Can Norway Escape from Dutch Disease?

With a strong economy, an effective welfare system and social democracy, Norway is considered one of the world’s most well-functioning and stable countries in the world. From 1960s, discovery and exploitation of petroleum and natural gas reserves in North Sea has been the main driving force of the economy, leading to a 760 billion oil fund and large petroleum industry today.

Yet, some people see other things beyond present prosperity. Richard Milne, from Financial Times states that more subtle forms of Dutch diseases are catching on.

Everyone can make his or her own judgment on where Norway is at the moment given the explanation of the theory. The Dutch disease refers to the phenomenon that one sector’s prosperity damages the other in the economy. In 1977 the Economist used this term to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959. In 1982, W.M.Corden and J.Peter created a classical economic model to describe the Dutch disease.  They categorized the economy of a nation into 3 sectors: a non-trade good sector (e.g. service and construction industry) and two trade sectors, one is booming (the exporting resource sector) and the other not (the manufacturing industry). The exploitation and export of natural resource leads to two main results. First, labor and capital will move towards the resource sector, making it more difficult for the manufacturing sector to attract labor and capital. It hit the manufacturing by increasing the cost. At the same time, exporting resource brings in more foreign currency, which makes the value of domestic currency rise. This again reduces the competitiveness of manufacturing.

Another result is that the increase of income brought by export of natural source creates more need for trade sector and non-trade sector.  Yet the need for tradable goods will be fulfilled by importing products from other countries, thus putting the manufacturing sector into disaster again. The need for non-trade sector can’t be met by trade, thus booming the local service industry.

Just have a look around you. Cheese from France and Spain are sold $100 a kilo in Oslo yet there are still buyers.  Norwegian business is also worried. The country’s low cost airline, Norwegian Air Shuttle has moved parts of its operations out of the country. “The oil economy in all other countries has the tendency to damage the rest of the industry that we have seen in several countries, so we definitely should worry about that”, according to Bjorn Klos, Chief Executive of Norwegian Air Shuttle.

“Nobody is predicting a crash for Norway anytime soon, but the warning sign is there, and the new center-right government has promised to boost the competitiveness of Norway’s non-oil industries. It’s likely to be a tough job given all the prosperities oil has brought the Nordic country, but crucial for what kind of nation Norway will be when the petroleum finally runs out.” Richard Milne from Financial Times concludes.

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