Stoltenberg: How Norway Escaped Economic Meltdown

Norway was the only Western industrialized state to escape the global economic meltdown relatively unscathed. It boasts a healthy banking sector, record-low unemployment, and one of the hottest sovereign wealth funds around. Prime Minister Jens Stoltenberg sat down with NEWSWEEK's Jerry Guo in Oslo last week to talk about lessons learned from the crisis. Excerpts:

You were stuck in New York due to the volcanic ash, and apparently kept your government running on an iPad?
I bought an iPad in New York. We are going to start to use it now in my office; it is an excellent tool.

There's been criticism of how Europe handled the flight cancellations.
There is very close cooperation internationally and especially in Europe, and meetings between the heads of aviation agencies. But not even highly technological societies like those in Europe are able to fully protect themselves against the forces of nature.

During the height of financial meltdown in 2008, Norway actually grew by 2.2 percent. What was Norway's secret?
Our GDP did fall during 2009. But it started to grow again at the end of 2009. The important thing is we have managed to keep unemployment down, the lowest unemployment in Europe. It's now at 3.3 percent which is not much higher than before. The reason is we conducted a classical countercyclical policy when the financial crisis hit Norway. We increased demand by reducing the interest rate from 5.75 percent to 1.25 percent and we increased demand by expanding the fiscal stimulus.

But fiscal stimulus and monetary expansion sound pretty orthodox.
There are several differences. One thing is we have a flexible labor market and this flexibility in the supply has contributed to the low unemployment. And one special thing we have are strong and responsible trade unions. We, for instance, agreed on a very big pension reform, which is estimated to reduce expenditures on pensions by 3 percent of GDP in the long run.

Banks are only 2 percent of your country's economy, compared to double digits for countries like the U.S. Is this all that's needed?
Our banking sector is healthy. Many learned from the financial crisis in the 1990s when several major banks were taken over by the state. Second, we have good regulations covering the whole financial sector. One lesson we have learned from other countries is that if you have regulations not covering the whole sector, you create loopholes.

Your country's $450 billion sovereign wealth fund actually bought $175 billion in stocks when the markets were still crashing. Why?
We bought a lot of stocks during the financial crisis for two reasons. One is that we decided in 2007 to increase the proportion invested in stocks from 40 to 60 percent. Stock prices were going down so we have to buy more stocks. We are small owners in around 8,000 different companies around the world, including emerging economies in Asia like China and India. We are a very long-term investor.

The fund, the single largest investor in European stock markets, returned 25 percent in 2009. That's astounding.
We regained almost all of what we lost in 2008 in 2009. We don't sell when share prices are low. We can afford to remain [in the market] during the bad times. We have the most transparent and most predictable investment fund in the world. The reason we have this sovereign fund is we have saved most of the oil revenues rather than spend them on tax cuts. Our value-added tax is 25 percent and gasoline price is $8 per gallon. The whole idea is to replace our national wealth from oil and gas in the ground to equity and bonds in the international market. It has been important for the Norwegian government to avoid Dutch disease by not spending too much.