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Is Norway immune to Dutch Disease? CGE Estimates of Sustainable Wage Growth and De-industrialisation

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    Norway's petroleum wealth has become considerably more liquid and thereby visible to the public since the mid 1990s. In the policy debate transformation of wealth is often confused with ordinary income. Such a misconception may have contributed to de-industrialisation through real appreciation beyond what is sustainable in a long run perspective. Since re-industrialisation is typically considered difficult, it is important to estimate a norm for sustainable wage growth. In Norway the textbook model of the Small Open Economy (SOE) has often been used for this purpose. We argue that this model neglects important aspects of the Norwegian economy. Instead we use a large scale dynamic CGE-model to estimate sustainable paths for wage growth and the activity in the traded goods sector, especially manufacturing. Under plausible assumptions we find that about 0.5 percent annual reduction of manufacturing employment is sustainable. The real appreciation over the last 7 years has been substantially above a sustainable trend.

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    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 413.

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    Date of creation: Mar 2005
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    Handle: RePEc:ssb:dispap:413

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    Keywords: Dutch Disease; multi-sector growth; dynamic CGE-modelling.;

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    1. Sachs, J-D & Warner, A-M, 1995. "Natural Resource Abundance and Economic Growth," Papers 517a, Harvard - Institute for International Development.
    2. Anthony J. Venables, 1993. "Equilibrium Locations of Vertically Linked Industries," CEP Discussion Papers dp0137, Centre for Economic Performance, LSE.
    3. Klette, T.J., 1998. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Memorandum 15/1998, Oslo University, Department of Economics.
    4. Erling Holmøy & Torbjørn Hægeland, 1997. "Aggregate Productivity Effects of Technology Shocks in a Model of Heterogeneous Firms: The Importance of Equilibrium Adjustments," Discussion Papers 198, Research Department of Statistics Norway.
    5. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
    6. Egil Matsen & Ragnar Torvik, 2002. "Optimal Dutch Disease," Working Paper Series 2703, Department of Economics, Norwegian University of Science and Technology.
    7. Tor Jakob Klette & Arvid Raknerud, 2005. "Heterogeneity, productivity and selection: an empirical study of Norwegian manufacturing firms," Discussion Papers 401, Research Department of Statistics Norway.
    8. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
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