the recession at the end of the 1980s was followed by a period of low wage growth and gains in competitiveness. this may help to explain why the decline in manufacturing employment came to a halt in the 1990s. however, wage costs increased again in the late 1990s. the relative wage level in manufacturing industry compared with trading partners is now back at the level in the 1970s. two forces were behind economic developments from the beginning of the 1970s. first, the deterioration in competitiveness was caused by the expansion of the norwegian welfare state and a transfer of real resources from the exposed sector to the sheltered sector. second, inflation expectations took root as a result of low administered interest rates and competitive devaluations. nominal interest rates were kept low although price inflation and the value of tax - deductible interest expenses rose. frequent devaluations in the period from 1976 were ultimately ineffective with regard to preventing a relative decline in manufacturing industry. on the contrary, the devaluations proved to be self - reinforcing. chart 7 over a period of 15 years from 1973 to 1988 consumer prices in norway rose twice as much as in germany. in the same period, the value of the krone was virtually halved against the mark. while we paid around 2 kroner for one mark in 1973, 15 years later we had to pay close to 4 kroner. since then the krone has remained relatively stable against the deutsche mark. today the exchange rate is around 4 kroner and 10 øre. the last devaluation came in 1986 after the fall in oil prices. thereafter, the krone exchange rate was fixed. the norwegian economy had to go through a severe economic turnaround. confidence in the krone had to be restored in order to avoid persistent inflation. this required very high interest rates. the norwegian economy entered the worst recession experienced since the interwar period. unemployment rose from about 2 % in 1987 to almost 6 % in the winter of 1992 / 1993. many companies went broke and households were faced with debt problems. the financial sector was hit by crisis. the fixed exchange rate regime led to a gradual decline in price inflation, but not to deflation as was the case in the 1920s. an improved wage - setting process, in conjunction with an active fiscal policy, contributed to curbing the real economic costs. hence, the experience of 1986 and the beginning of the 1990s probably provides a realistic picture of the minimal costs associated with stamping out high inflation.

will be further strengthened in the years ahead. however, government savings will hardly exceed the requisite level implied by pension expenditure over the next decades. considerations relating to the business sector and the supply of labour set limits on how fast the public sector can expand. given the current structure and pricing of public services - and the many tasks assumed by the public sector - it will become increasingly difficult as each year goes by to make ends meet in both central and local government budgets in an environment of growing demands and expectations. this probably represents the greatest challenge to economic policy in the years ahead.