Norway and the crisis of capitalism

Norway, until recently was seen as one of the most politically stable countries in Europe. That was before the dramatic events of this summer, when Anders Breivik, an ultra-right-wing fascist killed 69 youth at the Labour Youth Organisation’s summer camp. Yesterday, his appearance in court reiterated how much Norway has changed in the recent period. Already in September an article in “Bloomberg” pointed out that the deepening global crisis of capitalism is beginning to come to the fore in countries that seemed to have escaped it, such as Norway.

We recently saw the brutally honest critique of the capitalist system by AlessioRastani an independent trader who commented on the BBC that “personally, I've been dreaming of this moment for three years. I go to bed every night and I dream of another recession.” Alessio sees the opportunity to profit from the misery of the working class as another global recession is about to begin. (Surprise, surprise: “Governments don't rule the world, Goldman Sachs rules the world”)

However, the governments of some countries, such as Australia, Canada and Norway, thought that they could escape the present crisis. But there is no escape route; all countries are on the same road to ruin. The difference is merely one of how far down that road each country has travelled. We must understand that no country will be left untouched by a future collapse in the productive forces of capitalism.

The roots of the crisis

Marx explained the roots of the crisis as one of overproduction:

“The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit. (Capital Vol. III Part V, p. 615)

Various crises have been felt throughout the world in 1997 and in 2001. The way that the international bourgeoisie evaded a crisis at those points was through a massive expansion of credit. Central banks kept interest rates low and restrictions on lending were abolished (“deregulation” as they called it). Thus for a while the masses were given loans in order to keep up a level of consumption they could not afford. This enabled markets to keep expanding without significantly improving the wages of workers and it kept the crisis at bay.

A slow-motion attack on the working class combined with investment in new technologies, in countries such as Sweden and Germany, enabled employers to increase their competitiveness on the world market, even in comparison to China. However, the necessary counterpart to this was an expansion of credit in other countries, such as Spain, the United States and the United Kingdom. Also Greece and Italy were part of the same phenomenon, but it was public debt, rather than household debt that rose. Someone other than the German or Swedish workers had to buy the goods that were being produced. So, savings in one country were only possible by indebtedness in another.

When the crisis hit, those countries who in the previous period had brought down the cost of production, by investments and attacks on the working class, were thus the better prepared to recover after the crisis.

Norway developed differently. Its competitiveness on the world market fell but it did not become a net importer country. Unit labour costs, which measure the cost of labour in producing an average unit of goods, have risen by 40% in Norway since 2005, while in the same period unit labour costs rose by 4-6% in Sweden and Germany. This huge disparity has led to a significant fall in Norway’s ability to compete and therefore in its share of the world market. Whereas in 1999, Norway had a 1.5% share of the world market for goods, in 2007 it was only 1%. Sweden in the same period managed to retain, more or less, its proportion of the world market and Germany’s increased slightly. The loss in competitiveness on the world market would normally have led to a rise in unemployment but it did not because it was offset by an increased domestic demand.

Whilst the rest of the world was opening up their markets to global trade and capital flows, the Norwegian economy became comparatively closed. The combined value of imports and exports of goods is the equivalent of 57% of GDP, a proportion that has remained static for the past ten years, whilst in Sweden the proportion rose in the same period from 62% to 72% and in Germany from 50% to 80%. The way that Norway boosted domestic demand was through an increase in real wages (13% since 2005 and 30% since 2000) as well as a massive expansion of credit. Household debt in Norway has reached 200% of disposable income (from 127% in 2000), which is far higher even than in the US (115%) and the UK (150%), and it is set to rise to 214% by 2014. This is clearly unsustainable.

It is also true that although workers’ wages were rising, inequality kept increasing. The 9th decile of full time employees now earn 2.28 times that of the 1st decile, compared to 2 times as much in 2000. Norway’s Gini coefficient (after taxes and transfers) has risen from about 0.23 in the 1980s to around 0.28, a sharp rise compared to Denmark and Sweden who remain around 0.23. The recent call by the government for unions to limit their wage demands prompted union leaders to call for a limit on managers’ bonuses and wage rises. It is clear that although workers’ wages were improving in absolute terms in Norway, in relative terms they were going down, with the rich grabbing a larger slice of a growing cake.

What made all this possible were the massive oil and gas revenues in Norway. Oil is crucial to the economy. 22% of GDP is estimated to come from oil, and 28% of government income and almost half (46%) of exports are based on oil and gas. This dependency on oil and gas has grown even more as Norway’s ability to compete in other fields has been getting worse.

Oil and gas revenues

In a bid to keep inflation under control and reduce the negative impact of oil on the economy, successive Norwegian governments have for years set aside the bulk of government oil revenues in a special fund. The Norwegian “Government Pension Fund Global” is the largest equity investor in Europe. The October 6 budget expected the fund to grow by 3.1 trillion Norwegian Kroner by the end of 2012. So far the country’s sovereign wealth fund has held back the worst of the global economic crisis from the Norwegian economy. However, current Norwegian fiscal policy caps the use of oil and gas spending at 4% of the nation’s $524 billion sovereign wealth fund.

Norway is the world’s seventh largest crude oil exporter and will be using 3.9% of its 2012 oil fund to fill holes in the non-oil budget, which has reached a deficit of 122 billion kroner ($21 billion). That is, the state budget, excluding oil, has a deficit of $21 billion, which will be covered by the oil revenues. The amount covered is just below the 4% rule. The spending increase will be 2.1%, which is below the average of the past ten years, and a significant drop on the year before. So, although the overall government budget – including oil and gas – is expanding and not in deficit, it is tightening up compared to previous years.

The size of the oil fund itself, presently at $524 billion, is dependent on the world economy. It has, for example, lent $7.7 billion to Italy, $13.5 billion to France, $18.6 billion to the UK, $37.7 billion to the USA, etc. What would normally have seemed like a safe investment is under present circumstances far from safe. On top of that, much of the money is tied up in even riskier assets such as shares. According to official estimates in April, the fund could be worth anything between $464 billion and $3.4 trillion by 2030. In fact, there is no way of knowing how big this fund will be and even the April estimate was made before the latest round of the Euro crisis.

The 2012 budget

Three years into the crisis, Norway has Europe’s lowest unemployment rate but it also has a strong currency, which is forcing the government to limit spending for a second year. The Norwegian Labour party is trying to slow the growth of domestic demand to reduce imports while at the same shielding exporters from a Krone that is getting stronger, in effect proposing a disguised protectionist measures.

“It has never been so difficult to make a budget as it is right now,” commented Trond Giske the Industry minister, as he went onto comment that “we’ve had the approach that it’s going to be a tight budget and that we have the capacity and possibility to adjust if the crisis escalates.” Giske went further by commenting that, “there should be no reason why the budget should increase pressure on Norwegian interest rates and the strength of the krone.” Giske went on to state that the “overriding goal” of the October 6 budget was to protect the export industry and Norwegian economic competitiveness.

The mainland Norwegian economy – which excludes oil and shipping – is projected to grow by 2.5 percent in 2012 but these figures are more akin to wishful thinking as the crisis in European export markets deepens. The October 6 budget estimates that total exports are set to grow by 0.4% this year and 1% the year after. These figures are likely to be upset by recent developments in the EU, as most of Norway’s exports go to the UK, Germany, Netherlands and France.

The Minister of Finance Sigbjørn Johnsen commented that, “It’s a budget that is set during a period with much turbulence and uncertainty in Europe,” and he went on to add, “An important objective of this budget was to take the export industry into consideration.”

Bloomberg commented on October 3, in an article entitled “Norway Manufacturing Growth Slowed in September as Orders Eased”, reinforcing the above quote:

“Norway’s manufacturing growth slowed in September as orders eased, signaling weaker economic growth in the debt-burdened euro area is hurting an expansion in the world’s seventh-largest oil exporter.”

It is clear that capitalist contradictions are beginning to surface within the Norwegian economy. Bloomberg continues:

“Prime Minister Jens Stoltenberg said last month that Norway was not immune to a weaker global economic outlook, adding that unemployment may rise going forward. Norway, the second-richest nation per capita, has largely been shielded from the global financial crisis as oil revenue generated wide budget surpluses and kept unemployment below 3%.”

Bloomberg then went on to comment in an article on October 4 entitled “Norway Strains to Cool Economy as Rebound Proves Too Strong” that,

“The risk of overheating requires budget cuts that will probably spark ‘protest’ and ‘loud demands,’ Prime Minister Jens Stoltenberg warned in a speech last week at a conference organized by his Labour Party”.

From a capitalist point of view, in a shrinking world market, increased use of oil revenues to boost domestic consumption is likely to further increase Norway’s dependence on oil. This will in turn reduce Norway’s competitiveness and produce asset bubbles such as the one that has developed in housing. That explains why the government is turning towards restricting demand, which means slowing down the expansion of the public sector and putting pressure on the unions to reduce their wage demands.

The budget, however, has increased public spending by 2.1% (although relative to GDP it amounts to a cut as growth is projected to grow by more than this) in order to prop up domestic demand. Norwegian capitalism so far has managed to hold off the worst of the global financial crisis that broke out at the end of 2007 by increasing public spending. This, however, cannot be sustained forever. Norway has the revenue from its natural resources order to maintain current public spending programmes and invest in future programmes. However, this cannot be maintained over a long period under capitalism without an “overheating” of the economy which would lead to a credit driven inflationary bubble in domestic demand.

The International Monetary Fund even went as far to warn Norwegian capitalism that an oil price surge could throw the Norwegian economy “off track”, that is, to make Norway even more dependent on oil. Norway has the largest budget surplus (if oil and gas profits are included) of any AAA rated country, even in the face of the ensuing debt crisis of the Eurozone.

The Krone has been seen as a safe haven recently for investors looking to avoid the deepening debt crisis in the Eurozone, following the imposed depreciation of the Swiss franc. The Krone is at a similar level to what it was before the crisis, although it is on an upward trend. As we have shown, the Norwegian export industry can ill afford an appreciating currency. The world’s third largest newsprint producer Norske Skogindustrier ASA stated that it will lay off workers as profits are damaged by krone appreciation. The rise of the currency since it bottomed in 2009 has led to a surge in the Norwegian import market with a further strengthening of domestic demand, which has been underpinned by both growth in consumer credit and rising wages.

Credit bubble and pressure on the central bank

As we already pointed out the debt burden will increase to more than 200 percent of disposable income next year. This is the highest it has been since 1988. It is often forgotten that Norway suffered a real estate slump in the early 1990’s and in the process the government had to seize control of the country’s largest banks in order to stop the complete collapse of the economy. House prices in Norway also rose year-on-year by 9.4% in August, according to Norway’s real estate broker. Bloomberg reported:

“’Households are getting increasingly vulnerable to shocks,’ Haugland said. ‘If something unexpected, a shock, hits the Norwegian economy, the turnaround might be very abrupt and lead to a very strong and abrupt fall in the Norwegian economy’.”

Bloomberg also went onto quote finance minister Sigbjørn Johnsen who is considering imposing tighter lending controls on the country’s top banks, and also quoted Norway’s chief financial regulator Morten Baltzersen as saying, “The longer these developments go on, the further it goes, the higher is the risk of a bubble.” We would add that the bubble is already here.

The stimulus has also had the added side effect of placing pressure on the central bank. At the beginning of the year the central bank was in fact attempting to restrict credit to ease pressure on house prices and cool domestic demand. Now the rise of the Krone is forcing them to keep interest rates low in order to prevent more capital flowing into the country, which would further strengthen the Krone and thus further weaken Norway’s export industries. Thus the central bank, as well as the government, is caught between a rock and a very hard place.

As a result, splits have begun to open up between the Norwegian finance ministry and the parasites of finance capital who want to restrict public spending even further. Steinar Jule, the chief economist at the Nordea bank AB in Oslo, has commented that the budget “doesn’t fit very well with the rhetoric of the prime minister” about protecting export industries. Stein Bruun, chief economist at SEB AB bank in Oslo, sided with the government saying that “one might claim that the government should have tightened fiscal policy more than the budget proposal implies. However, the fiscal policy stance is justified by heightened uncertainty in the global outlook.” That is, the contracting global market would push Norway into recession, if the government didn’t keep on spending.

The Norwegian central bank postponed its plans in August to raise interest rates from their current low level of 2.25%. It went as far to signal that it may not commence tightening monetary policy until 2012 as they continue their attempts to protect Norwegian exporters against excessive krone gains. This will serve to worsen the housing bubble and keep consumer spending high. Thus the actions of the government and the central bank to keep Norway out of recession, in the short run serve to heighten the contradictions in the long run. A bubble that inflates can very often not be deflated gently, if at all, and it could burst in mid-air!

A Future Of Slowing Growth And Rising Unemployment

Karl Marx explained in Capital, Volume II, that it is towards the end of an economic boom and as the economy is at the point of falling towards a bust that there would be relatively full employment. It is at such a point in time that the workers would be most likely to make gains in real wages and increase their share of national income. It is unsurprisingly expected that wages will grow in Norway by 4% this year which is a slight rise on last year’s increase. It is also expected that unemployment will fall to 3.3% in 2011 and 2012, from 3.6% in 2010, according to the October 6 budget on.

At present, the Norwegian economy is being propped up by domestic demand from public spending and a credit bubble. When this credit bubble bursts the resulting drying up of credit in the Norwegian economy would mean that the working class could no longer afford to buy back the products they have manufactured, resulting in a crisis of overproduction. The crisis on a world level means a shrinking market for exports and loss of competitiveness will provide a further drag. Thus the contradictions are piling up also in the seemingly “healthy” Norwegian economy. In many ways Norway is building up the same sort of contradictions in its economy as were building up on a world scale prior to the crisis of 2007-2008.

Eventually, these contradictions will have to come to a head and the crisis in the eurozone will speed up these developments. By spending more of the oil reserves, the government can postpone the “evil day” but it cannot remove altogether. Under such conditions, rising unemployment will embolden employers to go onto the offensive to reduce wages and conditions in order to lower production costs. This will lay the basis for the development of the class struggle in Norway sooner than many may expect.

Note: Most of the figures come either from official Norwegian sources or from OECD, unless otherwise stated.