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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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  • Erling Holmøy & Kim Massey Heide, 2005. "Is Norway immune to Dutch Disease? CGE Estimates of Sustainable Wage Growth and De-industrialisation," Discussion Papers 413, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:413
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    1. Klette, Tor Jakob, 1999. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 451-476, December.
    2. Sachs, J-D & Warner, A-M, 1995. "Natural Resource Abundance and Economic Growth," Papers 517a, Harvard - Institute for International Development.
    3. Venables, Anthony J, 1996. "Equilibrium Locations of Vertically Linked Industries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 341-359, May.
    4. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-499, June.
    5. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
    6. Matsen, Egil & Torvik, Ragnar, 2005. "Optimal Dutch disease," Journal of Development Economics, Elsevier, vol. 78(2), pages 494-515, December.
    7. 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, Statistics Norway, Research Department.
    8. Tor Jakob Klette & Arvid Raknerud, 2005. "Heterogeneity, productivity and selection: an empirical study of Norwegian manufacturing firms," Discussion Papers 401, Statistics Norway, Research Department.
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    More about this item

    Keywords

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

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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