The Norwegian Economy NORWEGIAN LIFE AND SOCIETY (NORINT0500)

Thomas von Brasch: [email protected]

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

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How wealthy is Norway?

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National income per capita

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Why are we so wealthy?

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6

Disposable real income per capita (1000 2015- kroners)

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Sources of wealth • Productivity – Petroleum – Other

• Terms of trade – Petroleum – Other

• Movements between oil and other industries • Transfers to abroad (net) Thomas von Brasch: [email protected]

Decomposition of growth in real disposable income

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Labour productivity: reasons to worry?

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Main drivers of productivity • Human capital – Level of education – ICT knowledge

• Research and development

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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 Thomas von Brasch: [email protected]

PISA 2012

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ICT knowledge

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ICT knowledge

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

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ICT knowledge

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

Thomas von Brasch: [email protected]

R&D and productivity growth (1986 - 2008) TFP annual % change 2,0 FIN

1,5

NOR SWE DEU GBR

1,0

AUT ISL

USA

0,5

CHE

AUS

NZL PRT

0,0

FRA

NLD

JPN

BEL CAN

-0,5 ITA

-1,0

DNK

ESP

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

-1,5 0,0

0,5

1,0

1,5

2,0

2,5

R&D/GDP Thomas von Brasch: [email protected]

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).

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International comparisons

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Unadjusted business R&D intensity Adjusted business R&D intensity

4

%

R&D: controlling for industry composition

POL

SVK

ESP

ITA

HUN

PRT

NOR

CZE

IRL

GBR

NLD

AUS

SVN

BEL

EST

FRA

AUT

DEU

USA

DNK

JPN

SWE

KOR

FIN

0

2

Business R&D intensity, OECD average

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

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Labour productivity Norway Norway, Mainland Belgium Netherlands Denmark France Germany Sweden Austria Spain Finland Italy United Kingdom Iceland Greece Portugal Estonia Poland 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

GDP per hour, relative to USA in 2013. Converted to USD using economy wide purchasing power parities. Sources: OECD og SSB. Thomas von Brasch: [email protected]

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?

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Productivity and Purchasing Power Parities • Purchasing Power Parities compares price levels between countries: 𝑃𝑃𝑃 = 𝑃𝑗 /𝑃𝑘

• They are essential when comparing productivity between countries 𝐺𝐷𝑃𝑗 𝑃𝑃𝑃 𝐺𝐷𝑃𝑘

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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 𝑃𝑃𝑃 = 1

• Relative productivity is then measured by 𝐺𝐷𝑃𝑗

𝑃𝑃𝑃 𝐺𝐷𝑃𝑘

=

𝐺𝐷𝑃𝑗

𝐺𝐷𝑃𝑘

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Impact from industry composition on productivity • Assume further that country 𝑗 is a large oil exporter and that the oil price increases. Value added in constant prices will then increase most in country 𝑗. • Even if nothing has happened with productivity, the increase in oil prices will result in an increased of measured productivity: 𝐺𝐷𝑃𝑗 𝐺𝐷𝑃𝑘 Thomas von Brasch: [email protected]

Productivity – relative to US GDP per hour, two different base years

Norway Mainland Norway

Denmark 2013 (base year 2013)

Fance Germany

2013 (base year 1998)

Sweden Finland

-0,3

-0,2

-0,1

0,0

0,1

0,2

0,3

0,4

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The Norwegian Puzzle • Not that low R&D investments • Not as productive as previously believed • Not as puzzling after all

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Break

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Can one compare productivity between countries with different industry structures?

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Argentina

vs.

Norway

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Sectoral composition and productivity • Example: – Country𝑗 produces 1 banana per hour – Country 𝑘 produces 2 apples per hour

• Which country is most productive?

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Sectoral composition and productivity • Split production in three categories A. Products made by both country 𝑗 and 𝑘 B. Products made by country 𝑗 only C. Products made by country 𝑘 only

• Productivity comparisons across countries relates to A • But, how large is the common set of production?

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Equal sectoral composition? Common production relative to total production, Manufacturing, 2013. NLD LVA POL GBR FRA EST FIN SWE ITA AUT ESP BEL DEU IRL IS DNK 0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

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

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Equal sectoral composition? Norway vs. Denmark Shares of production, 2013 NOR 0,072 0,058 0,057 0,037 0,037 0,035 0,025 0,021 0,019 0,019 0,380

DNK

Product 0 Unwrought aluminium alloys 0 Offshore vessels 0 Fitting out services of ships and floating platforms and structures 0 Design and assembly of automated production plants 0 Repairing of ships, boats and floating structures 0 Frozen whole salt water fish 0,012 Other structures principally of sheet: other 0,003 Fresh or chilled fish fillets and other fish meat without bones 0,013 Fresh or chilled cuts, of beef and veal 0,001 Frozen fish fillets 0,029

0 0 0 0,007 0,001 0,004 0 0,005 0,002 0,005 0,024

0,138 Generating sets, wind-powered 0,029 Medicaments containing corticosteroid hormones 0,028 Medicaments containing insulin but not antibiotics, 0,028 Fresh or chilled pig meat 0,024 Weirs, sluices, lock-gates, and other maritime structures 0,022 Other food preparations n.e.c. 0,021 Enzymes; prepared enzymes 0,018 Articles of iron or steel, n.e.s. 0,017 Other articles of plastics or other materials 0,017 Beer made from malt 0,342

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

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How can we increase productivity?

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1. Produce more electronics

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Policy 1: Increase production of electronics

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2. Fire people with a disability

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Produce more electronics? Development relative to overall GDP. USA.

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

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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

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Future productivity growth

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42

Employment

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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?

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Other statistical facts about Norway

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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 etc.

• Health and survival – Female healthy life expectancy over male value

• Political empowerment – Females at ministerial level over male value World Economic Forum: http://www3.weforum.org/docs/GGGR14/GGGR_CompleteReport_2014.pdf

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Gender gap index

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Women at work

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Women at work

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

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Wise women

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

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Inequality (Gini coefficient)

Source: https://en.wikipedia.org/wiki/Economic_inequality Thomas von Brasch: [email protected]

Employment and labour force participation rates 2012

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

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Current macroeconomic situation

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Output gap

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Output gap in Norway

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Unemployment rate currently at 5.0 per cent

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Stabiliser 1: Government policy – «budgetary rule»

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Stabiliser 2: The Central Bank of Norway

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Stabiliser 2: The Central Bank of Norway (0,5 %)

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Stabiliser 3: Wage negotiations

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Stabiliser 4: Exchange rate

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

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Contributions to future GDP growth

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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 Thomas von Brasch: [email protected]