Norwegian Economic Policy experiences

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Ladies and gentlemen,

I am grateful for being invited to this conference and getting this opportunity to exchange views on issues of common interest. It’s very nice to be here in Haikou and to have this opportunity to exchange views on issues of common interest

I am also very pleased to have this opportunity to visit your country, which is so interesting in many different respects; historically, culturally, politically and economically. In Norway, and in the Ministry of Finance in particular, we are following with great interest the impressive economic growth in China, which. This is rapidly transforming your country into a modern and wealthy nation and reducing poverty (but also creating tensions/new challenges?).

China is now a major player in the world economy. China is an increasingly important trading partner also for Norway. China accounts for more than 5 pct. of Norway’s imports, making it our 5th-largest import source. In fact, increasing imports from China have in recent years contributed significantly to low inflation, not only in Norway, but in most developed countries. The Norwegian economy has benefited enormously from the integration of China in the world economy. For that we thank you.

China is conducting a policy that promotes development. The processes of capital accumulation and migration from the countryside to the cities – which in my part of the world took more that one hundred years – play it itself out/are taking place in China over a much shorter period of time. At the same time, it is obvious that such processes create new challenges, both concerning environmental constraints and distribution of wealth. These are types of issues that get much attention in my country.

Even though there are obvious differences between China and Norway, I believe we are faced with many similar challenges.

Let me start with a brief introduction of the present government in Norway: It is a majority government of three parties: The Labour Party, The Centre Party and my own party; The Socialist Left Party. We came into power after the parliamentary election in September 2005. The three parties expressed a clear will to safeguard and revitalize the welfare state. I believe that this is the main reason why we won the election.In order to fulfil these ambitions, a healthy economy is needed. Our economic policy aims at high labour participation, low unemployment and stable and sustainable growth.

Slides 2:
How has Norway developed over the last hundred years?

We have progressed from poor to rich:

• A hundred years ago Norway was among the poorer countries in Western Europe
• By 1950 caught up with Western Europe
• Today, Norway ranks among the richest countries in the world

How could this happen? I would like to emphasise three elements that have contributed to this development.

• The first element is the openness of our economy. Norway is a small country with strong traditions for open trade.
• The second concerns our natural resources. Our nation is blessed by nature in terms of energy resources – not only oil and gas, but also waterfalls.
• Today, it may be tempting to say that Norway’s success is based on our rapidly growing petroleum sector. It is true that Norway has benefited greatly from its petroleum resources. But I will argue that the good performance is not only about oil.
• I would rather point to a third element, namely what I will call the Nordic or Norwegian model. By this I mean our way of balancing the market economy and the role of the state.

Slides 3:
When discussing the Norwegian economy, oil and oil money often becomes the centre of attention. Indeed, lifted by high oil prices, the petroleum sector now represents close to 25 per cent of our GDP and more than half of our exports. Investments in exploration and field developments are at historically high levels. However, it is important to keep in mind that the petroleum rent – the value of the petroleum resources – is quite modest compared with the value added from labour.

This figure illustrates the point. The calculations date from 2004, but the main message is still valid. The figure shows that human capital amounts to almost 90 per cent of our national wealth.

The fact that the management of human capital is the by far dominant factor for our nation’s prosperity leads me to the Norwegian economic model.

Slides 4:
Income per capita depends on the number of hours worked, and the output produced from each hour of work. As you see from the figure, over the past 25 years, productivity growth has been stronger in Norway than in most OECD-countries, and this has contributed to a higher income growth. This is not confined to the petroleum sector. Also the traditional sectors experience higher productivity growth than most other countries.

According to conventional economic thinking, the Nordic countries should not perform well. Norway has a large tax financed government sector, and it is often claimed that this will disturb the economy. We also have a compressed wage structure, which is said to reduce incentives for education and hard work. So is our fairly generous safety net.

I believe that the Nordic countries have found a good balance between market economy and regulations. The role of the welfare state and cooperation with the social partners are important elements in this picture.

Let me mention some of the factors that may explain the performance of the Norwegian model:

• An efficient tax system reduces the overall distortions from taxes.
• Highly centralised wage bargaining is another factor. Sectors exposed to foreign competition set the bench mark for wage increases. Wage growth has, in fact, declined rapidly when this has been needed to counteract rising unemployment.
• A compressed wage structure secures profits in highly productive growth branches.
  A social safety net and active labour market policies are important as well. It reduces economic risks for the individual and the length of unemployment periods associated with job losses. It makes us less vulnerable to open trade and to changes in industrial structures. We aim at improving people’s employment opportunities, not sheltering particular types of jobs or industries.
• And finally, foreign trade openness and international and domestic competition is an explanation. Norway is a small economy with strong traditions for open trade. The strong dependence on trade, which we have in common with other small European countries, is important. Openness to trade implies openness to economic shocks. The Norwegian and Nordic features of flexible product and labour markets are especially important for the ability to respond to these shocks.

Slides 5:
A new element in the Norwegian model is the introduction of rules-based economic policies for managing the petroleum wealth. The petroleum sector is far more profitable than other sectors, since it gives rise to a resource rent. The Government collects a large share of this rent by taxation and other instruments. The net cash-flow from petroleum activities goes into a special fund named the Government Pension Fund – Global. In short, the rule says that we should spend only the real return on the fund and leave the fund’s capital untouched. Thereby all generations should benefit more or less equally from the petroleum wealth.

To accompany this fiscal guideline, a standard flexible inflation targeting regime for monetary policy was introduced. Let me just point out that the guidelines also open for an active use of fiscal policy for the sake of stabilisation. Traditionally, we have high ambitions for stabilisation policy in Norway to avoid high unemployment and thereby reduce the risk of people being pushed more permanently out of the labour market.

Using the rule’s flexibility, we may spend more than the expected return on the fund in downturns in order to stimulate economic activity. In periods of strong economic expansion we should spend less.

Slides 6:
I mentioned the social safety net as one of the elements of the Norwegian model. Allow me to expand a little on this topic, by describing our welfare model.

In Norway, the strong growth has gone in tandem with the building up of a modern welfare state

In the Nordic countries the government provides more services than in many other European countries. To some extent this makes it possible to have high female participation in the labour market. Care services that were previously provided within the families are now provided by the public sector, mostly by female employees.

Income distribution is rather compressed – the difference between high income earners and low income earners is less than in most other countries

The responsibility for providing most of the welfare services lies in the local government sector. There are around 450 local and regional authorities in Norway. Equality across regions is secured by legal acts giving the inhabitants the right to get public services at a certain standard. There is a regional redistribution income system managed by the Government. It ensures that all municipalities have sufficient income possibilities to actually support the inhabitants with the welfare services they have the right to receive.

Slides 7:
This chart shows the main welfare services that is provided, and compares Norway, Sweden, EU and US
Main welfare services are:

• Education. Primary and secondary school are public and free. Nursery school is heavily subsidized. No tuition fee at universities.
• Health. The main provider of health services is the public sector
• Care for elderly and disabled. Mainly a public responsibility

The main income replacement benefits are:

• Old  age pension and benefit in case of death of main income taker. Old age pension system is universal and public, but supplementary schemes both among public and private employees
• Public disability pension scheme
• The sickness benefit scheme
• Public unemployment scheme
• Family benefits, mainly related to children’s allowance

Slides 8:
The Norwegian Minister of Finance is responsible not only for economic policy, but also for coordinating the Government’s work on sustainable development. The most difficult – the most critical – sustainability issue today is an environmental one with widespread economic consequences, namely climate change. I am currently on my way to Bali, where I will join my Minister in the High-Level Event on Climate Change for Finance Ministers.

We have signaled ambitious climate policies. Our long-term goal should be to avoid temperature increase above 2 degrees Celsius. It will be no easy target, but we have already reached a stage where significant impacts on our planet cannot be avoided. 
Norway wants an international agreement:

• that includes as many countries as possible, 
• that is ambitious and fair, 
• and that reduces emissions in cost effective ways.

We have committed to over-fulfill our obligations under the Kyoto protocol.
And we aim for carbon neutrality by 2050.
We will contribute to develop new and climate friendly technologies, such as technology for capturing and storing carbon (CCS). I believe such technologies, once they are developed, will be valuable for ensuring that economic growth is not unneccesarily dampened. I also believe that there is ground for valuable cooperation between our two countries in this area.

All scientific knowledge points to the benefits of early action against climate change.
We will do this because it is the right thing to do, but also because it is economically sound.

Slides 9:
To conclude,

I have highlighted certain experiences we have had in Norway:

• Labour is by far our most important resource
• A well-functioning safety net is crucial for welfare and adaptability
• Openness to trade and investment is necessary for economic growth
• Economic growth creates challenges. The most urgent common challenge today, is climate change.

The differences between China and Norway are obvious. Norway is a small country with a rather homogeneous population. China is big, with a variety of cultures. Therefore, some parts of our experience may not be relevant for China. Other parts, however, like for instance the importance of a well developed public safety net and a flexible labour market, are of general relevance. So is also the challenge of climate change.

Thank you.