Oecd Economic Surveys : Denmark 1985-1986.

100 Pages·6.017 MB·English

by  OECD

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
ORBANISATION DE COOPERATION ET DE D E V E L 0 P P E M E N T ECONOMIQUES
rrmnnnnm
nnrrm
OECD ECONOMIC SURVEYS
I A R C H ( V E '
! "ÉFÉRENC r:
| DOCUMENT PRÉn
: RETOUR BUREAU ;
DENMARK
A R r- k : V E S
... !
ci- tcz_ i- i- :s i- N C Ë iTTj
;~f /-r Pf"*.-TÉ
~
>:f T'"J.--.:Iwi. 'O^AJ_6_"3
iv
*.
FEBRUARY 1986
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
PursuanttoarticleIoftheConventionsignedinParison 14thDecember,
1960,andwhichcameintoforceon30thSeptember, 1961,theOrganisation
Tor Economic Co-operation and Development (OECD) shall promote
policiesdesigned:
- toachievethehighestsustainableeconomicgrowthandemployment
andarisingstandardoflivinginMembercountries,whilemaintaining
financial stability, and thus tocontribute tothedevelopmentofthe
worldeconomy;
- to contribute to sound economic expansion in Member as well as
non-membercountriesin theprocessofeconomicdevelopment;and
- to contribute to the expansion of world trade on a multilateral,
non-discriminatory basis in accordance with international obliga¬
tions.
TheSignatoriesoftheConventionon theOECDareAustria, Belgium,
Canada, Denmark, France, the Federal Republic of Germany, Greece,
Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal,
Spain,Sweden,Switzerland,Turkey,theUnited Kingdomand theUnited
States.ThefollowingcountriesaccededsubsequentlytothisConvention(the
datesarethoseonwhichtheinstrumentsofaccessionweredeposited):Japan
(28thApril, 1964), Finland (28thJanuary, 1969), Australia (7thJune,
1971) and New Zealand (29th May, 1973).
TheSocialistFederalRepublicofYugoslaviatakespartincertainworkof
theOECD (agreementof28thOctober, 1961).
Publiéégalementen français.
©OECD, 1986
Application forpermission toreproduceortranslate
allorpartofthispublicationshould be madeto:
HeadofPublicationsService,OECD
2, rueAndré-Pascal, 75775 PARISCEDEX 16, France.
CONTENTS
Introduction
I. TheDanishpolicyapproach 7
Anoverview 7
Fiscalpolicy 9
Incomespolicy 14
Monetaryandexchange ratepolicies 14
Structural policies 19
11. Theresponseoftheeconomyaadmedhun-tenaprospects 20
Therecovery in internationaland historical perspective 20
Developmentsin 1985 22
Prospectsfor 1986and 1987 27
The Danisheconomy 1987 to 1990: theofficialview 29
HI. Externaléquilibreraandnationalsavings 32
IV. Competitiveness,industrialadjustmentaadbottlenecks:the«apply-siderisks 36
Exportperformance 37
Thestructureofforeigntrade 40
Internationalcompetitiveness 42
Structural featuresofDanish industry 44
Industrial policy 46
Bottlenecksinproduction capacity? 48
V. Conclusions SO
Notesand references 54
Annexes
1. Supplementarytablesanddiagrams 56
II. Liberalisationofcapitalcontrols:a listofmeasures 67
III. New measuresofmonetaryregulationand budgetarycontrol 69
IV. Marginalcostofpublicfunds 71
V. Constantmarketshareanalysisand theclassificationofexportsaccording totechnologycontent 73
VI. Chronologyofmaineconomicevents 75
VII. Instrumentsofindustrialand labourmarketpolicies 80
Statisticalannex gS
TABLES
Text
1. Objectives, policiesand results 8
2. PublicsectorspendingasaratiotoGDP ]]
3. PublicsectorrevenueaiaratiotoGDP 12
4. Discretionaryfiscal policy, 1980to 1986 12
5. Moneycreation 18
6. Contributionstotheaverageyearlyreal GDPgrowth 20
7. Thesupplyand useofresources 22
8. Employmentand unemployment 24
9. Wageandpricedevelopments 25
10. Balanceofpaymentsdeficitand itsfinancing, 1984to 1985 26
11. Short-term prospects 28
12. Official medium-term projections; keyfeatures 30
13. Thestructureofresourceuse, 1979 to 1990 31
14. Domesticabsorption,sourcesand usesoftotalsavings 33
15. Publicsectorfinances, 1982to 2010 36
16. Exportspecialisation ratios 41
17. Valueaddedin manufacturingasa percentageofGDP 45
18. Researchanddevelopment intensity in manufacturing, 1977-1983 46
19. Industrialsupport, 1980-1985 47
Annexes
Al. Generalgovernmentbalance 56
A2. Central governmentfinance 58
A3. Thestructureoftaxation in 1984 59
A4. Budgetary retrenchment 1983 to 1985 59
A5. Constant marketshareanalysis 60
A6. Classificationofhigh-tech products 61
A7. Labourmarketinstruments 61
.A8. Trainingandeducation schemes 62
Statisticalannex
Selected backgroundstatistics 85
A. Supplyand useofresources, currentprices 86
B. Supplyand useofresources, 1980prices 87
C. Generalgovernmentexpenditureand revenue 88
D. Balanceofpayments 90
E. Labourmarketand production 91
F. Foreign trade, total and byarea 93
G. Pricesand wages 94
H. Moneyandcredit 95
DIAGRAMS
Text
1. Trends in publicsectorspending,taxation and budgetbalance 10
2. Long-term interestrates 15
3. Bilateralexchangerates 16
4. Interest ratesandprivatecapitalflows 17
5. The recovery in international perspective 21
6. Export performance 38
7. Commodityandcountrydecompositionofexports 39
8. Tradebalances in high techgoods 40
9. Decompositionofrelativeunit labourcosts 43
10. Employment,capacity utilisationand thecapitalstockin theprivatenon-agriculturalsector 49
Annexes
Al. Theshareofhigh-techproducts in manufacturingexports 62
A2. High-technologydeficitfor Denmark 63
A3. TheopennessofselectedOECDeconomies 64
A4. Structureofmanufacturing 65
A5. R&Dintensitiesand weightsofhigh R&Dintensityindustriesin totalexportsofmanufacturing 66
industry
BASIC STATISTICS OF DENMARK
THELAND
Area(I OOOsq.km) 43 Inhabitantsinmajorcities 1-1-84(1000):
Agriculturalarea(I000sq.km) 1981 29 Metropolitanarea(incl.suburbs) 1740
Copenhagen(excl.suburbs) 483
Aarhus 250
Odcnsc 170
Aalborg 155
THEPEOPLE
Population, 1-1-84(1000) 5209 Civilianemployment, 1984(1000) 2482
Numberofinhabitantspersq.km 119 ofwhich:
Netnaturalincrease, Agriculture 177
average 1981-1984(1000) Manufacturing(excl.building) 499
Netnaturalincrease Buildingandconstruction 162
per1000inhabitants, 1984 -1.0 Marketservices 877
Government 763
PRODUCTION
GrossDomesticProductin 1984(Kr. million) 565838 Grossfixedcapitalformationin 1984
GDPperhead(USdollars) 10691 (Kr.million): 101024
PercentofGDP 17.9
Perhead(USdollars) 1909
THEGOVERNMENT
Publicconsumptionin 1984(percentofGDP) 26 CompositionofParliament(no.ofseats):
Generalgovernmentcurrentrevenue Social Democrats 56
in 1984(percentofGDP) 56 Conservatives 42
Publicgrossfixedcapitalinvestment People'sSocialists 21
in 1984(percentofGDP) 2 Liberals 22
ProgressiveParty 5
CenterDemocrats 8
Social Liberals 10
LeftSocialists 5
ChristianDemocrats 5
GreenlandandFaroeIslands 4
FreeDemocrats I
Total 179
Lastgeneralelection: 10.1.1984 Nextgeneralelection:atthelatest:9.1.1988
FOREIGNTRADE
Exportsofgoodsandservices Importsofgoodsandservices
aspercentofGDP(1984) 37 aspercentorGDP(1984) 36
Mainexportsin 1984(inpercent Mainimportsin 1984(percent
oftotalmerchandiseexports): oftotalmerchandiseimports):
Agriculturalproducts 18 Importstodirectuseintheagriculturalsector 5
Cannedmeatandcannedmilk 4 Importstodirectuseinotherprivatesectors 43
Industrialgoods 71 Fuelsandelectricity 18
Othergoods 7 Machineryandcapitalequipment 10
Transportequipment 15
Consumergoods 18
THECURRENCY
Monetaryunit:Krone CurrencyunitsperUSdollar,
averageofdailyfigures:
Year 1985 10.594
February 1986 8.605
Note:Aninternationalcomparisonofcertainbasicstatisticsisgiveninanannextable.
ThisSurveyisbasedontheSecretariat'sstudypreparedfor
theannualreviewofDenmarkbytheEconomicandDevelopment
Review Committeeon 10th February 1986.
Afterrevisionsinthelight ofdiscussionsduringthereview,
final approval ofthe Surveyfor publication was given by the
Committeeon 7th March 1986.
INTRODUCTION
The Danish economy has reacted with considerable dynamism to the policy approach
adopted in late 1982. Some of the severe imbalances, which had increasingly plagued the
economyafterthesecondoilshock,havebeenmarkedlyreduced.Theriseineconomicactivity
hasbeenstrongandself-sustaining,withasharprecoveryinprivateinvestment.Privatesector
employmenthasstartedtogrowagain,theunemploymentratehascomedowntosingledigits,
andinflationhasbeenbroughtdowntoanannualrateoflessthan4percent.Thegovernment
budget deficit has been reduced sharply. However, contrary to official aims, the current
external deficit has been rising, attaining Kr28 billion (4.6per cent of GNP) in 1985.
ThenatureoftheimmediateproblemsfortheDanisheconomyhaschanged. In 1983and
1984,itwasimportantthatthedemandslackcreatedbypublicsectorspendingrestraintwas
taken up by private sector demand and production so that both the budget deficit and
unemployment would fall. This having taken place in 1985, the main concern in the years
ahead should be to avoid bottlenecks in the labour market, and hence the reacceleration of
wage inflation and too strong consumer demand which would prevent the achievement of
current external account balance by 1988. Part I reviews policies followed under the new
economicstrategyintroduced in 1982. Part II describesthe responseoftheeconomytodate
andpresents prospects for 1986 and 1987 as well as the official medium-term projections to
1990.
Themountingcurrentexternaldeficitin 1985clearlyindicatesthatthetaskofreducing
all structural imbalances simultaneously is more difficult than envisaged when the new
economic strategy was launched three and a half years ago. Yet, official medium-term
projections continue to anticipate current account equilibrium in the course of 1988. This
would require a rise in domestic savings in excess of investment. Part III elaborates the
problemsinvolved inachievingsucha shiftin thesavings/investmentbalance. PartIVtakes
upsomeofthesupply-siderisksinvolvedinthemedium-termstrategy,inparticulartheriskof
structural weaknesses hampering a necessary transfer of resources to the tradeable goods
sector. PartV summarises the main findings of the present Survey and offers some policy
conclusions.
I. THE DANISH POLICY APPROACH
An overview
More than threeyears agothe Government presented its new economic programme in
order to reduce the severe imbalances which had built up in the preceding decade. The key
notewasthatthenecessaryadjustmentcouldonlybeachievedthroughastrongexpansionof
bothproductionandemploymentoftheprivatesector,inparticularthetradablegoodssector,
andattheexpenseofthepublicsectorwhichhadabsorbedmorethantheentiregrowthofthe
labour force in the ten years to 1982. As analysed in detail in previous OECD Surveys of
Denmark, this was to be achieved through a strategy comprising the following elements:
a) An incomes policy aimed at improved competitiveness through wage guidelines;
b) A tight fiscal policy, emphasising public sector spending restraint;
c) A stable exchange rate within the framework of the European Monetary
System;
d) A flexible monetary policy aimed at narrowing interest rate differentials vis-à-vis
international markets; and
e) A setofstructuralpoliciesdirectedatreducing rigiditiesin thelabourmarket,but
also atenhancing the potential foreconomicgrowth by promoting privatesavings
and technological progress in the private business sector.
The "principle of the three Cs" (consistency, continuity and credibility) which has
increasinglybeen adhered tobyOECD Membergovernmentssincethesecondoilcrisis, has
motivated the formulation and implementation of Danish economic policy during the last
three years. The various elements of policy have been seen and evaluated as a whole (the
consistency requirement). The strategy has been based on the recognition thatthe frequent
Table 1. Objectives,policiesandresults
A. Policies
1980-1982
Fiscal policy Expansionary. Growingstructuralde¬ Tight. Fallingstructuraldeficit
ficit
Incomespolicy Modification ofautomaticindexing Wageceilingsand suspensionofauto¬
scheme maticindexation
Exchange ratepolicy Enectivelya managed downwardfloat Exchange ratestability
Monetarypolicy Tightfinancialconditions. Increasing Easierfinancialconditions. Downward
premiumoverinternational interest adjustmentofinterest ratestowards in¬
rates. ternational levels
B. Objectivesandresults
Objective Initialsituation 1982 1985
Inflation1 Below internationalrates 10.1 4.7
Inflationdifferential2 +3.3 +0
Fiscal policy3 Budgetdeficittodisappear in 1990 -9.9 -4.6
Currentaccountofthe Balancein 1988* Kr.-18bill. Kr.-28bill.
balanceofpayments
Unemployment,percent Graduallyreduced 10.4 9
1. CPIincreaseperyear.
2. DifferentialbetweenDenmarkandtheOECDaverage.
3. CentralgovernmentbalanceinpercentofGDP.
4. Initially1986-87.
Source: OECDSecretarial.
changes in both public spending and taxation effected in the past had led to a pronounced
"stop-go" cycle. More steady policies were seen to help stabilize expectations of economic
agentsandhencethebusinesscycle(thecredibilityrequirement). Policieshavebeensetina
medium-term framework (the continuity requirement), a main reason being that the
restructuring of the economy as implied by the government's intentions would require
consistent policies over a prolonged period (Table 1).
Setting policies in a medium-term framework profoundly changed the nature ofpolicy
making,andshifted,atthepracticallevel,theemphasisawayfromshort-termbusinesscycle
analysis towards medium-term targets as the "trigger" for policy initiatives, with a view to
reducing the risk that policy action is based on tendencies which in retrospect prove to be
temporary.Theprojectionsarenotforecastsbutrather"scenarios" whichprovideabasisfor
assessing the policy measures needed to attain the authorities' objectives. Since 1983,
medium-termprojectionshavepointedtothepossibilityofcombiningrelativelyfasteconomic
growthwithsteadyreductionofthecurrentexternaldeficit. Initiallyexternal balancewasto
beachievedin 1986or 1987,buthasnow beendeferredto 1988. Bytheturnofthedecade,a
balanced current external account is to be combined with "internal balance" defined as a
situation with a balanced government budget and a significant reduction in the level of
unemployment.
Theassessment ofrecent trends and prospectsprovide the basis for adjustments ofthe
medium-termprojections;andiftheprojectionssuggestthattheGovernment'skeyeconomic
objectivesareunlikelytobeachievedaccordingtoschedule,thenpoliciesareadjusted. Such
an assessmentis inherentlydifficult; there isalwaysthe riskthatmisinterpretationoftrends
andlackoftimelypolicyactionwillenableimbalancestodevelop,sothattheeventualpolicy
adjustmentwill havetobeboth harsherand moreprolonged than ifan earlycorrection had
been made. Policy corrections took place twice in 1985:
i) TheMarch 1985packagewastriggeredbythebreakdownofthewagenegotiations.
It mainly consisted ofa prolongation and strengthening ofincomes policies and a
fiscal tightening in the formofa "compulsory savingsscheme". This policy action
alsofollowedTheFinanceReport 1984publishedbytheMinistryofFinancewhich
indicated that progress towards better overall balanceoverthe medium term had
ceased, notably because of a worsening of the outlook for the current account
balanceandperhapsalsomeagreprospectsforfurthersignificantreductionsofthe
rate ofinflation.
ii) Forcedbyarapidlywideningtradedeficitinlate 1985,itwaseventuallyrecognised
that the spring tightening of fiscal policy was insufficient to bring about the
necessary improvement in Denmark's external payments position in the years
aheadandthatatthesametimethereweredisquietingsignsofoverheatingin the
constructionsectorwhichcouldthreatentheincomespolicypartofthestrategy. It
wasthereforedecidedtoseekfurthersavingsonthecentralgovernmentbudgetfor
1986 (notably freezing construction expenditures); to "tax" local authority
spending; to increase the energy taxes and to restrict private borrowing for
consumption purposes.
Fiscal policy
Medium-term trends. The medium-term stance offiscal policy is defined in terms of
both expenditureandtax instruments: real publicsectorspending istobe held incheckwith
the view to steadily reducing the budget deficit and eventually peeling-off public sector