Book review: Landet som ble for rikt (The Country that Became Too Rich) by Martin Bech Holte
Norway is an oil-producing country. It gets revenue from taxing oil sales and from the profits of the state-owned oil company, Equinor. It would appear that as an oil exporter, the Norwegian economy would have enough foreign currency to finance its imports, but this is not the case. Norway puts most of the revenues from oil in a wealth fund that invests all over the world except in Norway. At the same time, Norwegian companies import more than they export. The gap between imports and exports must be filled by foreign investment. In order to attract foreign investment, Norway needs good governance. This is, in my opinion, the most important argument of the book.
Holte uses publicly available data to show that the Norwegian economy depends on foreign investment. No complicated analysis is needed, just the most basic summary of the data, but he presents it in a very clear and eye-opening way. The book is based on a mix of original data analysis and case studies.
The book disproves the myth that Norwegian wealth is built on oil revenues. This is a very common belief among Norwegians and foreigners alike. I too accepted it uncritically, but seeing the data presented by Holte convinced me that it is a misunderstanding. Oil revenues are indeed the basis of the state’s wealth and net foreign assets, but acccount for only a small fraction of national wealth. It was good economic policy and productivity growth that made Norway a rich country, in the same way that Sweden and Denmark became rich; oil revenues explain just the (not so large) divergence from these two countries. In 2013, even ignoring the contribution of the oil sector, Norway had higher per-capita income than the USA.
The book argues that foreign investment depends on a favorable tax regime and predictable regulation. Norway has alternated between periods when it has been very attractive to foreign investors and periods when it has been hostile. These periods correspond, respectively, to high growth and prosperity and to stagnation and crisis. Favorable periods have been the 1920s up to the Second World War and from 1990 to the early 2010s. The postwar period up to about 1990 was pretty bad. It seems that over the last 10 years, Norway has been sliding back to a state of bad governance.
Some examples that the book presents are the ever-expanding public sector without any productivity growth since 2013, and unpredictable regulations that scare foreign investors. The book spends a lot of time critiquing the public sector. This is the main angle the Economist focused on in its review: Can a country get too rich? While I agree that the public sector in Norway should be more efficient, I don’t think this is a very novel thesis.
A case study on bad governance presented by Holte is the sale of the main Norwegian gas pipeline to foreign pension funds. The pipeline is a natural monopoly and has a tariff and profit margin regulated by law. Soon after the sale, when Equinor, the state-owned oil company, had no stake in it, the tariff and profit margin were drastically reduced, basically ripping off foreign owners.
Another example highlighted in the book is the way in which taxes for fish farming were introduced. It is not unreasonable that fish farms pay special taxes, because they use public resources, but the way these taxes were introduced added unnecessary uncertainty. The consequence is that the risk premium for investing in Norway increases.
My own experience suggests that the book is right about foreign investors. I have a friend who works at a biotech startup with a product in clinical trials. They need to raise more financing. Normally this would be the kind of company that investors would love to give money to. What they find instead is that investors will only fund them if they move out of Norway.
The book touches briefly on another quirk of having a sovereign wealth fund that also distorts the economy. Households think that the state is saving for them, and so have very low savings rate. This makes the need for foreign financing even more acute.
The book shows that reforms undertaken in the 1990s led to very high productivity and made investment in Norway attractive to foreigners. Before 1990 the Norwegian economy was centrally planned. Not in the same way as in communist countries, but the government decided which companies had access to credit and which didn’t. This credit restriction, combined with cumbersome, unpredictable regulations, price controls, and high taxes, allowed the government to manage the economy and led to predictably bad results.
The book uses the history of Norsk Brændselolje as an example of the way Norway operated before the reforms. The company was started by private investors. It built the first oil refinery in Norway and owned and operated a network of gas stations, all before the discovery of oil on the Norwegian shelf. The government systematically restricted credit to the company and raised taxes to the point of extortion. After oil was found in Norwegian waters, the government created a state-owned Norwegian oil company, Statoil (today known as Equinor). When the government wanted Statoil to operate in the downstream market, it expropriated Norsk Brændselolje, paying far below its real value. Norsk Brændselolje became the kernel of Statoil’s refining and distribution business.
Overall, I liked how the book presented Norway’s need for foreign investment, and how that need can only be met through good governance. The economic history from 1920 to 2022, when the book was published, is presented clearly and convincingly, with many good examples of both successful reforms and bad policies. What I didn’t like is the way the author refers to “Day 1” and “Day 2” when describing those periods. It is just silly.
It is a common flaw of many books that present a thorough analysis of a complex topic to rush some half-backed recommendations in a final chapter. This one is no exception. What I found particularly irritating is that the author seems fixated on Ireland as an example to follow. Despite Ireland having one of the highest per-capita GDP in Europe and very solid public finances, thanks to tax revenue from multinational companies like Google and Apple, the Irish government is bad at providing basic public services. It delivers too little and at such high cost that it makes the Norwegian government look like a model of efficiency. Some examples are its inability to build public hospitals (Ireland has very stretched hospitals, with the highest hospital bed occupancy rate of any Western country, yet has been unable to procure more capacity for many years), public transport (after more than 25 years of planning, Dublin still has no metro, and won’t have one for at least 10 more years) and the mismanagement of refugee inflows (refugees ended up housed in hotels for months or even years, to the point that one in seven hotels in Ireland were used to house refugees).
Another negative is that the book derails onto adjacent topics that do not add to the main argument. A discussion of the Fornebu metro line project, for example, is meant to show that the project is unnecessary and a waste of public money. The project is indeed mismanaged, but a metro out of the Fornebu peninsula, where most of the housing construction in Oslo is happening now and will continue for the next few decades, is absolutely necessary and a good use of public funds. Holte should understand the difference between a mismanaged and an unnecessary undertaking.
The study of the relationship between changes in vocational training and increased disability insurance among young people was another such unnecessary detour. The correlation is intriguing and the author’s analysis very interesting, but it should have been a separate article. That discussion mostly distracted from the main argument.
The book made a big splash (deserved, in my opinion) and some of the points raised are part of the public debate. There has been some discussion about the wealth tax, currently at 1% or 1.1% for the very wealthy, and about taxes generally. The government appointed a non-partisan commission to study the tax system. The commission report recommended keeping the wealth tax, but lowering the rate to somewhere between 0.25 and 0.75%. And its main recommendation, that the tax system should be predictable, is precisely Holte’s point.