Economic perspectives.

Author:Gjedrem, Svein
Position:Company overview
 
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  1. Introduction

    On the way into this building, we pass a statue of the nineteenth century Norwegian actor Johannes Brun. He performed at Christiania Theatre, which once stood in the square in front of the main entrance. Brun was an acquaintance of Henrik Ibsen, who also worked at the same theatre for a period--part-time as dramatic consultant--when the theatre he had been directing closed. This was a difficult time for our great dramatist, both personally and financially. He was struggling to overcome writer's block and the public's preference for the mediocre and the trivial. (1) Nineteenth-century Christiania (now Oslo) was described as "O great and little city! What a cold and surly sky broods over you!" (2)

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    A bleak time for Ibsen, perhaps. But the Norwegian economy was not faring all that badly. The economic expansion that had begun in the 1820s gathered momentum from the middle of the century. The British navigation acts were repealed in 1849 and the Norwegian fleet was permitted to transport other countries' goods to and from England. Norway had suddenly become a major exporter of services. The tonnage of the Norwegian commercial fleet increased almost six-fold from 1850 to 1880.

  2. Changes in the international division of labour

    We are now again in a period of considerable changes in the international division of labour. Global trade is again growing at a markedly faster pace than production, thanks to technological advances and a sharp reduction in the costs associated with trade in goods, services and information.

    Trade barriers have been removed. In the early postwar years, tariff barriers between a few industrialised countries were dismantled. The later rounds in GATT, now the WTO, embraced both a far broader agenda and a greater number of countries. Today, almost all countries participate as members or observers and the issues are far-ranging. In addition to dismantling tariff barriers, anti-dumping measures have been introduced, subsidies have been removed and agreements have been entered into for textiles and agricultural products. In the current round, issues related to health, the environment and development are also being discussed.

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    Political changes have amplified this tendency. At the beginning of the 1990s, China changed course and is now a member of the WTO. Its share of total exports is growing rapidly. India is at the starting-line. These countries have large labour forces that offer their services at very low wages, and these labour resources are available to companies that compete on world markets. The working-age population in rural China is nearly the same as that of the entire OECD area. Many are underemployed and are seeking work in urban areas.

    Low labour costs and more efficient transport and communication attract labour-intensive production. Production is being transferred to China or other emerging economies. There are many examples showing that competition in selling highly skilled services is also intensifying. Myopia surgery is offered in Turkey. Dental care and other medical services are also offered, at prices that are substantially lower than in Norway. Norsk Hydro reports that almost 300 000 hours of engineering services for the Ormen Lange project were supplied by Indian engineers, located in India.

    Trade in services flows both ways. Norwegian architects are designing landmark buildings all around the world. Det Norske Veritas sells its services worldwide. A company--Vik-Sandvik--that designs ships that are built in Europe, Asia and the US has its head office in the rural community of Fitjar. An ICT firm located in Glen municipality--Omega--is developing and installing software for customers in Baku and Dubai.

    New markets in Asia are creating opportunities for industrialised countries. Resources are transferred to enterprises producing goods and services that require specialised skills. Businesses that have been sheltered and protected by national regulations are in a weak position when new technology or new agreements expose them to external competition.

    The shift in the division of labour is now influencing--and will continue to do so for a period--real wage growth in industrialised countries. The risk that a business will have to wind up operations or move abroad is dampening costs. In a number of European countries, wage growth is also being influenced by labour inflows from the new EU member states.

    Increased trade has engendered higher demand for shipping services and favourable freight rates. This has in turn led to a boom in the shipbuilding industry. At the same time, high energy prices are boosting investment in the petroleum and electricity sectors, with considerable impetus to the engineering industry. Growth in Asia is having a favourable impact on aluminium prices.

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    Prices for our imported goods are falling in relation to prices for goods we export. Norway's terms of trade are improving. The impact of the rise in oil and gas prices is particularly strong, but the terms-of-trade gains for the mainland economy have also been high.

    The situation in Norway differs from that of its Nordic neighbouring countries. Sales of Swedish and Finnish high-tech products are growing strongly in volume terms, but prices are falling. Denmark has a diversified business sector, which is overall moving on a steady path.

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    As consumers, we are benefiting from falling prices for many imported goods. Clothing prices are an illustration of this. Prices rose by around 3 per cent annually for a long period, but since 1995 they have been falling by about 6 per cent annually. This kink point coincides with the dismantling of the restrictions on textile trade and it coincides with a period of rationalisation in retail trade in Norway. China's membership of the WTO has subsequently pushed down prices further.

    The Internet facilitates price comparison, and price margins in all sectors are under pressure.

    World financial markets are also in flux. Technological advances, increased trade and liberalisation have increased cross-border capital flows. Foreign ownership of businesses has increased considerably. At the same time, savings are increasingly being invested in foreign countries. The home bias for investment has diminished.

    In recent years, long-term interest rates have declined. Low and stable inflation in many countries has made a contribution. Investors have less of a need to hedge against high inflation. There is a strong tendency to save among Asian and oil-exporting countries, while the willingness to invest is limited in many industrialised countries. This is pushing down interest rates. Low long-term rates probably also reflect low short-term interest rates and ample liquidity.

    Interest rate developments and buoyant growth have led to a sharp rise in equity prices in the past few years. At the same time, property prices are rising sharply in many countries.

    Low interest rates, sharply rising equity and property prices, high commodity prices and high energy prices are probably linked to cyclical developments and may therefore be transitory. Changes in the international division of labour, integrated financial markets and increased competition in broad goods and services markets are more permanent.

    Globalisation and cyclical developments have been kind to the Norwegian economy. Few countries are benefiting as much as Norway--and losing as little--in the current environment of freer trade in goods and services and cross-border labour mobility.

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  3. Challenges to monetary policy

    After almost two decades of high inflation, the rise in prices stabilised in many countries in the 1990s. The year-on-year rise in prices in the industrial countries was about 13 per cent at the beginning of the 1980s. In the course of the following decade, it fell to below 2 per cent. Today, most central banks orient monetary policy towards low and stable inflation.

    The practical implementation of monetary policy can vary, but the common...

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