In the last 6 months, I’ve made quite a few visits to Scandinavian countries, talking about the innovation and growth challenges they face. This week I returned to Oslo, to speak at the annual conference of Manifest Center for Social Analysis, a progressive think tank. During my previous visit in May 2014, I spoke at a conference on Energiforskningskonferansen (Norway After Oil) organized by the Department for Energy Research at the Research Council of Norway. During that visit, I also gave a talk to the Agency for Public Management and eGovernment (Difi).
The current Norwegian government is on a mission to increase ‘competitiveness’ and productivity. But there are serious questions about its strategy for doing so.
Last year the Danish Productivity Commission presented their final report, which recommended across-the-board deregulation and privatization to increase Denmark’s slow productivity growth. Seemingly inspired by this, the Norwegian government’s similarly named commission recently presented its first recommendations.
Manifest’s conference this year was named The People’s Productivity Commission. This was, according to the organizers, to underline the importance of bottom-up, employee-driven, solutions to increasing productivity, as opposed to the more top-down, technocratic, approach of the government.
Upon arriving, I took the Airport Express train (fast 20 minute, every 10 minutes, to the center of Norway, 15 pounds one way). This is an incredibly well-run and cheap (compared to crazy expensive Heathrow Express that costs 21 pounds one way), publicly owned company with very satisfied passengers and even runs with a surplus (at least as long as the infrastructure investments are covered in a different budget). Yet the latest is that the conservative government wants to sell the company, most likely to foreign investors, arguing that the state owns too much, and that “diversity in ownership” is good for the economy.
Yet alarm bells should be ringing: it would be good for the government to first study the results of privatized transport systems around the world, which have often suffered from a lack of long-term investment (UK rail!). In the Norwegian case, the state could relax a bit given that it doesn’t need the money, being the holder of the largest sovereign wealth fund in the world.
The conservative government’s firm belief in privatizing public companies like the Airport Express train indicates a flawed view of the public sector’s role in the economy – that it should be limited to fixing flawed markets. This conception could harm Norway’s ability to drive innovation-led growth.
In my recent book, The Entrepreneurial State: debunking private vs. public sector myths, I challenge this image of the lethargic, regulating state versus the dynamic business sector – using historical examples to show how some of the most high risk and courageous investments that led to revolutions in IT, biotechnology and nanotechnology, were sparked by public sector institutions.
There are big opportunities for innovation-led growth in Norway. Profits from the ‘extraction’ based industries could be used to fuel a green revolution across all sectors. This requires both the private and public sectors to up their game. Yet Norway has notoriously low spending by its business on research and development (R&D), and profits from its sovereign wealth fund are often spent on speculative areas like real estate. To increase business commitment to funding innovation, government must realize that it has been ‘mission-oriented’ direct public investments that have created the technological and market opportunities of the past which led to the internet, biotech and today’s emerging green technology sectors. What is needed is a national debate that steers away from static questions around state vs. market (and myths around ‘productivity’ and competition) towards more dynamic questions regarding how to kick start investment driven growth, with mission oriented public investments and a more committed private sector ready to play its part… before the oil runs out.
The fall in the oil price (50% fall since the summer) has lead to fewer investments in the petroleum sector in Norway. A large part of Norwegian industry is based on orders from the petroleum sector, and many of them are in trouble. One out of 10 jobs in Norway are directly or indirectly related to the oil industry (a total of 239,000 jobs). And two thirds of Norway’s exports are related to the oil and gas industry, making the Norwegian economy both extremely profitable and vulnerable.
Don’t bet on Tax-cuts
For these reasons 2015 could be the start of a downturn in the Norwegian economy. The government is considering cutting the corporation tax rate from 27 to 20 percent, following recommendations from the Scheel-commission. Since they took power in 2013 they have also reduced the highly progressive tax on net wealth (going of course against Piketty’s recommendation), among a host of other tax cuts.
There is no evidence, however, that these tax cuts are what the Norwegian economy needs to move away from a petroleum-based economy. Norway’s own history, and my own research, show us how the state instead should use direct investments in new industries and strengthen research institutions.
The question on everyone’s lips is: ”What will drive the Norwegian economy after the oil?” – a question that is becoming ever more important. Indeed, this was the subject of my previous trip to Norway where I gave a keynote at the Energiforskningskonferansen 2014 conference, in which I shared the stage with Michael Liebreich, founder of the Bloomberg New Energy Finance database that I’m currently using in my work on the role of different actors (public and private) in financing green energy around the world.
Falling oil prices and looming climate crisis makes it necessary for Norway to steer its economy away from its high dependency on petroleum. It was an active state, and strong direct investment in innovation from the state, that together with oil companies, created the petroleum industry in Norway. If the government continues in its belief that the market alone can solve the issues ahead, they are not learning from the positive experiences of the past. Norway should use the revenues from their oil extraction, and invest directly in green industry to make the green revolution happen. They could surely invest more in areas like offshore wind energy, high speed trains and various ways of capturing, storing and reusing carbon.
Strangely, instead, the big political parties in Norway are saying they would rather pay for emission cuts where they are cheaper, in less developed countries, instead of having direct investments in green energy and green industry in Norway. This is surprising given that Scandinavian countries are usually regarded as quite progressive and realistically oriented about the crucial role of the public sector in creating inclusive innovation-led growth. Not just fixing markets – creating them. I guess the battle is everywhere.
My work, and that of many of my colleagues who work in the ‘economics of innovation’, has clearly shown that innovation is driven not by current profits but by the perception of where the new technological and market opportunities are. The challenge for the Norwegian government is indeed to invest in areas that can create such opportunities. Only then will the private sector increase its own investment, reinvesting profits into the new innovation opportunities of the future.
Most tax cuts (especially those around capital gains, and wealth) do not affect such investments, they only increase inequality. Given that the conservative government is less likely to listen to progressives like Piketty, or myself, and perhaps more likely to listen to business and conservative forces: their ears will hopefully perk up when they listen to Warren Buffett, the most successful investor world wide:
“I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.”
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