During the Viking Age, Norway was the poorest of the three Scandinavian countries (Denmark and Sweden). Because of its geography and climatic conditions, Norway's economy was primarily dependent on agriculture, timber, and fishing before the industrial revolution. Norwegians often lived in minor scarcity, and many agricultural families were driven to poverty as farm laborers, which fuelled emigration to North America.
Surprisingly, Norway currently ranks third in GDP per capita, has a well-integrated welfare system, and maintains a trillion-dollar pension fund.
Hello 👋
Welcome to Gap Up. Following the very positive reaction to the last issue, we are back with another. So, if you haven't already, sign up to be updated👇.
Story Time 📖
Yes, you read that correctly. Norway is also regarded as the most democratic, the seventh healthiest, and one of the happiest countries in the world. It excels in the areas of freedom, charity, honesty, health, income, and fair governance. It has a fairly educated and resourceful population with one of the lowest crime rates in the world. Norway’s economy is based on the Nordic model and all of its citizens are technically quarter millionaires.
Nordic Model
The Nordic nations include Denmark, Finland, Iceland, Norway, and Sweden. They share many similarities in their lifestyle, history, religion, and social structure. The Nordic economic model emphasizes social equality with a robust welfare system, a high rate of unionization, and strong collective bargaining laws inside workplaces, implying that employees have a major voice in salary, work environment, and benefits. The Nordic model promotes more deregulation and the privatization of public services. Norway, on the other hand, is an exception because the government owns a considerable number of the country's publicly listed companies, accounting for 37% of the stock market. It also owns and operates some of the largest non-listed companies.
History
Norway was still uneducated and poor after its independence in 1814. Compared to its rapidly developing neighbors, its economy was focused on fishing, farming, and timber, with very few industries. Norway is located in northern Europe with a coastline of 100,000 kilometres, the second longest in the world after Canada. The exports of timber, fish, and mainly, maritime services experienced massive growth. Norway became a major shipping power, accounting for around 7% of the world's merchant fleet in 1875. Norwegian ships transported international products at an affordable cost all over the world. This brought a large amount of foreign currency to Norway.
However, all of this occurred simultaneously with the development of new technologies that greatly reduced the cost of transportation. Railways, roads, and other modes of communication have significantly reduced Norway's natural disadvantage of severe conditions compared to its European neighbors. All of these factors accelerated economic growth and industrialization. Norway, on the other hand, stood out for its strong connections to welfare, education, and public enterprise, which would help them in the future. Norway was politically neutral in both world wars, but its merchant fleet suffered greatly, and the country was invaded by the Germans in April 1940. Norway was devastated by the end of the war, and so was its economy.
The government established a strict social democratic rule with a growing public sector and extensive centralized economic planning. Norway also decided to join the United Nations, NATO, and the European Free Trade Area (EFTA). From 1950 to 1973, its GDP per capita increased at a 3.3% annual rate. Despite having some of the highest taxes in the world, the government expenditure on education has transformed the workforce into one of the most competent in the world. Foreign trade increased even more, unemployment was minimal, and inflation was stable. This is popularly referred to as the "golden era of the Norwegian economy."
Entry of Oil
When you hear the term "oil”, what comes to mind? The Middle East? Have you ever imagined that a country in northern Europe could be one of the top oil exporters? The story dates back to the late 1960s when the Norwegian government started selling licenses for oil exploration on its North Sea continental shelf. Phillips Petroleum was one such corporation that began drilling but discovered nothing. But, for the final time, they went a little deeper and extracted the first drops of North Sea oil in 1969. There was a lot of it, not just a little, and a black gold rush was on its way. In less than a decade, Norway produced more oil per capita than any other country in the world.
The oil industry grew into a giant. Thousands of high-paying jobs were created; small fishing towns were transformed into petroleum powerhouses; and billions of dollars poured in, forever changing Norway's economy. The beginning of Norway's oil story shared many similarities with the other oil-rich countries, but it differed significantly. While global corporations raced into Venezuela, making huge profits and giving nothing back apart from supporting its dictatorship, Norway took a different approach. Unlike in Venezuela, where total power was already concentrated in the hands of a single man, political power in Norway was evenly distributed, making it difficult for a single individual or organization to flourish at the expense of society. As a result, Norway's government was not only capable but also committed to making decisions based on the value it represented to the entire nation.
According to the government, Norway's natural resources belong to the people, not to multinational oil companies. Statoil, a state-owned company, was established to explore, drill, and extract oil, with earnings going to the government. Norway understood that to fully capitalize on this opportunity, it needed to not only produce crude oil but also develop its petroleum processing sector. This required huge infrastructure investment, rigorous central planning, and the formation of its own engineering workforce.
Prices shot up as the oil sector boomed. The government received more money than it knew what to do with. Although Norway was clear that it wanted to use the funds to help its people, it was not sure of the proper way to proceed. It could have easily cut taxes, increased social spending, and wasted its excess money on popular policies, but it didn't. It was also concerned about the petroleum sector dominating the rest of the economy, so it established a cap of 90 million tonnes each year. Oil was not to be the Norwegian economic engine's replacement; rather, it was to be its booster. Then, in the early 1980s, oil prices fell sharply, triggering a recession that lasted over a decade.
The Fund
When your economy is highly dependent on the price of a single commodity, diversifying your assets is the solution. Norway achieved this when it established the Government Pension Fund in 1990. The fund's objective was to invest a part of the large surplus made by the oil industry. Norway was not the first country to do so. Other governments have tried this, but they were unable to achieve their primary objective of saving for the day when the economy is no longer supported by oil. Because of their political environment, the funds became personal piggy banks for whoever was in control.
Norway's sovereign fund was different from the others. The government organized it such that it would not become corrupted and it could only spend the earnings generated by the fund. The fund invests internationally and follows strict investment rules. It avoids investing in firms that engage in unethical practices and is not allowed to invest in any oil-related business or any Norwegian company. This may look weird, but the fund's objective is to diversify risk. If the country’s economy falls into a deep recession, the fund will not suffer since it is not invested in Norwegian enterprises and so offers a buffer against short-term local shocks.
The Oil Fund, as it is popularly known, holds over 1.5 % of all shares in the world's publicly listed companies. The fund also invests in real estate and fixed-income securities. It was valued at $1.35 trillion at its peak, making it the world's largest sovereign wealth fund, enough for every citizen to be given $250,000, and this number is likely to rise. Norway uses its interest from oil revenue to provide health care, education, and a safety net to families hit by hard times.
Conclusion
Despite Norway's high cost of living and some of the highest tax rates in the world, its citizens never have to worry about paying unaffordable medical bills. Norway has been fortunate, but it has also wisely managed and equipped itself for the coming years. Oil is a huge part of the economy, but it also promotes many other valuable businesses. Norway would suffer if oil disappeared tomorrow, but it would still be one of the wealthiest countries.
Norway's economy is not ideal for the rest of the world, but it is ideal for Norway.
7 for 7 🙌
Netflix lost nearly 1 million subscribers between April and July. The firm says Stranger Things helped in slowing the outflow.
Tweet of the week :-
Tech Tool of the week 🖥:- Temp Mail provides you with a temporary email and inbox to let you sign up for a website and avoid spam.
Personal Finance Tip #2 💸 :- Get life insurance as early as possible covering at least ten times your annual income.
Quote of the week 🖋:-
“What a man wishes, he will believe.” - Demosthenes
Book of the week 📚:- Atomic Habits by James Clear provides a proven framework for daily progress and trust me it works.
Meme of the week 🤡:-
This brings us to the end of this week's newsletter. Hope you have learnt something new today. If you like this, subscribe to receive the coming issues directly in your inbox every week! (and don’t use Temp Mail for this 💀)
I appreciate feedback, so please let me know how we can improve this for you!