Norway is the tenth richest country globally and one of the most democratic, with one of the smallest income inequalities across the globe. It is the seventh-happiest and ninth-healthiest country on Earth. Many nations have failed to achieve in their entire history what Norway has in the last hundred years. The curious case that we are handling today is – how Norway became so rich.
The people of Norway enjoy one of the highest standards of living in the world, and it also has a sovereign wealth fund, worth 1.68 trillion US dollars, the largest of its kind, unmatched anywhere. However, if you look at the geography of Norway, it would appear not so friendly at first glance. With its rocky terrain and mountainous landscape, only a meagre 2.7% of the land is suitable for farming. If you compare this with another Nordic country, Denmark, it has 70% of arable land.
Even this small percentage of Norway’s fertile land is fragmented and scattered across valleys and hillsides, making it difficult to cultivate large areas efficiently. The average farm in Norway is a mere fraction of the size of its American counterpart, making it a daunting task for farmers to eke out a living from the land. Additionally, the country’s northern location, sharing a similar latitude with Alaska, means short growing seasons, further limiting agricultural productivity.
Norway is one of the least densely populated countries in the world. To put it in perspective, Japan and Norway have surprisingly similar land areas, with Japan being slightly smaller at 377,975 sq km compared to Norway’s 385,203 sq km. But Japan has a much larger population— over 125 million compared to Norway’s 5.5 million. This means that for the same amount of land area, Japan houses 23 times more people.
A hundred years ago, nobody would have guessed that Norway would finish the century among the richest countries in the world. Yet, it did. The question we’re addressing today is: how did this small nation, despite its daunting geographic challenges, create such remarkable wealth for its citizens and future generations? And no… it wasn’t because one day they found oil and the next day they became rich. In fact, it’s quite the opposite.
Norway Overview
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How Norway Became So Rich?
While it’s true that Norway was primarily a fishing and farming community at the start of the 19th century, by the mid-20th century it was already thriving. It had the biggest merchant fleet in Europe second to Britain, sold more lumber and timber than any other European nation, and was building dams on every darn river even before the discovery of oil. Oil simply amplified Norway’s existing wealth.
But the world should appreciate Norway for standing as a remarkable and unparalleled exception to the oil curse. While most oil-wealthy nations failed to create sufficient economic growth and jobs, Norway’s extra careful approach to managing its oil resources allowed it to dodge the bullet of the resource curse and become one of the richest countries on Earth.
No one denies that Norway was relatively well-off even before the discovery of oil. However, Norway could have easily been poorer than it is today. So, did Norway simply play its cards better than others? Were there visionary individuals who made a series of smart decisions, or was it just luck? How did Norway’s economy become so successful while others failed, even those with more oil and wealth beforehand? How did Norway start the century poor and end up rich? How did it happen?
This is the story of a tiny, poor European nation, with only two hours of daylight for half the year and temperatures far below freezing, with its rugged topography making transportation nearly impossible. A country once underdeveloped and insignificant, it transformed into one of the most prosperous nations on Earth, not only in wealth but in almost every goddamn metric that measures a nation’s prosperity.
This is the story of how Norway became so insanely rich…
1800-1900 The Modest Economy
Thomas Malthus, the great political economist, toured Norway in 1799. Malthus described Norway as an agricultural society and observed that most Norwegians lived a simple farming life, subsisting on a diet of whatever they were able to harvest. Meanwhile, the wealthy struggled with the high cost of imports.
The population censuses of 1801 and 1815 revealed that over 90% of Norway’s 0.9 million population lived in rural areas, and primarily engaged in agriculture, fisheries, and hunting. Norway was not warm, and travel and communication were challenging. It was not even an independent country. Under a harsh sky, farmers toiled on scarce land, their villages isolated by treacherous terrain and a lack of knowledge.
However, the country’s success can be attributed to its ability to overcome the challenges and capitalize on the opportunities presented by its unique landscape.
Norway became independent from Denmark in 1814 and entered into a new union with Sweden. The newly independent nation lacked institutions, industrial entrepreneurs, and domestic capital.
The rugged mountainous geography that restricted transportation also blessed Norway with deep fjords, which allowed it to develop a maritime culture. These fjords provided the ability to quickly travel between port settlements and easy access for traders to reach deep into the country’s interior.
Thanks to numerous fast-flowing rivers and proximity to the sea, a tree felled high in the mountains could be dumped into a river and float downstream to settlements. This lumber could then be cheaply exported through the fjords to the global market. By doing this Norway sold more lumber and timber than any other European nation and became the lumber powerhouse of Europe.
Furthermore, Norway’s small and dispersed population was well-connected via fjords and the sea. Importantly, this same geography and culture fostered a shared sense of identity among its people. For example, ships were crucial for trade and survival. Given the geographic challenges and absence of concentrated capital, entire villages would collaborate to build ships, with profits shared among all participants, from lumberjacks to carpenters.
Over time, this cooperative model expanded to other sectors, hindering the emergence of a powerful class of capitalists in Norway, unlike in Britain, France, and the US. In a way, Norway’s geography forced people to come together and build for the common good. This cultural influence extended to various sectors of the economy for centuries, including agriculture, forestry, fishing, and later the banking and hydropower sectors. It would even play a crucial role in how Norway managed its oil resources, as we will soon explore.
In 1849, Britain ended its Navigation Acts, dismantling the British ship monopoly in its territories. As Norway was already a maritime nation with a rich seafaring history dating back to the Viking Age, this opened a significant opportunity. 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
This demonstrates that despite adversities and challenges, Norway found ways to persevere and progress. By the 1870s, Norway’s GDP per capita was above the European average.
But then… all was well until it wasn’t…
From the mid-1870s to the early 1890s, Norway’s economy plummeted, primarily due to its dependence on a stagnating international economy, the adoption of the gold standard, and a slow transition from sailing ships to steamships. Prices dropped, and people began leaving in droves for a better life in North America, with the exodus peaking in 1882. Between 1879 and 1893, 250,000 Norwegians emigrated.
Amidst this crisis, Norway discovered a way to harness the enormous force of water. This breakthrough catapulted Norway into the ranks of wealthy nations, transforming it into an industrialised powerhouse and forever altering its destiny.
Hydroelectric Power
Modern Norway was built and industrialised through the utilisation of its abundant rivers and waterfalls for hydroelectric power. Samuel Eyde, a civil engineer and entrepreneur, spearheaded the development of hydropower, while former Prime Minister Gunnar Knutsen championed its potential in a famous letter to parliament in 1892 for industrial production.
By 1920, Norway was consuming more electricity per capita than any other country in the world. Norway could generate a huge amount of energy thanks to its fast-flowing rivers. This abundance of energy allowed Norway to develop energy-intensive industries, for example- aluminium production through Norsk Hydro, which is now one of the largest aluminium companies in the world.
In many ways, the utilization of hydropower resources transformed Norway’s traditional timber-based economy and paved the way for a modern, industrialized nation. It has provided Norway with essential, inexpensive, and clean electricity for over a century.
Today, Norway is Europe’s leading producer of hydropower and ranks sixth globally, with the state, counties, and municipalities owning 90% of the production capacity.
Norway is now seen as a potential giant battery for Europe, and Norwegian companies are exporting their hydropower technology and expertise globally, further contributing to the country’s economic success.
By the 1950s, Norway was a manufacturing hub with a strong merchant fleet and expertise in shipping and trade. It had passed legislation limiting foreign ownership of natural resources and preventing monopolies. New technologies like railways, roads, and improved communication enhanced transportation.
No longer was Norway crippled by geographical disadvantages; in fact, it was quite the opposite. Norway’s weakness now had become its strength. Plus, a strong emphasis on welfare, education, and public industry fueled the nation’s growth. By no means was Norway poor; it was fairly wealthy, well above average, but it had not yet achieved economic powerhouse status. Then came oil.
Discovery of Oil
In 1959, the Dutch Petroleum Company discovered the Groningen gas field. Even today it remains the largest natural gas field in Europe and one of the largest in the world. This discovery turned all eyes towards the rest of the North Sea, as major stakeholders began exploring for oil. Norway, however, was concerned about the security of potential oil fields due to a lack of clarity regarding maritime boundaries. The looming question was: who would own the oil if it was found?
The agreement was reached between the United Kingdom and other North Sea countries in 1965, granting Norway jurisdiction over 131,000 square kilometres of seabed, potentially averting conflict had the presence of oil and gas been more widely anticipated.
After securing its share of the North Sea, Norway was ready for oil exploration. After a few failed expeditions, Norway finally struck oil, declaring it a “giant” in their press release.
Initially, Norway relied on foreign companies for exploration and refining. However, the government’s priority was to nationalize the industry and establish domestic expertise. To achieve this goal, the government founded Statoil, a state-owned petroleum company retaining two-thirds ownership.
Under the banner of Statoil, now known as Equinor, Norway invested in refining infrastructure, minimizing reliance on foreign companies. They developed a skilled workforce and their extraction infrastructure, crucially retaining a large portion of the oil revenues within the country.
History often tells a disheartening tale of a pattern emerging within countries blessed with abundant fossil fuels: economic growth stagnates, democracy weakens, and social inequality deepens. The oil wealth, meant to uplift a nation, ends up lining the pockets of a privileged few, leaving ordinary citizens behind. For example, in Venezuela, heavy reliance on fossil fuels has led to concentrated power and widespread corruption. This is sometimes called “Dutch Disease,” where a country’s economy becomes overly reliant on exporting natural resources, potentially harming other industries.
Even Norway was not immune, but fortunately, it was cautious. When oil prices fell dramatically from December 1985 onwards, the trade surplus suddenly turned into a huge deficit. Crucially, Norway learned a valuable lesson from this: it needed to diversify away from the unpredictable ebbs and flows of the oil market.
So, In 1990, Norway created a massive sovereign wealth fund called the Government Pension Fund of Norway. This fund, owned by the state and its people, invests surplus oil and gas revenues in global markets to benefit future generations and diversify the economy. It follows strict rules, such as a 3% annual withdrawal limit, prevents misuse of funds by politicians and ensures long-term growth, avoiding the pitfalls of other petro-states where leaders often squander resource wealth for short-term gains.
Norway avoided the typical pitfalls of oil-rich nations, such as corruption and authoritarianism. Unlike many others, Norway managed its oil wealth wisely, saving and investing for the future instead of succumbing to mismanagement and greed. In simple words, Norway is like a kid who won the lottery, but instead of spending it all on fun stuff, saved it for the future.
Conclusion – How Norway Actually Became So Rich?
So, Norway’s careful management of its oil resources allowed it to invest in public services, avoid over-reliance on oil, and build a diversified economy. Today, oil and gas represent only 20% of Norway’s GDP, signifying the nation’s ability to thrive even without this resource. Norway’s success is a testament to its foresight, meticulous planning, and commitment to long-term sustainability.
Norway’s story of success doesn’t end with oil and gas. The recent discovery of the world’s largest phosphate reserve is of huge significance. It has major geopolitical implications, potentially shifting control from China and Morocco to the West, and impacting global markets and pricing. Phosphate is used to create fertilizer, batteries, solar panels and electric cars.
While the EU is concerned about the environmental impact of phosphate mining, this discovery offers Norway a strategic advantage and the potential for further economic growth through investment in its sovereign wealth fund or foreign aid.
Despite these strengths, weaknesses persist. While income inequality may appear reduced and it seems everyone is getting richer due to the oil fund, in reality, this wealth is not directly accessible to most Norwegians or in simple words they don’t see it in their bank accounts.
Norway also has a high tax burden, along with challenges such as high levels of private household debt and a shortage of skilled workers compounded by significant labour costs. Exposure to climate-related risks poses additional challenges.
Norway, a modern and highly developed country with a thriving private sector and robust social safety net, initially achieved remarkable wealth thanks to its lumber, timber, hydropower, and cooperative industries. The discovery of offshore oil and gas in the 1960s further enriched the nation.
Today, its economy is diverse, encompassing industries ranging from seafood, forestry, and minerals to a sophisticated services sector that includes finance, fintech, information technology, medtech, biotechnology, and renewable energy. This economic dynamism is further sustained by Norway’s sovereign wealth fund, the largest in the world, as well as an efficient legal framework, openness to global commerce, and preferential access to the EU market.
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