Norway is a Wealthy Country (even after making the appropriate adjustments)

I have previously wrote about living standards in Ireland, and how GDP per capita overstates typical incomes because of a lot of foreign investment.

This is not to say that foreign investment is bad — to the contrary! But standard income statistics, such as GDP, aren’t particularly useful for a country like Ireland.

Norway has a similar challenge with national income statistics, but a different reason: Oil. Norway has a very large supply of oil revenues relative to the size of the rest of its economy, and oil revenues are counted in GDP. But those oil revenues don’t necessarily translate into higher household income or consumption.

Using World Bank data, Norway appears to be very rich: GDP per capita in nominal terms was about $90,000 in 2021. Compare that with $70,000 in the US, which is a very rich country itself. Sounds extremely wealthy!

Of course, by that same statistic, average income in Ireland is $100,000. But after making all the proper adjustments, as we saw in my prior post, Ireland is right around the EU average in terms of what individuals and households actually consume.

What if we make similar adjustments for Norway?

The first adjustment we always need to make for cross-country income comparisons is for differences in the cost of living, or what we call purchasing power parity. It’s especially important for Norway because it is a very expensive place to live: a Big Mac will cost you about $10 (compare with about $5 in the US, even after the recent inflation).

Making the PPP adjustment immediately drops Norway by about $10,000 (again, from the World Bank in 2021), down to $80,000 per person. That’s still above the US ($70,000), and well above neighboring Sweden (around $60,000 — also a wealthy country!).

A more important adjustment to make is called actual individual consumption. This measure looks at goods and services actually consumed by individuals and households. While no measure is perfect (for example, this doesn’t take into account inequality), it is better than GDP per capita because it excludes national income that is not consumed by households in that year (such as foreign investment and oil revenues).

When using the AIC data, we see that Norway is quite as rich as the GDP data suggest, dropping from about 163% of the EU average down to 125% (Norway is not an EU country, but Eurostat still collects a lot of the same data for them anyway). That’s a big change, but Norwegians should not despair: that still makes them the 2nd highest ranked country in Europe by this measure, trailing only tiny Luxembourg. Ireland, by contrast, takes a much, much bigger hit with this measure (dropping from over 200% with GDP to under 100% of the EU average with AIC).

In other words, even using a better measure of the average standard of living, Norway is still a very wealthy country, one of the richest in Europe, though by this measure (AIC) Norway is much closer to its Scandinavian neighbors of Denmark (121% of EU Average) and Sweden (113%). Under GDP/capita, Norway blows them away.

On the AIC measure, I should mention that Eurostat also provides data for the United States to compare with Europe. And by this measure, the United States is far and away richer than all of Europe: AIC is 170% of the EU average. In fact, the US’s lead on Europe is even greater than using GDP per capita, which was only 144% of the EU average. So while you will often hear complaints that GDP gives the US an unfair advantage, using this potentially better measure of well-being, the US pulls even further away from Europe. Of course, there are still some potential issues. For example, while health care spending is included for all countries, health care valued at market prices (as in the US for the most part) is probably not directly comparable to health care expenditures valued on government accounts (a similar but smaller problem exists for higher education pricing). No measure is perfect.

Finally, I think it is useful to think about current Norwegian incomes in historical perspective. If we go back to 1900, when many Scandinavians (including my ancestors) immigrated to the US, Norway was a relatively poor part of Europe. GDP per capita was about half of the UK and two-thirds of Germany. Since then they have caught up significantly. As discussed above, you have to discount the recent decades for Norway in terms of GDP per capita, but we now know that, as measured by AIC, Norway has surpassed Germany slightly and indeed was ahead of the UK the last time that Eurostat published data for them.

Oil is Still Important

I’ve spent most of this post explaining how to separate the influence of oil from actual Norwegian living standards. But to close, I want to bring it back in. Oil is extremely important for the present and future of Norway. Over the decades, the Norwegian government has reinvested many of the profits from the oil revenue into investments outside of Norway. The Oil Fund (their biggest sovereign wealth fund) now contains the equivalent of about $1.2 trillion. That’s something like 3-4 times annual GDP. Tiny Norway has only about 0.07% of the world’s population, but their Oil Fund holds about 1.3% of the world’s publicly listed investments. It’s worth about $250,000 per Norwegian citizen (that’s not a projection of future discounted oil revenues — that’s essentially “money in the bank” right now).

For a relative comparison, if the US had a SWF this large, it would be large than the total market capitalization of all publicly listed stocks in the US. That would be a terrible idea for the US government to own the entire stock market. But because Norway is so small (and because the Oil Fund only invests in foreign companies, steering clear of potential domestic influence and corruption), they can hold this large amount within the broader scope of a free, private economy. It’s not a model that could scale, but it seems to work well for the Norwegians.

It’s not immediately clear what the future plans for this fund are. Presently some of it is used to support the general Norwegian government budget and welfare state, but only a very small part of the SWF is used each year. It does constitution about 20% of the government budget, but Norway still has famously high taxes, even for Europe. While tax revenue as a percent of GDP is slightly lower than other Scandinavian countries, keep in mind that this is using the inflated-by-the-oil-sector GDP as the denominator. Norway does not seem to have used the oil revenue as an offset for lowering other taxes (though perhaps this is true in some specific cases — I’d love to see examples).

They also don’t seem to have any plans to pay the revenue out as a kind of universal basic income, as is done in Alaska with the Permanent Fund Dividend (this is not a pure UBI, but it’s one of the closest real-world examples we have). While the Oil Fund is implicitly supporting individuals through its contributions to the annual government budget, I’m not aware of any plans to cut Norwegian citizens annual checks directly from the fund (again, I’d love to know if there are example of proposals to do this).

The Norwegian case will be an interesting one to watch in the future, both concerning economic development and public finance, but probably not one that can be easily replicated in many other places.

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