Pre-1980s, Norway’s economic policy was much like India’s

Norway’s Central Bank Governor Svein Gjedrem gives this superb lecture tracking developments in economic policy focusing on Norway. He also looks at state of economics in general and why should we study it.

First the topic. There were quite a few similarities between Norway and India in 1950s:

Keynes’ theories gave support to an era of more state planning and control. Some countries went farther than others. In Norway, the first Nobel laureate in economics Ragnar Frisch was an important agenda-setter. Frisch, who worked here in this department, wanted to make the subject more scientific by using mathematics and statistics. According to Frisch, economic theory should be expressed by mathematical models and supported by quantified relationships. He made a substantial contribution to the development of accounts for the nation as a whole – national accounts. When economists worldwide discuss concepts such as gross domestic product, private consumption and investment, this can to a large extent be attributed to Frisch. Together with Trygve Haavelmo, also a Nobel laureate in economics, Frisch contributed to giving the Department of Economics at the University of Oslo a proud past. Frisch was sceptical as to whether market forces alone would ensure an efficient distribution of resources. Equipped with new tools, he saw the economist as a sort of social engineer who, with the help of mathematical models, detailed accounts and proposals for regulation, management and control, could assist government and parliament in improving living standards and welfare.

Confidence in government planning and management marked Norwegian economic policy in the 1950s, 60s and 70s. Self-confidence among economists was considerable, as was their influence on economic policy. The work was led by former students of Frisch, such as Erik Brofoss who became finance minister and later also central bank governor.

Norway was among the countries that went particularly far in developing an economy with a high degree of centralised coordination and control.  It may perhaps be said that this work culminated in the 1973 proposal to establish an incomes policy council. The social partners were to undertake a commitment to keep negotiated wage increases within specific limits. The proposal to establish an incomes policy council was logical. It was the last wall in the structure erected after the war. Other elements were:

  • fiscal policy – the management of public spending and revenues – was oriented towards full employment
  • credit regulation within limits specified in a separate credit budget
  • channelling of loans through state banks
  • regulation of cross-border capital movements
  • low nominal interest rates stipulated by the government authorities
  • a fixed, though adjustable, krone exchange rate
  • use of price regulation
  • an active business policy through state ownership and state grants and subsidies.

 
The proposal to establish an incomes policy council did not receive support. There was just too much state control and coordination. Today, 40 years later, little remains of the management system that was built after the war. The structure was not sufficiently robust.

Detailed management and regulation of the economy was not able to deliver sustainable growth and welfare. On the contrary, the result was poor efficiency and wide fluctuations in the Norwegian economy in the 1970s and 1980s. The wide fluctuations culminated in a credit boom in the mid-1980s, which was followed by a banking crisis and a deep recession with high unemployment at the end of 1980s and the beginning of the 1990s.

Fascinating stuff. How Frisch’s ideas led to flow of economic thought and policies in Norway. And how the idea was stretched to a far point where income council kind of thing was to be established. Same was the case in India (though there were differences as well). What is also interesting is how quickly Norway manged the transition from a planned to a market economy and became an advanced economy. In India we still have a long long way to go.

All this changed from 1990 onwards:

Four pillars were established in the 1990s and in 2001 to stabilise economic developments:

  • the petroleum fund mechanism
  • the fiscal rule
  • a floating exchange rate
  • inflation targeting

This system was introduced in response to the sharp upturns and downturns in the economy over the first twenty years of the Norwegian oil age.

He lists few challenges ahead:

  • Norwegian labour has never been as costly as it is now
  • The management of Norway’s oil wealth poses another challenge. History has shown that countries that suddenly gain access to an abundance of resources have a tendency to deplete the values rapidly and then fall into decline
  • Another important issue is what should be done to prevent further crises in financial markets.

Finally on state of economics:

When I was a student here at the University of Oslo at the beginning of the 1970s, there was a fairly broad consensus that the problem of unemployment had been solved once and for all. The belief was that the economy could be fine-tuned through government management, control and regulation.

A similar optimism prevailed with respect to economics in the years prior to the financial crisis. In the preceding 15-20 years, the global economy was characterised by solid growth, greater economic stability than earlier and by low and stable inflation. The period is often referred to as “the great moderation”. A consensus was forming that wide fluctuations in the economy, as had been the norm, were a thing of the past. The US economist and Nobel Prize winner in economics Robert E. Lucas expressed a commonly held view in a speech he gave in 2003:

” […] macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”  (11)

Autumn 2008 was to become a reminder that we should be on our guard against established truths and consensus. If history has taught us anything, it is how little we actually know. So, if I were to offer some advice to those of you about to embark on your economics studies, I would first and foremost say this: be inquisitive and ask questions. Learn enough to be able to doubt.

Interesting throughout.

4 Responses to “Pre-1980s, Norway’s economic policy was much like India’s”

  1. Pre-1980s, Norway's economic policy was much like India's « Mostly … | Today Headlines Says:

    […] here: Pre-1980s, Norway's economic policy was much like India's « Mostly … Share […]

  2. Mostly Economics: Pre-1980s, Norway’s economic policy was much like India’s Says:

    […] ” […] macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.” (11) […]

  3. bre Says:

    I am a teacher in NC and came across your site while researching some information about Norway for a geography lesson for this years class. I wanted to thank you for the great information and articles about Norway, and second let you know about a site we are putting together for teachers that might have some useful information about Norway (link below) for your site.

    http://www.thefreeresource.com/norway-fun-interesting-facts-and-resources

    We would love it if you could write a couple articles for us, or spread our site to other teachers by linking to it, Tweeting it, or adding it to Facebook.

    Thanks and keep the resources coming
    Bre Matthews

  4. Shriniwas Joshi Says:

    The above lecture by Svein is funny and shows Svein’s shallow (or may be complete lack of) knowledge of India – mainly its economic and social constraints.

    It is very easy for any European country to plan and implements economic policies considering their small demographic and geographical structure and Norway is no exception. In 1950s huge amo0unt of US help was flowing in to Europe and and that was helping their domestic industries to prosper. Once this vicious cycle of poverty of broken, managing the growth becomes an easy part.

    In India, scenarios was very different. It was a young country coming out of 250 yrs of colonial era and was in the middle of politicial turmoil. The local industry was almost non-existent. The Indian govt gave huge emphasis on public sector companies to ensure that industrialization occurs at an accelerated pace. Making profits was never a goal of these companies. The support for basic industries such power, steel, cement, oil was built up so that many more industries can stand on their own. Agriculture was a neglected sector though a mass employer. Through green revolution, the country was made self reliant and from next importer it become net exporter of agri products.

    People like Svein and his collegues in Norway have never faced the kind of grandiose problems that were managed by indian policy maker.

    So to hide their ignorance lesser they say is better.

    Shrini

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