Norwegian Catch-Up

Development and Globalization before World War II

Jonathon W. Moses

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351585125
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

'Norwegian Catch-Up' looks at the early Norwegian economic trajectory in the light of its external commitments and opportunities. Detailing Norway's economic performance relative to other countries at a time characterized by globalization, it has a particular focus on the role of international trade, investment and migration. The book examines how a small open state adapted successfully to the demands of (and opportunities provided by) a global market place. Not only did Norway manage an impressive economic record, but it developed concomitantly a strong and articulate labor movement and resilient democratic institutions. In short, the Norwegian example provides hope for development in a context of globalization. This text provides the student with a pioneering new vantage point for understanding the nature and scope of today's globalization and its effect on economic (and political) development. It also provides a historical reflection on the liberal antecedent of modern social democracy.

Chapter 1
A Cinderella Story

The history of Norwegian economic development is a Cinderella story.

At the turn of the 19th century, Norway was a poor, underdeveloped country on the margins of Europe: there were no banks, no institutions of higher learning, not even an indigenous daily newspaper. Indeed, Norway’s infrastructure and level of development was so poor that Norwegian schoolchildren today are told that Bemt Anker, Norway’s richest person at the time, sent his clothes to England to get them properly washed and starched. By the end of the 19th century, the conditions at home remained grim enough to encourage tens of thousands of Norwegians to emigrate each year.

Contrast this picture of Norway’s gritty economic youth with the image of Norway as a mature economic power. At the dawn of the 21st century, Norway ranks consistently among or at the top of the United Nation’s Human Development Index. In 2002, Norway was ranked first in the world on this index, followed by Sweden, Australia, Canada and the Netherlands. This index rates countries of the world in terms a composite scale that includes life expectancy, per capita income, educational enrollment and adult literacy. Beneath this aggregate index lies an unemployment record that has long been the envy of many, and a level of poverty that is hardly visible in Norway today.

As a small country, with less than five million inhabitants, Norwegians have come to expect that the outside world knows little about it. For the few that do recognize Norway as one of the richest and most developed countries of the world, the vast majority of these tend to explain Norway’s wealth with reference to its North Sea petroleum reserves. These reserves were discovered in the 1960s, developed in the 1970s, and today feed an enormous investment fund managed by the Norwegian government. However, it is a mistake to think that Norway would be poor without oil: while oil is an important part of a story about how Norway rose from rags to riches, it is only the most recent chapter.

Norway’s Cinderella story is much older than oil, and it can be told in two parts. The second part of this story is better known. Since World War II, the Norwegian economy has grown at a remarkable and steady rate: between 1946 and 1980 its Gross Domestic Product (GDP) grew by more than 350 per cent! Under the stewardship of the Norwegian Labor Party, this growth was engineered with active state involvement and economic management. Most impressively, Norwegians have engineered this growth while maintaining a vibrant rural constituency, a relatively egalitarian income distribution, and a wide array of public social services. In many ways, the Norwegian record in the second half of the 20th century is a model of social democratic economic management.¹

While the social democratic chapters of the story are most familiar, they depend critically on an earlier, less known, part of Norwegian history. This story begins in the closing decades of the 19th century and tells of a poor country that manages the difficult transformation from a relatively static agricultural economy to a vibrant industrial economy. Over the stretch of a few short decades, the Norwegian economy (along with other economies in Scandinavia) outperformed the rest of what would become the OECD club, and probably the rest of the world. In effect, Norway was one of the world’s first ‘NICs’ (Newly Industrialized Countries); a rare European tiger from the late 19th century. Most significantly, Norway’s economic transformation occurred on an international stage that is not unlike our own: against the backdrop of liberalism and global integration. It is this story—of Norway’s economic transformation in an era of globalization—I aim to tell with this book.

Motivations

There are at least three reasons why I believe that Norway’s Cinderella story should be told now, a century later. Each of them, in different ways, concerns the ever-changing nature of the international context for economic development.

First of all, Norway’s early economic development happened at a point in history that is remarkably similar to our own. The turn to the 20th century was a wondrous time of rapid technological changes, shrinking communication and transportation costs, and—as a result—an increasingly global marketplace for ideas, goods, services and factors of production. This was the first modem period of globalization, and countries that managed to develop in this context did so by both exploiting and heeding the opportunities and constraints imposed by globalization.

Although many students of economic development are enamored by the Norwegian social democratic example, and hope to learn from its institutional and political experiences, the heart of Norwegian social democracy developed in an international context that is radically different from our own. The postwar European economy was one that allowed for a great deal of trade protection in the reconstruction years. Domestic monetary and tax autonomy was secured in the details of the Bretton Woods’ agreement that provided the institutional basis for what Gerard Ruggie (1982) called ‘embedded liberalism’. In other words, the nature of the postwar international regime allowed states much more political influence in determining the character of their economic development.

Indeed, this postwar international system was a direct response to the perceived failures of liberalism during the interwar (1919-1939) period. As John M. Keynes was fond of explaining, signatories of the Bretton Woods agreement aimed to exorcise the most frightening ghosts of the interwar period: devaluation, deflation and depression. More importantly, in the shadow of the Bolshevik revolution, these signatories realized the need for increased democratic accountability in economic management. If states could not provide more economic stability, with less unemployment and suffering, then they risked being overrun by a socialist revolution—either on the streets, or by the ballot box. This sort of democratic accountability for economic management could only be secured by allowing states some autonomy from international obligations. Thus, the postwar international economy allowed for economic sovereignty by way of limited trade protection and capital flows, fixed exchange rates, politicized central banks and extensive migration controls.

This sort of international environment no longer exists—although it may someday return in response to the excesses of contemporary liberalism. In this respect, the lessons of postwar Norwegian social democratic development are not particularly useful for students of development today. It is simply too difficult to limit capital mobility enough to allow economic managers the requisite control over the domestic economy. Social democracy depended on an autonomous tax base that is difficult, if not impossible, to sustain in a world where capital flees in search of the largest returns and the smallest tax burden. More importantly, social democracy relied on the state’s ability to provide political, not economic, targets for the rate of social investment. To do this, the state needed to control the domestic capital supply (and with it, its price: the interest rate).

This brings me to the second motivation for writing a book on the Norwegian economic transformation in the late 19th century: to reflect on the complexities of globalization. In today’s vernacular, ‘globalization’ has come to be understood as political impotency and the law of the jungle/market. As important venues in the world become increasingly integrated and dominated by large multinational actors (that include both multinational corporations as well as multinational and non-governmental organizations), it has become increasingly common to see globalization as a constraint on (if not a direct threat to) economic development and democracy. In the onslaught of liberal market forces, the state’s modern armory of economic weaponry has proven frightfully ineffective.

But the previous era of globalization occurred at a time of remarkable democratic progress. The modem form of representative democracy was bom during this era, and pressure to extend the democratic suffrage occurred hand-inhand with expanding market interactions. This earlier period of globalization was not accompanied by political apathy. Quite the contrary! The modem socialist movement was at its most vibrant and powerful phase in these decades of free trade, investment and migration. As a consequence, the modem welfare state was bom in an era of globalization, as workers fought for shorter working days and weeks, and greater social security.

Contrary to popular perception, there is no inherent reason to associate globalization with political apathy, democratic constraint, and the interests of big business. The social democratic state that eventually developed in Norway (and the international context in which it was embedded) can be understood as a direct response to the economic and political instability that was associated with a liberal world order. But the remarkable changes that occurred during the laissez faire period prior to World War I (WWI) suggest that the voice and influence of the little guy (workers, farmers and fishermen) was not insignificant.

This brings me to the third, and perhaps most speculative, motivation for writing this book. By implicitly contrasting the opportunities available to individuals during the previous era of globalization with those that exist today, we find that the nature of contemporary globalization is very different in one important respect: the lack of a migration option. While today’s economy enjoys relatively similar levels of international trade and investment flows (compared to the early 20th century), national labor markets remain highly protected.

Before World War I, when conditions became intolerable, the poor and oppressed always had one last option: they could leave. This potential threat to exit provided an important impetus for policy-makers to consider the interests of workers, farmers and fishermen. Many states, including Norway, were forced to change their domestic political and economic landscape in order to stave off the potential migration outflow. Today’s poor and oppressed do not enjoy this luxury (or influence).

By studying the effect of emigration on Norway’s economic (and political) development during the first modem era of globalization, we can begin to draw a picture of the important influence that international migration had on economic and political development in Europe and the Americas. In particular, this earlier bout of globalization encouraged economic convergence and spread democracy among participating states. To the extent that modem globalization seems to lack these leveling effects, the absence of a migration option might be used to explain why globalization today appears antithetical to democracy.

When introduced in this way, these motivations implicitly suggest that I am proposing a model of economic development that is applicable for poor states in today’s global economy—I am not. The economic gap that separated Norway from the world’s richest countries in the 19th century was much smaller than the gap that today separates the world’s richest and poorest countries and people. Indeed, a study done by Lant Pritchett (1997: 11) from the World Bank shows that the ratio between the incomes of the world’s richest and poorest countries has increased from 8.7:1 in 1870, to 38.5:1 in 1960 to 45.2:1 in 1990!² Thus, today’s path from poverty to plenty appears much longer and more cumbersome than it did before World War I. Still, the Norwegian example is inspiring and informative in that it provides us with a glimpse of how the international context both limited and stimulated Norway’s economic and political development.

History seldom repeats itself, and if it does—as Hegel reminded us —it often does so as farce. Interpreting Norwegian economic history in the late 19th and early 20th century does not provide a roadmap for developing countries with an eye for economic growth. My intent is much less ambitious and more honest: I hope to present the historical evidence in such a way as to challenge the way we think about globalization and development at the beginning of the 21st century. It is only by thinking differently that we can move from where we are, to where we want to be.

The story line

These motivations help to explain the outside-in³ perspective of the story that follows. In contrast to many influential economic histories in Norway—that focus largely on domestic factors for explaining Norway’s economic growth (for example, demographic changes, technological adaptations and institutional developments)—this story focuses on international developments and how they affected Norwegian economic growth before World War I.

This perspective is not unique; indeed it is quite common to students of small open economies. After all, the Norwegian economy has always been too small to exploit economies of scale and/or to satisfy domestic demand. To survive, Norwegians depend on the international economy—as a source for their needs (food, investment, industrial inputs) and as a market for their own products and services. In this context, it makes sense to prioritize international developments for explaining Norwegian economic development. But, as we shall see in subsequent chapters, there are also good theoretical grounds for prioritizing international trade, investment and migration when explaining Norway’s economic growth.

Before I begin a brief description of the chapters that follow, I should say something about the temporal parameters of this work. The empirical focus of this book concerns the period between 1865 and 1914. My objective is to capture the period of 19th century globalization, and Norway’s response to changing global markets for goods, services, capital and labor. But history seldom accommodates simple temporal typologies—economic and political processes tend to straddle over the time frames imposed by academic observers. Such is the case in the chapters that follow. The processes that concern us have long trajectories. As a result, I sometimes follow a historical strand beyond these self-imposed parameters. After all, the economic and political ramifications of an invention, event, or an agreement can sometimes linger on for decades.

Given the outside-in perspective of the study that follows, it makes sense to begin by outlining the main characteristics of the international economy in the half century preceding World War I. In doing so, I provide the essential context for the remainder of the book and remind the reader of the similarities between this era and our own. Like our own time, the late 19th century was rocked by a series of technological, social and political revolutions that, in effect, shrunk the globe. New developments in communication and transportation (for example, the telegraph and telephone, railroads, steel-hulled and steam-powered ships) made it both possible and viable to develop and exploit international contacts and markets. These technologies were supported with political agreements that facilitated economic exchange (for example, the demise of the Navigation Laws, the gold standard, an open migration regime), and a new Atlantic economy came into being.

Although my emphasis is on international factors behind Norwegian economic growth, I do not intend to ignore the domestic setting. For this reason, Chapter 3 provides a brief glimpse of Norway’s institutional context at the turn of the 19th century. After several centuries under Danish rule, Norwegians found themselves under Swedish tutelage for most of the 19th century. This awkward relationship to its larger neighbors (and regional powers) had an enormous impact on the institutional and market structure that developed in Norway.

In Chapter 4 I will describe the main characteristics of Norwegian economic growth over the period, relative to other countries. This description elaborates on the role played by the three main motors of the Norwegian economy: farming, fishing and shipping. Although changes in these three sectors are all linked to international markets (links that will be developed in Chapter 5), their impact on Norwegian industrialization and subsequent economic development is so important that they deserve special attention. The key nexus for economic development is the delicate balance that modernizes primary production in such a way as to free up redundant (rural) labor for the nascent industrial sector, while maintaining productivity such that it can supply the needs of the industrial sector. This chapter illustrates how changes in the farming, fishing and shipping sectors affected demographic trends in Norway and abroad, laying the groundwork for major economic and political transformations.

In the following three chapters, five to seven, I take a specific international market and explore its links to Norwegian development. Each chapter begins with a very brief sketch of the economic theory that illuminates the growth effects of foreign trade, foreign direct investment and international migration. We begin with the most familiar territory: Norway’s trade links to the outside world.

In Chapter 5 we examine the way in which changes in the international markets for grain, fish and shipping influenced Norwegian developments. Norway’s reliance on these markets meant that it had to respond quickly and decisively to important changes internationally. The liberalization of European grain markets made it much easier (and cheaper) for Norwegians to import necessary foodstuffs. This allowed Norwegian farmers to switch from grain production to animal husbandry, freeing up much surplus labor in the process. Similarly, the liberalization of British shipping laws provided a new and bountiful market for foreign shipping companies, which Norwegians were well-placed to exploit because of their sea-faring history.

In Chapter 6 we examine Norway’s reliance on international capital and investment sources. Until very recently, Norway has been a capital-poor country. Indeed, Norway’s development prior to the 1870s is unique in the way in which collective arrangements were used to secure the capital needed to exploit new markets. Thus, local communities or producer networks often came together to finance a fishing or shipping exploit. As industrialization began to take hold, however, Norway became increasingly reliant on the import of foreign capital from across Scandinavia, the European continent, and from returning New World émigrés.

Chapter 7 describes the role of emigration in Norway’s economic development. By the end of the 19th century, the economic and political conditions in Norway were so grim (or the draw of the New World was so strong), that Norway seemed to be suffering a demographic hemorrhage: only Ireland experienced a larger share of its population fleeing to the New World. While often ignored, this emigration had a substantial effect on Norw...