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APPENDIX I: A Note on the Sustainable Constant Non-oil Current Account Balance
Let F0 denote a country’s total net resource wealth, which reflects the net present value of all future export receipts of the country’s ownership of a natural resource such as oil. For simplicity, assume that all of the extracted natural resource is exported and prices are constant.
where yoil is the value of oil exports and r is the interest rate.
Assuming that there are no initial net financial assets aside from those reflecting the conversion of resource wealth into financial wealth, the country’s instantaneous budget constraint can be written as follows.
where C and I are consumption and investment, respectively. The last three terms represent the non-oil current account.
What level of the non-oil current account deficit, expressed as a constant fraction of output, can be sustained in perpetuity by drawing on the country’s oil wealth?
If consumption and investment grow at the same rate as output, they will remain a constant share of output. Let the non-oil current account deficit be given as a constant fraction of output, -φY. In order for Y to grow at a constant rate given the budget constraint, the ratio of F/Y must be constant. Then, using
The level of the non-oil current account deficit as a percent of GDP that can be financed indefinitely is a function of the interest rate, the trend growth rate, and the initial ratio of wealth to GDP.
APPENDIX II: Decomposition of the Real Exchange Rate
Suppose residents of each country consume a non-traded good and a traded good. With Cobb-Douglas preferences, the aggregate price index of the home country could be expressed:
The aggregate price index in a representative foreign country would be:
In logs (denoted by small letters), the real exchange rate can be defined as the nominal exchange rate adjusted by the relative price levels.
where the spot exchange rate, s, is in units of foreign to domestic currency, so that an increase in s or r corresponds to an appreciation.
Substituting for the domestic and foreign price indices,
If the law of one price holds for traded goods, the price of the traded good in the home country would equal the price of the traded good (assumed to be the same good) in the foreign country, after converting with the nominal exchange rate:
The real exchange rate is therefore a function of the relative price of nontraded goods to traded goods in the home country and also the relative price of nontraded goods to traded goods in the rest of the world.
Prepared by Valerie Cerra and Elie Canetti.
Unless otherwise noted, the sources for the figures are the Ministry of Finance, the Ministry of Oil and Energy, Statistics Norway, and staff estimates.
The other two elements of Norway’s Social Insurance Scheme are the Family Allowance Scheme and a recently introduced scheme paying cash benefits for families with small children.
Other benefits include survivors benefits, additional (more narrowly targeted) disability benefits, rehabilitation benefits, occupational injury benefits, benefits to single parents, medical benefits in case of sickness and maternity, funeral grants, and cash benefits for sickness, maternity, adoption, and unemployment. See Thomas (1998) for more details on some of these benefits, as well as on the family allowances and child cash benefits.
Pension points are earned annually as an increasing function of an individual’s income level, but are capped at 7 points per year as income reaches 12 times the basic amount. See Thomas (1998) and Ministry of Health and Social Affairs (2000) for details.
About one-third of old-age pensioners receive the minimum pension. This ratio is expected to decline over time, in particular due to the increase in work-force participation rates among women.
The first 16 days of sickness benefits are paid by the employer, and thereafter are covered by the state.
There are also funded occupational pension schemes for local government workers (other than teachers) and the private sector. The schemes for local government workers also guarantee a 66 percent replacement rate.
Their terms of reference enjoined them from considering broad changes in benefits.
For a somewhat skeptical view of the benefits of funded pension schemes, see Barr (2000). The Moland Committee itself was well aware that all possible financing models, including funded schemes, contain both benefits and drawbacks.
The oil current account only includes investment earnings on the SPF.
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Prepared by Balázs Horváth.
See DØlvik and Steen (1997), especially the chapters by Freeman, RØdseth, and Bosch, and Kahn (1998) for a detailed description of the Norwegian labor market and its key aspects; and Flanagan (1999), Blanchard and Wolfers (1999), and Freeman (2000) for a general overview of relevant labor market-related issues.
See Katz (1993), Stokke (2000), and Freeman (2000) for discussions of the role of rents in sustaining centralized bargaining; and Blanchard and Landier (2000) for a discussion of the latter issue using a French example.
In the absence of recent comparable wage distribution data, Norway’s ratio of top and bottom income deciles of 5.3 was compared to 8.9, the unweighted average of this ratio for European OECD countries. Income deciles are from the ILO World Labor Report (2000).
Stokke (2000) finds that Norway exceeds only Switzerland, UK and the US in the coverage of centralized bargaining among OECD countries with reliable data. Kahn (2000) places Norway behind Austria, Germany, Sweden, Italy and Australia in this regard.
Comparisons are based on OECD Analytical Database data, involve manufacturing wages for comparator countries, and contain no cyclical, tax, or exchange rate adjustment.
Kahn (2000) found a statistically significant positive effect of centralized bargaining on school attendance of younger individuals. He attributes this effect to the lower opportunity cost of schooling for youth and the need for additional training to secure employment when bottom deciles are relatively highly paid.
Dφlvik et al (1997) also argues that a strong link existed between the expansion of the public sector and rising female participation rates.
For example Estevão and Lach (2000) point to a tripling of THS employment in the United States during the 1990s, and its average annual increase of 11 percent since 1972.
While direct observations for this period are not available, Salvanes (1999) found labor market churning (gross job creation and destruction flows) in Norway to be substantial, at comparable levels to those in the United States using microeconomic data for 1987–1994.