The Economic History of Norway

Ola Honningdal Grytten, Norwegian School of Economics and Business Administration

Overview

Norway, with its population of 4.6 million on the northern flank of Europe, is today one of the most wealthy nations in the world, both measured as GDP per capita and in capital stock. On the United Nation Human Development Index, Norway has been among the three top countries for several years, and in some years the very top nation. Huge stocks of natural resources combined with a skilled labor force and the adoption of new technology made Norway a prosperous country during the nineteenth and twentieth century.

Table 1 shows rates of growth in the Norwegian economy from 1830 to the present using inflation-adjusted gross domestic product (GDP). This article splits the economic history of Norway into two major phases — before and after the nation gained its independence in 1814.

Table 1
Phases of Growth in the Real Gross Domestic Product of Norway, 1830-2003

(annual growth rates as percentages)

Source: Grytten (2004b)

Before Independence

The Norwegian economy was traditionally based on local farming communities combined with other types of industry, basically fishing, hunting, wood and timber along with a domestic and international-trading merchant fleet. Due to topography and climatic conditions the communities in the North and the West were more dependent on fish and foreign trade than the communities in the south and east, which relied mainly on agriculture. Agricultural output, fish catches and wars were decisive for the waves in the economy previous to independence. This is reflected in Figure 1, which reports a consumer price index for Norway from 1516 to present.

The peaks in this figure mark the sixteenth-century Price Revolution (1530s to 1590s), the Thirty Years War (1618-1648), the Great Nordic War (1700-1721), the Napoleonic Wars (1800-1815), the only period of hyperinflation in Norway — World War I (1914-1918) — and the stagflation period, i.e. high rates of inflation combined with a slowdown in production, in the 1970s and early 1980s.

Figure 1
Consumer Price Index for Norway, 1516-2003 (1850 = 100).

Source: Grytten (2004a)

During the last decades of the eighteenth century the Norwegian economy bloomed along with a first era of liberalism. Foreign trade of fish and timber had already been important for the Norwegian economy for centuries, and now the merchant fleet was growing rapidly. Bergen, located at the west coast, was the major city, with a Hanseatic office and one of the Nordic countries’ largest ports for domestic and foreign trade.

When Norway gained its independence from Denmark in 1814, after a tight union covering 417 years, it was a typical egalitarian country with a high degree of self-supply from agriculture, fisheries and hunting. According to the population censuses from 1801 and 1815 more than ninety percent of the population of 0.9 million lived in rural areas, mostly on small farms.

After Independence (1814)

Figure 2 shows annual development in GDP by expenditure (in fixed 2000 prices) from 1830 to 2003. The series, with few exceptions, reveal steady growth rates with few huge fluctuations. However, economic growth as a more or less continuous process started in the 1840s. We can also conclude that the growth process slowed down during the last three decades of the nineteenth century. The years 1914-1945 were more volatile than any other period in question, while there was an impressive and steady rate of growth until the mid 1970s and from then on slower growth.

Figure 2
Gross Domestic Product for Norway by Expenditure Category
(in 2000 Norwegian Kroner)

Source: Grytten (2004b)

Stagnation and Institution Building, 1814-1843

The newborn state lacked its own institutions, industrial entrepreneurs and domestic capital. However, due to its huge stocks of natural resources and its geographical closeness to the sea and to the United Kingdom, the new state, linked to Sweden in a loose royal union, seized its opportunities after some decades. By 1870 it had become a relatively wealthy nation. Measured in GDP per capita Norway was well over the European average, in the middle of the West European countries, and in fact, well above Sweden.

During the first decades after its independence from Denmark, the new state struggled with the international recession after the Napoleonic wars, deflationary monetary policy, and protectionism from the UK.

The Central Bank of Norway was founded in 1816, and a national currency, the spesidaler pegged to silver was introduced. The daler depreciated heavily during the first troubled years of recession in the 1820s.

The Great Boom, 1843-1875

After the Norwegian spesidaler gained its par value to silver in 1842, Norway saw a period of significant economic growth up to the mid 1870s. This impressive growth was mirrored in only a few other countries. The growth process was very much initiated by high productivity growth in agriculture and the success of the foreign sector. The adoption of new structures and technology along with substitution from arable to lifestock production made labor productivity in agriculture increase by about 150 percent between 1835 and 1910. The exports of timber, fish and in particular maritime services achieved high growth rates. In fact, Norway became a major power in shipping services during this period, accounting for about seven percent of the world merchant fleet in 1875. Norwegian sailing vessels freighted international goods all over the world at low prices.

The success of the Norwegian foreign sector can be explained by a number of factors. Liberalization of world trade and high international demand secured a market for Norwegian goods and services. In addition, Norway had vast stocks of fish and timber along with maritime skills. According to recent calculations, GDP per capita had an annual growth rate of 1.6 percent 1843 to 1876, well above the European average. At the same time the Norwegian annual rate of growth for exports was 4.8 percent. The first modern large-scale manufacturing industry in Norway saw daylight in the 1840s, when textile plants and mechanized industry were established. A second wave of industrialization took place in the 1860s and 1870s. Following the rapid productivity growth in agriculture, food processing and dairy production industries showed high growth in this period.

During this great boom, capital was imported mainly from Britain, but also from Sweden, Denmark and Germany, the four most important Norwegian trading partners at the time. In 1536 the King of Denmark and Norway chose the Lutheran faith as the state religion. In consequence of the Reformation, reading became compulsory; consequently Norway acquired a generally skilled and independent labor force. The constitution from 1814 also cleared the way for liberalism and democracy. The puritan revivals during the nineteenth century created a business environment, which raised entrepreneurship, domestic capital and a productive labor force. In the western and southern parts of the country these puritan movements are still strong, both in daily life and within business.

Relative Stagnation with Industrialization, 1875-1914

Norway’s economy was hit hard during the “depression” from mid 1870s to the early 1890s. GDP stagnated, particular during the 1880s, and prices fell until 1896. This stagnation is mirrored in the large-scale emigration from Norway to North America in the 1880s. At its peak in 1882 as many as 28,804 persons, 1.5 percent of the population, left the country. All in all, 250,000 emigrated in the period 1879-1893, equal to 60 percent of the birth surplus. Only Ireland had higher emigration rates than Norway between 1836 and 1930, when 860,000 Norwegians left the country.

The long slow down can largely been explained by Norway’s dependence on the international economy and in particular the United Kingdom, which experienced slower economic growth than the other major economies of the time. As a result of the international slowdown, Norwegian exports contracted in several years, but expanded in others. A second reason for the slowdown in Norway was the introduction of the international gold standard. Norway adopted gold in January 1874, and due to the trade deficit, lack of gold and lack of capital, the country experienced a huge contraction in gold reserves and in the money stock. The deflationary effect strangled the economy. Going onto the gold standard caused the appreciation of the Norwegian currency, the krone, as gold became relatively more expensive compared to silver. A third explanation of Norway’s economic problems in the 1880s is the transformation from sailing to steam vessels. Norway had by 1875 the fourth biggest merchant fleet in the world. However, due to lack of capital and technological skills, the transformation from sail to steam was slow. Norwegian ship owners found a niche in cheap second-hand sailing vessels. However, their market was diminishing, and finally, when the Norwegian steam fleet passed the size of the sailing fleet in 1907, Norway was no longer a major maritime power.

A short boom occurred from the early 1890s to 1899. Then, a crash in the Norwegian building industry led to a major financial crash and stagnation in GDP per capita from 1900 to 1905. Thus from the middle of the 1870s until 1905 Norway performed relatively bad. Measured in GDP per capita, Norway, like Britain, experienced a significant stagnation relative to most western economies.

After 1905, when Norway gained full independence from Sweden, a heavy wave of industrialization took place. In the 1890s the fish preserving and cellulose and paper industries started to grow rapidly. From 1905, when Norsk Hydro was established, manufacturing industry connected to hydroelectrical power took off. It is argued, quite convincingly, that if there was an industrial breakthrough in Norway, it must have taken place during the years 1905-1920. However, the primary sector, with its labor-intensive agriculture and increasingly more capital-intensive fisheries, was still the biggest sector.

Crises and Growth, 1914-1945

Officially Norway was neutral during World War I. However, in terms of the economy, the government clearly took the side of the British and their allies. Through several treaties Norway gave privileges to the allied powers, which protected the Norwegian merchant fleet. During the war’s first years, Norwegian ship owners profited from the war, and the economy boomed. From 1917, when Germany declared war against non-friendly vessels, Norway took heavy losses. A recession replaced the boom.

Norway suspended gold redemption in August 1914, and due to inflationary monetary policy during the war and in the first couple of years afterward, demand was very high. When the war came to an end this excess demand was met by a positive shift in supply. Thus, Norway, like other Western countries experienced a significant boom in the economy from the spring of 1919 to the early autumn 1920. The boom was followed by high inflation, trade deficits, currency depreciation and an overheated economy.

The international postwar recession beginning in autumn 1920, hit Norway more severely than most other countries. In 1921 GDP per capita fell by eleven percent, which was only exceeded by the United Kingdom. There are two major reasons for the devastating effect of the post-war recession. In the first place, as a small open economy, Norway was more sensitive to international recessions than most other countries. This was in particular the case because the recession hit the country’s most important trading partners, the United Kingdom and Sweden, so hard. Secondly, the combination of strong and mostly pro-cyclical inflationary monetary policy from 1914 to 1920 and thereafter a hard deflationary policy made the crisis worse (Figure 3).

Figure 3
Money Aggregates for Norway, 1910-1930

Source: Klovland (2004a)

In fact, Norway pursued a long, but non-persistent deflationary monetary policy aimed at restoring the par value of the krone (NOK) up to May 1928. In consequence, another recession hit the economy during the middle of the 1920s. Hence, Norway was one of the worst performers in the western world in the 1920s. This can best be seen in the number of bankruptcies, a huge financial crisis and mass unemployment. Bank losses amounted to seven percent of GDP in 1923. Total unemployment rose from about one percent in 1919 to more than eight percent in 1926 and 1927. In manufacturing it reached more than 18 percent the same years.

Despite a rapid boom and success within the whaling industry and shipping services, the country never saw a convincing recovery before the Great Depression hit Europe in late summer 1930. The worst year for Norway was 1931, when GDP per capita fell by 8.4 percent. This, however, was not only due to the international crisis, but also to a massive and violent labor conflict that year. According to the implicit GDP deflator prices fell more than 63 percent from 1920 to 1933.

All in all, however, the depression of the 1930s was milder and shorter in Norway than in most western countries. This was partly due to the deflationary monetary policy in the 1920s, which forced Norwegian companies to become more efficient in order to survive. However, it was probably more important that Norway left gold as early as September 27th, 1931 only a week after the United Kingdom. Those countries that left gold early, and thereby employed a more inflationary monetary policy, were the best performers in the 1930s. Among them were Norway and its most important trading partners, the United Kingdom and Sweden.

During the recovery period, Norway in particular saw growth in manufacturing output, exports and import substitution. This can to a large extent be explained by currency depreciation. Also, when the international merchant fleet contracted during the drop in international trade, the Norwegian fleet grew rapidly, as Norwegian ship owners were pioneers in the transformation from steam to diesel engines, tramp to line freights and into a new expanding niche: oil tankers.

The primary sector was still the largest in the economy during the interwar years. Both fisheries and agriculture struggled with overproduction problems, however. These were dealt with by introducing market controls and cartels, partly controlled by the industries themselves and partly by the government.

The business cycle reached its bottom in late 1932. Despite relatively rapid recovery and significant growth both in GDP and in employment, unemployment stayed high, and reached 10-11 percent on annual basis from 1931 to 1933 (Figure 4).

Figure 4
Unemployment Rate and Public Relief Work
as a Percent of the Work Force, 1919-1939

Source: Hodne and Grytten (2002)

The standard of living became poorer in the primary sector, among those employed in domestic services and for the underemployed and unemployed and their households. However, due to the strong deflation, which made consumer prices fall by than 50 percent from autumn 1920 to summer 1933, employees in manufacturing, construction and crafts experienced an increase in real wages. Unemployment stayed persistently high due to huge growth in labor supply, as result of immigration restrictions by North American countries from the 1920s onwards.

Denmark and Norway were both victims of a German surprise attack the 9th of April 1940. After two months of fighting, the allied troops surrendered in Norway on June 7th and the Norwegian royal family and government escaped to Britain.

From then until the end of the war there were two Norwegian economies, the domestic German-controlled and the foreign Norwegian- and Allied-controlled economy. The foreign economy was primarily established on the basis of the huge Norwegian merchant fleet, which again was among the biggest in the world accounting for more than seven percent of world total tonnage. Ninety percent of this floating capital escaped the Germans. The ships were united into one state-controlled company, NORTASHIP, which earned money to finance the foreign economy. The domestic economy, however, struggled with a significant fall in production, inflationary pressure and rationing of important goods, which three million Norwegians had to share with 400.000 Germans occupying the country.

Economic Planning and Growth, 1945-1973

After the war the challenge was to reconstruct the economy and re-establish political and economic order. The Labor Party, in office from 1935, grabbed the opportunity to establish a strict social democratic rule, with a growing public sector and widespread centralized economic planning. Norway first declined the U.S. proposition of financial aid after the world. However, due to lack of hard currencies they accepted the Marshall aid program. By receiving 400 million dollars from 1948 to 1952, Norway was one of the biggest per capita recipients.

As part of the reconstruction efforts Norway joined the Bretton Woods system, GATT, the IMF and the World Bank. Norway also chose to become member of NATO and the United Nations. In 1958 the country also joined the European Free Trade Area (EFTA). The same year Norway made the krone convertible to the U.S. dollar, as many other western countries did with their currencies.

The years from 1950 to 1973 are often called the golden era of the Norwegian economy. GDP per capita showed an annual growth rate of 3.3 percent. Foreign trade stepped up even more, unemployment barely existed and the inflation rate was stable. This has often been explained by the large public sector and good economic planning. The Nordic model, with its huge public sector, has been said to be a success in this period. If one takes a closer look into the situation, one will, nevertheless, find that the Norwegian growth rate in the period was lower than that for most western nations. The same is true for Sweden and Denmark. The Nordic model delivered social security and evenly-distributed wealth, but it did not necessarily give very high economic growth.

Figure 5
Public Sector as a Percent of GDP, 1900-1990

Source: Hodne and Grytten (2002)

Petroleum Economy and Neoliberalism, 1973 to the Present

After the Bretton Woods system fell apart (between August 1971 and March 1973) and the oil price shock in autumn 1973, most developed economies went into a period of prolonged recession and slow growth. In 1969 Philips Petroleum discovered petroleum resources at the Ekofisk field, which was defined as part of the Norwegian continental shelf. This enabled Norway to run a countercyclical financial policy during the stagflation period in the 1970s. Thus, economic growth was higher and unemployment lower than for most other western countries. However, since the countercyclical policy focused on branch and company subsidies, Norwegian firms soon learned to adapt to policy makers rather than to the markets. Hence, both productivity and business structure did not have the incentives to keep pace with changes in international markets.

Norway lost significant competitive power, and large-scale deindustrialization took place, despite efforts to save manufacturing industry. Another reason for deindustrialization was the huge growth in the profitable petroleum sector. Persistently high oil prices from the autumn 1973 to the end of 1985 pushed labor costs upward, through spillover effects from high wages in the petroleum sector. High labor costs made the Norwegian foreign sector less competitive. Thus, Norway saw deindustrialization at a more rapid pace than most of her largest trading partners. Due to the petroleum sector, however, Norway experienced high growth rates in all the three last decades of the twentieth century, bringing Norway to the top of the world GDP per capita list at the dawn of the new millennium. Nevertheless, Norway had economic problems both in the eighties and in the nineties.

In 1981 a conservative government replaced Labor, which had been in power for most of the post-war period. Norway had already joined the international wave of credit liberalization, and the new government gave fuel to this policy. However, along with the credit liberalization, the parliament still ran a policy that prevented market forces from setting interest rates. Instead they were set by politicians, in contradiction to the credit liberalization policy. The level of interest rates was an important part of the political game for power, and thus, they were set significantly below the market level. In consequence, a substantial credit boom was created in the early 1980s, and continued to the late spring of 1986. As a result, Norway had monetary expansion and an artificial boom, which created an overheated economy. When oil prices fell dramatically from December 1985 onwards, the trade surplus was suddenly turned to a huge deficit (Figure 6).

Figure 6
North Sea Oil Prices and Norway’s Trade Balance, 1975-2000

Source: Statistics Norway

The conservative-center government was forced to keep a tighter fiscal policy. The new Labor government pursued this from May 1986. Interest rates were persistently high as the government now tried to run a trustworthy fixed-currency policy. In the summer of 1990 the Norwegian krone was officially pegged to the ECU. When the international wave of currency speculation reached Norway during autumn 1992 the central bank finally had to suspend the fixed exchange rate and later devaluate.

In consequence of these years of monetary expansion and thereafter contraction, most western countries experienced financial crises. It was relatively hard in Norway. Prices of dwellings slid, consumers couldn’t pay their bills, and bankruptcies and unemployment reached new heights. The state took over most of the larger commercial banks to avoid a total financial collapse.

After the suspension of the ECU and the following devaluation, Norway had growth until 1998, due to optimism, an international boom and high prices of petroleum. The Asian financial crisis also rattled the Norwegian stock market. At the same time petroleum prices fell rapidly, due to internal problems among the OPEC countries. Hence, the krone depreciated. The fixed exchange rate policy had to be abandoned and the government adopted inflation targeting. Along with changes in monetary policy, the center coalition government was also able to monitor a tighter fiscal policy. At the same time interest rates were high. As result, Norway escaped the overheating process of 1993-1997 without any devastating effects. Today the country has a strong and sound economy.

The petroleum sector is still very important in Norway. In this respect the historical tradition of raw material dependency has had its renaissance. Unlike many other countries rich in raw materials, natural resources have helped make Norway one of the most prosperous economies in the world. Important factors for Norway’s ability to turn resource abundance into economic prosperity are an educated work force, the adoption of advanced technology used in other leading countries, stable and reliable institutions, and democratic rule.

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Citation: Grytten, Ola. “The Economic History of Norway”. EH.Net Encyclopedia, edited by Robert Whaples. March 16, 2008. URL http://eh.net/encyclopedia/the-economic-history-of-norway/