Chapter 1: Norway's economic success and the challenge of preserving it
The development of the petroleum industry and public spending made possible by oil revenues contributed strongly to the catch-up process and allowed Norway to overtake its neighbours. But well-functioning institutions seem at least as important to Norway’s performance. Liberalisation of a regulated economy, appropriate specialisation, traditional openness to trade, early adoption and diffusion of high technology despite apparently low innovation, and a good macroeconomic stabilisation framework may also explain this success. Norway’s supply structure has now made it a chief beneficiary of globalisation. Rapidly emerging countries like China are supplying Norway with low-cost consumer goods while raising world prices for Norway’s oil and commodity based products. Moreover, competitive forces in Norway have been strengthened by rising inflows of foreign goods, capital and workers. These favourable structural shocks have enabled monetary policy to deliver strong growth with low inflation. But some clear challenges lie ahead. These include: possible economic overheating via stimulative macro policies and reversals of favourable global supply shocks; high unit labour costs and the risk of real exchange rate appreciation; and potential damage to work incentives by lax public welfare programmes and exaggerated optimism about long term income prospects.
Chapter 2: Monetary policy under low inflation
Norway has a robust macroeconomic policy framework to manage the potentially destabilising impact of its oil wealth. Nonetheless, emerging macroeconomic imbalances due to the unusually large terms of trade shock may require adjustments to policy rules. The monetary policy setting may at present give too much weight to the attainment of the core inflation target, which has been widely influenced by supply shocks not under policy control, and too little weight to signs of overheating in the real economy and excessive exuberance in the housing market. While a structural boost to potential growth may explain the past period of strong growth and residential investment, this is hard to ascertain. Policy should assume that the structure of the economy has not really changed, and withdraw monetary stimulus relatively quickly.
Chapter 3: Putting public finances on a sustainable path
Prudent management of national resource abundance has been the hallmark of Norwegian public governance and a cornerstone of Norway’s economic success. Norway has rationally decided to exploit finite natural resources in the long term interests of all its citizens and descendants. The more oil money that can be saved now, or else used to improve the foundations for growth, the more easily can fiscal solvency and high growth be secured as the population ages and the pension system matures. Notwithstanding the illusion of a relaxed long run budget constraint, enhanced by the oil price windfall, expansive spending programmes must be resisted and budget room used for pension pre funding. This will involve a determined scrutiny of expenditure programmes and high transparency of tax and subsidy policies. In particular, the growing use of oil money to subsidise widespread non employment by various public schemes needs to be critically examined. Pension and welfare system reform is needed to encourage individual responsibility and longer working lives in the light of a massive rise in projected age related public spending, the highest in the OECD.
Chapter 4: Reforms to boost labour supply
In many respects, the Norwegian labour market is in fine form: unemployment is low; participation rates, notably of old aged workers and women, are above OECD averages; and the labour force is rising. Yet, the labour market faces challenges. Private sector employment has barely grown over the past 15 years, hours worked per employee are the lowest among OECD countries and old aged employment rates are heading downward. There is also evidence of a rising mismatch between labour supply and demand. Above all, Norway faces one of the highest shares of persons on disability and sickness absence benefits among OECD countries. Tightening eligibility criteria and reducing the generosity of sickness absence and temporary disability schemes seems necessary. For instance, reducing the number of days lost due to sickness absence to the EU average level would boost hours worked in Norway by 3%.
Chapter 5: Encouraging innovation
R&D intensity and other standard innovation measures are low in Norway. This presents something of a puzzle. On the one hand, productivity growth has been high, and on the other, Norway has developed a solid institutional framework for innovation support. The main problem seems to lie on the side of firms, who have done very well by adapting existing technologies to boost their productive efficiency, apparently seeing little need to produce innovations of their own on account of high risks and costs. Indeed, industrial structure is based largely on small, low tech firms. The same patterns are reflected in education output, with a dwindling supply of math, science and technology (MST) degrees given the apparent lack of demand for high tech skills. However, future growth potential will depend increasingly on innovative activity, especially as the oil sector, the source of many knowledge spillovers up until now, will henceforth decline while population ageing limits future growth of labour input. Furthermore, a minimum critical mass of technical competency is needed in order to be able to recognise and adapt evolving new technologies to confront global competition. All this suggests that a greater policy focus on improving the framework conditions for competition and risk-taking is needed, involving stronger competition policy reduced public ownership, and financial market development. This would stimulate a greater perceived need for innovation by firms and a corresponding demand for MST skills. The government could contribute to this process by encouraging the supply of qualified MST teachers and counteracting market failures in the supply of venture capital and equity financing more generally. Various regulatory and fiscal barriers to the growth of firms would also need to be removed by establishing a level playing field.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Norway 2007 is available from:
For further information please contact the Norway Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Alexandra Bibbee and Benoît Bellone under the supervision of Patrick Lenain.