svein gjedrem : a diversified economy speech by mr svein gjedrem, governor and chairman of the norges bank ( central bank of norway ), at the seminar “ oil in the economy ” at the norwegian oil museum, stavanger, 8 june 2010. the text below may differ from the actual presentation. this speech does not contain assessments of the economic situation or current interest rate setting. * * * “ look what i found! ” shouted askeladden ( the ash lad ) in the norwegian folktale “ the princess who always had to have the last word ”. he found a dead magpie, a willow hank, a bit of broken saucer, two ram ’ s horns, a wedge and a worn - out shoe sole, which he managed to transform into a princess and half a kingdom. askeladden is often perceived as the embodiment of sound norwegian values such as a sense of adventure, courage and helpfulness. askeladden is nevertheless someone who succeeds by pure chance. like askeladden, we also found wealth, but under the sea floor. we were lucky. an abundance of natural resources is in principle of benefit to a country ’ s economy. the production of petroleum and other natural resources generate gains that exceed the normal return on invested capital, economic rent. but oil is also associated with challenges. as early as in 1974, the storting 1 deliberated the economic challenges relating to oil production. we were able to learn from the experience of other countries. the concept dutch disease stems from the negative effects on the dutch economy of the spending of revenues from the substantial gas resources of the groningen field. from the end of the 1960s, these revenues financed strong growth in public expenditure, which led to higher costs and a decline in manufacturing. the situation went too far, resulting in large balance of trade and government deficits which required tightening measures. this in turn led to a sharp rise in unemployment in the first half of the 1980s. but the netherlands is not the first example of a nation that failed in this respect, and far from it 2. a very clear example is provided by spain as early as in the 17th century when the colonisation of south and central america provided the country with access to vast natural resources and gold. the historian david landes describes the effects on spanish society in his book “ the wealth and poverty of nations ” where he cites a happy spaniard who proclaimed the following in 1675 : “ let london manufacture

a risk that outflows from the labour market to various social security schemes will remain high. sickness absence is high, and the share of the working - age population on rehabilitation schemes or receiving disability pensions is rising. many workers choose to take early retirement under the afp scheme ( contractual early retirement ) when they reach 62 years of age, and – because this age group is expanding sharply – this number will probably increase in the years ahead. in norway, close to 600 000 persons of working age receive social security benefits or pensions. this is equivalent to 25 per cent of the labour force. this is the norwegian economy ’ s achilles ’ heel. a particularly disturbing aspect is that disability is increasing among young people 1. high income growth and a sharp rise in the number of households laid the basis for a sharp, long - term rise in house prices. self - reinforcing mechanisms were also at work, generating an atmosphere approaching euphoria. people hurried to buy dwellings in order to take advantage of the rise in value. it now appears that the housing market is cooling after an almost three - fold rise in prices in real terms in the course of the past 14 years. house price inflation has been accompanied by strong growth in household debt. household debt in norway is now about twice the level of disposable income, making the debt - income ratio higher than ever. at the same time, saving is declining and now seems to be negative. this means that in addition to fully financing their housing investments through mortgages, households are also raising loans to finance current consumption. as i mentioned earlier, the favourable developments in the norwegian economy of the past few years are primarily due to supply - side changes. a flexible inflation target for monetary policy – as in norway and a number of other countries – provides a sound basis for coping with the shocks to our economy that have occurred in recent years. the aim of preventing see elisabeth fevang og knut røed ( 2006 ) : ” veien til uføretrygd i norge ” ( the road to disability pensions in norway ), report no. 10 2006, ragnar frisch centre for economic research. norwegian only. inflation expectations from becoming entrenched below the operational target of 2. 5 per cent was one of the main reasons the interest rate was lowered to a very low level in 2003 and 2004, when inflation receded and approached zero. low interest rates have stimulated demand and output and gradually led to the prospect