Friday 5 December 2003

Pic of the day: Norwegians shop like never before, but mostly imported stuff. Illustration from The Sims, which incidentally is also imported, from the USA.

Norway is not the USA

The Norwegian central bank, Norges Bank, is keeping interest rates low. Our small, rich and peaceful country has seen parts of its industry relocate abroad or simply close down during the last couple years. There were mainly two reasons for this: Wages were rising more rapidly in Norway than practically anywhere else in the world for several years, and our currency has been unusually strong. This is an unusual combination and quite unfortunate for any industry that competes on the world market. Rising unemployment, falling inflation and widespread worry caused the central bank to rapidly and dramatically lower its interest rates. This reaction mirrored the action taken by Alan Greenspan, chairman of the Federal Reserve.

The United States of America is not just an economic and military superpower, it is also a really big nation in terms of geography and natural resources. Consequently, 90% of consumption by US citizens is also produced in the country. Or at least those are the latest numbers I have heard... I guess imports may have risen lately, especially from China; but still the principle holds: Increased spending in the USA means increased production in the USA.

In marked contrast, Norway is a country with 4.5 million inhabitants and a very open economy. Most of consumer goods are imported, and much of our industry production is for an international market. Our country also produces disproportionately more raw materials and partly processed goods for export.

When Norwegian citizens borrow to consume, much of this money is sent abroad, as imports increase. Admittedly, services are still largely local, although Norwegians tend to travel abroad for vacations; and particularly when they feel rich. So the American trick of pulling the economy back up with consumer spending... well, it simply doesn't work here. Like in America, people will dig themselves down in debt. But unlike in America, the benefits mostly flow to our trading partners. The effect on the Norwegian economy is indirect at best. In fact, the risk of deflation could theoretically increase, since imports increase and imports are generally cheaper. In practice however, I expect inflation to rise because much of the money will be spent on housing. Sadly, this would mostly be buying and selling existing homes, not building new ones.

Lack of private consumption is not a problem in Norway, and has not been for a very long time. The main problem for the Norwegian economy is the particular growth in Norwegian wages, which makes our industry products expensive. The way to counter this must be through improved productivity. This requires investment. Low interest rates do indeed encourage investment, but a reduced savings rate pulls in the opposite direction. The interest rate tool is simply not doing the job in Norway. We need to think independently, not just copy from the USA.

The solution, in my opinion, is to encourage panic rather than discourage it. Norwegians handle panic exceptionally well. We don't take to the streets to protest and burn and loot. Instead, we calm down and cooperate to avert the disaster. Economic downturns are no exception. Norwegian workers and employers cooperated quite well for a while after the previous economic downturn. They are likely to do so again if they get serious. Throwing large amounts of money at them is not likely to cause this effect. It is likely to make things worse, not better. Raise interest rates to normal levels now, because compared to the rest of the world Norway does not have economic problems.