Department of Economic History


Jonas Ljungberg and Lennart Schön, “Domestic Markets and International Integration.
Paths to industrialization in the Nordic countries”

14.15, Wednesday 20 February, 2013
Alfa 3004

Jonas Ljungberg and Lennart Schön Domestic markets and international integration. Paths to industrialization in the Nordic countries


This article scrutinizes the role of structural change and foreign trade in the Nordic countries, except Iceland, in industrialization prior to 1914. Sector contribution to GDP as well as the role of the foreign trade is compared across the countries. The comparison uncovers different paths to industrialization that cannot be explained by reference to received views, such as the shock of free trade or open economy forces. Denmark was not only richer than the rest of the “Nordic Periphery” but also earlier in industrialization. Furthermore, agriculture had a much neglected role in Swedish catch-up, and despite its relatively large export sector, Norway lagged behind, as did Finland. Economic growth was characterized not only by rising exports but also by capital imports and increasing consumption, indicating wider economic and social change. Different sector structures in the Nordic countries largely explain why there was no clear pattern of catch-up or convergence, neither in the region nor in relation to the Western European leaders. We conclude that the social capability of the Nordic countries to integrate and respond to external influences 1850-1914 must be seen in the perspective of the evolving domestic markets and the prior establishment of market institutions.

Key words: Convergence, industrialization, structural change, foreign trade. JEL classification: N13, O14


In a European perspective, the Nordic countries are cases of successful industrialization and growth from the second half of the nineteenth century. This success has traditionally been ascribed to the performance of the export sector and open economy forces, but over the last thirty years internal factors have become more prominent in explanations and have even been suggested to offer the prime cause of the industrialization. In this paper, we will apply a comparative approach on the four Nordic countries – leaving out the fifth, Iceland. With only a few exceptions, the countries have been dealt with as singular cases but we think the comparison is useful, in particular when the aim is to distinguish between causal factors.1 A very broad comparative approach was, however, provided in the literature on globalization where the Scandinavian countries figured as particularly successful upshots of open economy forces in the late nineteenth century.2 While the export argument, and even more so the globalization thesis, tend to pass over what Abramovitz termed the problem of social capability3 in the individual countries, proponents of the internal roots of development have sometimes forgotten about the broader context. In this article, we want to strike a balance between the role of internal factors and open economy forces, respectively, for the growth and modernization of the Nordic countries in the nineteenth and early twentieth century. In short, open economy forces were crucial for the Nordic performance but, for example, the fact that imports exceeded exports during the industrialization should remind us that the full picture requires a closer look at what was going on in the interior. And differences are as telling as similarities in success.


The comparative approach seems to have been reserved for encyclopedias: Jörberg, ‘Nordic Countries’ (1973); Hornby, ‘Dänemark, Norwegen und Schweden’ (1992); Ljungberg, ‘Nordic Countries’ (2004). 2 O’Rourke/Williamson, ‘Open Economy Forces’(1995) and ‘Education, Globalization, and CatchUp’ (1995); for a critique and a moderation, see Ljungberg, ‘Catch Up’(1996) and ‘Impact of the Great Emigration’ (1997); Schön, ‘Internal and External Factors’ (1997). 3 Abramovitz, ‘Catching Up’ (1986).


The article is organized as follows: the next section introduces the two major views on the Nordic development. Section three takes a look at income levels and economic growth in a broader perspective – comparing with Western Europe and extending the time period back to 1820. Section four explores the structures of the Nordic economies by dividing output and employment on the three major sectors of agriculture, industry, and services. Section five focuses on the economic growth and applies shift-share analysis to decompose the productivity change. Section six moves from production to the role of domestic and foreign markets and draws attention to the huge capital imports. Section seven summarizes the conclusions. Two views on industrialization in the Nordic countries The dominant traditional explanation of Scandinavian industrialization and economic growth since the mid-nineteenth century can be termed an export model according to which industrialization by and large was a response to foreign demand.4 Western European, notably British, expansion shifted demand very strongly towards the Nordic supply of primary products and shipping. The Nordic economies reacted elastically to this stimulus with vigorous export growth. Sweden demonstrated the most successful response where a broad range of export industries released a rapid economic growth. But also in Denmark, Norway and Finland the change should have occurred as a response to foreign demand. Thus Denmark responded to demand for foodstuffs, first grain and later dairy products and her economic growth centred on a flourishing agriculture. Norway also exported foodstuffs, notably fish, and moreover responded to demand for sawn wood and seaborne transport services. The Norwegian expansion in foreign markets, as indicated by the exports-to-GDP ratio, largely took place before the free trade era and reached its high level already by the mid-1840s,

See foremost Jörberg, ‘Nordic Countries’ (1973); Hodne, Norges ökonomiske (1981), ‘Export-Led Growth’ (1994).


and stayed about constant until World War I.5 Finally, Finland was a latecomer in her industrialization, yet already in the nineteenth century responded to demand for timber and pulp. The explanation of this favourable evolution into a developed industrial economy is underpinned by primarily the Lewis model of industrialization with an unlimited supply of labour.6 According to this model, the initial shift of demand leads to rising prices with steeply rising profits due to the elastic labour supply. Thus, low wages and high marginal return to capital stimulate investments, and a rapid growth is financed out of profits. After some three to four decades, however, the labour supply is severely drained, and the return to labour rises. At this stage dependence upon exports of primary products diminishes and the economy becomes more balanced. While the growth of profits and investments in the traditional export sector slows down, the domestic market becomes more vigorous. The industrial sector is transformed with new branches serving both exports and widened domestic markets in an industrial society. In this explanation there are some crucial points that need further explanation: Why was the initial response to the export demand – that mainly showed itself in the form of rising relative prices – so rapid and widely spread in the mid-nineteenth century? Why did no dual economy develop between a profitable and productive export sector and a stagnant traditional sector? Why did the whole (or most of the) Nordic economy transform into a developed industrial economy within some 40-50 years (i.e. within one generation) at a moment when profitability fell within the primary export sectors? The profit squeeze from the late 1870s originated not only in the exhaustion of the labour reserve but also in more fierce foreign competition and slower growth of demand.7

5 6

Brautaset, Norsk eksport (2002); Bjerke, Langtidslinjer (1966). Lewis, ‘Economic Development’ (1954). 7 Schön, Modern svensk (2000); Schön, Economic History (2012), chapter 3.


Answers to these questions emphasise qualities of flexibility and mobility within the economies – both at the individual and at the structural or institutional level. Such qualities are usually symptoms of a society that has acquired a social capability for catch-up.8 Institutionally the Nordic countries were certainly part of Western Europe with the market economy developing strongly during the century and a half that preceded the export boom from the 1850s. In this era trading and shipping companies emerged that lowered transaction costs in contacts with Western Europe but also within Scandinavia.9* The largely agrarian Nordic countries are also said to have been fairly egalitarian – dominated by a peasantry that during the eighteenth and nineteenth centuries emancipated from any bonds to landlords. From the mid-eighteenth century onwards, an agricultural transformation was carried through in large parts of agrarian Scandinavia with enclosures, intensified production and commercialization. In this process of modernization, peasants made investments in human capital (in literacy) that enhanced their inclination to engage in market activities and to perform long-term investments guided by information of relative prices rather than by local needs.10 Hence, the agricultural transformation in the Nordic countries was the ‘original accumulation’ upside-down. Instead of a landless proletariat, large scale capitalist agriculture and enriched landlords, it bred a propertied and politically self-confident class of peasantfarmers. Population growth also magnified the number of landless but the landlords, typical for the English enclosures, were retreating in the Nordic agricultural transformation.11 Flexibility in resource allocation and a wide diffusion of initiative in response to price changes were further sustained by the
8 9

Abramovitz, ‘Catching Up’ (1986). Thorburn, Economics of Transport (2000); Ejrnaes and Persson, ’Gains’ (2010); Andersson and Ljungberg, ‘Grain market integration’ (2012). 10 Nilsson et al, ‘Agrarian Transition’ (1999). 11 Ljungberg, ’Nordic countries’ (2004).


character of the early export goods. Increases in the production of cereals, wood, fish, iron and shipping entailed low initial costs and fairly well known technology. Export increases were also favoured by low transport costs generally (the very long Nordic coastline). To this wide commercial and popular response to the new impetus was added the reaction from the authorities. While the export sector could expand with low initial investments, a modernization of infrastructure was costly particularly in the sparsely populated parts of Scandinavia. The public sector (primarily the state but also local authorities), particularly in Denmark and Sweden, made early on investments to provide for goods such as railways, telegraph, education, sanitary utilities. To a large extent these public investments were financed through capital imports that served to increase growth rates and at the same time reserve private domestic savings for capitalist enterprises.12* The mentioned qualities, literacy and human capital, equality and entrepreneurial peasant-farmers, as well as government activity, do not square very well with the ‘Export Model’ even if it may not be enough for a refutation. However, one may ask whether it is plausible that the process of modernisation started off with the rise in exports. Research over the past decades has put much more weight on the internal or domestic factors in the causal chain of economic development. Thus, another model was suggested, early on called the ‘Domestic Market Model’, in which economic development was crucially shaped by internal factors. 13 What is important with this model, if at all one should refer to having one model, is not that it denies the contribution of exports and open economy forces. It is rather about a shift in the chain of causality. The bottom line is that a high level of social capability was a necessary prerequisite in the historical process of modernisation in the Nordic countries and that
12 13

Hyldtoft, Danmarks ökonomiske (1999), 71ff.; Schön, Modern svensk (2000) 205. Schön, ‘British competition’ (1980), ‘Market development’ (1986), ‘Internal and external’ (1997); Carlsson, ‘Jordbrukets roll’ (1980); Sejersted, ‘A Theory’ (1992); Hyldtoft, Danmarks ökonomiske historie (1999); see also Ljungberg, ‘Catch-up ‘(1996). The concept ‘domestic market model’ is used first time in Schön, Industrialismens förutsättningar (1982).


this implies a more gradual process than in the take-off like Export Model. In these explanations, similar dynamics is basically proposed to be at work in the Nordic countries as earlier in Britain. Commercialization and growth were propelled by the interplay between population growth, agricultural transformation and early industrialization directed mainly to the domestic market. Ideas and technology to these home-market industries were certainly transmitted from abroad, increasingly from Britain in the nineteenth century14, but fundamental dynamics came largely from the domestic agrarian economy with the concurrent development of rising population and rising surplus. In all Nordic countries the textile industry, e.g., grew vigorously from the 1830s and 1840s directed mainly to increasing domestic consumption. It is often overlooked that in Sweden by 1850 or 1860 the textile industry as well as the food industries were both substantially larger in terms of value added than the whole of the export-orientated mining and metal industries or the sawmill industries.15 It is also clear that the textile industries and part of the food industries were pioneers in productivity-raising technological change, implanting the new factory system in Scandinavia. Denmark was a forerunner -the first mechanical cotton-spinning was set up in Denmark at the turn of the century 1800 and was, through personal experience, imported from Copenhagen to Sweden and the Gothenburg area. By the 1830s and 1840s the factory system saw its breakthrough in all the Nordic countries, primarily in cotton textiles. Finland was a rather special case. The first Nordic full-fledged mechanised cotton factory was actually established by Finlayson in Tampere; i.e. in a forested lake district in the most backward Nordic

14 15

Bruland, Technology transfer (1991). Schön, Historiska nationalräkenskaper (1988).


country – one explanation being the Finnish access to the wide Russian market.16 Moreover, capital imports are a further indication of the growth of domestic demand. Research in recent decades for Sweden emphasises that capital imports allowed for both investments and consumption and that consumption grew at pace with GDP. With rising wages, incitements to flexibility and mobility were strengthened throughout the economy that became particularly important in the late nineteenth century.17 The essence of the controversy between a Domestic Market Model and the Export Model is thus to what extent the successful integration of open-economy forces was dependent upon the existence of domestic markets. Income per capita – levels and growth rates 1820-1910 In order to analyze the coherence of the explanations we apply a comparative approach. First, what is known about the growth of the Nordic economies in the nineteenth century? It is often overlooked that, by international standards, not all the Nordic countries were poor and that there were substantial differences between them. Denmark was well placed at a continental Western European level as regards income per capita during the nineteenth century, above both Germany and France though clearly below leading countries such as Belgium, the Netherlands and the United Kingdom. The other Nordic countries were, however, poorer in a range between about half to two thirds of the Danish level. In Table 1, the income levels are given for 1820, 1865 and 1910. Relative income levels were basically unchanged between 1820 and 1910, both between the Nordic countries and Western Europe and between the Nordic countries themselves. From this follows that over the European industrialization period from the Napoleonic Wars to World War I, average annual growth rates were overall very similar

Sejersted, ’A Theory’ (1992); Hyldtoft, Danmarks ökonomiske (1999); Schybergsson , Hantverk och fabriker (1974). 17 Schön, En modern svensk (2000), Schön, Economic History (2012).


for this group of countries. While the two leading Nordic countries were only slightly converging with the Western leaders, there was actually a tendency of divergence between the Nordic countries themselves. Thus, Danish leadership was slightly more pronounced in 1910 than in 1820, while Norway and particularly Finland had fallen behind. [Table 1 about here] Development was however more diverse during the first and the second half respectively. Forces of divergence were stronger during the first forty-five years, 1820-1865. With their early industrialization and modernization of agriculture, the leading countries in Western Europe forged ahead in relation to the Nordic countries. There was divergence also within the Nordic area, at least in the relation between Denmark, Sweden and Finland with growth rates positively related to income levels. Norway broke this pattern, however, taking a clear lead in terms of growth rate despite a low income level. Actually there was a geographical pattern with growth rates inverse to the distance to the UK. Norway was leading, followed by Denmark and then by Sweden at a distance and with Finland clearly lagging. Obviously, the Norwegian economy was early on stimulated by its relative proximity to Britain and by low transport costs, and even more so after the repeal of the British Navigation Act and the British move to free trade. Along the Norwegian coastline, shipping and fishing as well as forestry expanded through the 1830s to the 1860s.18 At the same time, Denmark was a pioneer in the modernization of agriculture, resulting in increasing surplus of grain for exports, notably to Germany. Low per capita growth rates in both


Total exports (in constant prices) of Norway grew at an annual rate of 3.3 per cent over the period 1830-47, and 5.5 per cent 1847-65. Calculated from Brautaset, Norsk eksport (2002), 267.


Sweden and Finland, on the other hand, signified a slower modernization of agriculture in overwhelmingly rural economies.19* In the second period, 1865-1910, all patterns were reversed. The Nordic countries converged with the Western leaders, and there was also a tendency to convergence, though weakly so, among the Nordic countries. Sweden and Finland caught up with leading Denmark, while Norway once again broke the pattern with a comparatively slow growth in relation to its income level. However, sluggish Norwegian growth was in line with the new geographical pattern. In this period, growth rates broadly increased with the distance to the Western leaders. The period 1865-1910 was characterized by market integration and sharply reduced transaction costs. Flows of labour, capital and goods increased tremendously over the Nordic borders. This was particularly so from 1873 onwards, when the Krona became common currency, on the Gold Standard, for Denmark and Sweden, with Norway joining two years later.20 Mobility of labour was not restricted, and Swedes migrated both to Denmark and Norway to find work and higher pay. As is well known, there was also a tremendous Trans-Atlantic migration from the Nordic countries, in particular from Norway and Sweden. The emigration pushed up wages and, by increasing the transformation pressure, enhanced structural change.21 Neither was trade much restricted, in particular between Norway and Sweden although their free trade agreement was cancelled in the late 1890s as a precursor of the dissolution of the union in 1905. Finland was to some extent isolated from the Scandinavian context, being a Grand Duchy within the Russian Empire during this period, but her economy seems anyhow to have been rather well integrated with the other Nordic countries, or at least largely oriented towards Stockholm. The Finns used Swedish currency long into the nineteenth century and Finland went on the
19 20

Ljungberg, ’Nordic countries’ (2004 ). See, e.g., Talia, Scandinavian Currency Union (2004). 21 Ljungberg, ‘Impact’ (1997).


Gold Standard in 1877, shortly after the other Nordic countries, yet twenty years before Tsarist Russia.22 Despite this strengthening of open economy forces, convergence in income levels was insignificant among the Nordic countries in the half century before World War I. Denmark remained by far the richest country, while Sweden, Norway and Finland kept their positions from the early nineteenth century. The weak convergence should be seen against the background of the economic structure in each country, where agriculture and forestry, services and industry had different significance. Despite the working of the open economy forces these specific structures still generated different income levels. Moreover, market integration as propelled by the open economy forces often develops faster between regions in different countries and first later works through to all regions within a country.23 If a dual economy develops, regional differences will be reinforced in that process. That seems not to have been the case, however. The structure of national income in the Nordic countries. In the mid-nineteenth century the Nordic countries showed markedly different economic structures, indicated by both the rate of urbanization and the distribution of the population between sectors. In terms of urbanization, Denmark was the leading Nordic country, close to the Western European average (table 2). Norway was trailing Denmark at a distance, whereas Sweden and particularly Finland were much more rural in character.24 Once again, the ranking mirrors the geographical distance to West European industrialization. Urbanization increased substantially in all countries over the period
22 23

Haavisto, Money and Economic Activity (1992). Ljungberg, ‘European Market Integration’ (1996). 24 In calculations of urbanization, a threshold of 5,000 inhabitants is often used. Here the administrative boundary is used, including also towns with less than 5,000 inhabitants. Although such towns were fairly numerous, their impact upon the urbanization rate is rather limited due to their low number of people. Thus, for Sweden such a threshold would reduce the urbanization rate with only about 2.5 percentage points over the period. From this follows as well that very few, if any, industrial centre in rural areas would qualify as urbanized with the threshold of 5,000 inhabitants.


of intensified industrialization 1860-1910, but the relative distances between them changed very little. Hence, there was hardly any convergence in the rates of urbanization. (table 2 about here) To some extent, the low urbanization rates in both Sweden and Finland were due to the large role played by resource based industries that expanded in rural areas, still at the turn of the century 1900. In Sweden, e.g., about a quarter of the rural population was occupied in the industrial sector by 1910 – a share that had risen from about one tenth in 1870. Thus, including also industrial centres outside the judicially urban areas would indubitably raise the Swedish and Finnish rates comparatively more than the Danish or the Norwegian rates, although hardly enough to change the ranking or relative pattern of urbanization.25 In the same vein, the capital cities were distinctly more prominent in terms of population shares in Denmark and Norway than in Sweden and Finland. The high concentration to the Danish capital is particularly striking, taking into account the role of agriculture in the Danish specialization that developed during the nineteenth century. Obviously, modernization also increased the specialization between the rural and urban sectors. The order in urbanization reappears in the distribution of employment between sectors. If one ranks the countries inversely from the percentage of the population occupied in agriculture, the same order appears as in urbanization which, furthermore, is very similar to the ranking in income level per capita. Denmark has a lead followed by Norway with Sweden and Finland lagging.


Bringing in the population both of rural industrial centres and of the surroundings of Helsinki would raise the Finnish level substantially according to Heikkinen, Labour market (1997), 36. Such a procedure would raise the levels also in the other Nordic countries but probably to a lesser extent than in Finland.


[Table 3 about here] Thus, Denmark was in a clear lead in the process of specialization between modern agriculture and new urban occupations. Around 1870, Danish agriculture fell below fifty percent of total employment, similar to other Western European countries like Belgium and France, later than the Netherlands but before Germany. Finland and Sweden, on the other hand, still had an agricultural employment around or above seventy percent while Norway was closer to Denmark than to Sweden. At that time productivity in Danish agriculture was outstanding, not far from double or more the level in the other countries and higher than that of her own industrial sector. The performance of Danish agriculture actually has given rise to remarkable misconceptions. For example, Gerschenkron26 classified Denmark as a case of lack of industrialization and as “very backward” by the mid-nineteenth century. On the contrary, Denmark had the largest manufacturing sector among the Nordic countries as well as a relatively large service sector. Thus, her industrial sector occupied a good fourth of the population in 1865, while industrial labour in the other Nordic countries at that time made out less than a sixth, as can be seen in Table 3. Moreover, the Danish industry is somewhat underestimated since dairies and slaughterhouses are considered as part of agriculture in the historical national accounts. At the end of our period, a shift in the accounts would increase industrial employment with about one percentage point, enough to keep ahead of Sweden, while industrial output would increase slightly more.27 If the impact of this accounting oddness is just marginal for industry, it is even
26 27

Gerschenkron, ‘Economic Backwardness’ (1952), 16. Assessed on basis of Johansen, Industriens vaekst (1988), who also pointed out this anomaly in Hansen, Oekonomisk vaekst (1974). A later revision of the series for Danish manufacturing industry by Kristensen, ‘Industrial growth’ (1989), does not, however, correct for this anomaly but redistributes shares from handicraft to manufacturing which not affects our estimates since both are part of the industry sector.


less so for agriculture and the efficiency of the Danish agricultural industry remains a historical fact. Far from being seen as an outcome of backwardness, it was a result of the integration of agriculture within a modern economy, both domestically and in foreign markets. Over the period 1865-1910 productivity in Danish agriculture fell behind both services and industry, yet not as much as agriculture in the other Nordic countries. Table 4 reports per capita product in the main sectors of the Nordic economies. The index figures give a rough measure of the relative productivity across countries. It can be noticed that the poorer a country is, the higher the relative productivity of services will be. With modernisation of the economy, the contribution of services to national income usually decreases in relative terms. One reason, though not the only, for that is the inclusion of imputed values for residential housing services which tends to inflate the latter sector, the more the smaller the service sector actually is. In particular in an agricultural society where there is no employment connected with residential housing services, it seems not adequate to add these to the output of the service sector. Therefore we have subtracted value added of residential housing services from the service sector, which reduces the output per employed in services, particularly for Finland and Sweden. It is also striking, in table 4, that the productivity of services in Norway is comparatively low. This is probably due to the huge merchant marine with a large number of seamen, giving lesser weight to more highly-valued services and making employment in services more extensive in Norway than in any other Nordic country.*28 Nevertheless, services had a dynamic role and increased their contribution to the Norwegian national product in the latter part of the nineteenth century. When scrutinising the sectoral productivity figures, one should be aware of the fact that the statistical basis for such

See, e.g., Bergh et al, Development and Growth (1981), 71 ff, about Norwegian shipping.


comparisons is hazardous, in particular due to the employment figures. For example, the high Swedish figure for agrarian occupation certainly underlines the rural, yet not purely agricultural, character of the economy. In 1865 only some 12 percent of the population was urban. Since much of the industrial work and of the transport services were seasonal and performed in close connection with agriculture, the percentage for agricultural employment is without doubt somewhat too high. Thus “agriculture” embraces some seasonal occupation within crafts such as saw milling, charcoal burning for the iron works or haulage. While the value added of these part-time or seasonal activities is reported in industry or services in the historical national accounts, employment is still fully reported in the main sector of activity, agriculture. In the present calculation, however, the value added of such activities is transferred from industry or services to agriculture to get a better match with the employment figures.29

[Table 4 about here] Industrial growth in the half century before 1914 was most rapid in Finland and Sweden, although the Finnish industry still remained rather small. It has already been noticed that, still on the eve of World War I, the Danish industry was as large as the Swedish, measured as a share of total employment. Moreover, considering productivity, Danish industry had increased its advantage over the other countries including Sweden. The high relative level of productivity in Danish industry by 1910 is noticeable. Firstly, this is remarkable since Denmark is famous for her agriculture, while other Scandinavian countries have been better known for industrial success. Secondly, it is noticeable since Danish manufacturing was

The transfer means that the share of agriculture in the value added of 1865 increases from 41.5 to 46.1 percent while the share of industry decreases from 24.8 to 22.9 and of services from 33.7 to 31.1. In 1910, the transfers were very small.


so predominantly producing for the domestic market, with the exception of butter and bacon which, however, have been calculated as agricultural output.30 Productivity and structural change as drivers of income growth Productivity change is largely synonymous with economic growth. However, rapid productivity change or a high level of productivity is not telling the whole story when we are dividing the economy into sectors. Structural change, or reallocation of resources between sectors may also contribute to the growth of GDP per capita. Shiftshare analysis could be used for decomposing productivity growth into within-sector change and the structural effect.31 However, there is also a price measurement problem when comparing between sectors, countries, and over time which we must deal with before going into the calculation. For example, in historical comparisons between countries it has become conventional to use Maddison’s GDP per capita in 1990 PPP adjusted dollars, as is done here in aggregate GDP. However, if also sectoral GDP per capita were given in the price levels of 1990, the industry sector would have seemed to contribute a much smaller share to GDP than was actually the case in 1865 or 1910, as indicated by the current prices of those years. Over time, prices of industrial goods fell in relation to prices of agricultural goods or services. To avoid such a misrepresentation of the historical sectoral relations, the estimates of the production of each sector, given in Table 4, are calculated by their shares of GDP at current prices times the aggregate GDP in 1990 PPP dollars. In this way the actual historical shares of each sector in 1865 and 1910 are measured in constant prices and comparable both over time and across the countries. However, this procedure means that the relative price movement of a sector, ceteris paribus, affects the estimates of production and productivity positively. Thus, the Danish industrial
30 31

Hyldtoft, Danmarks ökonomiske (1999) 160. Chenery et al, Industrialization (1986); Wang /Szirmai, ‘Productivity growth’ (2008).


productivity level in 1910 is favourably affected by the relative price development of the Danish industrial basket compared to the Swedish or the Finnish. When measured with a deflator for the whole GDP, total industrial annual growth was the strongest in Denmark (4.1 compared to 3.7 and 3.3 in Sweden and Finland respectively). However, if one measures at real product level with separate sector deflators – which take more note of the technical development but less of the income earning ability of the sector - annual industrial growth was stronger in Sweden and Finland (4.5 and 5.1 respectively compared to 3.5 in Denmark). To put it simply: The more pulp and paper - as an example of a very innovative commodity with a sharp fall in prices - in the industrial basket, the stronger the relative price fall of the industrial sector and the greater the industrial growth rate with separate sector deflators. Consequently rates of productivity growth differ between the two measures. When measured with the GDP-deflator, Danish industrial productivity growth was clearly leading as reported in Table 5. However, measuring the real product of industry, i.e. deflating with industrial prices, productivity growth was 2.4 percent in Denmark, compared to 2.3 and 3.2 percent in Sweden and Finland. Anyway, with both deflation methods, Danish industrial productivity growth was leading over Swedish. [Table 5 about here] Table 5 reports a comparison of productivity change in aggregate GDP as well as on sectoral levels for the period 1865-1910. As already pointed out, convergence did not occur among the Nordic countries in this period. Sweden and Finland just matched the Danish growth rate and the gap in absolute or money terms actually widened. Norway fell further behind and lost its position as number 2 to Sweden. As noted, and contrary to what might be expected, Swedish industrial productivity growth did not match the performance of


Danish industry and neither was the service sector more successful. Only as regards agricultural productivity, growth was faster in Sweden. In both industry and services productivity growth was the highest in Finland. Norwegian productivity dropped behind in all sectors as well as in the aggregate. In aggregate productivity growth, though, Sweden was slightly ahead of Finland and Denmark. It might be puzzling that the aggregate productivity growth in Sweden was higher than in any single sector. It highlights the importance of structural change and its contribution to economic growth, by reallocating productive resources to sectors with higher productivity. By use of shift-share analysis, productivity growth can be decomposed into one part of within-sector productivity change and another part of productivity change due to reallocation or structural change. At a low level of aggregation, the within sector productivity change is largely due to technical change and improved production methods, while at a higher level of aggregation it also contains reallocation effects within the sector. For example, within industry a considerable reallocation might be going on but is not distinguished from productivity change originating in new techniques when shiftshare analysis is applied on only a three sectoral economy. A standard variant of shift-share analysis is provided by:

where Pt and P0 denote aggregate productivity in year t and in year 0, respectively, and subscripts denote sector. Correspondingly with S which denotes share of employment. The left-hand term is the relative change in productivity over the period. The first term on the right-hand is the within-sector productivity change, the second and third terms are the static and dynamic structural effects on productivity change. The within-sectoral change equals the productivity change that would occur under the counterfactual assumption of no reallocation in the employment structure. It is


convenient to calculate the combined structural effects as the residual or difference between total and within productivity change. In an analysis of the American and German catch-up with Britain from the late nineteenth century onward, Broadberry has shown that this was largely due to structural change. By shifting resources out of agriculture into industry and services, the USA and later Germany succeeded to overtake the UK in aggregate income level, rather than by increasing productivity in manufacturing. This is at odds with the traditional view which held that the US and Germany were more successful with the technology of the second industrial revolution. However, Broadberry showed that the USA and Germany already had a productivity leadership in manufacturing and argued that the cause of the catch-up could not be found within manufacturing. 32 A limitation with the standard shift-share analysis is that the counterfactual assumption of constant employment implicitly assumes constant returns to scale. Hence, when applying the standard method, Broadberry found no structural effect in the American or German success stories although it, from a common sense, seemed obvious when major shares of employment were moved from low-productivity agriculture to more gainful activities. The simple reason for the inability of the standard shift-share to account for structural change in these cases is that the within-term combines the counterfactual constant and big employment with the actual productivity growth. As a consequence this counterfactual ‘explains’ a substantial part of the aggregate productivity change, and swamps the structural effect. However, Broadberry also developed a ‘modified shift-share’ under the assumption that sectors with diminishing employment shares had decreasing returns.* In other words, there was surplus labour or the ousting of labour out of agriculture was enhancing productivity growth. Yet, it is not obviously clear how the calculation should be adjusted. Broadberry’s

Broadberry, ‘How did the United States’ (1998).


‘modified shift-share’ introduced a counterfactual productivity adjustment for sectors with relatively shrinking employment, by reducing productivity rate of change with the rate of the relative reduction in employment.33 Table 6 shows the results of both a standard and a modified shift-share analysis of late nineteenth century productivity change in the Nordic countries. Even with the standard approach, the structural contribution to growth is significant. Its impact was the largest in Sweden but in relative terms it was more important in slowgrowing Norway. Following Broadberry and presuming that the real structural effect lies somewhere between the standard and the modified estimates, the contribution of structural change to productivity growth was somewhere around a fifth in Denmark and Finland, a third in Sweden, and two fifths in Norway. Crude as these estimates are, they nevertheless qualify some received views on industrialization in the Nordic countries. industry in productivity terms already in the beginning entieth century. [Table 6 about here] As noted earlier, Norwegian growth rates stand out in the Nordic context as low both in per capita terms and at GDP-level. Both Denmark and Sweden clearly advanced in relation to Norway while Finland nearly caught up. The retardation in Norwegian economic growth after the 1860s is often ascribed to a slow transformation of shipping from sail to steam.34 The service sector performed fairly well, however, in terms of productivity change, and was clearly leading in Norwegian economic growth. Structural change in terms of reallocation out of the primary sector was also more significant in Norway than in the other Nordic countries, and the contribution of

If < , counterfactual productivity change = pi – . van Ark and Timmer, ‘Asia’s Productivity’ (2003), denounces the ‘modified shift-share’ since it allegedly implies zero productivity change in diminishing sectors. This is however not the case and Broadberry’s contention that it shows an upper bound estimate of the structural effect seems reasonable. 34 See e.g. Bergh et al, Development and Growth (1981).


the structural effect to productivity change was substantial. If one should talk about a Norwegian failure, it was due to lagging sectoral productivity in agriculture and industry rather than sluggish structural change. Early stimulus from Western European industrialization to coastline economies seems to have created a too narrow base for further growth. Thus, notwithstanding the early integration with the international economy exhibited by the merchant marine, Norwegian economic growth fell behind that of the other Nordic countries in the late nineteenth century. Domestic and foreign markets in sectoral growth An important argument of the Export Model is that commodity exports grew faster than national income in all the Nordic countries. The argument is illustrated in figure 1, which pictures the exports relative to GDP. From about 1860 until the turn of the century exports as a ratio to GDP almost doubled in Denmark, Finland and Sweden, from roughly a tenth to a fifth of GDP, while being constantly high, between a fourth and a third, in Norway. Thus, the Norwegian export share stands out as an exception in the Nordic context being at a higher as well as at a rather constant level. The Norwegian export-to-GDP ratio attained the high level of 30 percent already in the mid-1840s. Fish, wood as well as services provided by international tramp shipping were major components in Norwegian exports. Expansion was brought to a halt, however, in the 1870s, due partly to a hesitant transformation from sail to steam, and partly to a narrow natural resource base in Norwegian forestry where expansion shifted to Sweden during the 1850s and 1860s.35* [Figure 1 about here] The behaviour of export growth in all countries raises some doubt about its validity as an argument for export-led growth. Firstly,

Montgomery, Industrialismens (1947) 101.


the very high export share in Norway is somewhat problematic to the export model, since export expansion in Norway was followed by the lowest growth among the Nordic countries. The high export share and the slow growth of agriculture and industry indicate a more dualist economy in Norway. Secondly, and more generally, all countries, also Norway, encountered a rapid growth of exports in the early 1860s, which proceeded into the 1870s in Sweden, Denmark and Finland. After that, however, the export ratio stagnated in Sweden and Finland, the most fast-growing countries. Only in Denmark did the growth of the export ratio continue. In the 1890s and 1900s, Denmark, Finland and Sweden all showed high growth rates in aggregate GDP (around 3 percent), although exports developed differently. In Sweden, the export ratio fell, in Finland it stagnated, while in Denmark the export ratio continued to grow at a slow pace. Thus, overall the more rapid growth of exports was a rather short phenomenon in most Nordic countries and the importance of domestic economy to assimilate that stimulus is emphasised. Foreign trade is not only exports, however. While exports long have been in focus for the analysis of industrialization in the Nordic countries, imports have not gained full attention. Actually imports grew faster than exports. Imports contained some investment goods and important inputs into production, such as coal. But the main component in imports was for consumption, either directly or indirectly. Consumption was a dynamic part of industrialization, much more than is acknowledged by the Export Model. The dynamics between exports, investment and consumption (thus, between the ingredients in aggregate GDP) is evident in the Swedish case, as demonstrated through a recurrent pattern in long cyclical fluctuations. Upswings were started by increases in exports, followed by a shift to increases in investments, resulting in increased employment and rising wages that lifted consumption. Thus, the standard behaviour for the short business cycle appears also as trend shifts in long swings over roughly 20 years, with trade deficits and


increased pressure towards structural change at the end. * While the direct role of capital imports was to finance investments, the result over the cycle was increasing consumption. Rising consumption was a stimulus to change, which is at the heart of the so called domestic model.36 Figure 2 highlights the resulting deficits in trade balances. The basic argument is that domestic demand tended to grow faster than exports in all the Nordic countries. [Figure 2 about here] It should be noted, though, that the series of the four countries are not exactly comparable. The Norwegian and Swedish trade balances are probably accurately computed, containing trade with both goods and services. Generally all Nordic countries had large deficits in the trade with goods but surplus in services due to the income of shipping. The Danish export of services has been crudely estimated for this paper whereas the Finnish series only considers the balance of merchandise trade and clearly overstates the trade deficit. Denmark’s merchandise foreign trade is reported in a study by Henriksen and Ölgaard, to which has been added freight income as a proxy for trade in services.37 Svend Aage Hansen provides an estimate of value added from shipping abroad; to arrive at net receipts the whole series has been doubled and then reduced by 15 per cent to allow for expenditures abroad. The result is certainly very stereotyped but the income from shipping services abroad is a reasonable explanation for a part of the very substantial deficit in merchandise trade. For the covering of the remaining deficits Denmark could fall back on a strong financial position built up in the third quarter of the nineteenth century, inter alia from the settlement

The cyclical pattern over periods of about twenty years is from Schön, ‘Kapitalimport’ (1989), ‘Internal and external’ (1997). 37 Henriksen/Ölgaard, Danmarks udenrigshandel (1960).


of the Sounds toll.38 Later on the large deficit had to be covered from capital imports. Denmark consequently accumulated a substantial foreign debt up to World War I. In the Nordic context, Denmark had an early lead also in trade deficits and capital imports that rose until a turning point in the late 1880s, when deficits diminished. At that time, Denmark had accomplished her agrarian transformation and developed a modern industry. The Nordic contrast to Denmark was Norway. The foreign affairs of Norway seem to have been balanced up to the 1890s with some capital exports from Norway to, for instance, Swedish sawmill industry. From the 1890s, however, a more extensive Norwegian capital import starts. Actually, the emergence of the modern electrochemical industry in Norway from the 1890s was heavily dependent upon foreign capital. In 1909 it is estimated that 39 percent of the capital in Norwegian limited companies within manufacturing was held by foreigners.39 With this injection into comprehensive industrial and structural change, Norway broke out of the long stagnation that had followed upon the early export oriented expansion. Sweden had an extensive and recurrent capital import from the 1850s until 1910. For Sweden a full estimate of the foreign debt – adding interest charges to the deficits in the current accounts - has been made. According to this estimate, the Swedish foreign debt was about 80 percent of GDP already around 1890, and grew slightly faster than GDP until World War I.40 Like the other Nordic countries, Finland had a very huge deficit in merchandise trade and Bärlund has made a comprehensive estimate of the different items that covered up for the deficits in the balance of payments in the period 1892-1913.41 Finland’s sailing merchant marine had earned important receipts but was in decline

38 39

Hansen, Ökonomisk vaekst (1972), 205f; Jörberg, ’Nordic countries’ (1973), .407. Hodne, Norges ökonomiske historie (1981). 362. 40 Schön, ’Kapitalimport’ (1989), Schön, Economic History (2012), 176. 41 Bärlund, ’Finland’s Balance’ (1992).


during the last quarter of the century.42 Together with travel expenditures and the like of the Russian army, freight receipts covered up for most of the Finnish merchandise trade deficits. Towards the end of the period that was not enough, and capital imports increased Finland’s recorded net foreign debt-to-GDP ratio from 2 percent in 1892 to 9 percent in 1913. Compared with the other Nordic countries this is not a large amount but it does not square well with the concept of export-led growth that all the Nordic countries developed deficits in their foreign trade. Capital imports highlight the complementarity between domestic markets and the international economy during the industrialization of the Nordic countries. The home market with its bulk in consumption was quick to integrate the impetus from export spurts in the second half of the nineteenth century. This was so since these spurts were stimulus into economies with market institutions that had developed already in previous decades, enabling them to diffuse the influences efficiently. Thus, widespread increases in wages and consumption became ingredients in profound domestic change. Conclusion Nordic development in the second half of the nineteenth century up to World War I is a case of successful economic growth, often referred to as a consequence of rising exports and open economy forces, particularly propelling industrializing economies such as the Swedish or the Finnish. However, the Nordic comparison uncovers different paths to industrialization that cannot be explained by reference to the shock of free trade or open economy forces only. While export growth was substantial in all countries, domestic markets were decisive for the different responses to the opening of new opportunities. Firstly, over the long period 1820-1910 the structure of income levels was largely stable, both between the Nordic countries themselves and between the Nordic countries and the Western

Kaukiainen, Sailing (1991), see also Hjerppe, Finnish Economy (1989), 154.


leaders. Divergence in the first half of the period was followed by convergence in the second half, but overall these tendencies were not very strong. The outlier to this pattern was Norway, where an early export spurt was followed by stagnation in economic growth. Secondly, Denmark kept its position as the leading Nordic economy in terms of income, modernization and industrialization, despite a comparatively strong direction to the domestic market within industry. Thirdly, the role of the main sectors agriculture, industry and services differed widely between the Nordic countries. Structural change since the 1860s was strongest in Sweden and the beginning of a catch-up with Denmark and Western Europe in aggregate income was driven not by industrial productivity but rather by shrinking agriculture. Also in Norway structural change was substantial but aggregate growth was retarded by slow productivity change in agriculture and industry. Fourthly, economic growth was characterized not only by rising exports but also by capital imports and increasing consumption, indicating wider economic and social change. Developments in foreign and domestic markets became highly integrated in the industrialization process. Over centuries there had been an interaction between the Nordic economies and international markets. The national responses to the mainly British challenge posed in the mid-nineteenth century were to a considerable extent determined by the preceding orientation towards markets, domestic as well as foreign, and by the social capabilities that had been accumulated during that development. These capabilities served to diffuse initiative and income both regionally and socially. Hence, the trap of dual economies was largely evaded and the pressure towards structural change of the whole economy was augmented. Thus, the social capability of the Nordic countries to integrate and respond to external influences 1850-1914 must be seen in the perspective of the evolving domestic markets and the prior establishment of market institutions. In this respect the Nordic


countries were part of a broader North-western European development.

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Tables Paths to Industrialization

Table 1. GDP per capita and annual growth rates in the Western leaders and the Nordic countries. 1820 - 1910. In 1990 Geary-Khamis dollars.
Western leaders Denmark Sweden Norway Finland 1820 1668 1274 921 801 781 GDP per capita 1865 2895 1875 1271 1293 951 1910 4457 3705 2638 2186 1906 Annual growth rates 1820-1865 1865-1910 1820-1910 1,23 0,96 1,10 0,86 1,53 1,19 0,72 1,64 1,18 1,07 1,17 1,12 0,44 1,56 1,00

Note: Western leaders are United Kingdom, Netherlands and Belgium. Sources: Data for Western leaders and Denmark, Norway and Finland are from Maddison, Historical Statistics ( , retrieved Oct. 2012 ); for Sweden data are from Schön/Krantz, Constructing (2012) (forthcoming on

Table 2. Urban shares and capital city shares of total population in the Nordic countries 1860-1910.
Year Urban shares of population Denmark 1860 1890 1910 23.4 32,8 42,0 Norway 15.6 23.3 29.3 Sweden 11.2 18.8 24.8 Finland 6.3 9.9 14.6 Capital city shares of population Copenhagen 9.7 16.6 20.3 Oslo 3.3 7.4 10,3 Stockholm 2.9 5.2 6.2 Helsinki 1.3 2.6 5.0

Note: Danish population data is for 1911. Sources: Denmark: Hyldtoft, Danmarks ökonomiske historie (1969), table 7:1;11:2 and 15:2. Norway: Norges Officielle Statistik: Folketellingen 1865, 1891 och 1910.( retrieved Oct. 2012 ) ; Sweden: Historisk Statistik (1969). Finland: Suomen Tilastollinen 1912, p. 10,(, retrieved Oct. 2012)

Tables Paths to Industrialization

Table 3. Sectoral distribution of employment in the Nordic countries, 1865 and 1910. Percent
Denmark Norway Sweden Finland 1865 Agriculture 53 60 68 75 Industry 26 14 17 16 Services 21 27 15 9 1910 Agriculture 38 39 48 67 Industry 29 25 29 18 Services 33 36 23 15 Sources: Hansen, Ökonomisk vaekst (1974) for Denmark, Bjerke, Langtidslinjer (1966) for Norway, Hjerppe, The Finnish Economy (1989) for Finland; Schön, En modern svensk (2000) for Sweden, (, retrieved Oct. 2012).

Table 4. Sectoral per capita product in the Nordic countries, 1865 and 1910. In 1990 Geary-Khamis dollars and index (Denmark=100).
Denmark 1865 Total Agriculture Industry Services 1910 Total Agriculture Industry Services 1875 1735 1539 2112 3705 3088 3176 4010 100 100 100 100 100 100 100 100 Norway 1293 982 1695 1342 2186 1329 2290 2482 69 57 110 64 59 43 72 62 Sweden 1271 746 1448 2275 2638 1396 2887 3956 68 43 94 108 71 45 91 99 Finland 951 750 991 1911 1906 1208 2490 3872 51 43 64 91 51 39 78 97

Note: The service sector is exclusive of services from dwellings. Sources: See table 1 and 3.

Tables Paths to Industrialization

Table 5. Growth rates of value added per head at constant prices (GDPdeflator) in the Nordic countries, 1865-1910.
Denmark Sector Agriculture Industry Services GDP per capita Sources: See table 3 and 4. 1.29 1.62 1.44 1.53 0.68 0.67 1.38 1.17 1.40 1.54 1.24 1.64 1.07 2.07 1.58 1.56 Norway Sweden Finland

Table 6. Decomposition of productivity change in the Nordic countries, 1865-1910: annual percentage change of within-change and structural-change
Denmark Norway Sweden Finland

Total GDP per capita Of which: Within-sector Structural effect - its relative contribution Of which: Within-sector Structural effect - its relative contribution Average structural contribution

1.53 1.17 Standard approach 1.34 0.85 0.18 0.32 11.8 % 27.4% Modified approach 1.01 0.51 33.3% 22.5% 0.49 0.68 58.1% 42.7%



1.25 0.39 23.8%

1.31 0.24 15.4%

0.94 0.70 42.7% 33.2%

1.18 0.37 23.7% 19.6%

Note: Current sector shares and GDP deflator. Sources, see table 3 and 4.

Figures Paths to Industrialization

Figure 1. Export-to-GDP ratio of the Nordic countries, 1820-1910.
.35 .30 .25 .20 .15 .10 .05 .00


Denmark Finland












Note: Three year centered moving averages. Merchandise exports only for Finland, while the others include service exports as sea freights. Denmark computed from Henriksen /Ölgaard (1960) and Hansen (1974); Finland from Hjerppe (1989); Norway from Brautaset, Norsk Eksport (2002), Grytten ‘Gross domestic product’ (2006), and NOS XII:163 (1965); Sweden from Krantz/Schön (2007). Brautaset’s export value in 1865 is 13 per cent higher than the official series but her series has been adjusted to the level of the latter.

Figure 2. Balance of trade-to-GDP ratios of the Nordic countries, 1850-1910.

.04 Norway .00 Sweden

-.04 Finland


-.12 1850

Denmark 1860 1870 1880 1890 1900 1910

Source: See Figure 1.