Are Things Too Good in Norway?

OSLO — Norway, with one of the highest standards of living in the world, the lowest unemployment in Europe and a tight social safety net, has a problem most of its neighbors would envy: how to keep it all going.

Powered by a steady stream of oil, Norway has transformed itself from a sleepy backwater on the fringe of Europe to the continent’s economic pride. Economic growth climbed from 3.3% in 1995 to about 5.1% last year, and unemployment is down to 4.1%.

“The danger is that we won’t be able to control the economic growth, that demand will get too strong and spark inflation,” said Finance Minister Jens Stoltenberg.

The economy already is beginning to feel the strain of a prolonged boom. The labor market is tightening, pushing wages higher, and the stronger krone has made some exporters complain that their competitiveness is threatened. About 43% of Norway’s gross domestic product (GDP) is being exported, though that share is declining.

“The main concern is that the krone will become too strong,” said Georg Stormer, senior vice president at Norsk Hydro ASA, Norway’s largest publicly traded industrial company.

The krone has surged against the currencies of such major trading partners as Germany, Sweden and Denmark, even though Norway’s central bank reduced its base rate to 3.25%.

“You can’t cut interest rates any further,” said Preben Munthe, an economics professor at Oslo University. “They are already lower than they should have been according to the domestic economic conditions.”

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Another danger is that oil prices could come tumbling off their highs. Crude futures on London’s International Petroleum Exchange traded at $22.63 a barrel Wednesday, up from $16.54 a year ago, but most observers consider the current level unsustainable in the long run.

With only 4.2 million inhabitants and limited domestic energy consumption, Norway exports about 93% of the oil it hauls up from the deeps of the North Sea, making it the world’s second-largest oil exporter, after Saudi Arabia.

To ensure that future generations will benefit from the gush, the majority of the oil profits are invested in a special fund, which is projected to be worth 46 billion kroner at the end of 1997 and 270 billion kroner at the end of 2000.

“It is an uncertain forecast,” said Stoltenberg, a 37-year-old former minister of industry and energy who is widely considered a prospective prime minister. “It depends very much on the oil price and on how the Norwegian economy will develop.”

He said that a one-krone decline per barrel translates into a net cash-flow loss of 1 billion kroner ($153.4 million) for Norway.

Asked why Norwegians don’t demand a piece of the growing riches now, Knut Anton Mork, Norwegian economist for Svenska Handelsbanken in Oslo, said: “People tend to accept the argument that there’s a need for the money later.”

Of course, Norwegians don’t seem to have too much to complain about. A long-standing social democracy ruled by Stoltenberg’s Labour Party for 10 of the past 11 years, Norway provides free education, a comprehensive national health-care plan and social benefits such as 42 weeks of fully paid maternity leave.

“There’s a funny combination of contempt for politicians and blind acceptance that the government runs things,” Mork said. “People believe in their politicians, who take care of them.”

A soaring benchmark OBX stock index, which has risen 38% in the past 13 months, has put more money in the pockets of Norwegians.

“There’s an enormous wealth and purchasing power in Norway,” said Stormer of Norsk Hydro. “That has fueled the stock market.”

The booming oil industry has helped the government pay the bills. Norway’s GDP is estimated to grow 3.5% this year.

“The main reason is oil and gas--nothing more, nothing less,” said Diderik Schnitler, executive vice president for shipbuilding at Kvaerner ASA, a Norwegian conglomerate that also has assets in construction and energy.

Still, mainland GDP--which does not include oil and gas production--rose 3.5% in 1996, more than double the growth rate of Germany and France, Europe’s two largest economies.

“Exports of traditional goods have performed very well, despite sluggishness in mainland Europe,” said Oystein Stephansen, Norwegian economist for Skandinaviska Enskilda Banken in Oslo. Chemicals, metals, and pulp and paper are Norway’s main industries.

While harboring a reputation as a cradle-to-grave welfare state, Norway has, in fact, created a climate more conducive to business than many other countries in the region.

Comparing Norway’s taxes, wage costs and vacation policies to those in the rest of Europe, Schnitler said, “We’re not at the top of the list. We’re somewhere in the middle.”

With a tight fiscal policy and a resolve to keep the oil profits out of the domestic economy, Norway has driven its inflation rate down to 1.3%, a 36-year low.

“If you look at what has happened in Norway since the late 1980s, inflation has been consistently lower than in our main trading partners,” said Stephansen. “That has kept wages lower. Costs are high compared to the U.K., but not compared to Sweden, Denmark or Germany.”

While the inflation rate is low, the Norges Bank, Norway’s central bank, cautions that it could double this year.

While all but a few European Union members are struggling to trim their debt-to-GDP ratios to 3% by the end of the year--one of the requirements for participation in the economic and monetary union planned for 1999--Norway’s economy is so strong that it would easily qualify for the planned single currency.

“The only problem is that we’re not part of the EU,” said Stoltenberg.

Norwegians in a 1994 referendum, by a 52%-to-48% margin, voted against the EU for the second time to protect their fishing and agricultural industries, defying Stoltenberg’s Labour Party and the majority of the parliament.