Norway’s economic success over the past 40 years cannot be fully explained by oil. “The X factor in the Norwegian economy is productivity,” asserts Professor Erling Røed Larsen.

KNOWLEDGE @ BI: The Norwegian Economy

Over the course of a century Norway has transformed itself from being a relatively poor country of fishermen, tenant farmers and loggers into one of the world’s richest countries.

Norway has done quite well during the global financial crisis; the country has hardly any unemployment to speak of, and house prices continue to rocket also after the credit crunch.

Norway’s GNP per capita  is among the highest in the world, second only to Luxembourg.

Production has increased tenfold

Why has Norway done so well? Has the oil money made Norway rich?

“Of course it’s partly the oil. But most countries with natural resources have done poorly. The development Norway has experienced isn’t only a question of dumb luck, skills come into it, too,” explains Professor Erling Røed Larsen at BI Norwegian Business School.

According to Røed Larsen, Norwegian skills are about being hugely productive. In fact, over the course of a century Norway’s production of goods and services has expanded tenfold. Norway produces an annual 3.7 billion man hours per year.

“This is our real asset. These working hours have to do everything that needs doing. Without these working hours, Norway would simply grind to a halt,” insists the professor at BI Norwegian Business School, who recently published the popular science book “Penger” ( “Money”).

Productivity continues to be a mystery

According to Larsen, productivity is the principal key to understanding economic development.

“Productivity is the X factor in the Norwegian economy. Even though economists have investigated the phenomenon of productivity for a century, it continues to be a mystery. If economists are to understand what drives people, they need help from social scientists,” he stresses.

Røed Larsen says productivity is something that is created by people in human interaction.

The source of productivity probably lies in the desire to accomplish something – the will to perform.

Five sources of productivity

Obviously, physical capital is important for productivity: machines, tractors, industrial robots, factories etc.

In addition to physical capital, Erling Røed Larsen has identified five key sources of productivity:

  1. Human capital: What matters is what people have in their heads, hands and feet. Both formal education and practice (learning by doing) play a role in improving human capital.
  2. Technology: New technology in itself does not lead to greater productivity; it has to be taken into use, too. Doing this requires knowledge, skills and flexibility.
  3. Work culture and norms: Work culture and the will to perform and employ new technology vary from business to business.
  4. Incentive systems: Different ways of rewarding effort lead to different results. Incentive systems are not merely about money, but also about honour, recognition, fame and pride – to mention a few.
  5. Social structure and organisation: Different companies and societies organise themselves differently, and there is considerable international interest in the Scandinavian model of society.

“These five factors explain Norway’s economic success – and they are the hope for the future of Norway,” concludes Røed Larsen.

Reference:

Erling Røed Larsen (2012): "Penger" Scriptorium norsk forlag. Photo: Katrine Lunke, Norges Bank.

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Send your comments and questions regarding this article by E-mail to forskning@bi.no

Text: Audun Farbrot, Head of Science Communication at BI Norwegian Business School (E-mail: forskning@bi.no

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