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OECD Economic Surveys : Norway 1973. PDF

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RGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION OE COOPERATION ET DE 0 E V E L 0 P P E M E N T ECONOMIQUES BASIC STATISTICS OF NORWAY THE LAND Area(1000sq.km) 324 Majorcities(31 12.71): Arabicarea(I000sq.km) 10 Oslo 477476 Productiveforest(1000sq.km) 70 Bergen 212120 THE PEOPLE Population(31.12.71) 3922000 Civilianemployment,1970 1497000 No.ofinhabitantspersq.km 12 ofwhich:Industry 358000 Netnaturalincrease Agriculture,forestry (average 1962-1970) 29200 andfishing 208000 Per 1000inhabitants(average Otheractivities 731000 1962-1970) PRODUCTION Grossdomesticproductin 1971 Grossfixedcapitalformation(1971): (millionsorKr.) 100774 PercentageofGDP 35 GNPperhead($) 3300 Perhead,S J274 THE GOVERNMENT Publicconsumptionin 1971 CompositionofParliament (percentageofGDP,OECDdefinition) 18 (No.ofseats): Generalgovernmentcurrentrevenuein Labourparty 74 1971 (percentageorGDP) 47 Conservativeparty 29 Publicgrossfixedcapitalformationin Centre(Agrarian)party 20 1971 (percentageofGDP) 8 Liberalparty 13 ChristianDemocrats 14 Left-wingSocialistparty 0 Total Ï5Ô Lastgeneralelection: 1969 Nextgeneralelection; 1973 FOREIGN TRADE Exportsofgoodsandservicesasa Importsofgoodsandservicesas a percentageofGDP(average1962-1971) percentageofGDP(average 1962-1971) 38 ofwhich: Mainimportsin 1971 (percentageoftotal Grossfreightearnings 15 commodityimports): Mainexportsin 1971 (percentageoftotal Ships(average1968-1971) commodityexports): Machinery,apparatusandtransport Forestryproducts 11 equipment(excl,ships) 25 Basemetalsandproductsthereof 28 Rawmaterials(non-edible)incl.fuels Fishandfishproducts 9 andchemicals 21 Machinery,apparatusandtransport Basemetalsandproductsthereof 10 equipment(excl.ships) THE CURRENCY Monetaryunit: Krone CurrencyunitperI(from20.12.1971): 6.64i Note Aninternationalcomparisonofcertainbasicstatisticsisgiveninanannextable. OECD ECONOMIC SURVEYS NORWAY ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The Organisation for Economic Co-operation and Development (OECD) was set up under a Convention signed in Paris on 14th December, 1960, which provides that the OECD shall promote policies designed: to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial sta¬ bility, and thus to contribute to the development of the world economy; to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accord¬ ance with international obligations. The Members of OECD are Australia, Austria, Belgium, Canada, Denmark, Finland, France, the Federal Republicof Germany, Greece, Iceland,Ireland,Italy, Japan, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Socialist Federal Republic of Yugoslavia is associated in certain work of the OECD, particularly that of the Economic and Development Review Committee. The annual review of Norway by the OECDEconomicandDevelopmentReviewCommittee took place on 20th December 1972. The present Survey has been updated subsequently. © OrganisationforEconomic Co-operation and Developement,1973. Querjes concerning permissions or translation rights should be addressed to : Director ofInformation, OECD 2, rue André-Pascal, 75775 PARIS CEDEX 16, France CONTENTS Introduction 5 I The acceleration of inflation 5 II Causes of inflation 8 International transmission 8 Domestic factors 14 HI Recent trends and prospects 22 IV Policy issues and conclusions 27 Annex I Chronology ofmajor eventsin the price/wage field 1958-1972 31 Annex II Regulation for the temporary pricefreeze for goods and services 39 Annex III Input-output tables 1961 and 1971 43 TABLES Text 1 Supply and use ofresources 23 2 Prospects for prices and incomes 24 3 Contribution to wage cost 25 4 Global balance ofpayments 26 5 Balance ofpayments ofthe shipping sector 27 Statistical annex A Supply and use ofresources, current prices 49 B Supply and use ofresources, 1961 prices 50 C Gross domestic product by industry oforigin, current prices 51 D Gross domestic product by industry oforigin, 1961 prices 52 E Gross fixed asset formation, 1961 prices 53 F Central government income and expenditure 54 G Balance ofpayments, $ million 55 H Balance ofpayments, quarterly, Kr. million 56 I Quarterly national accounts 57 J Labour market and employment 58 K Production and demand by sector 59 L Foreign trade, total and by area 62 M Imports: value, volume, prices and by commodity group 63 N Exports: value, volume, prices and by commodity group 64 O Prices and wages 65 P Money and credit 66 DIAGRAMS 1 Consumer prices in Norway and OECD Europe 6 2 Consumer prices, selected items 8 3 Deflators ofselected GDP components 9 4 Pressure indicators and external balance 10 5 Wage cost and profit manufacturing 12 6 Wage cost and profit shipping 14 7 Unit labour cost in manufacturing 15 8 Contribution to hourly wage cost in industry 16 9 Development ofwage differentials in industry 17 10 Distribution ofprivate consumption 18 11 Public expenditure, selected countries 19 12 Structure oftax revenue 20 INTRODUCTION Norway has once again come through an international recession without serious unemployment or retardation of growth. The boom in the late 1960s lasted longer than in most other European Member countries, and the subsequent slowdown in 1972 has been much milder than generally elsewhere. Norway has also longer resisted the worldwide phenomenon of accelerating inflation but the last couple of years have clearly seen a loss of price-cost stability. The 1972 bi-annual income settlements were follow¬ ed by a new wave of price increases which in September prompted the authorities to resort to a new temporary price freeze the third in the past two years. The official 1973 forecast is for full employment growth, but given the continued rapid expansion of the public sector and public transfer payments, progress towards better internal and external balance may be more difficult to realise. Norway has for many years past demonstrated that it is possible to pursue social and egalitarian objectives in economic policy while maintain¬ ing high employment, reasonable price stability, external balance and a satisfactory rate of economic growth. For most of the 1950s and 1960s domestic cost and price developments in Norway can be shown to have been largely determined by international prices and the growth rate of labour productivity in export and import-competing industries. In both these respects, experience in the past two years suggests a disquieting departure from past trends. Inflationary tendencies seem to have strengthen¬ ed partly because too much has been attempted too quickly towards further improvement of income distribution. And the steep rise in unit costs raises the question whether Norway's relative competitive position will be maintened in the coming years. The present Survey, after reviewing Norway's past price performance in Part I, attempts in Part II to analyse some features of income formation in Norway and to identify the main forces behing the recent acceleration of inflation. Part III discusses the prospects and conditions for regaining a higher degree of price stability. Part IV summarises the main policy issues and conclusions. I THE ACCELERATION OF INFLATION On average over the decade 1961 to 1971, Norwegian consumer prices rose somewhat (i percentage point) faster than the average for European OECD countries, and the difference disappears if allowance is made for OECD Economic Surveys Diagram1 ConsumerPricesinNorwayandOECDEurope A. Index 1961 = 100 Sem/-/og. 180 Norway 160 y 140 -***' OECD-Europe 120 100 i. 1961 62 63 64 65 .66 67 68 69 1970 71 721 B. Change over 6 months, seasonally adjusted annual rates Norwoy ____ OECD-Europ. Increaseofindirecttaxes I Price PriceFreeze PriceFreeze Freeze I(cid:9)1 I(cid:9)1 10 B Incl.TVA / 6 AVERAGE 7967-197! / -N' * 7"-k\\ Als'y7» 4 2 Excl.TVA 1968 1969 1970 1971 1972 1 EstimatesoftheOECD Secretariat. Source: MonthlyBulletinofStatisticsandOECD Secretariat. Norway the effect of the introduction of VAT on 1st January, 1970. Like other European countries, Norway experienced a sharp acceleration of price inflation in the latter part of the period. While price increases in both 1968 and 1969 were still relatively moderate, consumer prices rose at an average annual rate of as much as 8 per cent between 1969 and 1972, as against 3.5 per cent over the 10-year period 1959 to 1969. The acceleration of price increases since 1969 appears to have been fairly uniform for most categories of goods and services. Over the past three years, the behaviour of Nowegian consumer prices has been strongly influenced by three succesive attemps by the authorities to stem the rise in prices by direct intervention. Until 1969, the authorities, while following price developments closely through extensive control of monopolistic practices and general price surveillance, had not made use of general measures of price control. The need for such measures was felt for the first time when VAT was introduced in a situation of high demand pressures. The immediate object of the temporary and partial price freeze ordered in September 1969 was to deter enterprises from using the introduc¬ tion of VAT as an opportunity to widen profit margins. The freeze was abolished early in 1970, having so it seemed served its main purpose: excluding the mechanical impact of VAT estimated at 5.8 per cent, the annual rate of increase of consumer prices was reduced to 2 per cent, suggesting that at least a part of the initial rise in indirect taxation had been absorbed in profit margins. Following the lifting of the first price freeze, the rise in prices acceler¬ ated from month to month during 19701. In the second half of the year, the rate of increase exceeded 9 per cent2. The authorities decided to introduce a new price freeze, effective from 20th November, 1970. This freeze lasted about a year. However, only during the first six months did the administration take a rigorous line on request for price adjustments. During this period the annual rate of price increase was reduced to 3 to 4 per cent. Then a more flexible approach was adopted leading to some acceleration of price inflation in the last months of the freeze. After some months during the winter of 1971/72 when the annual rate fluctuated between 6 and 7 per cent, a new phase of acceleration began in April 1972. In September, when the rate of increase had reached 10 per cent3 the Government reintroduced the price freeze in a form which envisaged fairly general and tight control over the prices of most goods and services4. The freeze was relaxed in the following months and abolished as from 1st January 1973. Surveillance of profit margins, however, will be maintained. In the following chapter an attempt will be made to throw light on the causes of acceleration of price inflation in Norway, dealing first with possible external influences and then with domestic factors. 1 Therewasa small increaseinindirecttaxesinthesummer. 2 Annual rate, seasonallyadjustedby OECD Secretariat. 3 Changebetween March and Septemberexpressedas annualrate. 4 AsummaryoftheRoyalDecreeof15thSeptember1972isattachedasanAnnexto theSurvey. OECD Economic Surveys Diagram2 ConsumerPrices,SelectedItems 1959 = 100 Semi-log. 240 230 Healthservice 220 / Misc.services / 210 / Food 200 (cid:9) Consumerprices,total 190 Rentandmaintenance 180 Clothingandfootwear 170 Consumerdurables / 160 / y / 150 / 140 y 130 y 120 110 100 1959 60 61 62 63 64 65 66 67 69 70 72' 1 AverageofAprilto September. Source: MonthlyBulletinofStatistics. n CAUSES OF INFLATION International transmission In view of the general parallel movement of price developments in Norway and abroad, and especially the time lag with which Norway followed the acceleration elsewhere, it is tempting to attribute the speeding- up of inflation in Norway, at least in part, to external influences. As a particularly open and small economy, Norway is certainly more exposed

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