The Nordic Model and the Oil Nation

Abstract

This paper investigates the long-run economic effects of large natural resource endowments, through a comparative quantitative case study. Focusing on three economic features of the so-called Nordic model, namely low income inequality, high labour productivity growth, and high welfare spending,this study estimates the shocks to these key features in Norway after the country became one of the world'’s largest oil exporters. A synthetic control unit constructed by weighting Nordic countries that resemble the economy of Norway without being oil producers provides the most reliable comparisonunit to estimate the causal effects constituting the paper’s threefold contribution. First, results show that the resource windfall contributed to relatively higher top income shares, adding natural resources to the set of drivers of income inequality in Norway. Second, the resource windfall boostedlabour productivity. Third, resource revenues contributed to financing the steadily increasing gap between Norway and other Nordic countries in the degree of welfare generosity. Sensitivity tests through in-time placebo tests and difference-in-differences estimations confi rm the validity of theseresults

The Nordic Model of Economic Development: Shocks, Reforms and Future Prospects

“…Notice that this does not exclude the possibility of significant and positive effects on the fraction given by the very top of the income distribution, as shown for instance in Iacono (2016). Income inequality has indeed been increasing in Norway and in the other Nordic countries since 1985 (as shown in both Figures 1 and 5), but its causes will have to be found elsewhere, and not in the development of the Norwegian resource sector.…”

“…This section will draw only partially on the results of the broader empirical analysis in Iacono (2016), in that it will apply a different set of data -namely, the SWIID Gini index for market income rather than the top income shares of the World Wealth and Income Database (WID) as in Iacono (2016).…”

“…To answer this counterfactual question, let us conduct a synthetic control method exercise (as in Abadie et al, 2015;Mideksa, 2013;Iacono, 2016) to construct a synthetic control unit for Norway based on the donor pool constituted from the other Nordic countries (regarded as similar economies that did not develop a huge resource sector). The first step is to select the weights of the synthetic control unit based on the pre-windfall matching of a set of macroeconomic predictors.…”

“…Following Iacono (2016), the following set of labor market and macroeconomic predictors of income inequality were used in the estimation exercise: UTIP-UNIDO industrial pay-inequality; top 5% and top 1% income share excluding capital gains; unemployment rate as a percentage of labor force; trade union density; and real GDP per capita in constant 2005 USD.…”

“…Recent research on this issue is briefly reviewed (Dyrstad, 2016;Iacono, 2016) and some novel empirical evidence is presented. This first part is not only relevant as a case study, but it also provides insights about the robustness of the institutions of the Nordic model when subjected to substantial macroeconomic shocks.…”