Macroeconomics: Policies and Analysis

GROUP 10
Aastha HRA015
Dipanwita Kundu HRA023
Kautuk Thakur HRA025
Vrushal Sawant HRA037
Sukanya Paul HRA045
Shreyasi Srivastava HRA058
Akansha Devnani HRA064

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 Norwegian Perfection: Myth or
Reality?
INTRODUCTION
Lying on the northern edges of the European continent, Norway has retained a great
homogeneity between its people and their way of life, thereby avoiding the characteristics of
a geographical crossroads. Norway is a prosperous nation with the highest per capita GDP in
the world. The country also ranks at the top of the Human Development Index ranking of the
United Nations Development Program. In Norway, life expectancy rates are among the
highest in the world. The key political divide reflects different views on the value of free-
market forces; but long ago, the socialists stopped insisting on nationalization of the country's
industry, and widespread governmental regulation of the country's economy was
acknowledged by the nonsocialists. Such apparent national consensus was a major factor in
Norway's rapid growth as an industrial nation during the 20th century, along with ample
water power, offshore oil, and stable labor relations, and in the development of one of the
highest living standards in the world, strengthened by a robust social welfare system. The
mysterious natural beauty of Norway has drawn tourists from all over the world. Many
significant artists, including composers, painters, novelists, and playwrights, have also been
created by the country.
The economic freedom ranking for Norway is 73.4, making the economy the 28th best in the
2020 Index. Thanks to a higher labor freedom ranking, its overall score has improved by 0.4
points. Norway is ranked fifteenth out of 45 countries in the area of Europe, with an overall
score well above regional and global averages. A fair legal framework, transparent
legislation, and political stability make Norway a healthy and transparent place to do
business, but the business climate is under pressure from long-term demographic changes.
Labor expenses are high. The regulation of the labor market was recently changed to allow
more work at night. Monetary stability has been well preserved with an inflation targeting
regime, but high and increasing house prices have been added to by tax incentives and
subsidies to promote homeownership.
Agriculture accounts for 1.9% of GDP and 2 percent of the workforce are employed. Fishing
is an important activity because, after China, Norway is the second-largest exporter of
seafood in the world. There are very important agricultural subsidies. The industry employs a
little less than one-fifth of the workforce and accounts for 32% of GDP; its share began to
pick up after years of steady decline as of 2017. The economy of Norway relies on its energy
sources (oil, hydraulic energy, etc.).
Oil rents, once dominated by GDP, now account for less than 4% of GDP, as they are far
below their 2000 peak level. The political consensus is to save future generations of oil and
gas revenues, so Norway has the world's largest sovereign wealth fund (valued at over USD
1.14 trillion at the end of 2019). Norway's major production sectors include shipbuilding,
metals, machinery, and electrical equipment.

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The service sector is highly developed; it employs more than three-quarters (78.9%) of the
population and accounts for 56.8% of GDP.
In many ways, Norway is symbolic of the metaphorical rising of the phoenix from its ashes.
In the 1960s the country was grovelling in the dust, mostly dependent on fishing and
agriculture, with per capita income comparable to countries like Bangladesh and Nigeria but
that took a U-turn after a ship by the name of Ocean Viking struck a gold mine of oil off its
shores in 1966. Norway became one of the most oil-abundant countries in the world, falling
behind only UAE and Saudi Arabia. This windfall made Norway's GDP shoot up five times.
And while this was indeed a miraculous stroke of luck, and Norway could have had a field
day investing in infrastructure and reducing taxes, the government had the foresight to see
that the oil wells could run dry someday. So, they set up a government body called Statoil to
regulate the earnings from the oil. In essence, this is a giant national piggybank, but with a
catch. No one, not even the government, can dip into the actual money. Today, Norway's
exports total a whopping $149 billion, most of which is petroleum products. It has
consistently featured among the top three countries of the United Nations Development Index
for several years.
The earnings from the investment of the money are available to fund projects like education
and skill development. That explains the high level of skilled workforce in the country. That
also explains why Norwegian citizens don't spend on fancy jets and pay high taxes, and still
are among the happiest in the world as they do not worry about going bankrupt because of
education loans, fall into crippling debt or become homeless or overwork themselves with
multiple jobs. OECD reports that only 3% of Norwegians overwork themselves while the
global average remains at 11%. The unemployment rate is as low as 4.3%. Also, it enjoys
quite a high life expectancy of 83 years at birth compared to the global average of 71 years.
A question asked often is, "Is Norway a perfect economy?" or "Is it a model economy."
Norway has indeed added many feathers to its cap over the years, but what works for one
country may not always be copy-pasted to other nations across the world. However,
considering all they have done till now, it can be safely concluded they are close to
perfection, if not there already.
OBJECTIVE OF THE ANALYSIS
The main objective of our analysis of the economy of Norway lies in understanding its
macroeconomic scenario and macroeconomic policies over the last decade and apprehending
how these influences the performance of the economy.
We will begin by looking at the importance of Norway's economy on the world map which
will give insights about the macroeconomics scenario in the country and its policy
performance of Norway which has driven its growth status. With this, we wish to address the
various economic issues and challenges faced by Norway's economy which would shed light
on the performance of the economy based on these policies.
ANALYSIS OF THE MACROECONOMIC SCENARIO IN THE ECONOMY
Norway boasts of a vibrant and robust economy with an average GDP growth rate of 1.9%
and GDP per capita of $75,000. With a population of 5.4 million, it has an unemployment
rate as low as 4.2% and a nominal inflation rate of 1.9%. Not only has it flourished
economically, but also ranked among the happiest countries in the world, despite harsh

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winters and high taxes. But that was not always the case. Norway in the 1960s was an
economy mainly dependent on agriculture and fishing, with per capita income comparable to
countries like Bangladesh and Nigeria. But a sudden windfall in a form of a huge
undiscovered oil reserve struck this Nordic country in 1969. The economy picked instantly
and there has been no looking back since then.
The government, anticipating the limited reserve of this resource, did not hand over the reins
of drilling and production to private parties, choosing instead to manage it through extensive
regulation. Today, petroleum production contributes 12% to the GDP and 37% of exports.
Petrodollars have made Norway's economy fabulously resilient. But the earnings from the
sale of petroleum are not directly ploughed back into the economy. In anticipation of eventual
declines in oil and gas production and protect itself against the volatility of oil prices, Norway
saves state revenue from petroleum sector activities in the sovereign wealth fund, which is
valued at over $1 trillion at the end of 2017. In addition to that, the government has also a set
of extensive ethical mandates about the projects in which this money can be invested. For
example, Norway does not invest its oil money on projects involving weapons, alcohol,
tobacco, or organizations that flout environmental or labor norms. The interest earned on the
investment of its oil money is used to fuel projects like skill development and education. The
GDP grew from 2428 billion Norwegian kroner in 2009 to 3549 billion kroner in 2019. The
IMF predicted that Norway's economy would expand by 2.5% in 2019 and 2.1% in 2020.
Norway is also among the most economically equal nations in the world. According to
estimates, the lower 20% of wage earners take home roughly a third of the top 20% of the
earners. Although they have high taxes to offset the high income, the equitable distribution of
wealth has made it a model economy for nations worldwide. Unemployment remained
comfortably low, and oil prices remained materially above break-even levels, supporting
investment. Although global trade tensions have cast a shadow of doubt over this European
nation's future growth prospects, Norway's outlook remains positive.
Oil production fell to below 50% of its peak in 2000 but rose in 2016 for the third
consecutive year due to the higher production of existing oil fields and to new fields coming
on stream. To help in balancing the federal budget each year, the government follows a fiscal
rule, that states: spending of revenues from petroleum and fund investments shall correspond
to the expected real rate of return on the fund, an amount it estimates is sustainable over time.
In February 2017, the government revised the expected rate of return for the fund downward
from 4% to 3%. After solid GDP growth in the 2004-07 period, the economy slowed in 2008,
and contracted in 2009, before returning to modest, positive growth from 2010 to 2017. The
Norwegian economy has been adjusting to lower energy prices, as demonstrated by growth in
labor force participation and employment in 2017. GDP growth was about 1.5% in 2017,
driven largely by domestic demand, which has been boosted by the rebound in the labour
market and supportive fiscal policies. Economic growth is expected to be constant or improve
slightly in the following years. A few lurking concerns for Norway include the notorious
volatility of market conditions for oil (even though it has a buffer in the form of the sovereign
wealth fund), the ongoing US-China tensions, and downward trends in the European
economy. An impending climate change crisis may also add pressure to this nation that is so
heavily dependent on petroleum. But economists are certain that these factors are no cause
for concern, and as of now, the Norwegian economy continues with its smiling growth rates
as shown in Appendix (Exhibit A).

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 ANALYSIS OF MACROECONOMIC POLICIES
Fiscal Policy:
Fiscal Policy is the government's choice regarding overall levels of government purchases
and taxes. The fiscal policy of Norway puts strong importance on achieving Fiscal Neutrality,
i.e., balancing Fiscal Revenue and Expenditure. Fiscal priorities have been emphasized on
Tax Reforms for more business-friendly settings, and reallocation of funds from oil profits
towards infrastructure, education, and research. There has been a series of tax cuts in
corporate taxes, rail and road allocations have increased substantially. Efforts have been
made to achieve efficiency in public services. Increasing employment has also been a primary
focus of the Fiscal policy. The reforms are aimed at strengthening work incentives,
improving inclusion, occupational pensions, etc.
Also, the government is gradually investing revenues from the petroleum sector into the
economy. After the discovery of oil reserves, and the subsequent profits that the wealth
brought, the government realized that this wealth wouldn't last forever, so the government
invested the money into a wealth fund called sovereign wealth fund. This fund belongs to the
people of Norway. Only the profit generated by these funds are used to fund education,
public infrastructure, etc. it can be said to be an essential step towards ensuring the long-term
growth of the economy and its people. The expected real returns of these funds are spent as
expenditures, such that over time, the government's budget deficit is aligned with the fund's
real returns. Norway has not followed the policy framework of developed countries.
Expenditure of government in the year 2016 has been shown in Appendix (Exhibit 2):
Aggregate demand is the total expenditure made by the household, private government, and
foreign sectors. In other words, it is the total consumption expenditure, investment
expenditure, government expenditure, and net exports. In this case, the Norwegian
government has made significant expenditures in Health, Education, and Social Inclusion. It
can be inferred that these expenditures help increase the aggregate demand of the economy.
Taxation system: Also, taxes are quite high. However, the taxation system is such that
inequality is less. These taxes amount to government revenue which is in turn used for
building and strengthening social infrastructure for the citizens concerning health, education,
etc. Tax reforms in Norway have been towards growth-friendly policies. The rate of tax that
applies to most forms of income including corporate income has been decreased from 27% to
22%. This reduction has encouraged investment. The wealth-tax reductions brought gains
across income distributions.
Education Policy: Norwegian labour force is one of the most educated labour forces in the
world, substantiated by its proportion of working employees who have completed secondary
or tertiary education. The government accolades a significant amount of funds to be spent on
public education. There is an emphasis on free access to primary public school for primary
education thus ensuring equal opportunities. Also, students who face difficulties in learning
receive added high levels of attention. Details of the Education Policy of Norway has been
shown in Exhibit 3 in the Appendix. Investment in education is as important as that in

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physical capital for the long-run success of any economy. This is one way that the
government can enhance the standards of living of the Norwegian people. The benefits of
doing so are clear by the highly skilled workforce present in the economy of Norway.
Social Inclusion: There is a saying amongst Norwegians, "don't feel that I am rich but I
always know that I will have a roof above my head"
Compared to other European nations or the US, inequality in Norway is relatively low.
Poverty rates are amongst the lowest in the world. The government has been trying to
safeguard and support the standards of living of the disadvantaged and vulnerable groups of
people. Therefore, the government has allocated significant amounts of funds for Social
Inclusion, in the forms of social insurance, family-support expenditures (in terms of child
allowances, paid-leave agreements, and childcare). Other areas where the government is
spending significantly is related to work incapacity (reduce sickness absence and use of
disability pension also increasing the retirement age for workers). Details of the Education
Policy of Norway has been shown in Exhibit 4 in the Appendix.
Health: Having an excellent health-care system in place, Norway has been providing free of
cost health-care services to its community. The infant mortality rate is the sixth lowest in the
world. Also, all citizens have the right to provide financial assistance in any form as
community support when someone is ill. The Healthcare system for mothers and children is
especially focussed on. Norway's total healthcare expenditures total to about 12% of the
GDP. The government finances 84% of healthcare spending. Details of the Education Policy
of Norway has been shown in Exhibit 5 in the Appendix. A healthier workforce is more
productive. By investing proportionately in this sector, the government of Norway ensures to
increase productivity and raise the standards of living of its people.
Monetary Policy
Objectives of the Monetary Policy: By keeping inflation low and stable, the monetary policy
shall maintain monetary stability, according to the Norges Bank act and regulation on
Monetary policy. In the interest-rate setting, Norges Bank's operational target is inflation of
close to 2% over some time. As low and stable inflation is the primary objective of monetary
policy, it can be said that Norway has a monetary policy regime for inflation-targeting.
Inflation targeting should be dynamic and forward-looking so that it can contribute to high
and stable output and employment, and also to counteracting financial imbalances. When the
policy rate is set by Norges bank, different monetary policy considerations are compared with
each other
The Monetary policy rate is set with an objective of stabilizing inflation by bringing it to the
target in the medium term. The hurdles to which the economy is exposed and the effects on
the outlook for inflation and the output and employment will affect the time horizon.
A short-term trade-off may occur between supporting high and stable output and employment
and reaching the inflation target when disturbances occur. The Monetary Policy must reach a
common ground between these two considerations. The Monetary Policy can contribute to
smoothing disturbances in output and employment as long as there is a surety that the
inflation rate will remain low and stable over some time. Downturns can be prevented from
becoming deep and long-lasting by getting a flexible inflation-targeting scheme in place,

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where sufficient importance is given to the real economy. In this way, the risk of
unemployment becoming high following an economic downturn will be reduced.
Monetary Policy, to some extent, can counteract the build-up of financial imbalances and
thus reduce the sharp economic downturn ahead. If there are indications of financial
imbalances building up, then the consideration of high and stable output and employment
may suggest keeping the policy rate higher than decided otherwise. The primary means of
addressing disturbances to the financial system is the supervision and regulation of the
financial institutions.
The uncertainty in the functioning of the economy is taken into account by the conduct of the
monetary policy. A cautious approach to the interest rate setting is usually recommended due
to the uncertainty around the effects of the Monetary Policy. This shall reduce the risk of
unintended consequences due to the Monetary Policy. The policy rate will normally be
gradually altered so that it is possible to assess the effects of changes in interest rates and
other new information on economic developments. In situations where the risk of particularly
adverse outcomes is pronounced, or where there is no longer any confidence that inflation
will remain low and stable, it may be appropriate in some cases, to react more strongly than
normal to the interest rate setting.
The policy rate, which is the interest rate on banks' deposits in Norges Bank up to a
prescribed quota, is the primary monetary policy instrument. Norges Bank's Executive Board
sets the policy rate. Eight times a year, the Executive Board usually makes monetary policy
decisions. The meetings of the Executive Board where monetary policy decisions are taken
are called monetary policy meetings. Norges Bank controls the total amount of bank deposits
in Norges Bank for the level of the policy rate to match the level of other market rates, so that
banks benefit from lending to each other at a rate close to the policy rate.
POLICIES CONCERNING PERFORMANCE OF THE ECONOMY
In Norway, wellbeing is high but has to be sustained. Norway enjoys high living standards,
however, faces challenges while sustaining them for the future. It has become tougher for the
government to spend on public services and for the development of new projects. This is
because of the increasing fiscal deficit. Weak productivity growth, high labor costs, and
lower labour force participation are a hindrance to economic capacity which in turn hampers
the continuing wellbeing of the people of the nation.
The economy of Norway is vulnerable to trade. GDP growth has recovered from the 2014 oil-
price shock and is robust. It is sufficiently strong to further decline levels of unemployment.
Wage growth has also increased. This growth in GDP has been shown in Exhibit 6 in the
Appendix. Norway has been excessively dependent on European trade. However, due to a
global slowdown in trade and investment, as well as faltering business and lower
consumption, the trade environment of Norway is at risk.
The fiscal Deficit will be increasing but at a slower rate. Government expenditure has been
increasing over the years. Expenditure commitments in health care and pension for the aging
population are estimated to be at least 0.3 percentage points of the GDP every year. However,
due to a slowdown in trade & investment in the Euro area, profits have been declining. So,
the wealth fund will be growing but at a slower rate. The taxation system of Norway was
implemented in such a way as to eliminate tax distortions. Corporate tax has been reduced

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and value-added tax is now more uniform. But, tax concessions with regards to owner-
occupied properties have been too generous.
Productivity growth has been slower and labor-force participation has also been decreasing.
In the case of employment, in the Norwegian labor market, there is low unemployment, high
incomes, and good job quality. Also, the high participation of women in the labor force drives
the income inequalities low. But labor force participation has been declining and Norway is
no longer among the top-ranking countries. Norway's employment among youth and the
middle age has also been declining. It is raising concerns for the growth of the aging
population in the future. This has been shown in Exhibit 7 in the Appendix.
Also, there are high rates of sickness absence and a large number of unresolved disability
benefits issues. Due to the presence of sick-leave compensations and disability benefits, there
has been a trend among the aged population of taking early retirement. This impacts the labor
supply and defeats the purpose of government spending on retirement benefits as it was
primarily aimed at encouraging people to work longer.
From the key findings of the state of health in Norway, it has been seen that life expectancy
has increased by almost 4 years. This has been largely due to a reduction in the mortality rate.
Due to substantial spending on healthcare, the mortality rate has declined by over 10% from
2011 to 2016. In 2016, Norway had the lowest mortality rate indicating that the healthcare
system is effective and provides timely diagnosis and treatment. Government spending on
health is projected to grow by 1.2 percentage points of GDP between 2016 and 2070. The
long-term sustainability is challenged by growing pressure on long term care spending. Due
to the problem of an aging population, which has resulted in a prevalence of chronic diseases
among them, pressure on government spending on long-term health care may result in
spending to grow by 3.4 percentage points.
Monetary policy becomes effective when changes in the policy rate are reflected in the
market rates. The policy rate plays a major impact in the household and corporate demand
scenario. So, not only the present interest rate is important but if there is a policy direction
from the Norges bank that the key policy rate may rise further, households and firms perceive
such information as credible thereby impacting the current interest rate. Owing to the
specific characteristics of the Norwegian credit market, rate cuts in policy result in lowering
the borrowing costs for households and enterprises. The current real interest rate is assumed
to be zero. The neutral interest rate (the long-term equilibrium interest rate at full
employment and stable inflation level) has fallen to a low level close to zero in the past 20
years which has allowed little room to manoeuvre the policy rate. So, in current
circumstances the policy rate is not expected to rise much.
CONCLUSION

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 APPENDIX

EXHIBIT 1:

GDP in billion NOK

4000
3000
2000
1000
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
EXHIB
IT 2: EXHIBIT 3:

EXHIBIT 4: EXHIBIT 5:

EXHIBIT 6: EXHIBIT 7:

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