the oil curse.
Today Oil and Gas accounts for 27% of all energy generation.
Even as the world inevitably tries to move toward better and cleaner sources of energy,
oil today and for a long time will be a necessity.
With Oil nearing its highest price ever you would think that having large quantities of
it would be a blessing for a nation’s economy.
The problem with oil is that it’s like winning the lottery.
All asuddent sometimes overnight nations start to get inundated with mountains of money,
they use it to lower taxes and dramatically increase spending.
As the oil industry starts to snowball into the most powerful sector of the economy it
starts to box out and overshadow all other industries.
As more oil is exported the demand for the local currency increases, boosting citizens
buying power abroad but also crippling domestic manufacturing.
New politicians promise to spend more to get elected and dictators do the same to remain
in power, choosing to spend today instead of saving for tomorrow.
Often the government becomes corrupt, the wealth is funneled to a select few and before
you know it the economy is rich on paper yet the average citizen suffers.
But there seems to be a single extraordinary exception to the oil curse.
As you might have guessed, that country is Norway.
But why didnt oil destroy Norway’s economy, what makes it fundamentally different from
Libya, Venezuela, Saudi Arabia, and all the other small oil exporting nations?
About a hundred years after Mathus’ Visit Norway had just gained its independence when
it separated from Sweden.
it was still uneducated and still poor.
Its economy was centered around shipping raw resources like timber, fish and minerals and
it had little in common with its rapidly industrializing southern neighbors.
But it did have some things going for it.
Over the prior half century, in the age of free international trade Norway built the
world’s 4th largest merchant fleet, gaining them valuable expertise in shipping,trade
and technology, And being an important source of forign currency.
Norway had also coalesced a strong parliamentary system during its struggles for independence
and with it arose universal suffrage, workers rights and strong social reforms.
Its wide distribution of political power and checks and balances served as a strong backbone
to future prosperity.
Their geography while harsh also enabled immense amounts of cheap hydro electricity laying
the seeds for industrialization.
However by this point almost 3/4th of all hydro power was owned by forign companies.
The new government saw this as a risk and believed the resources of Norway should be
owned by and for norwegians.
A bill was passed limiting such forign ownership and putting constraints on any attempts at
monopolization.
This experience in controlling natural resources would prove incredibly important later in
the story.
But All of this coincided with the introduction of new technologies which significantly reduced
the burden of transportation.
Railways, roads and new methods of transmitting communication greatly narrowed Norway’s
inherent disadvantage against its European neighbors.
All of these forces kick started rapid economic growth and industrialization.
But one way in which Norway differed was its very strong ties to welfare, education and
public industry that would serve them well later on.
Norway would largely keep on growing but being small and reliant on international trade meant
it was swept up in the global economic and geopolitical forces of the early 20th century.
It was officially neutral in both world wars, but it’s merchant fleet took a massive hit
in the first and on April 9th 1940 it was invaded and then occupied for 5 years by the
germans.
By the end Like many other nations, Norway was left to pick up the pieces of its country
and economy.
It joined many international organizations and was one of the largest recipients per
capita under the United States’ Marshal plan.
The Labor Party seized the blank slate and worked to establish strict social democratic
rule with a large emphasis on the public sector and centralized planning, while also allowing
the inherent economic benefits of private competition to thrive.
From 1945-1975 Norway produced an incredibly reliable and strong 3.3% gdp growth per year.
Taxes were some of the highest in the world, but government spending on education shaped
Norway’s work force into one of the most capable on earth.
It had a strong social safety net and inequality continued to fall lower than comparable counties.
Inflation remained subdued and unemployment was almost non-existent.
Norway’s economic performance during this time was strong and steady but it was a far
cry from being the economic powerhouse it is today.
By the 1960s Norway was no longer poor.
It had largely caught up with other European nations but it was just an average performer.
That was about to change.
With the discovery of large reserves of natural gas found in the Netherlands, speculations
started to arise about oil being located in the North Sea.
But there was a problem, if there was vast amounts of oil beneath the waves, who was
it?
After some back and forth Norway asserted its claims over these waters.
The Norwegian government was skeptical about the idea of oil residing on the continental
shelf but it nevertheless started to divide up and sell licenses for oil exploration.
One such company Phillips Petroleum started drilling.
Well after well try after try they continued to find nothing.
Due to some technicalities in their contract Phillips gave it one last shot, but this time
deeper.
At last in 1969 the first drops of North sea oil were extracted, and not just a little,
but massive quantities of it.
A Black gold rush quickly ensued and In less than a Decade Norway was producing more oil
per resident than any other country on the planet.
The oil Sector became a titan, Thousands of high paying jobs opened, sleepy fishing towns
became petroleum powerhouses, billions of dollars started rolling in and Norway’s
economy was forever transformed, but we have heard about this before.
The beginning of Norway’s oil story had many similarities with other oil rich nations,
but it differed in incredibly important ways.
While forign companies rushed into Venezuela, profiting handsomely and returning little
more than propping up its dictatorship, Norway tried another way.
Unlike in Venezuela where absolute power was already in the hands of a single man, Norway’s
political power was already widely distributed making it impossible for a single person or
group to benefit themselves at the expense of society.
Therefore Norway’s government was not only able but restricted in making decisions based
on the utility to the whole nation.
Norway had also watched the oil curse happen across the world, it knew that oil luck did
not mean permanent luck.
Much like its battles with hydro companies immediately after independence, Norway took
the same approach with oil.
To the government, the natural resources of Norway belonged not to forign oil companies
but to the people of norway.
These companies could help explore ,drill and extract the oil but a majority of profits
earned was to be funneled to the state, at the same time its own public oil company statoil
was to study, replicate and eventually surpass their expertise.
Norway also knew that to squeeze everything out of this opportunity it needed to not only
extract crude oil but to create its own petroleum processing industry.
That meant massive investment in infrastructure, careful central planning, and the generation
of its own engineering workforce.
It could have easily slashed taxes, increased social spending and blew its lottery on popular
policies, but it didn’t.
It also worried about the petroleum sector dominating the rest of the economy so it set
a 90 million ton per year limit.
Oil was not to replace the Norwegian economic engine, it was to become its turbocharger.
But things were not perfect.
Norway knew it wanted to spend the money to benefit its people, but it was not entirely
sure how best to do this.
The oil industry expanded and so did prices, more money came in than the government knew
what to do with.
Then in the early 80s oil prices plummeted and a recession began, economic growth stagnated
for almost a decade.
A time old tale about economies based on oil.
Norway was not squandering its oil revenue but it needed to do something more.
When your economy is at the mercy of a single comoddy price, the solution is to diversify
investment.
This is exactly what Norway did when it created its Government Pension fund in 1990.
Other governments tried this, but their political climates enabled them to become personal piggy
banks to whomever was in charge, voiding them of their initial intended purpose, so save
for when oil no longer showers the economy in money.
Norway’s sovereign wealth fund was different, and the government structured it in such a
way as to not become corrupted.
The government can only spend the profit it expects to generate.
That means that new politicians cannot run on the promise of spending more today at the
expense of tomorrow, and it also follows strict investing rules.
It cannot invest in oil companies nor companies that follow unethical practices, and maybe
more importantly it cannot invest in norwegian companies.
This might seem strange at first but the purpose of the fund is to diversify risk.
If the Norwegian economy was to hit a steep recession the fund wouldn’t, because it’s
not invested in norwegian companies, and therefore it provides a safety net to short term domestic
shocks.
Today the fund has become the largest such in the world, owning 1.5% of all public companies
in the world.
At its peak it was valued at 1.35 trillion dollars, enough for every Norwegian to be
handed 250,000 dollars and this amount is expected to keep on growing.
While other Scandinavian countries have had to reduce their social spending, norways is
using the interest of its oil revenue to provide health care, education, and a safety net to
families hit by hard times.
Norway still has some of the highest taxes in the world but its people never have to
worry about paying medical bills they cannot afford.
Norway has managed to get lucky but it maneuvered carefully and set itself up for the foreseeable
future.
Oil is a massive part of the Norwegian economy, it provides high paying jobs but it still
maintains many other productive industries.
If oil went away tomorrow Norway would hurt but it would still manage to be one of the
wealthiest nations on earth.
Does this mean its a perfect economy or one that other nations should seek to replicate.
The Answer is No, Norway has been given an incredibly fortunate situation, not every
country has trillions of dollars of oil sitting off its coast, but Its reliance on the public
sector has reduced competition and potential growth and its cost of living is among the
highest in the world.
Norway’s economy is not perfect for the world, it’s perfect for norway.
But what about other oil rich nations?
Unfortunately it appears strong democracy needs to have already been established before
being blessed with oil, otherwise politicians and strong men jockey for power seeking short
term gains at the expense of the future.
Not only that but established productive industries must already be in place, along with strong
educational institutions to fully utilize the oil revenues potential.
For a more in depth look on how oil can destroy nations check out my video on how Venezuela
went from being the fourth richest nation on earth to one of the poorest.
Norway in a lot of ways got lucky, but luck alone can often be fatal for a nation.
While most nations squander their oil lottery, dumping money into social spending for votes,
buying luxury villas or sprawling desert highways , and stuffing the pockets of politicians,
Norway invested its money and now lives off of the interest.
Economics is the study of scarcity.
Everything is scarce, particularly luck, nations that know this tend to thrive.

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