NORWAY IS THE odd man out in the Nordics. While its neighbours are flirting with free markets, Norway is embracing state capitalism. Its national oil champion, Statoil, is the largest company in the region. The Norwegian state owns large stakes in Telenor, the country’s biggest telephone operator, Norsk Hydro, its biggest aluminium producer, Yara, its biggest fertiliser- maker, and DnBNor, its biggest bank. It holds 37% of the Oslo stockmarket, but it also controls some non-listed giants such as Statkraft, a power-generator, which if listed would be the third-biggest company on the stockmarket.

The simple explanation for Norway’s penchant for state capitalism is oil. When it was discovered in the North Sea in late 1969 it transformed the country’s economy. Today Norway is the world’s eighth-largest oil exporter. Petroleum accounts for 30% of the government’s revenues as well as a quarter of the country’s value added.

There is also a more nuanced explanation. Norwegians have always looked to the state to help manage their abundant natural resources—minerals, fjords, forests, waterfalls—and to look after isolated and thinly spread communities. Norway has a population density of only 13 people per square kilometre. Norway also came up with the idea of the state owning shares in private companies: after the second world war the government nationalised all German business interests in Norway and ended up owning 44% of Norsk Hydro’s shares. The formula of controlling business through shares rather than regulation seemed to work well, so the government used it wherever possible. “We invented the Chinese way of doing things before the Chinese,” says Torger Reve of the Norwegian Business School.

In recent years the Norwegians have been adjusting their model to get the best combination of state control and global competition. In 2007 they merged two state companies, Statoil and Hydro, in order to create a national champion. They also reduced the state’s share to 62.5%. For some this shows that Norway is liberalising. But the strategy is remarkably similar to that being adopted in China and other state-capitalist countries.

Norway’s state capitalism has resulted in several oddities. The country has become a significant oil producer, though it is not a member of the OPEC club. But unusually among oil-producing nations, it is also a big advocate of human rights—and a powerful one, thanks to its control of the Nobel peace prize. Norway has been able to cling onto more of its old social democratic habits than its neighbours. The oil boom led to a boom in public spending: since the 1970s the number of people employed in education has doubled and that in health and social services has quadrupled. The public sector continues to account for 52% of Norway’s GDP.

Oil wealth is bringing its own problems. The oil sector is monopolising the nation’s technical talent, with more than 50,000 engineers currently being employed offshore. Property prices are rising by nearly 7% a year. McDonalds charges $7.69 for a Big Mac, against $4.37 in America.

Oiling the wheels of welfare

Fellow Nordics like to dismiss Norway as the world’s most northerly Arab country, but the most striking thing about Norway is how quintessentially Nordic it is. Oil may have filled its coffers and reconfigured its political economy, but it has not changed its culture. Oslo is singularly free from the soaring skyscrapers and bling-filled shopping malls that sprout in other oil capitals. The new opera house is magnificent, but it tries its best to look modest. The Munch Museum, celebrating the country’s most famous painter, is housed in a concrete mausoleum.

The Norwegians are well aware of oil’s terrible ability to turn riches into rags and sages into fools. Back in 1990 they established a sovereign-wealth fund (formally known as the Government Pension Fund Global) to prepare the country for a post-oil future and to prevent deindustrialisation. They also used the oil industry to promote other local industries such as shipping.

The fund is not without its problems, such as its size (it now accounts for 1% of all the world’s stocks), its leisurely approach (it was slow to exploit the opportunities offered by the 2007-08 financial crisis) and its penchant for blacklisting offending companies. But it is nevertheless one of the best-run in the world. The Norwegians have established a clear division between the finance ministry as owner and the central bank as manager. They are now trying to improve returns and diversify risks.

The oil wealth has not destroyed Norway’s egalitarian spirit. Finn Jebsen, chairman of the Kongsberg Group, which has large defence interests, points out that his country has some of the world’s best-paid manual workers and some of the worst-paid CEOs: blue-collar workers earn three times as much as their British peers, whereas the boss of Statoil earns just a couple of million dollars a year. Many of Norway’s richer citizens live in London to escape from high taxes and a somewhat claustrophobic society.

Still, Norway is changing fast: new wealth is pulling in newcomers from all over the world and shaking natives out of some of their old habits. In Oslo you now see nouveaux riches flashing their wealth, drug addicts and dropouts begging for money, an army of Swedish barmen and waitresses and men with prayer beads driving taxis. Some 11% of Norway’s residents were born elsewhere.

Like its neighbours, Norway wants to occupy upmarket niches and sell its expertise to the rest of the world. Its government created Statoil out of nothing by compelling private oil companies to hand over some of their expertise in return for their contracts and by building on the country’s established skills in shipping. It badgered the company to innovate by taxing profits heavily but providing generous tax relief on R&D spending.

Norway is now the world’s deep-sea drilling capital. Statoil is a leading global company in its own right as well as being at the centre of an elaborate network that includes Norwegian companies such as Aker Solutions and Kongsberg Maritime and the deep-sea divisions of foreign oil companies such as Schlumberger. Norwegian companies have learned how to drill horizontally as well as vertically. They have also cut the cost of exploratory drilling by developing technologies for mobile rigs that allows them to be kept steady in rough weather. The demand for this expertise is booming.

Norway applies the same strategy to traditional industries such as fishing, logging and mining. Its fjords are home to the world’s most advanced fish-farming industry. Its pulp and paper companies are moving into biorefining. Its tradition of exploiting natural resources (“we live off what we find in nature” is a common refrain) is giving rise to new occupations such as bioforaging. Norwegian aquaculturists are selling their expertise to other countries that specialise in fish farming, such as Chile.

Norway has also caught the region’s enthusiasm for entrepreneurship. The government is promoting new businesses through bodies such as Innovation Norway and university science parks. Venture-capital firms such as Northzone, too, are on the lookout for clever ideas. The Norwegian Institute for Air Research has come up with a device that can measure the levels of volcanic ash in the air. Clean Marine has invented a way of cleaning ships’ exhaust. Norway also has a flourishing culture industry: Karl Ove Knausgard, the author of “My Struggle” (in six volumes), is a huge literary talent.

The country’s principled response to the actions of Anders Breivik, who committed mass murder in the name of white supremacy, was deeply impressive

Norway is also a strong exponent of Nordic social values, supporting negotiated solutions abroad and humanitarian policies at home. Of late it has not been a wise guardian of its biggest source of soft power. Giving Barack Obama the Nobel peace prize before he had a chance to do anything, or to the European Union in the midst of a euro crisis, might have been fine individually, but doing both in rapid succession was bad management.

Still, the country’s principled response to the atrocities perpetrated by Anders Breivik was deeply impressive. Mr Breivik blew up eight government buildings in Oslo, killing eight people, and then shot dead 69 more, most of them teenagers, on the nearby island of Utoya. He committed mass murder in the name of white supremacy. Yet the country’s reaction was a model of restraint. The court gave him an impeccably fair trial and sentenced him to 21 years in prison. He now spends his time writing letters complaining about life in his “mini Abu Ghraib” and working on a book to explain his actions.

Correction: Norway is not a member of OPEC, as this article originally suggested. This was corrected on February 4th 2013.