Svein Gjedrem: Economic perspectives
Annual address by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the
meeting of the Supervisory Council of Norges Bank, Oslo, 20 February 2003
* * *
The global economy is ailing, plagued by a recent history of unsound investments, a fall in equity
prices and fears of terror and war. In Norway, employees obtained the strongest increase in real
wages for a generation in 2002. Petroleum revenues have generated excessive optimism. The
imbalances caused by the combination of global stagnation and the high Norwegian cost level are
leading to job losses and higher unemployment.
Why has the krone appreciated?
The krone is strong. As a result, prices for imported goods have fallen. This has led to low and stable
inflation in spite of sharp wage growth. It would appear that inflation will also remain low in the years
ahead.
Chart 1. Effective exchange rates
1990=100
120 120
110 110
GBP
100 100
NOK
90 90
NZD
80 80
SEK
70 70
60 60
1990 1992 1994 1996 1998 2000 2002
Source: EcoWin
The krone exchange rate fluctuates. This is not surprising because other countries' currencies also
fluctuate. The Swedish krona depreciated sharply in 1992. Since then it has remained weak, but has
shown wide variations. Pound sterling appreciated by more than 20 per cent between 1996 and 1998,
reflecting solid growth in the UK economy from the mid-1990s. A currency that has exhibited wider
swings than most is the New Zealand dollar. A sharp appreciation up to the mid-1990s was
subsequently reversed. Over the past two years, this currency has moved in tandem with the
Norwegian krone.
The krone exchange rate is the price of our currency measured in terms of a foreign currency.
Developments in other countries are just as important for the krone as developments in the Norwegian
economy.
Capital flows freely and flows can change rapidly. This can spill over to exchange rates and interest
rates as well as output and employment.
Chart 2. Equity prices and long-term interest rates
in the US
Index Per cent
1600 12
1200 9
800 6
10-year rates
400 3
(right-hand scale)
Standard & Poor's 500
(left-hand scale)
0 0
1990 1992 1994 1996 1998 2000 2002
Source: EcoWin
Currency swings are driven by cross-border capital movements. Capital flows were heavily influenced
by investor focus on stock market returns until the downturn began. In the US, equity prices almost
trebled between 1995 and 2000. Stock markets in other countries followed suit. Capital inflows into the
stock market resulted in a strong dollar. However, expectations concerning corporate earnings were
higher than later proved to be warranted. When expectations were lowered, equity prices fell. The
decline was amplified after the downturn in the global economy deepened as a result of terror and
fears of war. Investors sought to avert the risk in the stock market. Demand for bonds increased,
resulting in low long-term interest rates.
Chart 3. A war economy?
Index. January 2001=100
110 150
Swiss franc
105 (left-hand scale) 125
100 100
Oil price
Gold reserves
(right-hand
(right-hand scale)
95 75
scale)
11 September Resolution 1441
90 50
2001 2002 2003
Source: EcoWin
In response to heightened uncertainty and fears of war, traditional safe havens for capital, such as the
Swiss franc and gold, have become increasingly attractive. The Swiss franc appreciated after the
terrorist attacks on 11 September 2001 and towards the end of last year. Gold prices moved up
sharply after UN Security Council Resolution 1441 was adopted on 8 November last year.
Oil prices fell markedly after 11 September 2001, but have since risen. Fears of war in Iraq have
increased the uncertainty surrounding global oil supplies. Strategic oil reserves have risen, while
private reserves are low. This has exerted upward pressure on oil prices. The strike in Venezuela has
also had an impact.
Major economies such as the US, Germany and France are struggling with stagnation and fears of
recession. Substantial tax relief and low interest rates are holding up activity in the US. The Japanese
economy has been in a deflationary recession for a long period.
Chart 4. Krone exchange rate and the interest
rate differential
Per cent Index
5 90
Interest rate differential
4 95
(left-hand scale)
3 100
2 105
Krone exchange rate,TWI
1 110
(right-hand scale)
0 115
1999 2000 2001 2002 2003
Source: Norges Bank
In recent years, the krone exchange rate has shadowed the difference between Norwegian and
foreign short-term rates. This is why the krone has appreciated to its current strong level. In addition,
high oil prices have had an influence. The effect of the interest rate differential on the krone has been
intensified by conditions in capital markets. Investors have been favouring carry trades. Risk premiums
in major currency markets have been low, which seems to indicate that investors have been less
prone to speculate in exchange rate fluctuations.
Chart 5. Krone exchange rate and US equity
prices
110 1500
105 1300
Krone exchange rate
(left-hand scale)
100 1100
Equity prices
(right-hand scale)
95 900
1999 2000 2001 2002
Sources: EcoWin and Norges Bank
As equity prices fell, investors started seeking alternative vehicles. This made the krone market more
attractive. The krone appreciated at the same time that foreign stock markets and domestic equity
prices fell. Bonds and other interest-bearing securities have been of particular interest.
Chart 6. NOK bonds issued outside Norway
Total outstanding. In billions of NOK
100 100
80 80
60 60
40 40
20 20
0 0
2000 2001 2002 2003
Source: Norges Bank
This is reflected in the international market for bonds issued in NOK. Last year, such bond issues
amounted to more than NOK 50 billion. Both foreign and Norwegian companies were issuers and a
number of small and large foreign investors and Norwegian companies - primarily life insurance
companies - were buyers.
The relationships in the foreign exchange market are unstable. New shifts in the world economy may
reduce interest in the krone.
Chart 7. Relative labour costs
Deviation from historical average. Per cent
20 20
31 January 2003
15 15
10 10
5 5
0 0
-5 -5
Common currency
-10 -10
-15 -15
1970 1975 1980 1985 1990 1995 2000
Sources: TRCIS/IMF, Ministry of Finance and Norges Bank
As a result of the strong krone and a high wage level, competitiveness in business and industry is
close to 15 per cent weaker than the average for the past 30 years. Historically, following such
substantial deviations, competitiveness has always returned to the average fairly rapidly. Market
participants weigh the interest rate differential between Norway and other countries against the
likelihood of a depreciation of the krone in the future. Cyclical divergence can cause the krone to
overshoot its future level in the short term. However, in the long term, the krone cannot remain this
strong. This would require a substantial improvement in our capacity to generate income.
What are the factors behind the wide interest rate differential?
With the krone exchange rate prevailing at end-January, competitiveness had weakened by a little less
than 25 per cent since 1996. The krone had appreciated by almost 10 per cent.
Chart 8. Relative labour costs
120 120
31 January 2003
110 110
Local currency
100 100
90 90
Common currency
80 80
1990 1992 1994 1996 1998 2000 2002
Sources: TRCIS/IMF, Ministry of Finance and Norges Bank
In the same period, wages in Norwegian manufacturing increased by close to 15 per cent more than
wages among trading partners. In the years around the millennium, the depreciation of the krone
veiled the underlying deterioration in competitiveness. In May 2000, the krone hit its lowest level in six
years1. The krone has since appreciated, and the effect of high wage growth has gradually come into
evidence in company accounts.
In the ten years that have passed since the banking and currency crisis in 1992, the economy featured
a long period of balanced growth. However, towards the end of the upturn the economy was facing
labour shortages, higher wage growth and a sharp increase in household consumption and debt.
Interest rates had to be kept at a high level in Norway.
Chart 9. Cyclical divergence
Short-term interest rates in the US and Norway
10 10
8 Norway 8
6 6
4 4
US
2 2
0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: EcoWin
The turnaround abroad took place two years ago, but the Norwegian economy continued to show a
high level of activity. This led to a widening of the interest rate differential against other countries. The
main explanation for the wide interest rate differential is not that interest rates are high in Norway, but
that interest rates are at a historic low abroad. Interest rates in the US have not been at such a low
level since the 1960s.
1
Measured by the monthly average of the import-weighted exchange rate against 44 countries, the krone was at its weakest
level in May 2000 since May 1994. Measured by the monthly average of the trade-weighted exchange rate index, the krone
was at its weakest level in May 2002 since the series was started in January 1971. Measured by both indices, there were a
few days in autumn and winter 1998 when the krone was weaker than in May 2000.
A further jump in wages in 2002 amplified the imbalances in the economy and fuelled the rise in prices
for goods and services produced in Norway. This is why monetary policy has been tight.
Chart 10. The real interest rate
Per cent
10 10
8 8
6 6
4 4
2 2
Average
0 0
-2 -2
-4 -4
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002
Sources: Statistics Norway and Norges Bank
The real interest rate, i.e. the interest rate adjusted for inflation, rose in 2000 and was thereafter
somewhat higher than the average for the past 30 years. With the reduction in the key rate this winter,
the real interest rate is no longer particularly high. The tight monetary stance is reflected in the strong
krone.
Is there a risk of prolonged stagnation?
The US has been the driving force in the world economy. The US economy has historically been very
resilient. Growth tends to pick up rapidly after short periods of contraction. Most likely this will prove to
be the case this time as well. A positive aspect is that confidence in the financial system has not been
impaired. There is some evidence of a recovery in investment.
However, we cannot exclude the possibility of a fairly long period of stagnation in the global economy.
Low interest rates in the US and Europe are a reflection of this risk. The level of investment in the US
was high during the expansion, which may have resulted in excess capacity in the business sector.
The fall in equity prices is having a negative effect on household wealth. In addition, US household
saving is low and low interest rates have induced households to accumulate debt. The fall in the value
of the dollar may make a contribution, but growth in the business sector is still not self-driven and the
depreciation of the dollar is reducing other countries' exports. The impetus generated by the US
economy may be weak for several years ahead.
Nor is the rest of the world showing clear signs of an imminent recovery. Japan is dragging down
growth in the world economy. The large European economies, in particular Germany, are stagnating.
Unemployment is high, but the growth potential appears to be low.
Interest rates in the US and Japan have been reduced to such a low level that there is little room for
further stimulus. The monetary policy authorities could use more unorthodox measures. For example,
the central bank could purchase massive volumes of long-term bonds - as seen in Japan - or other
assets. It is uncertain how effective such measures are. Traditional fiscal policy instruments may also
prove to be ineffective when budget deficits are rising sharply. This may fuel expectations of future
fiscal retrenchment and tax increases.
If the world economy continues to stagnate over a longer period, the effects will also spill over to the
Norwegian economy. The decline in traditional exports will then persist. Sooner or later, the oil market
will also feel the effects of the downturn and oil prices will decline. If the world economy experiences
prolonged stagnation and the krone remains firm, a markedly lower interest rate will contribute to a
weakening of the krone and mitigate the effects for Norway. On the other hand, any fiscal slippage will
contribute to maintaining a strong krone.
A precondition for countering a possible downturn by means of monetary policy easing is slower
growth in labour costs. Monetary policy cannot prevent an increase in unemployment that is caused by
a significantly higher rate of growth in labour costs in Norway compared with other countries.
A stagnating global economy has changed the domestic inflation outlook in recent months. World
stock markets have continued to decline. It does not appear that interest rates in the US and Europe
will increase in the near future. They may even be reduced further before the recovery starts. In
Norway, the interest rate has also been reduced. At the same time, fiscal policy is stimulating activity,
partly through tax reductions and growth in government allocations. In addition, state finances weaken
when the economy shows little growth and unemployment rises. As a result of the strong krone,
however, overall economic policy is tight. With an equally tight policy ahead, inflation would probably
have been lower than the inflation target. A gradual easing of monetary policy would thus seem
appropriate.
Does the inflation target promote stability?
The operational target of monetary policy as defined by the Government is inflation of close to 2.5 per
cent over time. The inflation target provides economic agents with an anchor for their decisions
concerning saving, investment, budgets and wages. Households, businesses, public entities,
employees and employers can base decisions on the assumption that inflation in Norway will be
21⁄2 per cent over time.
The responsibility for implementing monetary policy has been delegated to the central bank. This is
also the case in comparable countries. The central bank shall exercise professional judgement within
the framework of its mandate. Assessments of economic developments and the basis for interest rate
decisions are presented to the public. This makes it possible for others to gain insight into the
assumptions and analyses underlying interest rate decisions.
The operational target is well defined. The Bank's judgement can therefore be evaluated
retrospectively. Norges Bank explains the reasoning behind its judgement in its annual report. The
Bank's reporting requirement is set out in § 75, litra c of the Constitution, which stipulates that the
Storting shall supervise Norway's monetary system. Up to 1950, the annual report was submitted
directly to the Storting. Today, in keeping with the Norges Bank Act, it is sent to the Ministry of Finance
for submission to the King in Council and communication to the Storting in the Government's credit
report. The law thereby provides a framework that allows the government authorities to follow up the
performance of the delegated responsibility for monetary policy.
Norges Bank sets the interest rate so that future inflation will be equal to the inflation target of 21⁄2 per
cent. High demand for goods and services and labour shortages normally point to higher inflation in
the future. When interest rates are increased, demand falls and inflation is kept at bay. When demand
is low and unemployment rises, inflation will tend to slow. Interest rates will then be reduced. The
inflation target is a vehicle for, not an obstacle to, monetary policy's contribution to stabilising output
and employment. This intention is also expressed in the Regulation on Monetary Policy.
The inflation target of 21⁄2 per cent is broadly in line with the inflation targets of our trading partners. It
is also an anchor for developments in the krone exchange rate. The krone fluctuates. We have open
trade with other countries and free capital movements. We do not have the instruments to fine-tune
the krone exchange rate. As long as inflation remains low and stable, any substantial deviations in the
krone exchange rate over time will have a considerable impact on activity in business and industry. As
a result, the krone exchange rate will tend to return towards its long-term mean following any
substantial deviations. The best contribution monetary policy can make to stability in the krone
exchange rate is to aim at low and stable inflation.
Wide cyclical differences and differences in wage formation between Norway and other countries have
always had an impact on the krone exchange rate and competitiveness. The central bank alone
cannot, with the instruments at its disposal, steer the exchange rate.
During the years when a fixed or stable exchange rate was the objective of monetary policy, fiscal
policy was responsible for smoothing fluctuations in the economy. At the same time, incomes policy's
role was to keep wage growth in line with wage growth abroad. The objective of exchange rate stability
therefore provided a framework for economic policy.
When foreign interest rates moved up, the interest rate in Norway also had to be raised in order to
prevent a weakening of the krone. Conversely, interest rates in Norway were often reduced following a
reduction in interest rates abroad.
One can imagine how this division of responsibility would have been implemented in the face of the
disturbances to the Norwegian economy which occurred in 2001 and 2002. The upward tendency of
the krone would have led to reductions in the interest rate down to the international level. As a result,
interest rates would also have reached a historical low in Norway. Low interest rates would have
fuelled lending growth, pushed up house prices and intensified the shortage of labour. In order to
prevent another bubble of this type in the Norwegian economy, substantial fiscal policy tightening
would have been required in 2001, 2002 and 2003.
The fiscal rule stipulates that the central government budget deficit shall over time be equivalent to the
expected real return on the Government Petroleum Fund. The rule is robust to variations in
government revenues and provides a stable framework for economic developments. The fiscal rule
has been adhered to, which in itself makes a considerable contribution to stability.
Monetary policy has been assigned a clear responsibility for stabilising the economy. Inflationary
pressures are addressed using a different approach than earlier. Monetary policy keeps inflation under
control. This may translate into high interest rates and in periods a strong krone.
The alternative could have been higher inflation, with a continued contest for economic resources and
persistently high wage growth. This would have resulted in a continued deterioration in business
sector competitiveness year after year as a result of higher price and cost inflation in Norway than
abroad. The experience of the 1970s and 1980s shows that inflation and wage growth do not have a
stable anchor under these conditions. Inflation and wage growth would have continued to move up
until monetary policy was tightened. Unleashing inflation is not a viable alternative.
Why is unemployment rising?
High labour costs, a strong krone and global stagnation are leaving a mark on Norway's internationally
exposed sector. Many enterprises will not be able to sustain activity given current market conditions
and cost levels. Labour costs are also squeezing margins in some private service industries. More
enterprises are competing on international markets. Moreover, even if allocations are growing, public
entities have limited capacity for increasing employment because wage expenses have risen so
sharply.
Chart 11. Unemployment
Per cent
9 9
8 8
Registered plus
7 7
labour market programmes
6 6
5 5
4 LFS unemployment 4
3 3
2 2
1 Average 1990s 1
0 0
1990 1992 1994 1996 1998 2000 2002
Sources: Public Employment Service, Statistics Norway and Norges Bank
Unemployment has edged up recently. The current unemployment rate of 4 per cent is more or less on
a par with unemployment in 1997. It is also 2 percentage points lower than the average number of
unemployed and persons participating in labour market programmes in the 1990s. For manufacturing,
the effect of weak profitability has not yet come into full evidence. Unemployment is therefore
expected to increase somewhat in the period ahead.
In spite of the high level of wage growth, inflation is low. Conditions are now conducive to a gradual
narrowing of the interest rate differential between Norway and abroad. How tight monetary policy will
be is essentially contingent on how fast wage growth is brought down.
The inflation targets adopted by Norway and our trading partners imply that total wage growth of about
41⁄2 per cent is consistent with little or no change in business sector competitiveness. This is based on
the assumption that productivity growth in Norway is around 2 per cent, or about the same as the
average for the past 20 years. Both companies and employees can take as a given that inflation will
be 21⁄2 per cent over time. This reduces uncertainty and makes it possible for the social partners to
disregard brief spells of somewhat lower or somewhat higher inflation.
Inflation does not have to be higher than 21⁄2 per cent in Norway to achieve growth and high
employment. The experience of the 1990s demonstrates this. During that period unemployment fell
and growth was strong. Even with major restructuring and changes in industry structure, inflation was
close to 21⁄2 per cent.
Growth in real wages is now markedly higher than the underlying growth in productivity. This is why
unemployment is rising. Businesses must adjust their workforces to sustain profitability. This leads to a
fall in employment, but also continued operations in Norway. The alternative is that companies are not
able to adjust their workforces quickly enough. If higher costs cannot be passed on to customers,
earnings will fall and the wage share rise. This may lead to closures or relocation of production.
Chart 12. Wage shares
Labour costs as a percentage of factor income
100 100
90 90
Manufacturing
80 80
70 70
60 60
Other mainland industries
50 50
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Sources: TRCIS and Statistics Norway
The wage share in Norwegian manufacturing has increased. The situation in service industries is more
mixed. Import firms have wider margins. We know that employment in some service industries has
fallen. This may indicate that many service enterprises have adjusted their workforces. To some
extent, higher costs can more easily be passed on to customers through higher prices in this sector.
This picture is typical of the final phase of an expansion. A tight labour market and the contest for
economic resources lead to a sharp increase in real wages. This results in high growth in household
income, consumption and housing investment. The propensity to borrow increases and house prices
rise sharply. On the other hand, the business sector faces pressures on profitability, a high cost level
and declining investment. Commercial property prices fall. At the same time, corporate restructuring
brings growth in employment to a halt. When costs reach a high level, employment starts to fall. The
period of expansion has then come to an end. The cost level must be adjusted to restore balance in
the labour market.
Wage formation in Norway is subject to an institutional and statutory framework and agreements that
have been developed over several decades. The result of negotiations is influenced by labour
legislation, including regulations relating to job protection, unemployment benefits and the rules that
apply to cooperation and settlement of industrial disputes.
In important segments of the labour market, there appears to have been a shift in the social partners'
strategic position in negotiations in favour of employees. Technological changes, increased demands
for stable supplies and intensified international competition have made enterprises in many industries
ever more vulnerable to even short operational disruptions. The employers' ability and willingness to
take on open labour conflicts have therefore diminished.
On the other hand, corporate boards and management are responsible for decisions on expansions,
closures, rationalisation, location and workforce increases. Unions have little direct influence on these
matters. If company costs increase, either productivity must be improved, production closed or
relocated to another country. This is the companies' arena. Their decisions concerning operations,
investment and location are in turn determined by the required rate of return that owners set to keep
their capital in the company.
Under these operating parameters, developments in labour costs essentially reflect employees' and
their organisations' assessment of the trade-off between real wage growth and employment. These
organisations cannot assume that others can safeguard their members' jobs when they determine how
high pay increases should be.
The pay increases for white-collar workers in the business and financial sector and academics in the
public sector have been particularly high. For a long period, this mirrored the high wage growth for
liberal professions, consultancy firms, law firms and the IT industry. However, wage growth for
whitecollar workers and academics appears to be holding up even with weaker labour market conditions for
these groups. In many places in our country, public sector wages are higher than the level that can be
sustained by local businesses in a less favourable economic environment.
It may appear that wages for white-collar workers are first increased in line with that of other groups
and then supplemented by individual increases based on performance and profits. The overall rise in
wages does not seem to be adapted to the situation now faced by many enterprises or to an ample
supply of labour. The system for determining these groups' wages may be an unnecessary source of
cost increases for enterprises and public entities.
Last year's wage settlements resulted in wide differences in pay increases across different groups.
This may give rise to renewed tension between occupational groups and new wage spirals. Because
substantial pay increases negotiated in 2002 will take effect in 2003, wage growth will also be high this
year even without any new generous pay increases. It may take time and be very costly for business
and public entities to resolve the problems caused by last year's wage settlements. It will only be well
into 2004 before we can assess how high the unemployment rate will be in this business cycle.
One of the richest countries in the world?
Norway's position as petroleum exporter may have influenced wage developments and affected
household optimism and eagerness to borrow. The risk of job losses and a rise in unemployment may
have been underestimated. Cash flows from the petroleum sector may give rise to the perception that
Norway is one of the absolute richest countries in the world.
Chart 13. GDP per capita in 2000.
In NOK - purchasing power parity
US
Norway
Switzerland
Ireland
Denmark
Iceland
Canada
Netherlands
Austria
Australia
Germany
Finland
Sweden
0 100000 200000 300000
Sources: OECD and Norges Bank
The large cash flows from petroleum activities are reflected in official income figures. Measured by
GDP per capita, Norway ranks high in the statistics. These figures do not, however, provide an
accurate picture of value added.
When calculating GDP and national income, the cash flow from petroleum activities is measured in the
same way as all other income. Extracting oil and gas from the seabed is measured in the same way as
all other production. This means that Norway's income is overestimated. Oil and gas represent wealth
under the seabed. When oil and gas are sold, this wealth is invested abroad. This transaction does not
in itself generate income, even though it is posted as income in the national accounts. The income is
not equivalent to the entire cash flow, only to the return on this wealth.
Chart 14. Adjusted GDP per capita in 2000
In NOK - purchasing power parity
US
Switzerland
Ireland
Denmark
Iceland
Canada
Netherlands
Austria
Australia
Norway
Germany
Finland
Sweden
0 100000 200000 300000
Sources: OECD, Ministry of Finance and Norges Bank
A more accurate picture of Norway's income is obtained when GDP is adjusted for the transfer of
petroleum wealth to financial investments abroad. The so-called "permanent income" from petroleum
activities can be used to calculate the return both on today's Petroleum Fund and on future
investments. The value of labour input in the petroleum sector comes in addition.
With this more accurate picture, the income level in Norway is not particularly high. Norway's income
is approximately on a level with other Western countries such as Australia and Germany, while the
level in, for example, Canada and Denmark is considerably higher.
Chart 15. Productivity in the private service sector
Annual growth. Per cent
5 5
4 4
3 3
2 2
1 1
0 0
1980 1984 1988 1992 1996 2000
Source: Statistics Norway
Norway's income is generated through labour. Income growth in the 1990s was unusually strong as a
result of substantial productivity gains and a sharp increase in employment. Major technological
advances were achieved in the petroleum industry, and productivity growth in private services was
especially high - particularly in retail trade, financial services and telecommunications and postal
services. In retail trade, nationwide chains boosted efficiency. New technology and improved services
provided new impetus to the financial industry. The telecommunications and postal services started
operating on normal commercial terms.
A number of conditions were conducive to favourable developments in the 1990s. Wage growth was
moderate for a long period and interest rates were low. Banks regained their strength after the banking
crisis. The tax reform stimulated innovation and strengthened the incentive to work. The reorganisation
of state-owned commercial enterprises enhanced efficiency and value added. It is unlikely that gains
of this magnitude will be achieved in this decade.
Today, the greatest potential for new and substantial improvements is probably to be found within the
public service sector. Norway has a high level of spending for schools and education compared with
other countries. The considerable potential for efficiency gains in public administration, particularly in
local government, has been amply documented. The reorganisation of the regional health authorities
promises an increase in efficiency. The organisational challenges are nevertheless considerably
greater than they were for Telenor and Norway Post. In hospitals managed by the regional health
authorities, the patient's bill is covered by the central government and competition is - for obvious
reasons - highly limited. In this context, therefore, other instruments to promote efficiency are
required. Hospitals must have reasonable prospects of being able to provide satisfactory services to
the public over time. On the other hand, establishing a framework that the hospital authorities and
employees perceive as binding and credible is not an easy task for the central government. Thus,
encouraging hospitals to seek the most efficient solutions probably represents a particular challenge.
Is it wise to invest in equities?
The cash flow from petroleum activities to the Treasury resulted in a government budget surplus - as
this is measured - of almost 10 per cent of GDP in 2002. The central government invests this amount
abroad through the Petroleum Fund. This results in capital outflows and a balance-of-payments
surplus. The central government builds up assets, but also obligations through the social security
system. Even if a large share of oil revenues is set aside, it would appear that, in the long term, the
level of direct and indirect taxes will have to be at least maintained in order to honour these
obligations.
Petroleum revenues would normally have resulted in substantial currency inflows into Norway. If we
had used this capital domestically, we would have had to convert this currency into NOK. The
attendant increase in demand for kroner would have resulted in an even sharper appreciation of the
krone exchange rate. The capital outflow through the Petroleum Fund contributes to curbing the
appreciation of the krone. With oil and gas pr