How Norway Got Rich Against All Odds Before Oil
This thinly populated, partially subarctic and barren country got rich long before oil was discovered. How on Earth did that happen?
Explaining Norwegian prosperity is easy, right? First they were a poor backwater and then they hit the jackpot in the North Sea and got rich beyond their wildest dreams!
That is a catchy rags-to-riches story, 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: Through most of human history wealth and prosperity has been almost exclusively been tied to the abundance of fertile land and favorable climate.
That is why the first civilizations appeared along the Nile (Egypt), Euphrates and Tigris (Babylonia), Yangtze (China) and Ganges (India).
With plenty of fertile land and high agricultural yields, these civilizations could support dense populations and large cities. Cities allowed specialization and the development of advanced bureaucracies, crafts, science, and literature.
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.
- Most of the country is 60 degrees north. That is the same latitude as Alaska. That means short growing seasons.
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?
What Malthus had failed to take into account was that Norway was a very open economy. In fact the only country in the world at this time that had a more export- and import-oriented economy was the Netherlands.
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 was 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 import of lumber from Norway.
And the Netherlands were not alone. Forest was getting depleted all over Europe in the age of sail. Britain also need large quantities of lumber. Spain had almost cut down all its forest 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 neighbouring 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 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 leads 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.
This meant that to be a metal-exporting country you could not merely have rich ores but also needed access to a lot of timber to make charcoal for smelting. Both Norway and Sweden have plenty of forest, especially Sweden. It is part of the reason why, in the 1700s, half the cannons in Europe were made in Sweden.
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 fjords that sabotaged Norwegian agriculture gave an advantage in timber transport. Timber could be moved down numerous rivers. At the end, one could build saw mills 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 forest 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 saw mills cheaply.
Sweden could in theory compete as it has more mountains and streams. However, Norway offers more ice-free harbors 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.
Why Did Japan Benefit Less From Lumber Than Norway?
One can find interesting stories all around the world that sheds light on all the factors that often have to come together. For example, while Japan has somewhat similar geography to Norway with mountains and large forests, timber and lumber never became important economically to Japan the way it did in Norway.
Japan, being further south, has better climate and conditions for agriculture. Rice, which can grow in Japan, can also be grown efficiently through terrace farming, hence hilly terrain is not a problem. This helps explain why Japan — despite having similar size to Norway — has 120 million people, while Norway only has 5 million.
But this also created problems for Japanese utilization of water for lumber production. Rivers in Japan were primarily set up to feed intricate irrigation systems for rice paddies.
Norwegian style agriculture did not rely on irrigation as rainfall was more than enough to provide water to most farms. Thus in Japan people who wanted to float timber or utilize water power had to compete with farmers. Also Japan had a disadvantage of being far away from the more industrialized and modern nations. Norway got assistance from the Dutch — who had built advanced mechanical saws in their windmills — to set up sawmills powered by water. Japan lacked access to the technical expertise to do that, and thus had to rely on woodcutting done by hand.
Anyway, let us go more into detail on important historical periods for various phases of Norwegian economic development. Shipping was the first new industry to compete with lumber exports as the more important source of income for Norway.
Shipping Boom 1849–1875
1849 was an important year in Norwegian economic history. It was when Britain ended its Navigation acts. These were laws that required transportation of goods to Britain and its dominions to happen on British ships.
Until then, Norwegian shipping had primarily revolved around goods transported to and from Norway, and often between Denmark and Norway. But here there was always a great potential. Norway has been a maritime nation since the Viking age, traveling to Arab countries, Iceland, and Greenland as well as the Americas. The ocean has always been important to Norwegians, not only for fishing but also for transportation. With the difficult mountainous terrain, the only way to actually travel anywhere in Norway has often been by utilizing the seas. Even in modern Norway, a lot of travel happens by ferry on the west coast. It is hard to build roads in the mountainous terrain.
Thus in 1849, Norwegians got a chance to prove their skills on the seas. Norway quickly started outcompeting other nations in shipping goods by sea. In a mere 28 years, Norway went from the 8th largest maritime nation to the 3rd largest measured in capacity to carry cargo. Only Britain and the US had larger merchant fleets. But this was quite impressive considering just how tiny Norway was in terms of population. If you compared tonnage (freight capacity in tons) per capita, nobody could beat Norway. Norway had four times as much tonnage per capita as Great Britain, and seven times more than Sweden and Denmark per capita.
Shipping thus became one of the main sources of income for Norway in addition to lumber and fish exports. One might ask why was it that Norway outcompeted so many other nations?
For Britain and the US it was partly because Norwegian sailors had lower salaries, but it doesn’t explain why Norway outcompeted Sweden, which has similar salary levels. A key reason was simply seamanship. Norwegian sailors tended to be more skilled than others.
Trust — A Norwegian Secret Weapon
But skill was not all. There was another “secret” weapon that gave Norway an advantage and which has often benefitted Norway in many context, and that is a high level of trust between people. Norway is a country where people traditionally kept their doors unlocked, and even today we regularly leave small children in strollers sleeping outside. Some decades ago, we would even leave babies in strollers outside stores while we went in to shop.
Trust had a special benefit in shipping, because it is such a risky businesses. Ships could sink at great cost. Thus shipping required insurance. Insurance is hard to get working without a high level of trust. It is easy for people to cheat each other. The high trust level in Norwegian society allowed insurance schemes to be much cheaper in Norway than other countries as there was little cheating or abuse of the system. These insurance schemes were not based on big business, but rather on what looked more like cooperatives rather than for-profit companies.
For Norwegians, being somebody you could trust was a valued trademark of economic benefit. An old story illustrates this: A Norwegian sailor once told his crewmates that he had cheated a prostitute in Thailand and not paid her. This outraged all his fellow sailors, who forced him to go back next year to the same prostitute when the ship arrived in Bangkok and pay back the prostitute and apologize. Hence, there was a strong social pressure to retain the Norwegian reputation for honesty.
As in many other Scandinavian countries, cooperatives played a much larger role than in Anglo-Saxon countries where a rich capitalist elite dominated economic life more. Thus long before socialism and social democracy arose in Scandinavia, there were practices in Nordic countries with a strong relation to economic relations preferred by socialists.
For example, the early Norwegian banking sector was dominated by credit unions, which is a form of cooperative. Cooperatives would also come to dominate the agricultural sector, and even the building of telephone lines.
These insurance cooperatives built on trust, allowed Norwegian ships to have cheaper insurance than the countries Norway competed with. Combined with excellent seamen, this made Norway quickly outcompete other nations at sea.
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.
But I will avoid sidetracking on Dutch history, as much as I love writing about that. The point is that this sort of synergy can happen everywhere.
In Norway, the shipping industry created a lot of synergies. Shipping created a demand for ships. This caused the creation of numerous shipyards along the coasts of Norway. This again caused the creation of a machinery industry in Norway, such as Akers mekaniske versksted, Kværner Brug, and Myrens Verksted.
Numerous industries helped develop the machinery industry: Sawmills needed equipment for cutting. Ships would need things like pumps. These companies would end up making anything from irons (for clothes) to distillation apparatus for alcohol production to waterwheels to steam engines. Sawmills in the mid 1800s started increasingly to use steam engines and more ships used steam.
Later, these kinds of companies would play an important role in the 1900s when it became possible to build hydroelectric plants and Norway needed turbines for hydropower plants. These companies would also deliver equipment to the fishing industry and would later play an important role when Norway became an oil nation in building equipment for oil platforms and specialized ships used in the oil industry such as seismic ships, rigs, etc.
Once you have a machines and tools industry, that creates other synergy effects. For example, in the 1850s the Norwegian agriculture saw productivity increases not just from better cultivation practices but also from better tools, plows, and threshing machines.
There is a red thread going through the economic history. Success tends to build on previous successes. New industries can often piggyback on related earlier industries.
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 farm land 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 on 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 in 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 the Norwegian finance sector.
Even today we have a special word in Norwegian called “dugnad,” which means coming together for common good. It means contributing your labour for mutual benefit. This is a lot of what the cooperative organizations were about. The cooperative insurance schemes were often based on voluntary free labour.
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 many other European countries. In other countries, phone networks were primarily built by for-profit companies. This slowed expansion in more rural areas, which were not clearly profitable. With cooperatives and dugnad, networks got build primarily based on the needs of the community rather than by the possibilities a capitalist saw for profit.
Norwegian Government and Democracy
In many European countries, including Sweden and Denmark, the richer agricultural sector allowed accumulation of capital and the establishment of an affluent capitalist class, which could lead the building of modern industry and larger cooperation. The poor agriculture in Norway made this development path impossible.
In Britain, this rich capitalist class was able to finance the building of railroads and telegraph lines. Rich philanthropists established schools and health care. The British state — as in America — was thus typically a backseat driver. Instead, rich capitalists led the way to modernizing the country. Thus their ideology was quite hands off. The British state did not have an active industrial policy.
Norway could not modernize and industrialize in this fashion for many reasons. In Britain and other nations, the higher concentration of agricultural lands allowed the formation of large rich estates and landowners. These could be a starting point for a capitalist class.
In Norway, land was too scattered around and in too poor quality to establish great estates. The lack of population concentration and poor conditions of the land led to weak central authorities and meant that Norwegian farms were unusually free from a European standpoint. Norwegian farmers had a lot of independence and did not get bossed around. It was the tradeoff for having such poor soil. This also mean that having large estates simply was not very profitable and larger land areas started getting sold off in the 1700s. Thus by the time Norway got its constitution, parliament and democratic elections in 1814, most land was actually owned by independent farmers. Sure, they each had tiny crappy farms, but they were still land owners. Thus one stark contrast emerge between Norway and the US and the UK. When the US made its constitution only 3% were eligible to vote. Similar numbers for Britain when it allowed parliamentary elections. Norway in 1814 was uniquely democratic and egalitarian in that a whole 40% of the population became eligible to vote. That was most of the male population.
Norway had no higher form of education. There was no university. Yet despite not having any Oxford or Cambridge, Norway had a good average level of education as Scandinavian countries established mandatory public schooling 150 years before most other European nations, including Britain.
This is a characteristic one can see in Norway today as well. Norway is not exceptional in terms of elite schools and highly specialized skills. Rather what stands out is the high skill level of average citizens. The US and the UK are interesting contrasts. The US and the UK have the top universities in the world, educating the best and the brightest. Norway has no top-ranking universities. Yet both the US and UK struggle with an underclass which are poorly educated. The US has a functional illiteracy rate of 21%, which is unheard of in Norway. When American oil workers came to Norway in the 70s to help build up Norwegian oil industry, Norwegian blue collar workers were shocked that many of their American colleagues could not read and write properly. One has to keep in mind that the US was a far wealthier and more developed country at the time, with far more citizens with college education.
Libertarianism and Taxes in the 1800s
Many, particularly in America, tend to rate how leftist a country is almost exclusively in terms of how high the taxes are. It is then interesting to observe how Norway in the 1800s and earlier was among the lowest-taxed countries in Europe. However, Norway and much of Scandinavia cannot be compared to Anglo-Saxon ideas of capitalism and libertarianism.
The state and private enterprise worked far more in a symbiotic manner than what was common in Anglo-Saxon countries such as Britain and the US. Then as now the state played a crucial role in modernizing and evolving the country.
Modern libertarians also often like to argue against income taxes by pointing to their absence in the 1800s in many countries. Indeed, there was no income tax in much of the 1800s in Norway. However, income tax was introduced around the world — including in Norway — due to libertarian ideology. Before direct taxation of inhabitants, the state collected income from imports and exports of goods.
This is an old thing. If you have read the Bible, you may remember all the accounts of tax collectors at the city gates where traders had to pay customs duty to enter.
Likewise, Norwegian government income was primarily based on taxation of exports and imports. In the 1840s, the Norwegian state got 10% of their taxes from import duties on grain import. To encourage more free trade, those of a libertarian mindset actually wanted direct income taxation as that would allow elimination of export and import taxes. Around 1870, British Prime Minister Peel introduced a 3% income tax in order to cover the lack of income from import and export duties.
Such a tax however, was deeply unpopular with the farmers who dominated elections in Norway. Things like a grain import tax naturally benefitted them, while income taxation would hurt them.
State Capitalism 1826–1875
Unlike the Anglo-Saxon countries, the Norwegian state played a crucial role in the economy as a modernizer.
In Anglo-Saxon laissez-faire capitalism, the state is supposed to be hands-off and let private enterprise take care of as much as possible. As mentioned earlier, the railroad and the telegraph were built by private companies in Britain. Health care and education were also done on private philanthropic initiatives.
In the mid 1800s, Liberal prime minister Frederik Stang played a key role in rapid state lead modernization of Norway. From 1845 to 1860, the funding of infrastructure project grew twentyfold.
Unlike Britain, the state initiated rail and telegraph construction. How did they do that? A state-run enterprise? No, things did not work that way in the 1800s. Instead the classic Norwegian dugnad concept was utilized, where multiple parties worked together. The state organized and led the work with their engineer corps while local authorities and private interests pitched in.
As remarked on earlier, Norway is a country where the seas play a crucial role in communications as mountains essentially block road based transport, especially on the West Coast. Thus one of the first major infrastructure investment for the Norwegian state happened in 1826, when they began buying steamboats. These were used to establish scheduled traffic along the coast. This allowed rapid movement of post and people along the Norwegian coast. This helped bind the country together. To Norway, this served much the same purpose as high-speed rail building in China today.
Railroad began revolutionizing Norwegian society and economy a bit later, in 1857, when the first line was build between Oslo and Eidsvoll. To anyone who has visited Norway this may look like a strange choice, as rather few people live in Eidsvoll. However, this was tied to the primary exports of Norway: lumber. It allowed timber to the shipped from the forest rich inland of Norway to coastal downs where modern steam powered saws could cut it into lumber for export.
In 1875, 60% of government infrastructure investments went to railroad-building. The government organized this by establishing private companies for each railroad track in which they bought 80% of the stock. This highlights the symbiosis between private enterprise and the state. The state was spearheading development but worked together with private interests.
Even today, a lot of companies in Norway have majority state ownership, but it is often seen as valuable to have partial private ownership to get access to good practices, ideas and connections.
Telegraph line construction began in 1854. This was also much in part from the energetic devotion by prime minister Fredrik Stang to modernize the Norwegian economy.
How did telegraph lines improve the economy? Fishing, for example, could be made more profitable using the telegraph because it allowed sending warnings about bad weather, as well as the location of where herring would arrive based on earlier observations further down the coast.
In general, the telegraph allowed sending orders for goods and services far away, as well as information about prices of different goods that could help plan economic activity around the country.
But for most of the private enterprise, it was actually the steam ships that played the biggest role, as the ships could carry large quantities of mail. In a way, the bandwidth of post ships was much higher than for a telegraph line.
In this sense, government economic activity helped create a foundation for a large variety of other private industry to grow more rapidly and develop. This was repeated numerous times through Norwegian economic history. In the 1900s, for example, the state began large scale building of hydro-electric power plants. The cheap electric power provided thus laid the foundation for an explosion in economic activity powered by cheap electric power in the private sector.
This also happened in the 1970s as the Norwegian oil age began. The government established Statoil, a government-owned oil company. Like state- and municipal-owned electric power stations, Statoil was used to create the foundation for a the growth of a myriad of other smaller private enterprise delivering services and equipment to these state giants.
It was not just in infrastructural terms that the government engaged in modernization. Agricultural schools and agronomists got trained by the state to attempt to modernize the Norwegian agricultural sector further. This also helped increased yields and profits in the agricultural sector, which in the 1800s was still the most important sector for the economy in most countries.
State Banks
As we have already touched upon, the unique characteristics of Norway with its low population density made large capital formations difficult.
Modernization, however, required a lot more capital. For example, farms could increasingly use more equipment and tools to increase yields or make new products. There was no large capital class to easily provide this, hence the state created the Hypotekbank in 1851 to give cheap loans to farmers and other property owners.
This was in addition to the Norwegian Bank, which served as the central bank and which was partially state owned. In 1870 the Hypotekbank had 15 percent of all loans in Norway. Fully and partially government-owned banks had around 40 percent of all registered loans in Norway. In addition, the credit unions played a significant role.
This setup was quite different from the rest of Scandinavia and other major European countries where large privately owned commercial banks dominated the financial market.
Norwegian Boom and Bust Economy 1880–1905
Great progress was made until 1875. By various measures, Norway was a less prosperous country in 1905 than in 1875. Why did the success end?
In many ways, technologies such as the railroad and steamships that had helped Norway eventually ended up undermining the Norwegian economy.
Siberian Lumber and Norwegian Deforestation
The railroad opened up enormous markets in Russia and the Ukraine. The sea and the fjords had been Norway’s strength. It allowed cheap transport of timber. With the railroad, the endless Russian forests became accessible to the world. Vast quantities of timber could be transported cheaply by rail. The enormous farming areas of the Ukraine and Russia also became accessible. Thus cheap timber and grain hit world markets.
Multiple unfortunate developments in the lumber trade hit Norway at this time. After over hundred years of being a big timber exporter, the country was starting to suffer deforestation. Private enterprise was being reckless with their own forest by cutting down too many trees, thereby undermining the sustainability of their own forests. Norwegian prime ministers like Fredrik Stang had warned against this. He saw that Norwegians were undermining their own future and had argued strongly in the 1860s that the Norwegian government had to buy up forests to protect them against overexploitation. His government did eventually pass laws that limited how much private individuals could exploit their own forest, with the intention of helping the long term sustainability of the trade.
This was in fact a reoccurring problem through Norwegian history. In the 1700s the Danish king then ruling Norway had had to deliberately reduce the number of sawmills in order to prevent complete deforestation.
This was a well-known problem for anyone who knew their classical history. Mesopotamia was once rich in forests but saw a major decline when they had cut down all their trees and thus lacked wood for fuel, smelting metals, building material, etc. Phoenician dominance of the seas ended as well when they cut down their last forest. Greece also experienced major deforestation, which gradually caused a shift in power towards Italy. While the Roman empire collapsed for many reasons, deforestation certainly played a part. The Italian peninsula could scarcely produce metals anymore when most of the forest had been cut down. Building merchant ships and warships became harder, thus further undermining Roman power.
As Britain built its navy, it cut down most of its own and the Irish forests to do so. Countries like Norway were the last line of defense. Norway did not just sell timber to the Netherlands and Britain. This lumber also got transported through middlemen to many other European countries. Thus for a country to preserve its forest is not given. Countless civilizations before Norway had failed to do so.
This was, however, just one problem. The other was that both Sweden, Finland and Russia all had much more forest than Norway and could flood the market with cheap lumber. In fact a lot of the lumber exporting business from these countries actually got built up by Norwegian businessmen who knew the trade well. While Sweden was generally ahead of Norway, they were behind on lumber. The Norwegian lumber industry was more advanced, and Norwegian businessmen started setting up sawmills according to Norwegian practices in Sweden and Russia.
Planed Lumber, Pulp, Cellulose and Paper
The Norwegian lumber industry was getting outcompeted. Deforestation meant Norway lacked a lot of the large tree trunks that customers wanted. The industry had to go up the value chain. Thus, while this was a period of relative stagnation, it was also a period of major transformation. The Norwegian lumber industry was more advanced and technical competent than these new arrivals to the market. They used this to increase the degree of processing.
Norway started selling a lot more planed lumber. Norwegian sawmills began using wood planer machines, which trims boards to consistent thickness and create smooth surface. For example,. in 1885, 25% of Norwegian lumber export was planed lumber compared to 1.5% in Sweden.
Norwegian sawmills also began installing machines to create pulp. Around this time one had discovered that paper could be made from cellulose. At the time, the production of cellulose and paper was akin to a high tech industry. Norwegian companies struggle to get this right as Norway with its spread-out population lacked knowledge centers to serve a scientifically demanding industry. The breakthrough happened when British Kellner-Partington invested in Borregaard in 1889. Britain was the leading industrial and scientific nation at the time. With British expertise and market connections, Norwegian cellulose and paper production became successful. Local skill was also important in this transformation and Norwegian investors eventually took over the company.
Norwegian Farming and Large Scale Immigration to America
In the 1870s, Norway had followed the libertarian free-trade-oriented spirit of the times and lowered toll barriers. As cheap Ukrainian grain flooded the market thanks to the railroad, most European countries got second thoughts about this and began adding import tariffs to protect local farmers.
In Norway, this was controversial. Unlike most other European nations, Norway was very dependent on grain imports as it could not produce enough grain itself. Local grown grain was fairly expensive thanks to the poor conditions under which farming had to survive in Norway. Thus protection of local farming was more controversial as it would have cause a major price increase on food for everybody else. Thus Norway chose not to attempt to protect local farmers from cheap Ukrainian grain.
As a result, fishermen, industrial workers and others got better economic conditions because they could spend less of their income on food. However, farming was the most important sector in Norway at the time and still employed most people. This policy thus became a death kneel to Norwegian farming.
They tried to improve profits by pivoting to more animal husbandry, dairy farming, etc, all of which could give better profits. However, this also reduced the need for labour. This led to major hardships for those at the bottom of the ladder in the countryside. Massive immigration to America ensued. No other country besides Ireland had as large percentage of their citizens leave for America. But it was the young and able-bodied who left, while a larger percentage of the old and sick remained behind.
The appeal of emigration was obvious. America had fertile soil in large quantities. Most farms in Norway in 1907 were less than 20 acres. The average American farm in contrast was 140 acres. Furthermore, the American Homestead Acts gave out 160 to 320 acres of land for a minimal fee to immigrants beginning in the 1850s. A Norwegian could get 16 times as much land in America for free than most could hope to ever own in Norway. It wasn’t just more land, but also much better land.
This affluence also meant that salaries in the US were way higher. Unskilled labour earned four times as much in the US as in Norway. While this drain of Norwegian youth was a problem, it later gave many benefits to Norway.
Norwegian families benefitted in the same way that poor South American families benefit from remittance payments from relatives living in America today. A survey in Norway’s most important newspaper Aftenposten in 1906 concluded that Norwegian-Americans sent a staggering amount of money home to their families: 20 million NOK. It sound like very little today, but at the time the whole state budget of Norway was 60 million NOK.
Perhaps more importantly, many Norwegians actually came home to Norway and brought with them their savings as well as important skills. I think all Norwegian families have stories like this. The rich uncle in America is part of the mythology. My great-grandfather built railroad tracks in the Wild West. He saved up his money and sewed it into pockets of his coat to avoid getting robbed. Unfortunately, while crossing the ocean back to Norway, somebody found a way to slit his pockets with a knife and steal most of the money.
He had been away for so long that the family at home in Norway had thought he was dead. My grandfather often told the story about how he just walked into the house while the family was out. (Keep in mind that Norwegians did not lock the doors of their houses back then.) The family were shocked when they came home and saw what they thought was a dead man sitting in their kitchen by the kitchen table.
But enough tangents. For the Norwegian economy, it was probably most important that over half of the engineers came back to Norway and could bring experience and expertise of how a far more developed country did things.
British Steam Trawlers
Steamships began taking over the oceans after the 1870s. Norwegian shipping had been based on sail ships. Norwegian skill in building wooden sail ships since Viking times and skilled sailors mattered less in this new era.
Local craftsmen and shipbuilders scattered around small local communities could build sail ships. This was impossible with steamships. These were high tech wonders of the time, requiring a lot of specialized machine shops, skills, engineers, complex supply chains, etc. Small coastal societies in Norway could not offer that.
Thus, as the British merchant marine rapidly transitioned to steamships, Norway was stuck with sail ships. Only some of the larger towns in Norway such as Bergen had some luck building steamships.
Thus, shipping — which had been a major source of income — stagnated. But all was not lost. Steamships required bring coal with them. For very long distances, the coal would would take up too much cargo space. The Norwegian counter move was thus to go global. Norwegian shipping companies began focusing on long distance travel where they could outcompete steam ships.
But other problems appeared. Large powerful countries and big companies began forming cartels in international shipping and trade that locked Norway out. Norway was too small of a country to fight this. Major powers took the more lucrative trade routes for themselves.
This was, however, not the end of the problems that steamships caused for Norway. British steam trawlers began entering Norwegian waters and outcompeting local fishermen who only had small boats. This began to cause major conflicts with Britain as large British fishing vessels would go straight into the Norwegian fjords and fish. Locals with their small boats got furious and demanded that the government take action. These were tough negotiations as Britain was akin to a superpower at the time, while Norway was a minor nation. Some compromise was found, but Norway was put in a much weaker position.
Even in 1914 Norway only had about 250 steam trawlers while Britain had over 4000.
Whaling
While the period from 1880s to 1905 was a lot about Norwegian industries getting outcompeted and falling behind technologically, whaling was an exception.
Steam trawlers didn’t fit the existing social structures in Norway. In the north of the country, independent fishermen in small boats dominated fishing and it went against national interests to deprive them of a source of income given the social problems that would follow if they became unemployed.
Whaling was different as there was no existing important industry or trade to compete with. I am reminded of the story of how an electronics industry based on transistors had a slow start in America but took off quickly in Japan. In the US, there was a large and successful vacuum tube industry. This industry put up roadblocks from a competing transistor industry. Japan, in contrast, had no vacuum tube industry and thus transistor based electronics companies could develop unopposed.
Whaling seems to have been in a similar situation in Norway. It was a more technologically demanding industry but it was one where Norway became a clear world leader. Industrial clusters around whaling grew up around whaling in the towns of Tønsberg, Sandefjord, and Oslo. There were machine and tool companies, shipyards making whaling ships, as well as all the different kinds of specialized equipment for catching whales such as whale cannons, explosive harpoons, etc. Svend Foyn (1809–1894) was one of the pioneers in this field. He went all over to get the best expertise and improve his methods. He employed British chemists to develop different methods of refining the valuable whale oil.
To our eyes, this industry may seem crude, but back in those days it was quite high tech. Patents on the most advanced whaling technology were as hot as Silicon Valley patents today. Few know much about whale oil nowadays, but it had much the same position in the 1800s as mineral oil does for us. We make a huge number of products today by refining mineral oil; in the 1800s, whale oil was refined to be used in lamps, soap making, perfume, margarine (substitute for butter), lubricants, cosmetics, paint, insect spray, waterproofing (on wooden boats) and many more uses.
The oil had very desirable properties compared to many other oils, which contributed to high demand. Towards the end of the 1800s, whaling constituted 18% of the export value of the whole Norwegian fishing industry.
Norway developed into the biggest whaling nation in the world. In 1912 Norwegian companies produced 100 000 tons of whale oil per year, which was 80% of world production.
Norwegian agricultural was not very competitive but Norway used its advantage in whaling to develop margarine, which was based on whale oil, a substitute for butter. For common people, this was a big deal. Hard physical labour meant people needed a lot of calories but butter was expensive for the average person. Margarine was substantially cheaper, and became a Norwegian export. Danes, however, were not impressed and mockingly called it “Norwegian butter.”
Hydropower Boom 1905–1920
The period from 1875 to 1905 was marked by a variety of technological and economic developments that went directly against Norwegian strengths.
However, at the turn of the century, a series of technological changes led to a new boom time. From 1905 to 1920 the Norwegian economy grew 60%, more than any other Western European country.
The industrial revolution centered around steam power had not fit well with Norwegian conditions for several reasons:
- Norway has no coal reserves and had to import it.
- Steam engines are large and capital-intensive, favoring large towns and urban areas of which Norway had few.
- Steam power favors large companies with lots of capital. Norwegian companies and businesses tended to be quite small and in short supply of capital.
Due to Norway’s spread-out population, there were very many companies but few of them were large. While Norway had a similar population to Denmark, it notably had many more banks— though most of them were small. In Denmark, with its more urban population, a few large national banks dominated.
Norway had in fact more shareholder companies per capita than almost any other nation, and it was easier to register a company in Norway than in most other countries. Interestingly, this is still the case. The process to register a company is still quicker than in most other countries. Thus it was not regulation or the state holding development back, but simply the demographic realities of the country.
Electric Motor Replaces Steam
Electric motors are much cheaper than steam engines, which suited all the small companies in Norway very well. This helped cause a boom in small scale industry: furniture making, canning, printing etc.
The invention of high pressure turbines and electric generators made this possible. Capital strong foreign investors from major European powers like Britain began building hydropower in Norway as well as mining operations.
Norwegian capitalists lacked capital and skills to do these large scale constructions.
Electrochemical Industry
However, it was not small industry such as furniture making which really drove Norwegian growth after 1900 but electrochemical industry using electricity to produce ferroalloys, nickel, aluminum, carbide and other products. Here the large mountain ranges which had held back Norwegian development for centuries finally became an advantage. Few countries came to produce as much electricity in Europe as Norway. In 1920 Norway had become the leading nation in the world in the use of electricity.
Norway generated and used 12–13 times more power per capita than industrial powerhouses such as Britain, France and Germany. In fact the factories of Hydro, one of Norways largest corporations, located in the tiny towns of Rjukan and Notodden consumed more than twice as much power as all of the Netherlands. Norway had a population of 2.6 million then and the Netherlands 6.7 million, 2.5 times more.
2/3rd of Norwegian homes had electricity, which is quite remarkable given that far richer and developed countries such as Canada and the US only had 1/3rd. In Sweden and Britain only 1/6th of all homes had electricity.
Internal Combustion Engine Replaces Steam
The internal combustion engine was perfect for Norwegian conditions. It could be mass produced in much smaller and cheaper units, which could be fitted on the small boats that dominated Norwegian fishing unlike a steam engine. Thus finally it became possible to motorize and modernize Norwegian fishing.
By 1920, over 15 000 fishing vessels had a motor. A motor cost about 1000 NOK in 1913 which was a couple of yearly salaries for a fisherman. It was expensive but within reach unlike a steam engine.
Again the Norwegian government stepped in with vigor to modernize, offering various government loan guaranties and arrangements to make it easier for fishermen to upgrade. By 1910 this caused a doubling of the catch. And perhaps more importantly the number of deaths and sea got cut in half. Before fishermen could often not get to shore in time when storms started brewing. With a motor they could quickly escape the storm and get to shore.
Northern Norway has known a lot of widows of fishermen over the centuries.
Resource Nationalization and State Capitalism
With hydropower a Norwegian philosophy and understanding of natural resources began to form which would continue to dominate in the oil age that came later in the 1970s.
The idea that developed was that natural resources was not just private property but also a collective good, or a sort of national heritage. A sort of family silver. This developed especially under liberal prime minister Gunnar Knudsen in the years 1908 to 1910 and 1913 to 1920.
As large mining operations, hydropower and electrochemical industry began to develop Norway realized then as it would later with the oil industry that Norway lacked both capital and important foreign expertise to develop these industries. A study presented to parliament in 1906 showed that 77% of hydropower was foreign owned. In 1909 80% of stocks in mining operations were foreign owned. 85% of power hungry industry was was on foreign hands.
Norway saw a need to have national control over these valuable industries, but a straight out nationalization would deprive Norway of foreign capital and know-how. Thus Norway followed a policy which would later be repeated for the oil industry.
Utilization of natural resources would require special licenses. Obtaining these required followed a number of directives:
- Factory builders had to establish houses and schools for workers and their families.
- A cooperative store for buying groceries and other products.
- Facilitate to allow Norwegian companies to deliver machines and equipment.
- Norwegian produced equipment would have to be bought unless 10% more expensive than foreign equipment.
- Hydropower plant builders were required to sell part of their electric production to the local population.
- If hydropower plant was sold, then it would have to be offered for sale to the local municipality first.
- Licenses contain a clause about “hjemfall,” meaning power stations, and mines would have to be handed over to the Norwegian state after 60–80 years without economic compensation.
For forest industry the economic nationalism was much stronger. A company could not buy forest unless it was 100% owned by Norwegians. There was also many restrictions on selling of forest by forest to large corporations for farmers. This was to secure an economically strong class of farmers.
Why such different policies for forest resources? Because this was an industry where Norwegians were already successful and had plenty of know-how. One simply did not need foreign owners and capital.
This kind of strategy would later be repeated in the 1970s for the emerging Norwegian oil industry. Numerous rules got put in place to favor Norwegian providers and owners. E.g. just like in China foreign oil companies often had to partner with Norwegian state oil company Statoil. They had to do technology transfer to Statoil and eventually pass main responsibility to Statoil to operate the oil fields.
Thus state power was used to build up domestic industry and help technology transfer.
War profiteering WWI
The outbreak of World War I brought new opportunities for Norway. Norwegian shipping had been kept out of many important markets but the war led to major shortage of all goods and ships ready to transport said goods.
This caused a boom for Norwegian shipping. Shipping grain from the US to Great Britain paid 8 times more than before the war. Coal from England to Italy fetched 12 times higher rate.
Due to blockade Germany lost a lot of its normal import. They tried to compensate by importing from neutral countries like Norway. Thus demand for copper, sulfur, nickel and other metals and minerals increased rapidly. Germans were also in short supply of food and bought more Norwegian fish than ever.
The result of this had a polarizing effect. Capitalists earned lots of money from this development. Government got higher tax incomes. Meanwhile regular working class people suffered. When Germany began its submarine offensive in 1916 a lot of Norwegian ships got sunk. Almost half the Norwegian merchant fleet got lost and thousands of sailors lost their lives. Import of various food products got much more expensive and difficult hurting regular people.
This became a period of great expansion for power hungry industry and hydropower. Norwegian government got more involved and Norwegian capitalists started buying out foreigners which had dominated before and got more active in starting their own industrial companies.
1920s Postwar Crisis
During the war years the Norwegian government began spending like a drunken sailor or 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 was 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 crisis in its history.
Unemployed rose rapidly and Norway got politically radicalized. The working class got angry at the hedonistic lifestyle of the rich during the war years while regular people had suffered. Meanwhile many got provoked by the sheer amount of swindle and speculation. A lot looked familiar to the American financial crisis in 2008. A lot of immorality and illegal financial activity got uncovered but largely went unpunished. This provoked the working class. The Russian revolution of 1917 contributed to further radicalization.
There was also a fall in agricultural prices, causing widespread bankruptcy among farmers.
Prices also fell for fish exports and timber exports. Norwegian lumber trade suffered double as they had been major investors in Finland and Russia. Most of these investments got lost due the Russian and Finnish civil wars of 1917.
Labour Crisis
All the problems and radicalization led to countless labour conflicts. Both employers and employees suffered in the 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 which 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 in the labour market.
A Bright Spot — Shipping
Everything seemed to go to hell but there was some bright spots. Norwegian shipping strengthened their 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 companies began letting third parties take care of oil transport began to benefit Norway. Oil tankers was easier than other shipping markets as it 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 fleet. When WWII broke out Norway had the worlds most modern merchant fleet. Norway had gone from having 3% of the worlds 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 with the Norwegian oil industry today. In 2019 it constituted 14% of Norwegian GDP.
Problems in Electrochemical Industry
Yet power hungry industry still probably played a larger role for the economy. Few ships got built on Norwegian shipyards. Only 2%. Labour disputes and high Norwegian salaries made shipbuilding in Norway unattractive.
Power hungry industry 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 and 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 own land and was naturally fearful of a party with a political goal of ending private property. Meanwhile the labour party did not trust the farmers seeing them as reactionaries supporting the Burgoise.
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 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 in as today in running balanced budgets. Opposition had always tried to paint them as reckless. Thus labour 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 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.
Nordic Exceptionalism
What stands out about Norway in the 1930s is that while Norwegian economy had been doing worse than the rest of Europe in the 1920s, it was doing a lot better than other countries in the 1930s. We have to remember than with the stock exchange crack of 1929, things were not looking so good around the world in the 1930s.
Norwegian exports did not pick up that much in the 1930s which makes it hard to explain why the economy was doing so much better than other economies.
A key reason was likely that extremism was spreading across much of Europe. Southern and Eastern European countries saw the rise of dictatorships and in Germany it got dramatically worse as we know. Nordic countries as a whole benefitted from surviving as democratic states with solid foundations, and where rules and regulations for private enterprise remained stable and predictable securing growth. In the rest of Europe far too much chaos ensued putting a damper of economic progress.
In this way Norway like other Nordic countries reaped economic benefit from its strong democratic and egalitarian roots. The fact that Social Democrats ceased power made sure that confrontation between different classes in society got reduced. The improvements of conditions for farmers and the working class reduced tension in society and strengthened faith in democratic institutions while those institutions started to collapse in other countries.
Final Word
There is of course a lot more economic history in Norway to cover, but hopefully this detailed account gives a sense of how a country seemingly at the edge of the world could develop into a prosperous democracy.
Resources
A selection of related stories both by me and others.
- How Denmark invented Social Democracy — This youtube video by Kraut is very complementary to my story about Norway. It tells the story from a Danish perspective.
- How Fjords Made Norway Rich — Similar story which homes in how fjords, forests and mountains shaped Norwegian economic and technological development.
- The Secret Story of Nordic Prosperity — Comparison of all the Nordic countries and how the developed in the post war years. A look at the role of socialism and social democracy.
