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 closely resemble the economy of Norway without being oil producers provides the most reliable comparison unit 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 boosted labour productivity. Third, resource revenues contributed to financing the steadily increasing gap between Norway and other Nordic countries in the degree of welfare generosity, with generosity increasing in Norway relative to the others. Sensitivity tests through in-time placebo tests and difference-in-differences estimations confirm the validity of these results.