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Family Business Forum, 29. mars 2019, Oslo

Challenges of tomorrow

"We must meet the challenge from international tensions and from less support for free and open markets by an even stronger commitment to liberal core values", said Finance Minister Siv Jensen (Progress Party) in her speech today.

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Thank you for the opportunity to join you here today.

Family owned businesses are important to our economies.

In Norway, two in three companies are family owned, and they are represented in all parts of the economy.

It is therefore a true pleasure to be here with you in the Family Business Community.

We are surely living in a time of change. Many good things are happening – let us not forget that.

But not all changes we see on the global scene are for the better.

And some changes contribute to uncertainty and more muted prospects for global growth.

After decades of increased integration and international cooperation, it may appear that sentiments has changed.

Even if our cooperation is not perfect, it is better than what we can achieve on our own.

Norway is a keen supporter of multilateral cooperation.

We are a small open economy and an active participant on various arenas for international cooperation, and we have benefited tremendously from it.

I believe open and free markets internationally and well-managed economies nationally are the main drivers behind high levels of prosperity.

To illustrate what might be at stake if we are to see more geo-political tension and less international cooperation, I will elaborate on these drivers here today.

By using experiences from my own country, I will show how opportunities from abroad and sound national policies is crucial for sustainable growth and high living standards.

Let me start with the first driver, open and free markets internationally, by taking you through the Norwegian trade journey, from the seafaring Vikings to a WTO member.

The Vikings, often portrayed as primitive, were indeed sophisticated in terms of trading in distant markets.

Recently, researchers, by using DNA from fish bones, could substantiate theories about how the Vikings supplied foreign markets with stockfish perhaps as early as in the 9th century.

Since then, trade and investment have been defining forces in shaping the Norwegian economy.

In the centuries of Hanseatic dominance in the North sea, Bergen – the coastal city west in Norway – became an enclave of the Hanseatic network.

Being part of the Hanseatic trade routes ensured a steady supply of Norwegian stockfish, whale oil, and hides to distant ports.

In exchange, the hanseatics brought different grains and other goods that could supplement diets in Norwegian societies.

In this way, meagre outposts in the Norwegian geography, prone to extreme weather, gained a lifeline.

Then, as today, trade connected local markets to the larger economy, and allowed for an improved composition of production and consumption that raised living standards.

Throughout the western world, we have for centuries witnessed how integration into international markets has boosted business potentials, increased personal freedom and lifted overall living standards.

The result is a world that is more interconnected than ever seen in history.

In Norway, as a small economy, generously endowed with natural resources, trade has allowed for specialization of production.

The result is that we produce more fish, oil and seismic services than we consume.

Access to foreign markets allows us to trade our production into a range of goods and services that are cheaper and often of higher quality than if we had produced them ourselves.

Our journey of trade has brought us far: From a stockfish supplier to the owner of 1.4 pct. of all traded stocks at international stock exchanges through our Government Pension Fund.

Moreover, trade has made Norway a highly productive economy.

Through competition and exposure to new technology, the Norwegian economy has gone through continuous adjustments to what and how we produce.

Being small and open means there is no way we can shield the economy from external economic conditions.

Rather, we have adapted and, by that, reaped the gains from trade. In fact, I will argue that few countries have benefitted more from trade than Norway.

And within the economy, gains have been widely shared.

Internationally, integration of markets has moved in waves.

Liberalization in the 1800s was reversed by conflicts, depression and protectionism in the first half of the 1900s.

The social, political and economic consequences were devastating.

From this harsh experience, a new notion of mutual dependence emerged.

After the World War II, we saw a renewed belief in international cooperation among Western nations.

This gave rise to an institutional architecture that would govern international relations up until today.

This architecture, with the IMF and WTO at the core, set the stage for rules-based international trade, as opposed to power-based.

It enabled more countries to connect to global markets and secured a more predictable world trade – essential to long-term investments and efficient production patterns.

For several decades, a rising tide of democracies spread throughout the world, and more countries accepted membership in global institutions.

What had predominantly been a Western world order would increasingly become a shared system of rules and values.

The model of open and rules-based markets became an engine of economic growth and technological change.

Based on a mindset, in which technological and economic development in one country was seen as the source of other countries’ trade, investment and technological change. A win-win.

What this rules-based model has made possible is remarkable:

In the past 50 years, average GDP per capita has doubled. At the same time, world population has also doubled.

The majority of the world population has benefitted from this astonishing rise in income.

As a result, the share of the world population living in extreme poverty has come down from one in three in 1990 to about one in ten today.

What is more, the rise of free and open markets throughout the Western world has built trust among nations.

Through cooperation and integration, the level of conflict internationally is brought down. Interstate conflicts have been almost non-existent in recent years.

Let me now turn to the second driver behind the high living standards we enjoy in Norway – a well-managed national economy.

Arriving at policies with which to frame the Norwegian economy, is a continuous process of learning from experience and adapting to new realities.

Yet, I will argue here today that we have come a long way in creating policies that allow for efficient working of the economy, while at the same time providing stability and resilience.

The early 1980s started a process of deregulation that would lead to our economic system of today, with open and free national markets. Today regulation is aimed at framing predictable and efficient markets .

Our macroeconomic framework, which is within my responsibilities, supports domestic stability.

It also offers important buffers to international disturbances.

Divided into three, this macroeconomic framework consists of our monetary policy, our fiscal framework and our macroprudential regulation in the financial sector.

I will provide you with a brief overview of these three policy areas and illustrate how they have passed important tests within the last years.

From 2001, monetary policy has been geared towards keeping the inflation stable around a specific target, while allowing the currency to float.

Monetary policy, conducted in this way, has a prominent role in the defence against economic shocks.

The interest rate can be changed overnight and has a fast response on the economy.

This allows for efficient short-term response, leaving fiscal policy free to deal primarily with medium-term considerations.

This monetary regime has served us well. The period after 2001 has been characterized by low and stable inflation in Norway, and the monetary policy has served as a stabiliser when we have endured economic shocks.

Our monetary policy does not necessarily differ much from that of our peers. We have gone through much of the same developments, made some of the same mistakes and ended up with many of the same solutions.

In the second policy area, fiscal policy, we have had to make more of our own path.

As a large oil producer, we differ from most other countries.

Access to a valuable natural resource is a privilege, but the wealth must be managed well to provide prosperity and widely shared welfare, both today and in the future.

Many countries have experienced that transforming rich resource endowments into a lasting provision of welfare is indeed complicated.

In Norway, we have certainly tried different approaches to managing the wealth before we reached todays system:

  • In the 1970s, we spent the oil money before we earned them – frontloading expenditures.
  • In the 1980s, we spent the money as we earned them – a system of pay as you go, vulnerable to fluctuations in revenues.
  • As from the mid 1990s, we have spent the money after we earned them. And saved them.  
  • This approach has clearly been the most successful. Our oil fund – the Government Pension Fund Global, as we call it – is today close to 1 trillion USD. All invested abroad.

In line with our fiscal rule, over time only the expected real return on the fund is spent over the budget. In a given year, the use of fund money is adapted to the economic situation.

The fund and the fiscal rule shield the budget from short-term fluctuations in oil revenues or the market value of the fund, and give us fiscal space to counteract economic downturns.

The rule also ensures that all generations will benefit from the petroleum revenues.

Sensible monetary and fiscal policies are important macro tools to stabilise the economy, but not enough. We also need a sound banking system and a strong capital market.

Which lead me to the third policy area, the macro prudential regulation of the financial sector.

In the aftermath of the international financial crisis, much effort has been made to reduce systemic risk in financial markets.

New policy measures have been introduced under the common term “macro-prudential policies”.

The objective of these measures is two-fold:

  • Firstly – to increase the resilience of the financial system by building buffers that can be drawn on to mitigate the effects of disturbances and downturns.
  • Secondly – to identify and manage contagion effects in the financial system.

We have taken steps to make both the banking sector and indebted households more resilient.

We were among the first countries to introduce new tools to address systemic risks associated with high growth in house prices and household debt.

Norwegian banks have also become more resilient due to stricter capital requirements.

In addition, Norway supports the international joint effort for a more robust financial sector.

As a result, I believe we are better equipped for the next financial shock.

By a careful use of the tools within the three policy areas, monetary and fiscal policy and prudential policies, we can cushion economic shocks.

Though history has shown us that they still must be used with care. Our ability to fine-tune the economy is limited, and interfering too much does more harm than good.

Rather, my job is to accommodate well-functioning economic mechanisms, to ensure that market participants make good choices for themselves.

Choices that result in the stable and sustainable economic growth we want.

Our macroeconomic framework was built block by block, and over time. I believe we are more resilient to both domestic and international turbulence than we were a few decades ago.

In fact, the effects on the Norwegian economy of both the international financial crisis in 2008 and the steep oil price fall in 2014 were moderate, and our economy rebounded fairly quickly.

We may have had some luck along the way, but if we compare with earlier downturns, it becomes clear that policies matter.

Let me illustrate:

The oil price fall in 1986 and in 2014 were, in size, similar. The economic developments that followed, however, differed substantially.

The oil price fall in 1986 set off a long period of economic turbulence. It took five years before economic activity had returned to previous levels. During those years employment fell continuously and unemployment tripled.

In 2014, the increase in unemployment was far more subdued. And, importantly, this time employment continued to increase.

Similarly, the rather moderate downturn in the Norwegian economy after the financial crisis in 2008, compares favourably with the long-lasting effects we suffered from the banking crisis in the early 1990s.

The fact that we tackled these last downturns well is promising.

Still, we must be conscious that the real test may very well be ahead of us.

Going forward, crises might emerge that hold other characteristics and that strike in new ways.

Indeed, a small economy as the Norwegian, deeply integrated into international markets, will always be prone to external risk.

Being open requires policies that induce resilience to protect the domestic economy against external downturns.

While the upturns provide gains that must be widely shared.

In fact, the legitimacy of pursuing further integration rests with our ability to translate the opportunities of free and open markets internationally into broad-based rises in living standards.

A well-functioning tax system constitutes the backbone of a strong and supportive public sector.

The state’s capacity to tax is therefore crucial to the sustainability of public finances and the welfare state.

Yet, while economic activity transcends borders easily, some of our policy tools are mainly national. Tax is among them.

As you probably know, in today’s globalized world, tax planning – legally utilising tax rules of different jurisdictions – result in tax avoidance and may erode the tax base.

The increased importance of intangible assets , such as patents, trademarks and other intellectual property, in the production of goods and services makes it particularly hard to identify where value is created and thereby where income should be taxed.

A well-functioning tax system is also key to ensure the economy is working efficiently.

In recent years, we have introduced a number of tax measures to induce growth and efficiency in the Norwegian economy.

We have reduced the capital tax and income tax, and removed the highly opposed inheritance tax.

Since this government took office in 2013, we have gradually reduced the tax level on both individuals and companies from 28 per cent to 22 per cent.

The tax level is now more in line with corporate tax levels among our trade partners.

Family businesses can have a special role in creating sustainable growth. Their ability to plan for the true long term and to transfer knowledge over generations is unique.

By removing the inheritance tax we have made it easier to pass the business on to the next generation.

We have also reduced wealth tax on equity to make it more profitable to invest and create new jobs in Norway.

If production and trade are to work efficiently, we need well-functioning infrastructure.

To help this, we are building roads and railways like never before, and the needs of businesses are given weight in these investment decisions.

In 2019 alone, we will be opening 104 kilometres of new four lane highway, more than twice the sum of all motorways in Norway in 1990!

The theme for this session, “how to secure sustainable growth in a time of geopolitical turbulence, is a timely question.

A question all politicians, as well as business leaders, have to ask themselves these days.

Indeed, the current international environment is characterized by polarization and a declining belief in mutual dependency and cooperation.

We see a world where strategic rivalry is played out in the economic realm. Trade is at the core of current tensions between US and China.

Technological rivalry and national security concerns are creating new impediments to foreign investment and trade. Worldwide we see that protectionist sentiments are causing a rise in trade barriers.

With this state of play in international trade relations, trade-dependent economies must prepare for adverse shocks ahead.

This is bad news to business and bad for our economies. I assume these are real concerns to many of you here today.

In my talk, I have tried to shed light on some important factors for enhancing resilience and underpinning sustainable growth by using Norwegian examples.

The basic lesson from them is that when entering more troubled waters, open markets, sound macroeconomic policies and solid and efficient institutions are key.

The first priority must therefore be to put our own house in order. The beauty of this is that we can do it domestically.

What is more challenging is how to secure open global markets and a liberal and rules-based world order.

Looking ahead, the demographic and economic weight of non-Western countries will gravitate power towards the East and Southeast.

There is great interest for maritime transportation between Asia and Europe through the Northeast Passage.

The reason for this is simple.

It is 40 percent shorter to drive a ship from London to Japan through the North East passage than through the Suez canal.

The distance between the Norwegian city of Kirkenes and the Bering strait is actually just as short as the distance from Kirkenes to the Mediterranean by ship.

We are following the development in the Northeast Passage with great interest.

We should expect the Western world to be relatively smaller, both as a share of the world economy and in terms of wielding political and economic influence.

Liberal values and the belief in free and open markets may lose traction.

Recently, the independent watchdog Freedom House, which analyses developments in global democracy, country by country, warned about a reversal of global freedom.

Support for democratic values seems to be on the decline.

These prospects suggest that rules-based, as opposed to power-based, international cooperation might erode, in a time where we need it the most.

Less adherence to the rules, more discretionary measures, and protectionist sentiments are bad news to Norway.

And bad news to the world. In particular when it comes to identifying solutions to the challenges of tomorrow, of which many will be global in nature.

In this situation, we must target our efforts in three main areas:

First, we must work to strengthen the global system.

Clearly, the system we have today is not perfect. We need to mend flaws in order to improve and modernize the multilateral system.

Only by doing so will the system support stable and sustainable development also into the future.

Second, even if others build barriers to economic integration, we should refrain from increasing our own.

Only by maintaining our economy open, can we expect trade and investment to remain important drivers of economic development and high living standards.

Third, we must continue to manage our economies well. A dynamic economy and well-adjusted regulation are crucial to ward off turbulence in the global economy.

To conclude:

In order to secure sustainable growth, we must put our domestic policies and institutions in order.

Moreover, liberal values, international cooperation and economic integration have provided the world with astonishing welfare gains for decades.

It holds the potential to continue to do so.

We must meet the challenge from international tensions and from less support for free and open markets by an even stronger commitment to liberal core values.

Thank you.