Social policies and the phasing in of oil in the Norwegian economy.

By Halvor Mehlum, Kalle Moene, and Ragnar Torvik.

Oil was discovered on the Norwegian shelf in the 1960s and oil production started in 1973. In the first years of the oil era Norway ran had to run a rather large current account deficit in order to allow for the necessary investments in the petroleum sector. The first explorations and investments were paid for by international companies. During the 1970s Norwegian involvement, in part through the state owned oil company Statoil, increased steadily.

In the 1960s, before the start of the oil era, trade was more or less in balance. In the mid 1970s there was a deficit followed by a surplus of close to ten percent from the 1980s and onwards, eventually rising to 15 percent. The deficit in the 1970s finds its counterpart in the expansion of capital formation related to establishing the oil industry. In terms of disposable income, the Norwegian economy has become very dependent on the oil sector. When building up the oil industry in the 1970’s, Norway benefited from international credit. Norway became an international creditor in 1995 and has been so ever since.

The impact of the oil income has led to a decline in the share of manufacturing production over the period. There are two main reasons: First, as in all rich countries globalization has led to a division of labor in the world, with Asian countries delivering manufacturing goods that previously were domestically produced. Second, the oil income allowed a reduction in traditional exports such as metals, fish, and timber.

Manufacturing production has declined from 20 percent of GDP in the early 1970s to close to ten percent in the early 1990s. Since then manufacturing production has been stabilized. Textiles, for example, are all but gone, while several of the remaining main contributors to manufacturing are oil related, such as oil refineries and ship and petroleum exploration equipment.

While manufacturing production declined, the oil revenue opened up for expanded production of services, particularly in the public sector. This expansion in services production did not, however, lead to a dramatic decline in other employment, the reason being female labor market participation doubling over the same period. This increase in labor force participation was in part made possible by the boom in subsidized higher education, particularly among women in the 1960s. Another contributing factor was the increased provision of day care for children in the 1970s, explaining the sharp increase in female labor force participation in the mid 1970s.

Summing up, social policy made room for a high labor participation rate. Contrary to popular perceptions, the growth of the welfare state increased employment rather than reducing it. The increased income led to an increased demand for services and to increased female labor participation. Public participation in child care and also in the caring for elderly opened up opportunities for women to participate in the formal labor market. Spending on education made it possible to expand the provision of public services without bringing about a too dramatic side effect on industrial production. Hence, the potential harm of rapid reallocations between sectors was to some extent mitigated. In this perspective social spending was in part a prerequisite for the transformation that followed with petroleum, where higher income in part led to higher demand for social spending. Hence, the smooth but fundamental transformation of the Norwegian economy is an illustration of the interaction and complementarity between societal arrangements as diverse as child care and oil production.


1 Response to “Social policies and the phasing in of oil in the Norwegian economy.”

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