the norwegian economy norwegian life and society (norint0500) thomas von brasch: vonbrasch@gmail.com

The Norwegian EconomyNORWEGIAN LIFE AND SOCIETY (NORINT0500)

Thomas von Brasch: vonbrasch@gmail.com

Plan for the lecture

• Wealth and productivity in Norway– The Norwegian Productivity Puzzle

• Other statistical facts about Norway• Current macroeconomic situation

– Four important stabilising mechanisms

How wealthy is Norway?

National income per capita,Current prices, Norway=1

Why are we so wealthy?

Sources of wealth

19701974

19781982

19861990

19941998

20022006

20102014

Disposable real income per capita

Productivity - oil

Productivity - non oil

Terms of trade

Balance of income and current transfers

Hours worked/Population

Reasons to worry?

1970-1994 1995-2004 2005-2014-2.0

Productivity - oilProductivity - non oilTerms of tradeBalance of income and current transfersHours worked/Population

Contributions to labour productivity growth

1970-1994 1995-2004 2005-20140

TFPCapital intensity

Main drivers of TFP

• Human capital– Level of education– ICT knowledge

• Research and development

Level of education

Johansson, Å. et al. (2013), “Long-Term Growth Scenarios”, OECD Economics Department Working Papers, No. 1000, OECD Publishing. http://dx.doi.org/10.1787/5k4ddxpr2fmr-en

PISA 2012

ICT knowledge

OECD (2014), Measuring the Digital Economy: A New Perspective, OECD Publishing. http://dx.doi.org/10.1787/9789264221796-en

ICT knowledge

OECD (2014), Measuring the Digital Economy: A New Perspective, OECD Publishing. http://dx.doi.org/10.1787/9789264221796-en

R&D and productivity growth (1986 - 2008)

0.0 0.5 1.0 1.5 2.0 2.5-1.5

TFP annual % change

R&D/GDP

MFP growth=-0.18+0.497(R&D/GDP)t-statistic: 2.08**

The Norwegian Puzzle

• “There is a puzzle about Norway. How did it succeed in reaching one of the highest living standards among OECD countries from a relatively poor ranking in 1970?”(p. 18)

• “Productivity is high, real growth rates have been respectable, overall TFP growth is better than in many countries with higher R&D spending, and industry has by and large managed to survive a changing world and a strong exchange rate” (p. 129)

Source: OECD (2007), Economic Surveys: Norway, January (2).

Labour productivity

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4

NorwayNorway, Mainland

BelgiumNetherlands

DenmarkFrance

GermanySwedenAustria

SpainFinland

ItalyUnited Kingdom

IcelandGreece

PortugalEstoniaPoland

GDP per hour, relative to USA in 2013. Converted to USD using economy wide purchasing power parities. Sources: OECD og SSB.

Productivity and Purchasing Power Parities• Productivity refers to the volume of

outputs relative to the volume of inputs

• But the value of production is measured in different currencies

• How should the value of production be compared across countries?

Productivity and Purchasing Power Parities• Purchasing Power Parities compares

price levels between countries:

• They are essential when comparing productivity between countries

Impact from industry composition on productivity• Assume that two countries produce

two goods and that the prices of the two goods are the same in both countries at both time periods

• The Purchasing Power Parity between the two countries is then

• Relative productivity is then measured by

Impact from industry composition on productivity• Assume further that country is a

large oil exporter and that the oil price increases. Value added in constant prices will then increase most in country .

• Even if nothing has happened with productivity, the increase in oil prices will result in an increased of measured productivity:

Productivity (in time and space)

1980 1985 1990 1995 2000 2005 2010

Norway Denmark Sweden USAGermany France Finland

Sources: OECD og EUKLEMS. Gross product per hour. USD, basic prices. All industries except oil and electronics.

International comparisons

R&D: controlling for industry composition

Business R&D intensity, OECD average

Andrews, Criscuolo, 2013, Knowledge-based capital, innovation and resource Allocation, OECD Economic Policy Papers (4)

The Norwegian Puzzle

• Not that low R&D investments• Not as productive as previously

believed• Not as puzzling after all

Can one compare productivity between

countries with different industry structures?

Argentina vs. Norway

Sectoral composition and productivity• Example:

– Country produces 1 banana per hour– Country produces 2 apples per hour

• Which country is most productive?

Sectoral composition and productivity• Split production in three categories

A. Products made by both country and B. Products made by country onlyC. Products made by country only

• Productivity comparisons across countries relates to A

• But, how large is the common set of production?

Equal sectoral composition?

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Common production relative to total production, Manufacturing, 2013.

Source: Eurostat, PRODCOM database 2013. Average of the shares for Norway and the comparison country. ISO country codes.

Equal sectoral composition? Norway vs. Denmark

NOR DNK Product0,072 0 Unwrought aluminium alloys 0,058 0 Offshore vessels0,057 0 Fitting out services of ships and floating platforms and structures0,037 0 Design and assembly of automated production plants0,037 0 Repairing of ships, boats and floating structures 0,035 0 Frozen whole salt water fish0,025 0,012 Other structures principally of sheet: other0,021 0,003 Fresh or chilled fish fillets and other fish meat without bones0,019 0,013 Fresh or chilled cuts, of beef and veal0,019 0,001 Frozen fish fillets0,380 0,029

0 0,138 Generating sets, wind-powered0 0,029 Medicaments containing corticosteroid hormones0 0,028 Medicaments containing insulin but not antibiotics,

0,007 0,028 Fresh or chilled pig meat 0,001 0,024 Weirs, sluices, lock-gates, and other maritime structures0,004 0,022 Other food preparations n.e.c.

0 0,021 Enzymes; prepared enzymes 0,005 0,018 Articles of iron or steel, n.e.s.0,002 0,017 Other articles of plastics or other materials0,005 0,017 Beer made from malt 0,024 0,342

Shares of production, 2013

Source: Eurostat, PRODCOM database 2013. ISO country codes.

How can we increase productivity?

1. Produce more electronics

Produce more electronics?

Kilde: OECD STAN ISIC REV. 4, Industry d26 for USA.

Development relative to overall GDP. USA.

2. Fire people with a disability

Productivity – not at any price• Policies directed at increasing

productivity should be based on what is an overall gain for society, not only by the gain in productivity.

• Public policies to raise productivity in private businesses should be based on the existence of market failure, e.g., – Monopoly– Polution

Future productivity growth

Employment

Implications for productivity: envelope calculation• Public employment share is expected

to rise from 30% to between 40 and 50% in 2060

• Change in overall productivity growth= (change in employment share) x (difference in productivity growth)= (50%-30%) x (0,5%-2%) = -0,3 (percentage points)

• Is this a problem?

Other statistical facts about Norway

Gender gap index

• Economic Participation and opportunity– E.g., Female labour force participation,

income etc. relative to male.

• Educational attainment– E.g., female literacy rate, enrolment rate

• Health and survival– Female healthy life expectancy over

male value

• Political empowerment– Females at ministerial level over male

World Economic Forum: http://www3.weforum.org/docs/GGGR14/GGGR_CompleteReport_2014.pdf

Gender gap index

Women at work

https://www.regjeringen.no/no/dokumenter/meld-st-46-20122013/id733259/?ch=2

Wise women

Inequality: Gini coefficient = A/(A+B)

Inequality (Gini coefficient)

Source: https://en.wikipedia.org/wiki/Economic_inequality

Employment and labour force participation rates 2012

https://www.regjeringen.no/no/dokumenter/meld-st-46-20122013/id733259/?ch=2

Current macroeconomic situation

Output gap

Output

Potential output

Actual output

Output gap in Norway

Stabiliser 1: Government policy – «budgetary rule»

Stabiliser 2: The Central Bank of Norway

Why do we have so low interest rates?

𝑟∗

Savings

Investments

Real interest rate,

Savings

Investment slump

Real interest rate,

𝑟∗

Savings glut

Investment slump

Real interest rate,

𝑟∗

Stabiliser 3: Wage negotiations

Stabiliser 4: Exchange rate

http://www.economist.com/news/finance-and-economics/21674775-currency-pegs-are-still-fashion-some-are-creaking-pegs-under-pressure?frsc=dg%7Cd

Stabiliser 4: Exchange rate

Contributions to future GDP growth

Summary

• Norway – Wealthy– «Equal» in many respects– Highly educated– No productivity puzzle– Different sectoral composition sector

compared with many other European countries

• 4 important short run stabilising mechanisms

the norwegian economy norwegian life and society (norint0500) thomas von brasch: vonbrasch@gmail.com

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