The Norwegian Economy · Andrews, Criscuolo, 2013, Knowledge-based capital, innovation and resource...

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

Why are we so wealthy?

Disposable real income per capita (1000 2016- kroners)

Sources of wealth

• Productivity– Petroleum– Other

• Terms of trade – Petroleum– Other

• Movements between oil and other industries• Transfers to abroad (net)

Decomposition of growth in real disposable income

Hours worked per capita

Balance of income and current transfers

Terms of trade, other

Terms of trade, oil and gas

Labour reallocation gains

Productivity growth, mainland

Productivity growth, oil

Labour productivity: reasons to worry?

Main drivers of productivity

• Human capital– Level of education– ICT knowledge

• Research and development

Level of education

Thomas von Brasch: vonbrasch@gmail.comJohansson, 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

Level of education

PISA 2015

ICT knowledge

Thomas von Brasch: vonbrasch@gmail.comOECD (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)

JPNNLD

0,0 0,5 1,0 1,5 2,0 2,5

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).

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)

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

Norway

Norway, Mainland

Belgium

Netherlands

Denmark

France

Germany

Sweden

Austria

Finland

United Kingdom

Iceland

Greece

Portugal

Estonia

Poland

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:

𝑃𝑃𝑃 = 𝑃𝑗/𝑃𝑘

• They are essential when comparing productivity between countries

𝐺𝐷𝑃𝑗

𝑃𝑃𝑃 𝐺𝐷𝑃𝑘

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 then𝑃𝑃𝑃 = 1

• Relative productivity is then measured by𝐺𝐷𝑃𝑗

𝑃𝑃𝑃 𝐺𝐷𝑃𝑘= 𝐺𝐷𝑃𝑗

𝐺𝐷𝑃𝑘

Impact from industry composition on productivity

• Assume further that country 𝑗 is a large oil exporter and that the oilprice increases. Value added in constant prices will then increase most in country 𝑗.

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

𝐺𝐷𝑃𝑗

𝐺𝐷𝑃𝑘

Productivity – relative to USGDP per hour, two different base years

-0,3 -0,2 -0,1 0,0 0,1 0,2 0,3 0,4

Norway

Mainland Norway

Denmark

Germany

Sweden

Finland

2013 (base year 2013)

2013 (base year 1998)

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?

Sectoral composition and productivity

• Example:– Country𝑗 produces 1 banana per hour– Country 𝑘 produces 2 apples per hour

• Which country is most productive?

Sectoral composition and productivity

• Split production in three categoriesA. Products made by both country 𝑗 and 𝑘B. Products made by country 𝑗 onlyC. Products made by country 𝑘 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 Product

0,072 0 Unwrought aluminium alloys

0,058 0 Offshore vessels

0,057 0 Fitting out services of ships and floating platforms and structures

0,037 0 Design and assembly of automated production plants

0,037 0 Repairing of ships, boats and floating structures

0,035 0 Frozen whole salt water fish

0,025 0,012 Other structures principally of sheet: other

0,021 0,003 Fresh or chilled fish fillets and other fish meat without bones

0,019 0,013 Fresh or chilled cuts, of beef and veal

0,019 0,001 Frozen fish fillets

0,380 0,029

0 0,138 Generating sets, wind-powered

0 0,029 Medicaments containing corticosteroid hormones

0 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 structures

0,004 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 materials

0,005 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

Policy 1: Increase production of electronics

2. Fire people with a disability

Produce more electronics?

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

Development relative to overall GDP. USA.

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 etc.

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

• Political empowerment– Females at ministerial level over male value

Thomas von Brasch: vonbrasch@gmail.comWorld Economic Forum: http://www3.weforum.org/docs/GGGR14/GGGR_CompleteReport_2014.pdf

Gender gap index

Women at work

Wise women

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

Inequality (Gini coefficient)

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

Current macroeconomic situation

Output gap

Output gap in Norway – what happened in 2014?

Drop in oil price from

Unemployment rate currently at 5.0 per cent

Stabiliser 1: Government policy – «budgetary rule»

Stabiliser 2: The Central Bank of Norway

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

Stabiliser 3: Wage negotiations

Stabiliser 3: Lower relative costs of production

Stabiliser 4: Exchange rate

Thomas von Brasch: vonbrasch@gmail.comhttp://www.economist.com/news/finance-and-economics/21674775-currency-pegs-are-still-fashion-some-are-creaking-pegs-under-pressure?frsc=dg%7Cd

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 · Andrews, Criscuolo, 2013, Knowledge-based capital, innovation and resource...

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