LME or CME – whats it gonna be? - Norwegian egalitarian/statist capitalism in transition

Prepared for conference on Politics and the Varieties of Capitalism,

WZB 31.10 - 01.10 2003.

Bent Sofus Tranøy, Post-doctoral Research Fellow, Centre for Technology, Innovation and Culture,

Faculty of Social Science, University of Oslo, Box 1108 Blindern, 0317 Oslo, Norway

E-mail: b.s.tranoy@tik.uio.no

1.Introduction

This paper has two general aims. Firstly, to place Norwegian capitalism more

firmly on the conceptual map developed by the Varieties of Capitalism literature.

Secondly, this is used as a springboard for reflections on the role of the state in a

VOC-context. The paper is, at this stage, an exploratory exercise. It is not driven

forward by one or two key arguments towards a coherent set of conclusions. Rather

this is what I will be aiming for in later versions.

Norwegian capitalism is, if at all, categorised as a Coordinated Market

Economy (CME) Hall and Soskice 2001: ). To a large degree this is a valid claim.

Among the variables highlighted by the VOC literature, as regards Industrial

Relations, Vocational Training and Education, Norway has typical CME traits. These

are uncontroversial statements, and they will fleshed out in a paragraph or two, not

critically examined. In stead the paper will focus areas where categorisation is more

difficult.

Difficulties related to categorisation, and by extension, to understanding the

logic and complementarities that characterise Norwegian capitalism arise for three

reasons. Firstly Norway has some key traits that go beyond the scope of the two ideal-

typical models the VOC literature is based upon. Simply put, in Norway the role of

state is arguably more important for the capitalist system, at the very least in different

ways, than what the pure VOC-models allow for. Secondly Norwegian wage

negotiations, produces not only wage restraint, but wage compression, which interacts

with educational policy in a way that to my knowledge is not commonly highlighted in

the VOC literature. Thirdly, some areas are currently undergoing fairly rapid change

towards the ideal of Liberal Market Economies (LMEs).

The first point means that industrial policy, macro-economic policy and some

elements of welfare policies will be included in the analyses. The second means that

wholesale change of the financial system and partial change of the corporate

governance system has to be analysed.

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The paper proceeds in four steps. In the next section I will describe the

Institutions of Norwegian capitalism in a VOK-framework. Then the following

arguments will be pursued with falling levels of precision and empirical detail:

Section three presents an argument that links industrial financing, corporate

governance and macro-economic policy. Norwegian capitalism has long been

characterised by a dual structure. One structure is made up of small, local and locally

financed companies engaged in Diversified Quality Production (DPQ). The second

structure is made up of large, often state owned companies basing their activities on

Norway’s large natural resources (oil, gas and hydro electric power). These two

structures, have been deeply, but differently, influenced by changes in the financial

and corporate governance system.

Changes in the financial- and by extension the corporate governance system

have primarily been driven by change in macro-economic policy regime. The regime

has gone from being centred on producing low and stable interest rates to lifting

interest rate up to being the central technocratic instrument in an effort to discipline

fiscal and incomes policy. Norway now has an independent central bank with an

inflation target. Industry is thus no longer able to count on cheap credit and stable

exchange rates. At the same time the share market has grown in stature facilitating the

import of US-style share holder value norms. The loss of cheap credit and a stable

exchange rate has had very different impact on the two main sectors. While the big –

rent extracting - companies have been able to compensate through increasing both

their share of equity capital, through increased use of bond market and finally, through

increasing the share of activities located abroad. These compensatory measures have

not been available to any significant degree for the majority of the smaller, local,

DPQ-oriented sector.

Section four sketches the second argument, which is that wage negotiations and

the educational system in Norway interacts in a way that gives rise to a specific

institutional advantage. In analyses of coordinated wage bargaining most attention is

afforded to these systems ability to produce wage restraint. A second outcome that is

closely associated with high degrees of coordination however, is wage compression. In

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a highly educated population this means that industry and the public sector has access

to cheap labour at the high end of the market For the resource extracting industry, for

example, this translates into a comparative advantage in the cost of engineering (Barth,

Moene and Wallerstein 2003).

In section five, the third argument or set of arguments, tries to spell out that

there is set of equilibrium producing mechanisms that links egalitarian outcomes with

full employment and high level of welfare provisions. This section will probably be

dropped in the next draft, but I have left it in for now, to see if the topic arises any

interest.

Reflecting the drafty quality of the paper, section six does not provide a

conclusion. In stead a list of challenges that confronts the logic outlined here

arguments is presented.

2. Norwegian capitalist institutions

2.1 Finance and corporate governance

Norwegian capitalism has long been characterised by a dual structure that taken

together can justify using the label state-dominated CME. One structure made up of

small companies has been oriented towards diversified quality production (DQP)

within sectors such as furniture, engineering and machinery. These companies are

often family owned, dependent on local finance (savings banks) and have provided

long-term employment for employees willing to invest in company specific skills. The

second structure, which can be described as (resource) rent extracting, has been

dominated by large companies seeking to exploit Norway’s vast natural resources. Of

these hydro electric power and oil and gas are the most important. In this structure the

state has, particularly in the period from 1945 to the late 70s, provided a very hands-on

type of coordination achieved through entrepreneurship, ownership, licensing

agreements, privileged access to capital and special considerations in incomes policy.

In turn this reflected both the size of the required investments relative to a

comparatively weak financial system, a discourse centred on the common ownership

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of national resources and the prime political position of the social democratic party for

the first three post-war decades.1

In the German ideal-type long term funding is secured through mechanisms

rooted in bank credit, proxy voting and stable cross-ownership patterns. Monitoring is

secured through the networks these patterns give rise to. In Norway neither universal

style bank credit nor cross-share holding ownership is prevalent, while transparency

rules for listed companies are probably closer to US than German standards. And

although a market for corporate control has arisen over the last 20 years, in the really

big actors, amounting to almost 60 percent of the total value of the Oslo stock

exchange, the state holds a controlling stake. This means that ownership is stabilised,

while the availability of long-term finance is secured through a combination of the

formidable political clout of the companies in question and the securities market.

Two of these giants Statoil (oil and gas) and Telenor (telecoms and cable) were

until recently fully state-owned and the state still has more than a 50 percent share. In

a third national champion, the industrial conglomerate Norsk Hydro (oil and gas,

metals and fertilizers), the state has had a controlling stake hovering around 50 percent

throughout the post-war period. In addition the state has a 47.8 stake Norway’s biggest

bank (DnB).2 What is often referred to as the “Hydro-model” is emerging as an ideal

(that Statoil and Telenor should also approach) in social democratic political quarters

and beyond. The argument being that a 50/50 split between the state and private

owners secures domestic control and stability while the discipline of the market is still

a real force.

1 Norwegian egalitarian traditions, historically the result of how land resources were

distributed and the yield from these were generally to low to sustain a powerful aristocracy. These egalitarian outcomes have been reinforced through political and labour market institutions. A side effect of this is that that private capital has been, and still is, scarce. This goes for both banking and private investors. At the same time the fixed costs of developing natural resources like hydro-electric power and even more so offshore oil and gas can be extremely high. This has created an opening for the state as an investor and provider of capital. At the same time a high level of trust in government and egalitarian values has provided state ownership with a high degree of legitimacy.

2 This share will be diluted to 30-something if and when a proposed merger with the banking

side of financial supermarket “Gjensidige Nor” is finalised.

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Other key actors from the private sector have also been intimate with the state.

The business historian, Knut Sogner (2003:44-45 ), argues that the incentives (and

disincentives) established by the state after WW2, played into the hands of growth-

oriented management-led companies while penalising owner-controlled dividend-

oriented companies. High taxes on profits and dividend penalised the latter, while tax

concessions for investments and high deprecation rates encouraged the former. It was

in short a tax regime geared towards growth and investement.

The oil and gas sector when established in the 1970s continued this tradition.

Huge investments and “a licence to drill”, in exchange for large contracts securing

employment at shipyards and petroleum related mechanical engineering sites. The

state, dominated by a self confident and power conscious social democratic elite, ran

industrial policy as well as several funding programmes with the three targets of

earning foreign exchange, modernising the industrial base and securing regional

employment and development.

Smaller DQP oriented companies has traditionally secured funding through

retained profits, local savings banks and diverse public funds. Before the financial

market was liberalised and the share market stimulated through diverse means in the

first part of the 1980s, both small and large companies relied heavily on borrowed

funds. The share of equity of Norwegian companies was low by international

standards (Flæte 1997: 52-53). This made sense in a credit regime where real post tax

rates often reached zero or less (se section 3.1 below). As real interest rates shot up

and the tax regime was changed towards reducing the rewards tied to credit financed

investment, large companies adapted through use of the share market. The state came

in through “Folketrygdfondet” (a fund earmarked for paying for future pensions) with

shares of 8-11 percent in many of Norway’s main corporate entities (Engelstad

2003:46). A second source of equity was through foreign (most portfolio) investors.

Norway’s share market opened up to foreign capital through the 1980s. A third source

was the mutual fund industry which grew up in the same period.3

3 Here and many other places numbers will provided in next draft

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In smaller companies however, equity shares actually fell though the first half

of the 90s, making companies less creditworthy just as market pricing of credit took

hold. Most small and medium sized companies in Norway are too small to be listed on

the bourse’s list for such companies, and the bond market is also closed to a majority

of them. This means that the State’s willingness to provide seed capital and go in and

own parts of companies through its bank for industrial and regional development is

crucial together with other measures such as differentiated pay-roll tax and regional

infrastructure projects.

2.2 Industrial Relations

There is a huge established literature covering industrial relations in Norway.

This is probably because Norway has been seen as a prime example of corporatism,

and typically obtains score near the top on indexes of degrees of coordination in wage-

setting (Wallerstein 1999:table 5.2). Research by Barth, Moene and Wallerstein

(2003), shows that there is strong independent relationship between wage coordination

and wage compression.

Furthermore, the main employer organisation NHO, plays exactly the role that

the notion of CME would lead one to expect. It provides organised labour with a

coherent counterpart. As Bowman (1998, 2002) has convincingly argued, the system is

resilient in the face of increased international competition because it serves important

employer interests like facilitating wage moderation, reducing transaction costs,

stabilising industrial relations and increasing the political leverage of organised

employer interests. It is a system where a balance is constantly being sought between

the need for flexibility and firm level adaptation, while at same time limiting one

effect of this, namely wage-drift. Therefore the NHO invests resources into building

trust and loyality between key negotiators through discourse and social interaction.4

4 Exactly what role Norwegian inter-firm organisations play in issues like standard-setting,

collaborative research and so on is a topic where it has been difficult to find secondary literature. My suspicion is that Norway would not achieve a full CME-score on this dimension if we had data and indicators.

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Norway has, however, been experiencing something of a middle class revolt

against wage compression over the last 10 years. Led by medical doctors and other

public sector employees, this has spread down in the hierarchy resulting in

fragmentation of the bargaining system. New organisations are sought brought into the

system in an orderly manner. This has increased the need for external discipline, which

as we shall se below has been provided by granting the central bank autonomy and an

inflation target. Whether middle class revolt signals the end of wage coordination as

we know it, or merely a rebalancing of the distributive bargain within the welfare

state, with welfare state employees gaining relative to exposed sector workers is too

early to say.

Norwegian labour markets also have typical CME-traits. Norway is in the upper

echelons both when it comes to employment and unemployment protection (Estevez-

Abe, Iversen and Soskice 2001: tables 4.1 and 4.2). This is an arena where the link

between welfare policy and corporatist organisation is particularly strong. A recent

survey documented that Norwegian business-elites (owners and top managers) are

generally very positive towards institutions like the employee protection act (check

English term), much more so than populist and conservative politicians, and

irrespective of their political orientation otherwise (Gulbrandsen 2002).

2.3 Inter-firm relations

This is an area where there is little secondary literature to draw upon. Possibly

because inter-firm relations in themselves (apart from those concerning wage

bargaining) are not very spectacular. When Norwegian firms cooperate it is often in

order to get something from the state.

For example, the state has a prominent position in the innovation system. A

larger proportion R&D spending is on the state’s hand than in most other OECD

countries. Furthermore the whole system is geared towards the needs of traditional big

industry, such as metals (processed in processes powered hydro-electrically), wood,

pulp and the petroleum sector (Fagerberg and Narula 2001).

On a more general level, the importance of the state as an agent controlling

resources that the private sector wants, is reflected in employers’ policy. Important

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reorganisations (like the creation of NHO – which fused employer and industry

interests into one organisation in 1987) and strategy shifts on the employers side, has

primarily been motivated by a desire to increase employers leverage vis-à-vis the state

(Espeli 2003).

3.0 Macro-economic routines and institutions

3.1 The social democratic credit model

One way of viewing the Macro-economic regime of Norway in the period from

about 1950 to around 1980 is by placing credit policy at the centre, and interpreting

other policies in light of this. In short we can speak of a Social Democratic Credit

Regime (SDCR), Tranøy (2000).

At the core of the SDCR was the relationship between interest rate controls that

kept nominal rates low and stable, and credit controls that kept excess demand

generated by the low rates from being realised in the market. Low interest-rates

contributed to keeping investments high. It was also a common perception that low

interest rates favoured investments in real capital over portfolio investments. Low and

stable interest rates also favoured incomes from work relative to “passive” investments

in bonds. The authorities also sought to stabilise investment levels. Credit controls

secured that there was always a “queue” of projects waiting for the go ahead. This

enabled the authorities to “release” waiting investment projects in case of a cyclical

downturn. An important prerequisite for the SDCR was the deployment of capital

controls. This made it easier to maintain a domestically oriented interest rate policy

without putting too much strain on the exchange rate.

A corollary to the active use of credit policy for stabilisation purposes was a

corresponding lack of active fiscal policy. In stead fiscal policy was cautious, small

surpluses was the routine. This corresponded to the functional requirements of the

credit regime in several respects. It reduced the state’s need for borrowing, it reduced

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monetary growth and it reduced the need borrow abroad, which in turn would have put

pressure on the system of capital controls. (Tranøy 1998).

In general the low rate of interest influenced savings negatively. This made it

more important that the authorities contributed positively to aggregate savings. Budget

surpluses also made it easier to finance the network of state banks. The state banks got

further funding through some of the credit controls.5

In the period from the early 1980 to the early 90s the regime was gradually and

hesitantly reformed, but at great short- to medium term costs. In a total breake with the

model, policies became pro-cyclical to dramatic effect. This lead to an asset price

bubble forming in the mid-eighties. Basically what happened was that popular reforms

were implemented (housing and share market liberalisation and access to credit was

eased) while unpopular measures like letting interest rates tackle increased demand

and reducing the value of tax breaks on interest rate payments were postponed.

3.2. Towards central bank independence

Then, when the oil price fell dramatically in the winter of 1986, agreement on

these less popular measures were agreed upon. Norway chose a totally inflexible fixed

exchange-rate a la Mitterand and Delor’s “Franc forte” of a few years earlier. This

produced record high interest rates while the rate of inflation and the value of tax

breaks came down. In sum the economy was given a real post-tax interest rate shock,

resulting in a very hard landing consisting of banking- and dept crises and a steep rise

in unemployment.6

In 1992-93 super-fixed exchange rates were driven off their pegs in many

European countries. The UK fell in September, Sweden in November while the oil-

rich and twin surplus producing, but nevertheless recession-ridden Norway followed

in December 1992 to the great dismay and surprise of key decision makers.

5 Instruments forcing banks and insurance companies to purchase low yield government and

government backed bonds served the double purpose of restraining private sector credit supply, and funding state banks and politically prioritised industry at the same time.

6 Real post-tax rates went from around zero in 1986 (depending marginal tax rates which in turn depended on income levels) to around 7 percent in 1992.

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In the shadow of the chaotic and confusing situation Norwegian decision-

makers suffered during the autumn and winter of 1992, a new national macro

economic governance strategy – the so-called solidarity alternative - was worked out.

This entailed a division of labour between the three key policy areas. Fiscal policy was

to be used to control aggregate demand. Incomes policy should take care of improving

competitiveness by aiming for wage inflation below that of Norway’s competitors.

Finally the task of monetary policy should be to stabilise the NOK against European

currencies to secure a stable monetary framework for incomes policy.

In 1993 conditions were conducive to realising these ambitions. The, by

Norwegian standards, record high unemployment rate indicated that fiscal policy

should not be too tight.7 The unemployment situation also dampened wage demands

from organised Labour. On the exchange rate front, NOK was to be stabilised against

ECU, with no official margins. This translated into accepting short-term deviations,

with the aim of returning to old levels as soon as possible. This way the authorities

hoped to provide business with the fruits of a stable exchange rate without paying the

price in terms of vulnerability against one-way bets and self-fulfilling prophecies.

Gradually, however, it became clear that the solidarity alternative was too much

a product of the business cycle circumstance ruling at its inception. It was best suited

for a rainy day. Counter-cyclical fiscal policy was more easily achieved as long as it

implied spending increases rather than cuts, and wage moderation was more easily

achieved while unemployment was high. To make matters worse for the “Solidarity

alternative” the NOK got stronger during the upturn, while the continental economies

were still in slump. This meant that interest rates had to be cut in line with German

interest rates in order to fend off upward pressure on the exchange rate even though

employment, BNP, wages and housing prices started to climb.

At the heart of this problem was - simply put - petroleum revenues. These grew

phenomenally during 1996 and 1997 and this strengthened the position of the NOK

vis-à-vis the core EMS currencies. The state run “petroleum fund”, which invests

passively abroad in order to protect Norway from catching “Dutch disease”, grew very

7 In 1992 unemployment reached 6 percent a Norwegian post-war record.

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fast. This visualised how rich the Norwegian state was growing, and made the

pedagogics of fiscal policy much more difficult, in effect playing into the hands of

populist politicians and media.

The booming oil sector also contributed to increasing the output gap differential

between Norway and Europe. The biggest economies in the EMS were sluggish during

1996, 1997 and 1998, and the output gap differential between Norway and “Euroland”

(that is the 11 countries that were to join the EMU in 1999) went from zero in 1994-95

to around 5 percent in 1998.8 This gap illustrates well that Norway and the big

economies of continental Europe had divergent monetary policy needs in this period.

The Central Bank realised this, but felt hamstrung by the exchange rate regulation. It

was realised that Norway’s departure from the path of the continental European

economies was systematic and probably structurally determined.9

The new Central Bank governor as of 1999, former top official from the

Ministry of Finance Svein Gjedrem, took this into account when he boldly decided to

reinterpret the exchange rate regulation which had hamstrung his predecessor. He

shifted emphasis from a part of the instruction which talked about “maintaining a

stable NOK exchange rate against European currencies” to the part which talked about

orienting monetary policy “with a view to returning the exchange rate over time to its

initial range (italics added). By deciding to take a more long-term view of events in the

currency market, he in effect defined a (direct) inflation target (by implication the

ECBs target of 2 pecent) rather than an (intermediate) exchange rate target for

Norwegian monetary policy.

In the spring of 2001 the new system was formalised. The then labour

government of Jens Stoltenberg, was being put under enormous pressure to spend

more oil revenue to solve perceived problems within welfare sectors such as old-age

8 Skånland (1999):chart 2. 9 The Norwegan export sector with petroleum products totally dominant probably has a lot do

with this. On the other hand, over the 1990’s Norway’s movement over the business cycle has been better synchronised with economies such as that of the USA, the UK and Sweden (Norges Bank 1998:304). Earlier the difference – to the degree that it was observed – was often though of as a function of idiosyncrasies of Norwegian policy making (Skånland 1999:6).

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and health care. Stoltenberg decided to start phasing in oil revenues a bit faster, but in

a controlled manner.10 A corollary to this was to actually give the central bank a

symmetrical inflation target of 2.5 percent, the extra 0.5 percent compared to the ECB

representing room to phase in oil income and thus accept a moderate appreciation of

the exchange rate.

Thus in stead of the “division of labour” with one policy area responsible for

one target each, he established a policy hierarchy with the instrument he has assumed

control over – monetary policy – on top. This rests on the notion that the societal

interests that ultimately shape fiscal and incomes policy (democratically elected

politicians and trade- and employer organisation leaders respectively) might be

responsive to disciplining from empowered technocrats in the Central Bank. If they

decide on budgets or wage settlements respectively, that the central bank deem to be

inflationary, they will be punished through unpopular and costly interest rate hikes.

We may ask, might similar results not be possible with the routines of the

“Solidarity alternative”? In short, the answer is no. The net effect of “irresponsible”

wage settlements or fiscal policy may sometimes have been similar (that is, higher

interest rates), but under that regime the effect had to come by way of the currency

market and the exchange rate. That is, Norges Bank did not control the situation.

Given a wage settlement or a budget that it did not like, it had to hope that the

currency market would react negatively bringing the exchange rate under pressure so

that it could employ the interest rate weapon. But the exchange rate is determined by

more factors than incomes and fiscal policy, the oil price being perhaps the single most

important exogenous factor. Under such conditions, the threat of interest rate hikes is

much less credible than the one Norges Bank wields with the current regime.

This is broadly speaking in harmony with analyses that take what might be

termed the pessimistic view of democratic governance of the economy. In this

literature, the general notion is that governments respond to short term electoral

“imperatives” when making fiscal and monetary policy and therefore need to insulate

10 A “rule” allowing the government to spend a sum corresponding to the expected real

appreciation of the petroleum fund (around 4 percent) yearly but accommodated to the business cycle was devised and agreed upon by all parties except for the by populist Progress party.

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monetary policy/and or establish a more rule-based fiscal policy routine. To this

picture can also be added a long line of studies of wage formation emphasising

collective action problems and the inflationary consequences of these.

Essentially all these literatures are about co-ordination. A key question is, what

kind of institutional set up can facilitate co-ordination across different interests so that

societal or “welfare” gains can be achieved. Most often gains are conceptualised in

terms of reducing inflation with no or minimal impact on employment. If we introduce

some auxiliary conditions, we can use elements of this literature as a yardstick when

discussing the co-ordination potential between fiscal, monetary, and incomes policy in

Norway.

The view of fiscal policy inherent in the original pessimistic literature is not

very nuanced. Elected politicians are generally said to be bad at producing fiscal

restraint if given too much discretionary power. This kind of general proposition does

not sit easy with the fiscal track record of Norwegian governments from the war and

until the mid-1960s. Very powerful Labour governments dominated this period of

Norwegian political history. Most observers would probably agree that Labour

wielded its power in a decidedly discretionary manner. Still, fiscal restraint (i.e. budget

surpluses) was the trend. Later on, however, institutional variation has been introduced

to the study of fiscal policy. A common finding from this literature is that it is more

difficult to hold Government deficits and debt down when the state and the party

system is fragmented. This is so, to put it simply, because co-ordination and balancing

of competing demands is more difficult to achieve when power is fragmented (Alesina

and Perotti 1994).

The Norwegian state is traditionally understood as unitary and the party system

is neither particularly fragmented nor concentrated (Lijphart 1984:178, 122). Still, it is

my contention that the gist of the argument about co-ordination fits the observation

that relatively weak minority and/or coalition governments have become the rule in

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Norwegian politics over the last 30 years. And, cabinets resting on such foundations

have tended to have trouble in producing fiscal restraint.11

As Einar Lie (1998:83-85) has pointed out, Labour has a tradition for showing

restraint in power. This has often been achieved with the help of the Conservatives

who tend to feel obliged to support a fiscal stance that can help keep taxes down. But

in a situation where Labour stabilised at a level of support first around 30 then fell

further toward mid-20s, the result seems to be weaker governments and a greater

diffusion of power. The centrist parties on their part are more “pet policy parties”. If

they are not ruling themselves, their support comes at a fiscal price. At the same time,

all other parties are consistently pounded from the right by the populist “Progress

party”. This party led by the media darling, Carl I Hagen, simply refuses to accept the

general limits on oil revenue spending which all the other parties acknowledge. Given

that the cabinet-parliament relationship has changed permanently, self-binding through

giving the Central Bank the power to punish politicians by way of interest rates seems

an adequate tool for improving co-ordination between fiscal and monetary policy.

A similar kind of logic applies in the case of incomes policy. Political

economists have developed the argument that the relationship between central bank

independence and inflation performance is better understood as resulting from an

interaction effect with the system of wage determination. More specifically this

literature emphases the importance of co-ordinated wage bargaining systems as

facilitators of an effective signalling process between the central bank and wage setters

(Hall 1994, Hall and Franzese 1998:511). The main implication is that:

11 The last majority government Norway had was Willoch’s second cabinet (1983-85). It could

be argued that this government was a majority government also in the years when the Conservatives ruled alone (1981-83) because of the solid support it enjoyed from its later coalition partners. The most interesting fact about this government’s fiscal performance is, however, how it gradually lost control over public spending in its later years. And as a corollary to this – its lack of enthusiasm for administrating the cuts that all parties agreed were necessary in one way or the other in spring of 1986 when the price of oil plummeted. The last majority government before this was the non-socialist coalition led by the Centre-party’s Per Borten from 1965 to 1971. This was not a government of great restraint either. Commenting on this government’s performance, Hanisch (1996:178) remarks that “never before had public expenditure grown so fast during peace-time.” Eventually, the post-war tradition of the Labour cabinets that had been hegemonic in Norwegian political life until 1965 of running fiscal surplusses was broken by Borten’s government.

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…where wage bargaining is co-ordinated, the central bank may be able to influence the level of settlements and reduce inflation simply by signalling its policy intentions so that monetary policy does not raise unemployment

This is in contrast to the incentives faced by actors in uncoordinated wage

bargaining systems. In such systems each bargaining actor is too small to expect direct

reactions to its particular settlement. And where they furthermore face disincentives to

show moderation of their own accord because of collective action problems. In such a

system maintains Hall and Franzese, the central bank may well have to actually

implement a policy of tight money and thereby contribute to higher unemployment.

As we have seen, Norway has a highly co-ordinated wage bargaining system,

but under the solidarity alternative wage moderation has been difficult to achieve

when labour market conditions got too tight. This indicates that a central bank able to

send out credible signals (or threats) and pulling in the same direction as the trade and

employer union leadership, could achieve more versus the rank and file of trade union

members and businessleaders, compared to a situation where these leaderships are

working alone.

If we accept the premise that wage and fiscal restraint together with wage

compression are integral to the logic of Norwegian capitalism, the conclusion that

follows from this discussion is that institutional innovation in the set-up for monetary

policy making in Norway represents and answer to new problems within the spheres

of fiscal policy and wage formation thereby increasing the effectiveness of older

institutions in these arenas.

At the same time new problems, in particular for smaller local firms sprung up.

The shift towards inflation targeting implied that Norway for the first time in modern

history operated with a flexible exchange rate. In the spring of 2001 a serious

appreciation got under way. This was partly predictable (the result of phasing in oil

revenues in a full employment economy which implied positive interest rate

differentials to most trading partners), but also partly stochastic in origin: The bursting

of the dot.com bubble led to a flight out of stocks, and out of dollar denominated

stocks in particular, which made investors, at least in the short to medium term more

interested in interest rate differentials.

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A lively debate ensued, pitting the central bank against actors who argued that

the bank a) overstated the case for de-industrialisation in order to phase in petroleum

revenues and b) underestimated the effect its communication of this had on the price

of the NOK in the market and c) underestimated the disinflationary effect of a high

nominal exchange rate. This was thus, essentially not a debate about central bank

independence as such, but about how the bank went about pursuing its mandate. In the

spring of 2003 the bank changed its stance, instigating a series of interest rate cuts

which has so far brought the bank’s key signalling rate down from 7 to 3 percent.

Small and mediumsized companies, what I have roughly described as the DPQ

sector is however, not out of prison yet. There conditions have been worsened on

many scores. To sum up:

They are experiencing more interest rate instability with periods of high interest

rates quite frequent over the last 15 years.

Often this has come together with a high nominal (and real) exchange-rate. Due

to their size they have very limited access to the stock and bond markets. At the same

time the banking crisis and the emergence of a more active market for corporate

governance has led to an enormous decline in local (savings and loans) banking. This

means that it is more difficult to achieve financing on relational terms. I.e credit

conditions obtained on the basis of network monitoring and trust funded by deposits.

In stead branch offices of national banks come in. These are mostly funded on national

capital market terms, which means that the relational element is weakened if not gone

altogether. Firms with low equity can obtain good rates in a relationship framework,

but not when the criteria are “objective” and hammered out by analysts in Oslo or

some European financial centre.

Internationalisation of production, apart from outright relocalisation – a choice

made more and more often – is seldom an option. Finally, the system of innovation is

as we have seen, not geared towards the needs of small firms.

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4. The comparative advantage of wage compression and cheap

education

The most interesting feature of the Norwegian education and training system is

not the skill profile defined as the relative presence of general versus firm specific

skills, although Norway has a relatively skilled blue-collar work force. What really

stands out is the very high share willing to invest in higher education. Norway has the

highest levels of education in Europe, just behind Sweden and Finland.

This is so, even though the monetary pay-off from this choice is one of the

lowest among the advanced industrial countries ( Barth, Moene and Wallerstein 2003).

Wage compression translates into the 3.lowest individual rates of return on education

in the OECD-area. The way Norway combines top ranking on share of highly

educated individuals in the work-force with bottom ranking on wage dispersion is

deeply paradoxical if seen as a set of individual financial calculations and in isolation

from how the educational system is funded. One needs to bring in how education is

financed in order to understand this outcome. “Equal right to education” has been a

slogan in Norwegian educational policy. The practical implication has been a

combination of student grants, loans that carry no interest while students are studying

and no school fees in higher education12

Wage compression (and relative abundance) provides cheap labour at the high

end of the market, engineers being the prime example. What we find is a

complementarity between the institutions of welfare provision and wage formation.

Norwegian extractive industry and the mechanical engineering (yards, consultancies)

that service them, has therefore enjoyed an institutional comparative advantage in

terms of the cost of engineers. This has made it attractive to invest in the high-skill end

of the so-called traditional and low-tech industries that dominate the Norwegian

economy.

12 There are some exceptions to the no school fee rule, but in practice the fees charged are still

heavily subsidised through grants to the schools in question while the students in question often get a higher grant in order to compensate.

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5 Egalitarian outcomes, full employment and high levels of public

welfare provisions

- Wage compression has particularly penalised the (growing) middle class. This

provides an incentive for establishing two-income families. In turn this is made easier through high levels of welfare provisions (day care, generous parental leave entitlements). Several of these welfare arrangements have a double effect, they provide jobs and they make it easier to go to work for those who have caring responsibilities.

- Two-income families (which in a comparative context is significant through

high female participation in the workforce) increases the tax base needed to finance the generous welfare state.

- Compression of disposable incomes in general and high marginal tax rates in

particular, can be a disincentive to work overtime and can arguably be seen as creating spontaneous work-share arrangements, boosting full employment (see below).

- Exposed sectors have been wage-leading, meaning that labour required for

staffing the welfare state has been relatively cheap in domestic terms. While wage compression has meant that staffing the higher echelons of the welfare state has been cheap also in absolute terms.

- Given certain conditions (amongst others that welfare provisions are primarily

seen as insurance and that insurance is a normal good for which demand rises with income) the political support for a high level of redistribution through policy and political institutions increases with a high “initial level” of wage compression.

6. Forces of change

In keeping with the format of this paper, I have not tried to write a proper

conclusion. In stead I will indicate some tendencies that may destabilise and serve to

break up some of the complementarities outlined in the introduction/summary above.

- Internationalisation of business. Outgoing FDI has grown enormously. This

reduces the coordination capacity of the state while it also arguably reduces the interest of large companies in maintaining domestic institutions. Ingoing FDI has also increased. This, naturally, often targets smaller companies unprotected

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by state ownership and weakened by interest rate volatility and real exchange rate appreciation. On going research on the effects of this for the Norwegian industrial base indicates that the country of origin is crucial for how Norwegian companies fare under foreign ownership (Herstad 2004 forthcoming). Simply put, companies taken over by investors from CME-countries thrive, while those taken over by owners from LME countries complain of lack of investment, excessive short-termism and focus on cosmetically motivated balance sheet operations.

- Even though I have argued that the state-stabilised rent extracting sector has

enjoyed better conditions than the smaller DPQ oriented sector in recent years, the implications of part-privatisation and the imposition of share holder value ideology should be further analysed. One hypothesis is that introducing short term ideals on rent extraction is potentially detrimental to the future of this sector. The incentives to invest can simply get too small. A second element is that the easy hire and fire ideals (and cosmetic balance sheet operations like outsourcing permanent tasks and hiring the services back from former employers turned consultants), and modern executive pay packages that often come with share holder value ideology can contribute to undermining industrial relations in the long run.

- Finally, the integration of petroleum-revenues goes on and on. This entails at

least two dangers, one political the other economic. On the economic front recent developments has taught us that the exchange rate is the Achilles heal of the new macro-economic set-up. A new period with an overvalued exchange rate can accelerate de-industrialisation to a degree that the issue becomes one of structural change more than adaptation. Politically the presence of a petroleum fund approaching one thousand billion NOK provides populist sentiment with a continuous supply of energy. The worst case scenario is that Norwegian political culture gradually degenerates into a level of rent-seeking hitherto associated with non-democratic countries.

References:

Alesina and Perotti, 1994

Barth, Moene and Wallerstein 2003

Bowman 1998

Bowman 2002

Engelstad et. Al 2003

Estevez-Abe, Iversen and Soskice 2001

Flæte 1997

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21

Freeman 1996:

Hall and Soskice 2001

Hanisch 1996

Lie 1998

Lijphardt 1984

Skånland 1999

Sogner 2003

Soskice 1999

Tranøy 2000

Wallerstein 1999