Countries of the World/COUNTRYS.BIN/dp/0268/02685.txt

Text File | 1991-06-25 | 15KB | 259 lines

$Unique_ID{COW02685}
$Pretitle{436}
$Title{Norway
Economic Perspectives}
$Subtitle{}
$Author{Norges Bank}
$Affiliation{Embassy of Norway, Washington DC}
$Subject{banks
financial
bank
capital
economy
norway
oil
skanland
norwegian
institutions}
$Date{1990}
$Log{}
Country:     Norway
Book:        Fact Sheets on Norway
Author:      Norges Bank
Affiliation: Embassy of Norway, Washington DC
Date:        1990

Economic Perspectives

     Address by Governor Hermod Skanland at the meeting of the Supervisory
Council of Norges Bank on 14 February 1991
(Summary, in translation)

     In his annual address, delivered in Oslo on 14 February, the Governor of
Norway's Central Bank, Hermod Skanland, emphasised the important role that
increasing international integration will play in the years ahead,
particularly in Europe. This integration would affect Norway even if the
country did not itself participate in the negotiations on further integration.
He emphasised that for Norway, increased integration means new challenges, but
also new opportunities.

     In his survey of the Norwegian economy, Mr. Skanland said that large
parts of Norwegian business and industry will face stiffer competition.
Moreover, there will be less scope for departure from the economic policy of
other countries. In recent years Norway has improved its capacity for meeting
these challenges by reducing price inflation to a level below that of her
trading partners. Furthermore, the free wage round in 1990, following two
years of wage legislation, did not result in a wage explosion. Last year the
external economy showed a surplus corresponding to 4 per cent of GDP.

     However, the improvement in the external economy last year was due to
higher oil prices and reduced ship imports. The deficit of the mainland
economy widened somewhat, after substantial improvement in the three preceding
years. For some years now the mainland Norwegian economy has to a large extent
been assisted by rapid growth abroad, a trend which may easily be interrupted
for some time. Major trading partners, like Sweden and the United Kingdom,
will need to re-establish a proper balance in their economies. Oil production
is expected to rise to a new peak in 1991, and a current account surplus is
expected in 1991, even at the current oil price of about USD 20.

     It now appears that a high level of oil production can be maintained for
a longer period than was previously thought possible, and an increasing share
of the oil revenues will accrue to the state. However, this does not make room
for a more expansionary fiscal policy. Even at the estimated peak level, the
state's oil revenues will barely cover the deficit before oil revenues,
excluding repayments on the government debt, in 1991. Mr. Skanland stressed
that the dependence on oil makes the Norwegian economy vulnerable to falls in
the oil price.

     The central bank governor said it was crucial for Norwegian business and
industry to be able to adapt once stiffer competition makes itself felt in
certain areas of the economy. The ability to adapt depends on how well we
manage our natural resources, our labour and our capital. He stated that the
impending tax reform is aimed at improving our use of capital. The reform
should be implemented as quickly as possible, not least because business and
industry will otherwise face a prolonged period of uncertainty regarding the
future regulatory framework.

     Mr. Skanland also emphasised that the wage level is the key to achieving
the required competitive strength. If there is a reasonable balance in the
external economy, concurrent with a satisfactory employment level, wage costs
cannot be said to be excessive. However, neither the employment level nor the
state of the external economy is such that Norway could bear any increase in
its relative cost level: the opposite is what is needed. He stated that the
only way to achieve a sustainable high employment level is to enhance labour
market flexibility, and to put wages onto a path more beneficial to product
market competitiveness. It must primarily be up to the labour and management
organisations to ascertain to what extent this requires revision of the actual
process of wage formation and what can be achieved within the framework of
this process.

     The Governor also emphasised that the merit of the fixed exchange rate
policy pursued in recent years was further confirmed by the pegging of the
krone to the ecu on 22 October last year. The authorities' recourse to
devaluation to combat business and industry's cost problems is now a thing of
the past.

     Mr. Skanland cited the realisation in most countries that, given the way
the labour market works, the authorities have few other means of stimulating
employment than public spending increases, which is apt to lead to a weakened
external economy, inflation, or both. However, this form of "job-creation"
reduces the sustainability of employment in the long term. As long as demand
could be stimulated using oil revenues, Norway escaped having to face up to
this realisation. However, increased use of oil revenues cannot be continued.
The notion that the state is responsible for employment, which appears more
deep-rooted in Norway than in other countries, is a threat to employment since
it undermines an understanding of the responsibility of the social parties.

     In discussing the international economy, Mr. Skanland pointed to fears
that problems of financial institutions in many countries will contribute to
weaker economic growth. He emphasised the importance of fruitful
collaboration among central banks to secure the stability of the system.

     In his discussion of the Norwegian financial system, Mr. Skanland said:

     "In the financial markets the distribution of responsibility should be
clear enough in principle. Profits and financial strength are the
responsibility of the individual institution. However, the statutory framework
must give institutions the freedom of action to exercise this responsibility.
The Banking, Insurance and Securities Commission ensures compliance with the
legislation, both in formal and real terms, while Norges Bank ensures the
supply of liquidity in accordance with guidelines laid down by the political
authorities. Moreover, Norges Bank, like other central banks, is responsible
for ensuring that difficulties which may affect the individual financial
institution do not undermine confidence in the country's financial system.
The question of appropriate response in such cases, particularly on the part
of the political authorities, was addressed in the White Paper on Sparebanken
Nord-Norge. Moreover, the general weakening of financial institutions' capital
as a result of the losses of recent years has given added focus to the
question of how the political authorities should exercise their responsibility
in practice.

     The background to the grave problems facing the banks is illustrated by
the loss trend. Whereas bank losses constituted less than 0.5 per cent of
loans up to 1986, the ratio rose sharply in 1987. In the past three years,
losses have constituted 2-2 1/2 per cent of loans per year. As a result, the
banks as a whole have been in deficit after actual losses, or at best broken
even. Their reserves have been eroded, which has made it difficult for them to
attract fresh capital by issuing shares and (in the case of savings banks)
primary capital certificates. Moreover, their net interest revenues have
weakened owing to a decline in interest earned on capital. The problems are
compounded by the fact that financial institutions are required to raise
their capital to comply with international capital standards adopted by
Norway by the end of 1992.

     The public debate is still concerned with apportioning responsibility
for the financial crisis. In my 1989 address, I pointed to three factors: bad
banking, bad policies and bad luck. This terse description was later confirmed
in quite extensive analyses. Thus there is no reason