Norway in the Global Financial Crisis - Dissertation Example

?Why Norway did much Better than Greece in the Global Financial Crisis (A Literature Review) The global financial crisis that the shook the foundations of many economies in 2008 had left devastating effects that continued to be felt until today. The crisis had not only seriously affected the less developed countries but also the industrialized and developed ones, including Japan, the United States, and those in Western Europe. However, while almost every nation had experienced the impact of the crisis, the degree or gravity differed. The difference may, at first glance, be attributed to the soundness of the respective economies. A closer look would provide another perspective; it is not simply the gross domestic product or gross national product that matters but the nature of the government policies on the economy that has a profound influence. It is obvious though that government economic policy does shape the quantitative results as can be determined from the GNP and GDP. Because of this, the global financial crisis also highlighted the different approaches that governments employ in managing the economies of their respective countries. The experiences of Norway and Greece expose the fundamental differences in government’s type of leadership in the economic sphere, particularly in finance. While many countries, including the economic powers reeled in the midst of recession, Norway’s economy grew stronger by almost 3 percent while its government enjoyed an 11 percent surplus budget (Thomas 2009). Greece’s economy, on the other hand, started to plummet at the onset of global financial crisis. While Norway, despite its relatively robust economic policies, managed to institute reforms to cushion the impact of the recession, Greece continues to experience worsening social turmoil brought about by the crisis. The Greek government gets a huge part of the blame as it failed in the area of financial management. According to the Global Financial Integrity analyst Dev Kar, “over the past decade ending 2009, Greece lost an estimated US$160 billion in unrecorded transfers through its balance of payments” (2010). This extremely blatant example of economic mismanagement is just one of the major factors that have caused the current financial crisis in the Mediterranean country. Further explications of the reasons why Norway fared much better than Greece during the global financial crisis would be presented in this literature review. The development of Norway’s economy took a long and tedious process before it achieved its current healthy conditions. While the uncertainties plagued the country in the decades and centuries before, it has been able to sustain its growth since the 1970s. There were times since the mid-1970s when the growth rate slowed but, compared to the respective economies of its European neighbours, Norway’s steady development has been considered as unprecedented. Ola Honningdal Grytten of the Norwegian School of Economics and Business Administration points out that there are three major factors that contributed to the economic growth of the country, particularly in the 19th and 20th centuries. Grytten identifies these as the country’s richness when it comes to natural resources, its skilled labour force, and its willingness to make use of the latest technology for productive endeavours (2010). In his article, Grytten acknowledges that government policies play a very important role in the maximisation of the said assets. For a long time, since the years of the economy’s rapid development, Norway was led by the Labour party. The Labour-dominated government initiated countercyclical policies which resulted in deindustrialization in the 1970s, a process which many economists, was regressive in essence. Countercyclical policies include the imposition of heavy taxes on business to generate funds for the government, particularly for its welfare programmes. During those times, the country was on the path of becoming one of the most advanced welfare states in Europe. Grytten’s bias against countercyclical policies can be observed as he indicates that economic problems were averted primarily because of the discovery of petroleum in the country. He believes that if oil had not been discovered and utilized for the good of the economy, the Labour-led government would have encountered a crisis brought about by such countercyclical programmes. The 1980s saw the rise to power of the conservative bloc that claimed to have an alternative economic policy. The conservatives believed that government should reduce its influence on the economy and allow the market forces to dictate it instead. Credit liberalization was one of the key policies that were implemented. However, Grytten points out that “the parliament still ran a policy that prevented market forces from setting interest rates” (2010). This is in contrast to the essence of credit liberalization. Grytten’s article, therefore, does not present the factors which he perceives as the bases for Norway’s economic growth. He also explains how the government has responded to such factors in order to direct the said growth. The Norwegian Financial Commission presented a report that does not fully concur to the points raised by Grytten. In its summary, the NFC explains that the capability of the Norwegian economy to weather the financial crisis is brought about by a “combination of luck, skill, and caution” (Altintzis 2011). Unlike Grytten’s analysis, the report does not see any problem with government regulation and control over a significant part of the economy. Coming from an agency that belongs to the government, such perspective may be expected. However, it is still necessary to consider the points asserted by the NFC as it also sheds light on an angle opposite to that of Grytten’s. For the NFC, Norway’s resilience during the financial crisis is a proof that market regulation by government is adequate and necessary. The Norwegian government’s intervention in the market may be considered as one of the strictest in Europe but, according to the NFC, “this contributed to the Norwegian financial institutions being better capitalized at the outbreak of the crisis” (Altintzis 2011). This line of thinking can very well be an indicator that the current government is bent on continuing its policy of intervening in the market, particularly in the sector of finance. Both Grytten and the NFC agree on the fact that Norway has been able to survive the financial crisis without reeling from the effects the way that other countries in Europe and North America did. The difference in their analysis as to what made it so shows that the country’s leaders still have formulate a clear-cut policy that would make the economy more robust in the face of possible similar crisis in the future. It would be necessary to study also the perspectives of multilateral international organizations regarding the said ability of the country. Since such organizations are not part of any opposing political camp in Norway, it can be concluded that their views are relatively more objective. In the economic survey conducted in 2008, the Organisation of Economic Cooperation and Development admitted that the Norwegian government’s policy prior to the onset of the crisis had a positive effect on the country’s preparedness. The “Norwegian governments have so far been able to resist many spending pressures by adopting forward-looking behaviour in managing public resources” according to the survey (OECD 2008). However, even as the OECD credits the government’s regulatory practices in the financial sector, it also puts emphasis on the cyclical development programmes that were employed from 2005 to 2006 as the main factors why the country had successfully thwarted any detrimental effect of the global financial crisis on the domestic economy. It is clear that the Grytten’s proposition of a more liberalized and economy and financial sector is similar to the conclusions reached by the OECD. The multilateral body which has also become the foremost proponent of economic policies in line with globalisation within the powerful economies of the world is expectedly pushing for the absolute freedom of the market from government intervention, citing that such measure is the guarantee that Norway would continue to prosper despite the crisis. This is contrary to the point of view of the NFC. The NFC finds ample support for its arguments from the Erling Larsen’s article The Norwegian Economy 1920-2000: From Rags to Riches. The article was published the in Economic Survey, a publication of Statistics Norway, which is the government agency tasked to collect, collate trends in Norwegian society. Larsen explains that there are three factors that shaped the country’s economic stature. These are luck, climate, and the discovery and utilization of Norway’s North Sea oil reserves. Similar the NFC, Larsen puts emphasis on the aspect of luck, particularly in the aspect of location and climate. Being a research follow of a government research agency, Larsen could only defend the policies that are being implemented in the economy. He finds the economy as not being strictly capitalist or socialist by definition and instead explains it as an economy that is a combination of free market and substantial government intervention, a coordinated market economy. Larsen expounds further that “market solutions are inefficient in the presence of phenomena involving third parties and non-market features” and that “the efficiency of an economy may then be improved through governmental intervention or legislation” (2002: 24). This defence of the Norwegian government’s economic policy is a reflection of the dominant ideological principles that have been upheld by majority of the people for a long time. As Larsen indicates, while it allows the business sector and the economists to achieve maximum efficiency, the government makes sure that fairness is upheld always that such drive for higher business earnings does not result in injustice. According to him the “core lesson of Norwegian economic policy is that sharing the fruits of prosperity establishes an atmosphere of security, identity and belonging, and ensures that an individual believes in the opportunity to make use of her energy and talents” (2002: 36). It is clear that Larsen contradicts his own theory of luck when he indicates that government intervention is necessary. Nevertheless, it conflicts with the concepts of Grytten and the OECD. Norway’s economy has proven itself to be robust and resilient enough to survive and to salvage some degree of development despite the global financial crisis. However, the aforementioned sources of information and analysis, Grytten, the NFC, the OECD, and Larsen, provide the impression that interpretation on the factors that brought about its success vary. It exposes that while the economy is generally sound, it is also fuelled by contradictions between market forces and government intervention. It is necessary to situate Norway as part of a greater European economy. Apparently, the contradiction within the country is not exclusive to it since this is the same issue that is confronting other countries in Europe. In this regard, it is important to consider E. Daamsgard Hansen’s European Economic History: From Mercantilism to Maastricht and Beyond. The book provides relevant details on how Norway has reacted to the pressures for policy changes from its neighbours and market forces in the continent. It narrates the history of the continent’s gradual shift from economic closed-doorism per country towards the establishment of a freer market economy to point of having a common currency. Norway has been confronted with the issue of joining the trend or not since the 1970s. In a 1972 referendum whether to join the European Economic Cooperation or EEC or not, the government campaigned for a Yes vote but the people eventually voted No. With Britain and Denmark solidly supporting the formation of the EEC, its top partners in trading, there were fears that Norway’s seemingly isolationist stand would result in economic crisis. However, “the period turned out to be one of unusual growth at a time when the rest of the industrialized world was suffering in the throes of recession” (Hansen 2002: 345). This verdict by a Danish author may be considered as more objective since he is not part of the Norwegian government or a stakeholder in Norway’s economy. One other proof that such isolationist tendency can be bring about positive results is the country’s resilience during the global financial crisis that started in 2008. Many European Union members suffered greatly from its effects. One of the worst hit and is still ravaged until the present is Greece. Non-EU member Norway, on other hand has still managed to achieve a growth rate during the period A relevant literature that supports the perspective of Larsen is the report written by Dick Nanto. Nanto is a coordinator of the United States Congressional Research Service, a branch below the U.S. Congress which conducts studies on trends for the purpose of enlightening the nation’s policymakers on key concerns. As a specialist in trade and industry, Nanto wrote a report The Global Financial Crisis: Analysis and Policy Implications. The report was written in order to provide the U.S. congress with a comprehensive background on the global final crisis. This also explicitly points out the options that the U.S. can undertake in order to reduce the impact that it experienced due to the crisis. In attempting to arrive at correct solutions, the paper highlights the ability of Norway to survive the crisis and even provide aid to other countries in distress, particularly Iceland. Nanto notes that with relatively stronger government control on the economy, measures were immediately undertaken to reinforce the Norwegian economy such as the stimulus package of $2.88 billion that includes “investment in construction, infrastructure, and renovation of state-owned buildings, tax breaks for companies” (2009: 108). It is clear that other powerful economies, like the U.S., looked up to the example set by Norway in combating the effects of the financial crisis. However, it obviously also gave credit to the prevailing economic system of the country, one in which the government’s role in the economy is quite dominant. The stimulus packaged that was released to both the private and public sectors of the economy may well be considered as Neo-Keynesian in essence, an economic thought which has been constantly criticized by proponents of the free market and globalization. With government’s reins on the economy, apologists for a free market have expressed that Norway is stifling the more advanced growth of its financial sector. However, during the global financial crisis, the system proved to be beneficial for the country. A New York Times report said that “banks represent just 2 percent of the economy and tight public oversight over their lending practices have kept Norwegian banks from taking on the risk that brought down their Icelandic counterparts” (Thomas 2009). There may be truth in the point that the Norwegian economy could have grown to its optimum had there been a free market and financial sector, with lesser government intervention. The global financial crisis though had proven that such government role would be found very important to protect the economy from recession brought about by unbridled capitalism. Greece met an entirely different fate during the peak of the global financial crisis. Unlike the more developed economies though, it did not immediately feel the impact in 2008. Once it did in 2009, the country suffered the worst recession in its long history, which then resulted into a social turmoil that lasted until today. According to Dr. Dev Kar, lead economist of the economic think-tank Global Financial Integrity, there were two major factors that ignited the Greek crisis: the government’s mismanagement of the loans it incurred from foreign banks and its inability to curb illicit money inflows and outflows (2010). Apparently, Kar’s conclusion puts blame on the Greek government for the crisis that the country is experiencing currently. However, this only indicates that the cause is mere omission or negligence on the part of the government and not the economic policy that it is implementing. It is necessary to understand further the root of the country’s economic crisis in order to answer the question of why it failed in the face of a global crisis while Norway did not. Although there were analysts who said that Norway partially made it through sheer luck, this has been debunked by the review on the aforementioned literatures. Greece certainly does not suffer simply because it is unlucky. Still, there are analysts who hold on to the concept of fate or destiny when attempting to study the causes of the current Greek economic crisis. Robert Kaplan of The New York Times writes an article which articulated that Greece’s fate is decided by a geographical factor. Kaplan points out that it is not surprising that the most of the countries in Europe that bore the brunt of financial crisis are located in the South; Greece, Spain and Portugal. He explains that “the relatively poor quality of Mediterranean soils favoured large holdings that were, perforce, under the control of the wealthy… (which) contributed to an inflexible social order, in which middle classes developed much later than in northern Europe, and which led to economic and political pathologies like statism and autocracy” (Kaplan 2010). Such analysis, although valid to a certain extent could not be considered as the most accurate conclusion on the cause of the crisis. It is clear that despite its geographical position, Greece still managed to develop and become a high-income economy. Harris Mylonas, a professor at the George Washington University, explains that there are other proximate causes lurking within economic, political, and cultural systems in Greece that resulted in the current crisis. While Mylonas does not debunk the argument raised by Kaplan, he includes other factors that could be attributed to human behaviour and mindset, particularly those of the country’s leaders. According to him, there could be two proximate causes the crisis in the country’s modern history. One is the extremely high spending in defence as the country’s perpetually strengthens its forces in preparation for any outbreak of violence between itself and Turkey (Mylonas 2011: 79). Second is the culture of patronage politics among the country’s leaders. The political leaders have the tendency to appease the public not for the long-term benefits but for, usually, electoral purposes; setting up projects and non-productive activities that gobble a huge chunk of the national budget. As result of the excessive spending for defence and for the non-capital or non-industrial public sector, the budget deficit also soared beyond the means of the gross domestic product to compensate. In order to make the economy stay afloat, the government had to seek loans from abroad, particularly from banks based in Germany, the United Kingdom, and France. With debts increasing drastically, the Greek government found an instant solution in 2001 and this was its inclusion in the European Monetary Union. However, this actually became an aggravating factor instead. Membership in the EU and its being part of a single-currency system allowed the country to have easier access to more loans from beyond its borders. This situation encouraged “Greeks to borrow and consume more and delayed the market's realisation of the Greek sovereign debt problem” (Mylonas 2011: 80). Throughout all these, Greece’s political leaders have displayed inaction. Even as the ballooning debt problem became an issue during elections, there were very little changes that took effect despite the regime change. According to Mylonas in his article, the succeeding administration would just spend efforts in blaming the previous one for the crisis but would apparently fail in introducing the necessary reforms. In 2010, the Greek government requested for bailout from the European Union. Bankruptcy was obviously knocking on the doors of many businesses, including private and public, banks as well state enterprises. With this, the government showed that it continues to depend on external help and debts in order to survive the crisis. Joseph Quinlan’s account on the experience of Greece as it tried to seek fresh bailout funds provides a picture of how the rest of the developed countries of Europe reacted to the crisis. It also exposes further the reasons why Greece projected a robust economic development a couple of decades ago only to come crashing beginning 2009. First of all, it must be reiterated that while the global financial crisis did have an effect on many countries, Greece’s domestic financial troubles was due to its own erroneous economic policies. It overspent and acquired heavy loans while fell short in seeking ways for the economy to grow and the government to earn revenues. Overspending and huge loans ultimately resulted in the Greek government’s impending bankruptcy. Quinlan points out that “once the global financial capital markets grew increasingly nervous over Greece’s ability to repay its debt, they demanded higher interest payments on its outstanding debt, a situation that brought Greece to the brink of a sovereign default” (2011: 158). Germany, a leading member in the EU, opposed Greece’s request for bailouts from the EU itself as it criticises the blatant overspending that the Greek government is doing in the public sector. This is understandable since many of the creditors whom the Greeks have relied on are based in Germany. George Soros points out that it is not that Germany wants to impose its demands for austerity measure; it just “wants to do is to maintain its competitiveness and avoid becoming the deep pocket to the rest of Europe” (Hurriyet Daily News). Finally, it was the International Monetary Fund that provided Greece with bailout funds, a step which Germany also vehemently expressed opposition. As part of the conditions for the bailout funds, due to the pressure from the creditor banks, and in order to lessen the impact of the higher interest rates imposed on the country’s standing loans, the Greek government instituted austerity measures. The law on austerity includes a number of tax increases while spending cuts are made mostly on the public sector budget, particularly on welfare. With the approval of the law by Parliament, the Greek government would expect the fifth tranche of the bailout funds from the IMF to be released. The government would also “start working on a fresh bail-out, which could be worth up to €150bn, to manage Greece’s €360bn debt pile and avoid the Eurozone’s first-ever default” (Armitstead 2011). Although Quinlan’s book is meant to provide a perspective on the crisis besetting the U.S. economy, he cites Greece and the actions taken by neighbouring countries as a prime example of how America must deal with it own economic troubles and with the others. Anders Aslund in his book The Last Shall be the First provides a more critical description of how Greece behaved prior to the crisis and when it finally experienced the worst effects. In a bid to gain entry to the European Monetary Union, the Greek government apparently did not divulge certain information regarding the deficits it is facing as well as the ballooning sovereign debts. Members of the EU, particularly, the more developed economies such as Germany trusted that Greece is in the position to repay its loans due to the impression that it is not experiencing any serious problems regarding its fiscal situation. Despite the discovery of its misrepresentation, Greece did not get any sanctions from EMU, which allowed it to continue its practice of heavy borrowing. When the crisis finally broke out, the EMU began sanctioning Greece and imposed heavier burdens on its economy. Aslund considers this as a proof that the EMU governments have their share of the blame. He writes that “the EMU governments delayed crisis treatment, pursuing haphazard improvisation from February until May 2010, when financial markets exploded” (2011: 93). At a glance, the most obvious difference between Norway and Greece is that the former has been able to assert its sovereignty in the economic sphere while the latter has been tied to the rules and conditions of the EMU. However, it actually goes deeper than that. The Norwegian government has never relinquished its dominant role in shaping the economy while at the same time wisely spending for the public sector. Despite its influential position on the economy, the Norwegian government has been consciously encouraging also the growth of its private business sector. Greece, on the other hand, has not done the same policies. List of References Altintzis, Y. (2011) Summary of the Norwegian Financial Commission's Report [online] available from [accessed 23 June 2011] Armitstead, L. (2011) Greece Approves Second Part of Controversial Austerity Bill [online] available from [accessed 28 June 2011] Aslund, A. (2011) Last Shall be the First: East European Financial Crisis. Washington: Peterson Institute for International Economics Grytten, O. (2010) The Economic History of Norway [online] available from [accessed 24 June 2011] Hansen, E.D. (2002) European Economic History: From Mercantilism to Maastricht and Beyond. Copenhagen: Copenhagen Business School Press Kaplan, D. (2010) For Greece's Economy, Geography was Destiny [online] [accessed 27 June 2011] Kar, D. (2010) The Alpha, But Whither the Omega, of the Greek Crisis? [online] available from [accessed 26 June 2011] Larsen, E. (2001) ‘The Norwegian Economy 1900-2000: From Rags to Riches.’ Economic Survey 4, 2001. Statistics Norway. Mylonas, H. (2011) ‘Is Greece a Failing Developed State? Causes and Socio-economic Consequences of the Financial Crisis.’ ed. by Botsiou, K.E. and Klapsis, A. The Konstantinos Karamanlis Institute for Democracy Yearbook 2011. Athens: Konstantinos Karamanlis Institute for Democracy Nanto, D. (2009) The Global Financial Crisis: Analysis and Policy Implications. Washington, DC: Congressional Research Service Organization of Economic Cooperation and Development. (2008) OECD Economic Surveys - Norway. Paris: OECD Quinlan, J. (2011) The Last Economic Superpower: The Retreat of Globalization, the End of American Dominance, and what we can do about it. New York: McGraw-Hill Thomas, L. (2009) Thriving Norway Provides an Economics Lesson [online] available from [accessed 26 June 2011] Hurriyet Daily News. (2011) Soros Blames Germany for Euro Crisis [online] available from [accessed 27 June 2011] Read More