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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 Thomas von Brasch: [email protected] How wealthy is Norway? Thomas von Brasch: [email protected] National income per capita, Current prices, Norway=1 Thomas von Brasch: [email protected] Why are we so wealthy? Thomas von Brasch: [email protected] 6 Sources of wealth 3.5 Disposable real income per capita Productivity - oil Productivity - non oil 3 2.5 2 1.5 Terms of trade Balance of income and current transfers 1 0.5 Hours worked/Population 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 0 Thomas von Brasch: [email protected] Reasons to worry? 5.0 4.0 Productivity - oil 3.0 Productivity - non oil 2.0 Terms of trade 1.0 Balance of income and current transfers 0.0 Hours worked/Population -1.0 -2.0 1970-1994 1995-2004 2005-2014 Thomas von Brasch: [email protected] Contributions to labour productivity growth 3 2.5 2 TFP 1.5 Capital intensity 1 0.5 0 1970-1994 1995-2004 2005-2014 Thomas von Brasch: [email protected] Main drivers of TFP • Human capital – Level of education – ICT knowledge • Research and development Thomas von Brasch: [email protected] 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 Thomas von Brasch: [email protected] ICT knowledge Thomas von Brasch: [email protected] 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] 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). Thomas von Brasch: [email protected] 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? Thomas von Brasch: [email protected] Productivity and Purchasing Power Parities • Purchasing Power Parities compares price levels between countries: 𝑃𝑃𝑃 = 𝑃𝑗 /𝑃𝑘 • They are essential when comparing productivity between countries 𝐵𝑁𝑃𝑗 𝑃𝑃𝑃 𝐵𝑁𝑃𝑘 Thomas von Brasch: [email protected] 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 𝐵𝑁𝑃𝑗 𝑃𝑃𝑃 𝐵𝑁𝑃𝑘 = 𝐵𝑁𝑃𝑗 𝐵𝑁𝑃𝑘 Thomas von Brasch: [email protected] 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: 𝐵𝑁𝑃𝑗 𝐵𝑁𝑃𝑘 Thomas von Brasch: [email protected] Productivity (in time and space) 44 44 40 40 36 36 32 32 28 28 24 24 20 20 16 16 2010 1980 1985 Norway Germany 1990 1995 Denmark France 2000 Sweden Finland Sources: OECD og EUKLEMS. Gross product per hour. USD, basic prices. All industries except oil and electronics. 2005 USA Thomas von Brasch: [email protected] International comparisons Thomas von Brasch: [email protected] 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) Thomas von Brasch: [email protected] The Norwegian Puzzle • Not that low R&D investments • Not as productive as previously believed • Not as puzzling after all Thomas von Brasch: [email protected] Break Thomas von Brasch: [email protected] Can one compare productivity between countries with different industry structures? Thomas von Brasch: [email protected] Argentina vs. Norway Thomas von Brasch: [email protected] Sectoral composition and productivity • Example: – Country𝑗 produces 1 banana per hour – Country 𝑘 produces 2 apples per hour • Which country is most productive? Thomas von Brasch: [email protected] 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 𝑗 only • Productivity comparisons across countries relates to A • But, how large is the common set of production? Thomas von Brasch: [email protected] 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. Thomas von Brasch: [email protected] 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. Thomas von Brasch: [email protected] How can we increase productivity? Thomas von Brasch: [email protected] 1. Produce more electronics Thomas von Brasch: [email protected] Produce more electronics? Development relative to overall GDP. USA. Kilde: OECD STAN ISIC REV. 4, Industry d26 for USA. Thomas von Brasch: [email protected] 2. Fire people with a disability Thomas von Brasch: [email protected] 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 Thomas von Brasch: [email protected] Future productivity growth Thomas von Brasch: [email protected] 40 Employment Thomas von Brasch: [email protected] 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? Thomas von Brasch: [email protected] Other statistical facts about Norway Thomas von Brasch: [email protected] 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 Thomas von Brasch: [email protected] Gender gap index Thomas von Brasch: [email protected] Women at work Thomas von Brasch: [email protected] Women at work https://www.regjeringen.no/no/dokumenter/meld-st-46-20122013/id733259/?ch=2 Thomas von Brasch: [email protected] Wise women Thomas von Brasch: [email protected] Inequality: Gini coefficient = A/(A+B) Thomas von Brasch: [email protected] 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 Thomas von Brasch: [email protected] Thomas von Brasch: [email protected] Current macroeconomic situation Thomas von Brasch: [email protected] Output gap Output Potential output Actual output Time Thomas von Brasch: [email protected] Output gap in Norway Thomas von Brasch: [email protected] Stabiliser 1: Government policy – «budgetary rule» Thomas von Brasch: [email protected] Stabiliser 2: The Central Bank of Norway Thomas von Brasch: [email protected] Stabiliser 2: The Central Bank of Norway Thomas von Brasch: [email protected] Why do we have so low interest rates? Real interest rate, 𝑟 Savings 𝑟∗ Investments Thomas von Brasch: [email protected] Why do we have so low interest rates? Real interest rate, 𝑟 Savings 𝑟∗ Investment slump Thomas von Brasch: [email protected] Why do we have so low interest rates? Real interest rate, 𝑟 Savings glut 𝑟∗ Investment slump Thomas von Brasch: [email protected] Stabiliser 3: Wage negotiations Thomas von Brasch: [email protected] 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 Thomas von Brasch: [email protected] Stabiliser 4: Exchange rate Thomas von Brasch: [email protected] Contributions to future GDP growth Thomas von Brasch: [email protected] 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]