Breaking Brent: Norway’s response to the recent oil price shock

Abstract

Many petroleum-producing countries find themselves in dire financial straits after oil’s price fall in recent times. This article looks at how Norway has responded to the price shock. Norway’s response is particularly interesting in that the country is broadly admired for its capacity to avoid the Paradox of Plenty. As a small open economy, Norway has always had to respond quickly to changes in the global marketplace. To do this, the country developed a number of institutions and policies to facilitate rapid adjustment to international price shocks—and many of these institutions and polices predated Norway’s discovery of oil. In particular, Norway’s flexible exchange rate regime, its corporatist wage-bargaining framework, and its responsible fiscal policies (along with its ability to tap into a deep sovereign wealth fund) have helped the country minimize the nation’s economic pain, but also encouraged a slow transition away from oil and into other export sectors.