This paper is prepared for the Bank's internal use and is not SX 2 J V VP 24 | - -for publication. The views are ! ~~~~~~~~~~~those. of the auLthor and not necessarily those of the Bank. INTERNATIONAL BANK FMR RECONSTRUCTION AND DEVELOPMENT INIIERNATIONAL DEVELOPMEIT ASSOCIATION Economics Department Working Paper No. 24 INDUSTRIAL DEVELOPMENT IN AN OPEN ECONOMY: THE' CASE CF NORWAY August 21, 1968 This paper examines the strategy of industrial development fol- lowed by Norway in the postwar period. It is shown that Norway has been successful in expanding its manufacturing industry in the frame- work of an open economy with low tariff barriers. Foreign competition has contributed to the efficient operatJon of Norwegian firms while the maintenancej of realistic exchange rates and low duties on imported in- puts have permitted the expansion of exports. The result has been a rapid expansion of manufacturing industries, characterized by an export orientation. The expansion of the manufacturing sector has involved a shift towards industries with a high labor skill requirement, as well as to a higher level of processing. There has also been a tendency toward intraindustry specialization, Norwegian firms specialize in narrow ranges of products for domestic use and for exports while. other varieties are imported. The author, Professor of Political Econoory at the JTohns Hopkins University, is Corinultant to the Economics Deprrtment of the World Bank. Prepared by Bela Balassa Industrial Development in an Opeo Economw: The Case of Norway Bela Balassa I In the period following the Second World War, the need for protection to foster manufacturing irndustries in primary expcrting countries was widely argued. With import substitution as the principal objective,,generous mar- gins of protection were provided for domestic firms while the cost of the protective measures to the national economy received lXttle aiatention. -- At the same time, the incentives accorded to import-competing industries, the high cost of protected inputs, and the ever valuation of the exchange rate associated with high trade barri;ers all entailed discrimination against export activities. The newly-developed manufacturing industries of these countries are therefore geared to supply the sheltered domestic market and do not have to meet the test of the world mArket. While permitting the expansion of manu Cacturing industries, this policy has led to the establishment of inefficient firms in variouis developing countries of Latin gmerica and Asia. 2/ Morcover, continuing high levels 1/ As an ECLA official noted in regard to Latin America, the basic objective was "import substitution at qny cost, regardless of which industries it is more exrpedient to develon and how far the process should be carried". (Santiago Macario, "P'rotectionism and Industria- lization in Latin America, Economic Btulletin for Latin America, March, l964, p. 61) 2/ For a discussion of the Latin American case, see my "Integration and Resource Allocation in Latin America", in The Next Decade of Latin American Development (Tom Davis ed.) forthcoming. - 2 - of protection in these countries (1o not provide inducement for improvements in efficiency and thus the life of high cost industries tends to be perpetua- ted. Accordingly, whereas the infant industry argument calls for the use of protective measures for a limited period to permit the industry to become competitive in the world market, in case of the indefinite maintenance of protection the industry may never "grow up" and the misallocation of resour- ces will provide obstacles to further industrial development These adverse consequences have recently led to a reappraisal of trade policies in several of the developing countries. Eimphasis is given to chang- ing the mix of trade and exchange rate policies, with a view t6 teducing the extent of protection accorded to import-competing industries and encouraging exports. The search:for new policies draws attention to the experience of countries that expanded: their manufacturing industries in the framework of an open economy with low protective barriers.. In the postwar period, Norway and Denmark provide examples: of this type of'policy in Western Eurppe, Until the Second World War., primary products and ipdustrifal goods at the lower stages of transformation characterized the export pattern of both of these countries. Howevar, they subsequently increased the exports of manu- factured goods at a rapid rate, thereby providing a stimulus to the expansion of manufacturing industries. The experience of Norway and Denmark is of ad- ditionfl interest since it indicates the possibilities of expanding manufac- turing exp,orts ir countries whpre relatively high virge levels have been reached due to high productivity in primary activities and in industries'sat lower stages of transformation. The, present investigation is limited to Norwsy because the avaitlability of inpult-cutput tables Qn an annual basis makes- possible detailed comparisons' - 3 - over time. 1949, 1553, 1958, 1961 and 1966 have been selected as benchmark years. By 1949 the damage suffered taring the Secohd World War Was virtually restored; 1953 was the first post-Korean peace year; 1958 preceded the esta- lishment of the European Free Trade Association; by 1961 tariffs on intra- EFTA trade in nonagricultural .,roducts were reduced 20 percent; and by the end of 1966 tariffs on all such trade were abolished. II As an introduction to the discussion. the structure of the Norwegian economy in the early postwar period vill be briefly described. We shall dis- tinguish among primary producing activities, industries producing intermediate products at lower stages of transformation, and manufacturing industries proper. The first group includes agriculture, fishing and whaling, forestry, and mining; the second encompasses.processed food, processed fish, pulp and paper, ferti- lizers and carbide, unwrought nonferrous metals, and ferroalloys; the third comprises commodity classes 5 to 8 of the WN Standard International Trade Classification less paper, fertilizers, carbide, unwrought metals and ferro- alloys. This classification permits us to separate the production of primary goods and standardized products requiring relatively simple technological pro- cesses from manufacturing taken in a narrower sense. Apart from the basic electro-chemical industry (fertilizers and carbide), industries producing primary commodities and intermediate products will further be combined into four major sectors, so that one can indicate chanaes in the relative import- ance of processing activities within each. 'The sectors in question are agri- culture and processed food; fisheries and fish processing; forestTry and forest products. and mining, nonferrous meta3s and ferroalloys. In the base year, 1q49, primary activities accounted for 41.6 percent of value added in the commodity producing sectors, intermediate products at lover stages of transformation for 21.3 percent, and manufactured goods for 37.1 percent (Table 1). Among primary activities, agriculture was of greatest importance, followed by forestry, fishing and whaling, and mining. The ranking is the same in regard.to the intermediate goods produced in thes'e sectors ex- cept that unvrought metals and ferroalloys., which in large part use imported materials, rank higher' than processed fish. Comparisons with other countries at similar levels of industrialization are of further interest. In semi-industrial countries, value added' in the industrial sectors' -- including intermediate as well as final production -- amounted to 25-30 percent of the. gross domestic prodact in 1950; the relevant figures are Argentina 30 percent, Denmark and Norway 28 percent, and Japan 25 percent. By contrast, in the major developed countries of Western Europe (France, Germany and the United Kingdom) this share was in the 38-4.0 percent range. - But intermediate products at, owver'levels of transformat.ion accounted for a higher proportion of value:added in the industrial sector in Norvay than elsewhere, so that Norway was behind these countries, in terms of the share of manufacturing as defined above. Around 1950, the, share of manufacturing in the gross national product was 15 percent in Norway, as compared to 17 percent in Denmark and Japan, 21 percent in Argentina and 27 to 29 percent in.France, Germany and the United Kingdom. 1/ United Nations, Yearbook of-aol Accounts Statistics 1964, Nev York, 1965 2/ Ibid and United.Nations, The Growth of World Industry 1938-1961, New York', 1963.-- Dt.ta'for the manufacturing sector refer to Talue added in the cas.e-of Argentina, Germany, Norway and the United Kingdom and to employment in Denmark, France and.Japan...- For each country. avail- able figures for a yean; nearest. to 1950,have been use4. - 5 - It should be added that tne intermediate goods produced in Norway are mater4al intensive and/or utilize large amounts of electrical energy; hence, their share in the commodity producing sectors was much greater in terms of production value (39.6 percent) th.n in terms of value added (21.3 percent). The importanse of these products for th6 Norweg:ian economy is put in even stronger focus if we consider their contribution to exports, Inter- mediate products at lower stages of transformation provided nearly four-fifths of Norwegian merchandise exports in 1949, with processed fish and pulp and paper each providing one-fourth of the total (Table 2). -/ In turn manufacturing activities were oriented towards the home market. Only 3 percent of output was exported in 1949, and manufactured goods ac- counted for less than c,ne-tenth of merchandise exports5 Consumer goods in- dustries were created behind moderate protection to cater to domestic needs, the manufacture of wood and cork products benief'ited from the availability of cheap raw material, while the engineering industry specialized in ship- building and in machinery used for the processing of domestic materials. 2/ At the sasne time, despite the quanti'tative restrictions applied for balance- of-payments reasons, over one-fourth of the domestic consumption of manufac- tured goods was Drovided by imports. 1/ T'he paper does not consider the contribution of shipping services to foreign exchange earnings. These amounted to )12 percent of the exports of goods and services in 1949 and 38 nercent in 1966. International Morietary Fund, Balance of Paymento Statistics. 21 For a detailed description, see Norges Industriforbund, Ind9stry in No Oslo, 1951. -6- III It appears then that in the early postwar period Norway showed the char- acteristic features of a semi-industrialized country. Although various mnanu- facturing activities were.establish.ed, primary activities and the relatively simple transformation of foods and raw materials had a preponderant place in the Norwegian econocmy. The development of these sectors reflected the avail- ability of natural resources and hydroelectricity, and they supplied much of Norway 's export earnings. But, given the limitations of fishing, forestry and mining resources, the continuation of'this pattern of specialization' wpuld not have' permitted a full utilization of all productive factors and a rapid rate of growth of the Norwegian economy. L Accordingly, Norway faced the choice between an inward-looking and an ou ward-loolki'ng stretegy of industrial d'evelopment, i.e. between import substitution and export-based expansion. The decision was made for the latter-, vit;h appropriste'policy measures taken to stimulate exports and to increase. foreign-competition. in domestic. markets'. In the early part of the period, successful efforts to maintain price stability contributed to the profitability of sales!-in foreign markets, and exports were also favored by the government."s inves-sment policy. ! Subse- quently, the maintenance' of realistic exchange rates and low tari'ffs on 1/ On this point,, see:Alice Bourneuf, Norway -- kPllanned Revival, Cambridge, Mass-..,.Harvard University Press, 1958, p. 11. 2/ Cf. Alice Bourneuf, Norway -- A Planned Revival, Ch.6 and 7 and The Norwegian Loa 1e9n1 Program, l9S-1957; Oslo, 1957. imported inputs benefited exDorts. In turn, the domestic market became in- creasingly open to foreign competition as quantitative restrictions were abolished and Norway proceeded with reductions ±n tariffs. As a result, Norwegian import duties are not ohly substeltially lower then in the semi-industrial countries of Latin America, where tariffs on manufactured products are mostly in the 100-200 percent range, but are also below thie tariff levels of the major industrial cou.atries. In 1958, the year for which comparable data are available, Norwegian tariffs on manufactured goods averaged 11.7 percent while the corresponding figures for the United Kingdom were 16.2 percent, for the European omrnion Market 14.5 percent and for the United States 16.8 percent. --/ At the same time, aside from some agricultural goods, quantitative restrictions are not applied in Norway. We can thius classify Norway as a low-taiiff country even in comparison with the major developed nations that possess a highly advanced manufacturing sector. Furthermore, the structure of protection contains fewer peaks and valleys in Norway than in the United States and Britain, 5o that selected industries are not protected at the expense of others. 3/ In 1958, Norwegian 1/ As regards the liberalization of trade, it is interesting to note that while participation in the EOCD required the dismantling of quantitative restrictions, the pressures were less stronow in regard to reductions in duties. In multilateral tariff negotiations undertaken in the frane- work of GATT, the United States and the larger European countries were the major bargaining partners sad reciprocity on the part of small countries was of secondary importance. Nevertheless, Norway has chosen to reduce tariffs to a considerable extert. during the postwar period. 2/ Weighted averages of tariffs for 91 three and four digit SITC categories derived from Political and Economic Planning, Atlantic Tariffs and Trade, London, 1962, Allep & Unwin, pp.3-62. -- In the averaging, the combined imports of the OECD countries have been used as weights while the PEP tariff data for the individual categories are unweighted averages. 3/ rhis momparison does not hold for the FVC 'where the averaging of the tariffs of the member nations reducedl tl,e 1isnr.r.on of duties. - 8 - tariffs exceeded 20 percent in only 11 of the 91 industrial categories while this was the case in 37 categories in the U.S. and 35 categories in the U.K. Norwegian duties are the highest on synthetic materials and fabrics, clothing and travel goods, and on passenger automobiles. As Norway does not produce automobiles, tariffs have the function of an excise tax in this case. Changes in Norwegian attitudes towards economic integration are of fur- ther interest. Along with Denmark and Sweden, Norway participated in nego- tiations for the establishment of a Nordic Union in the early postwar period. But the talks were unsuccessful, largely because of Norway's reluctance to face Swedish competition in a customs union of the Scandinavian countries. Opposition was especially strong on the part of industrialists who feared that they would not be able to stand up to the more advanced Swedish in- dustry. 7 A further contributina factor was that the traditional Norwegian export products were subject to low duties while tariffs on imports of manu- factures were at the time higher in Norway than in other Scandinavian countries. Attitudes had changed, however, by 1958 when the Norwegian industrial federation joined similar organizations of the other Scandinavian countries, Austria, Switzerland and the United Kingdom in calling for the establishment of an all-European free trade area. Apparently, the ability of dr,mestic producers to meet foreign competition despite reductions in tariffs in the postwar period, their increasing success in exporting manufactured goods, and the fear of being cut off from the markets of the participating countries, 1/ For a detailed account of the negotiations, see Frantz Wendt. The Nordic Council and Co-9 ration in Scandinavia, Copenhagen, Munksgasrd, 1959. See also Stanley V, Anderson, The Nordic Council, Seattle,. The University of SeattLe Press, 1967, ch. 6. -9- led many industrialists to favor this scheme. tt Vas further understood that the thrust of Swedish competition would not be concentrated on the Norwegian industry while producers expected to gai.i in the hitherto hignly protected markets or the United Kingdom. After the breeadown of negotiations fot an all-E'uropean free trade area, Norway became one of the founding members of the European Free Trade Associa- tion, establ)shed in 1959. The other member countries of EFTA are Austria, Denmark, Portugal, Sweden, Switzerland, the United Kingdom and, in an asso- ciate status, Finland. Since its creation, tariffs on intra-EFTA trade in non-agrieultural products have been successively reduced and ultimately elindnated. IV 'The policies followed in the postwar period have provided both the stick and the carrot of foreign competition in Norway. Rather than being sheltered from foreign competition, domestic industries have-had to compete with imports. In turn, cost reductions obtainable in large-8cale production have induced firms to search for export markets and these incentives have not been frustrated by the disadvantages of overvalued exchange rates and high input prices observed in semi-industrial countries which follow an inward-looking stratepgy. Thus, the process of industrial trensformation has taken place in the framework of an open econorw with considerable em- phe6is on exports, and the Norwegian manufacturing industry has had to meet the test of the world market at home as well as abroad. - 10 - The export orientation of manufacturing industries has led to a rapid rise of exports. Between 1949 and 1966, the volume of exports of manufac- tured goods grew more,than twelve times, and their share in merchandise exports increased from 9 percent in 1949 to 31 percent in 1966. In the same period, the average ratio of exports to manufacturing output rose from 3 to 16 percent, with their incremental ratio exceeding 25 percent (Tables 1, 2 and 3). Even larger was the increase, of'exports as a proportion of value added which is a more appropriate measure of the effects of exnorts on the growth of manufacturing. Between 1949.and 1966, exnorts accounted for two-thirds of the increment in value added in manufacturing indulstries, as against a ratio of 8 percent in 19119. The impact 'of exports on the growth. of, manufacturing in Norway was of especial importance.after the establishment of the European Free Trade Asso- ciation. This is shown by increases in both the incremental export-production and export-value added ratios; between 1949-58 and 1958-66 the former rose from 21 to 26 percent and the latter from 46 to 80 percent. As a result, the rate of growth of output accelerated; value added in manufacturing grew at an *nnual rate of 4.7 percent in the first period and 5.8 percent in the second. While exports contributed to the grqwth of manufacturing in Norway, none of the commonly used measures of import subst,t.ition show evidence of import replacement. Thus, ,he share of imports in the consumption of mwiu- factured goods rose from 26 percent in 1949 to 29 pereent in 1.958 pad to 39 percen't in 1966, indicating an acceleration after jth9e establishnepnt of EFTA. - 1/ Similar trends are shown in the ratio of irports to the sum of production and imports, a measure of import substitution suggested by j,.-B. Chenery, ("Patterns of Industrial Crowth", A,m.e-r-egn Economic Review, September, 1960, p. 64o),. This ratio increasen -fi,rppi 25 percent in 1949 to 27 per- cent in 1b958, and 35 -percent iEn :1'960'. - 11 - The results are explained by the fact that, apart from providing inducements to exports, an outward-looking strategy of industrial development also stimu- lates imports through the liberalization of trade. V The expansion of manufacturing industries brought about an increase in the share of this sector in value added in comniodity production from 37.1 percent in 1949 to 48.4 percer.t in 1966: three-fifths of the increment of value added in the commodity producing sectors was in manufacturing during this period. In turn, the share of primary producing activities declined from 41.6 to 24.4 percent, and that of internediate products at lower stages of transformation rose from 21.3 to 27.2 percent. Apart from the limitations of the do.nestic material base, the sk;ift from primary activities to industries at lower stages of transformation reflects the growing importance of process- ing as well as the increased reliance on hydroelectricity. In fact, the ex- pansion was the most rapid in industries using large amounts of electricity: fertilizers and carbide as well as ferroaJloys and non-ferrous metals (chief- ly aluminum). We consider next the chan,7es that occurred in the four major non manufac- turing sectors: agriculture and processed food: fisheries and processed fish; forestry and forest products; and mining. ferroalloys and non-ferrous metals. The share of agriculture and food processing in value ndded in commodity pro- duction declined from 29.4 percent in 1949 to 20.1 percent in 1966. The entire decline took place in the share of crops and livestock, where produc- tion remained stationary although productivity increased. The soil and - 12 - climatic conditions for Norwegian agriculture being unfavorable, the result has been an improvement in the efficiency of resource allocdti6h in the national economy. ln turn, value added in food processing nearly doubled and exports rose at a so'mewhat higher rate, Among primary awtiV:ities, fi§ihIhA 'nd 'whalinfg alsb inc'riaied at a low rate in the period Wiidet consta1d&tibn; With the dontinuini C§t6blbshment of processing plants, ihcr'ease's 4erP lf6P Yji'd in v&hue added i'n fish processing, and there was a shrft t-w&±?di the eL*d-pt6Adid nf 1fish in proce'ssd form. Thus, a one-half decline -ifi the expofts o'f ria 'sh between 1949 dbd i99A was accom- panied by a doublihg of the ex'corts of J'Pbdes'sed fish. Stilli liiYi-tations in the catch led to & d&eeYase iri the shi&z 6 f fisHiBr prbducts iii i ' dbifodity exports from one-thitd -in 1949 to bh =sveith in 1 Similar devel6pifeitts boccurred in thM> d4be of ibrest prod-lets. Thus, supply limitations l.ed to a decl-in'e in viaue added in forestry, yet the share of pulp and papet in cd6finodity output ifi6f&sed. Als6, Nbrv&y vir'tually ceased to export 16kgt ad pulpwood whil the combifned exports 6of buip and paper more than doub-led with paper gaiThiig At the expense of woodpulp. Neverthel'ess, the. 6mbined share bf fo6iH§t 'product- in Norwegian exports fell from 18. 5 percent to i5.3 percent. On the cther. hand, the share of non=fefrrus MitAls (aluminum and to a lesser extent nickel an'd copper) and fertfaioys ih commodity production and exports increased during the 1949-66 period; Sup1ly limitationis did not play a role here since NcrVegian aluminum production i-1iis on imptVted bauxite and alumina, and nickel and conper ores aS well as most alloying mnet&ls are also imported. Mor*6Ver, these indPsttl6§ b-ehefitod from the VI1vAh1ility of - 13 - hydroelectricity. This explains the rapid expansion of their sales aebrond, with Norwegian alurinum increasing its share irn the world market. Similar factors have contributed to the rise in thp shiare of basic electro-chemical products in commodity production as well Rs in ex-nots. VI Further interest attaciles to changes witlhin the manufacturing sector. As noted above, until 1949 manufacturing industries were oriented towards the domestic market in Norway. Sales abroad accounted for only 3 percent of output, ships being the largest single iter. Exports of textiles, clothing, steel and machinerv were negligible or nonexif;tpnt, while imports provided over orne-fourth of the domestic cornsumption of rianuf4ictured goods and exceeded exports ten times. Between l9409 and 1966, the exports of mamnfactured goods increased more than twelvefold. Chemicals and engineering products each now account for nearly one-fourth of the exports of manufactured goods: exports of steel products, ships, electrical machinery, textiles and wood products also assumed importance. As regards the share of exportv in the increment of output, steel products lead with a marginal export-production ratio of 56 percent for the period 1949-66; the corresponding ratio for text.iles and rubber products is two-fifths and for all manufactured goods, LEiken together, nearly one-fourth. Exports of manufactures also cover an incrensing proportion of imports: 10 percent in 19b.', 23 percent in 195t3 and 30 percent in 1966. 'ihese developments reflect the changes that occurred in the structure of Norwegiain industry. There has been a shift from commodities of low to those of high labor skill requirement, as well as from lower to higher levels of processing. Moreover, industries characterized by product differentiation have assumed importance and there has been a tendenry towards intraindustry specialization. In Norway's case this specialization involves, in addition to concentrating on narrow ranges of products, the production of parts and components for assembly elsewhere. The shift towards products with & high -1ibor Skill requirement is ex- plained by the wage situation in No?ray and the high educational level of the Norvegian labor force. As a result of' the- high productivity attained in the production of primary goods and intermediate p1-oductd at loweti-tev'1s of transformation, wages reached levels a-pr6kimatinr those of the MQ6j6f European countries. Correspondingly, ixidustries ±elIyfhg td aL iarge ekt6ht oin unskilled and semi-skilled labor grew at a- relative-ly s16o rate (textilesI d16thing, and and footwear) or even experienced a declite in output (leather and leather products), and the share% of imports in the dohiestic consumpti6n 6f these products increased. substantially. In turn,- the hiPh educatiofil; i6Vel of the labor force permitted a rapild expaasionr fit skiil-intensive' iffdvutries, such as engineering:and electrical machinery- The developments observe'd in regard to textile.', leather and clothing products are of especis.tainterest since industrial countries often follow policies aimed at supporting these industri'es desr$te theit comparative disadvantage in them.. iorway, however, accepted alrise in imports to pro- vide for the bulk of" the increase in consumption, thereby free6isg: Idbor for occupations which' required hig) er skillsw. At the game time,s t48ere has - 15 - been a considerable incizeast in exports of specialty plroducts, such as ]knit- wear and ski clothes; between 1949 and ]2)6O, two-fifths of the increase in textile production was destinedl for exportationi. 'Tlhere has also been a Bhift in productioni and exports towards processed goods at higher levels of fabrication. Among wood products, the shift has been from exportation of logs to pulp, paper and simple wood products, and again to paper products, wallboard and furniture. As rega.rds chemicals, in- creases in the production of fertilizer and carbide were overshadowed by the development of more advanced branches of the chemical industry, including the production of carbide-based synthetic chemieals. Correspondingly, by 1966 the exports of synthetic fibers and resins, petroleum derivatives and a variety of inorganic chemical products taken toaether approached the value of fertilizer and carbide exports, as against a. ratio of one-fourth in 101t9. Finally, among rubber products, the exports of tires nnd tubes assumed im- portance. Due to the availability of cheap electrivity, the steel industry employs mostly electrical furnaces. While this industrv is of relatively recent ori- gin, Norway has not followed some other semi-inditstrias countries in producing a great variety of shapes and forms of steel.. Rather she has concentrated on specialty products, such as quality pig iron containing titanium and vanadium, high quality alloyed steel., as well. as heavy castinrs for shipbuilding. Aside from heavy castings, much of the output is exported:. between 1958 and 1966, two-thirds of the increment in output was sold abroad. In turn, steel ingots and many finished steel products are imported, accoint:inv for two-th,irds of the increment of domestic consumption in this period. - 16 - While the Norwegpi a engineering and machinery industries produced almost exclusively for the home market in 1949, foreign sales accounted for nearly one-fourth of the increment of output between 1949 and 1966. Increases came in a variety of products, including mechanical handling equirment (cranes, hoists and excavatorni), calculakting machines, cash registers, as well as radios and tape recorders. In conjunction with the increasing impprtance of intraindustry specialization in these industries, the share of imports in' domestic uses also increased.. Nevertheless, industrial development in Norway led to a rise in the ratio of exports to iporpts in the engineering and machin- ery industries from 6 percent In 1949 t,o ,25 percent in 1966. Shipbuilding-was already an impor,tant inkiustry In Norway Xn the inter- war period. In additi.on to providing -f.or doostic needs, the industry assumed increasing importance in export markets after 1958. Tankers conti,nue to dominate shipbuilding activity, but NorwAy ha,s started to export hydrofoils and pleasure boats too. Finally,, in the g-roup of miscellaneous manu,factured products, exports of pJastic articles a4 sppporting goods are noteworthy. At various point,s ih the discussion, reference has been made to the importance of intraindustry specialization. Norwegian firms tend to specia- lize in narrow ranges ,of- products for domestic use as well as exports while other product varilettes are imported. Intraindustry specialization is espe- sially characteristic of.Norway 's trade in steel products,, machinery and eguipment. Moreover, a number of firms produce parts and components of automobiles aTnd niach*nery for assembly abroad, especially in Sveden. There are aleo cooperativ.e -arrangements with foreign producers, an example being the agreement between Norwegian and Danish manufacturers for the production of hydraulic deck fi--tirgs for ships. Intraindustry specialization received a boost through the establishment or the European Free Trade Association, in the framework of which tariffs on nonagricultural products traded anmong the member countries have been abolished. The effects of the establishment of EFrA on specialization can be indicated by calculating the average ratio of net export (import) balances to the sum of exports and imports in individual industries. 1/ It is easy to see that the resulting ratio would approach unity in the case of interindustry spe- cialization sinice a country would either export or tmT'ort a commodity, while in the event of intraindustry Special:Lzation the ratio would tend to assume low values. In the present paper, I have made calculations for the years 1961 and 1966 on the basis of data for 61 manufacturing industries in Norway. The results show average specialization ratios of 0.63 Tor 1961 and 0.56 for 1966. 'These ratios are comparable to those obtained for Italy in regard to intra- EEC trade for 1958 and 1963, 2. and point to tile increasing importance of intraindustry specialization. VII The purpose of this paper has been to eFCnm.ine the strategy of industrial development followed by Norway in the postwa.r period. At the beginning of 1/ The following formula has been used in the calculations: 1 E /Xi - 1/ n Xi + Mi where Xi and Mi refer to exports and imports in the individual commodity categories, and n is the number of conmmoditv catoeories considered. 2/ Cf. my "TrIariff Reductions and T'rade in Manuifactures Among the Industrial Countries"', American Economic Review, Junc, 1966, p. 471. - 18 _ the period, the Norwegian economy was characterized by the predominance of exports of primary products and intermediate goods at lower stages of trans- formation, chiefly fiJshery and forest products, and aluminum. Manufacturing industries were of less inportance in Norway than in other semi-industrial countries and they were oriented towards domestic markets, with exports accounting for only 3 percent of output. Resource limitations in fishing and forestry- would not hate permitted the full utilization of all productive factors and a rapid growth of the Norwegian economy in subsequent years. Accordingly, increased reliance had to be placed on manufacturinw industries. This has been accozhplishe'd wit}} moderate tariff protection; Norwegian tariffs are n'ot only conside'rably lower than in other semi-industrial countries but are also below those in the major industrial iiations. Moreover, Norway has joined the Eur'dpean Free Trade Association where tariffs on industrital products traded among' the mem- ber countries have been eliminated. Foreign competition has contributed toithe efficient operation of Norwegian firms. At the same time, cost reductions'obtainable-in large-scale Droduction have provided inducement for their participation'in the export market, and these incentives have not been frustrated by discrimination against export activities in the form of overvalued-exchange rates and high duties on imported inputs. The result has been a rapid growth of manufacturing industries, characterized by an export orientation. Between 1949 and 1966 value added in manufacturing rose at an annual rate of 5.2 percent and exports. of manufactures at a rate of 15.8 percenti. In tpe period following the estab- lishmert of EFT'A, the share of exports came to account for four-fifths of the - 19 - increnient of value added in manufacturing and by 1966 manufacQured goods pro- vided nearly one-third of Norwegian merchandise exports. The expansion of the manufacturing sector has involved a shift towards industries with a high labor skill requirement. and a higher level of pro- cessing. There has also been a tendency towards intraindustry specialization. Norwegian firms specialize in narrow ranges of products for domestic use and for exports and also, they participate in the international division of the production process by manufacturing parts and components for assembly abroad. Thle record of the Norwegian economy indicates the possibilities of expanding manufacturing industries behind low trade bhrriers. It also points to the need for concentration on skill-intensive activities by semi-industrial countries with high wage levels. Accordingly, the Norwegian example has implications for semi-industrial countries in the developing country group, such as Argentina and Chile, as well as for countries, such as Australia, Canada and New Zealand, whiclh have reached a. high living standard on the basis ot' Primary activities. Note should be taken, however, of the special advantages enjoyed by Norway. Norway has nearby markets for its industrial products in countries wlhich have long followed a liberal trade policy and have been eager to partic- ipate in regional integration schemes. Also. despite its relatively high wage level. Norway has a wage advantage as compared to Sweden, and this fact has contributed to Swedish purchases of parts and componients from Norwegian firms. In this way, Norway has been able to redulce the disadvantages of its small - 20 - size; yet, as long as the division of Western Eurote into two trading areas continues and countries follow national economic policies - the uncertainties associated with foreign trade will not disappear. :1/ The British surcharge on imports in the .years 1964-66, thegimplicit subsidy to aluminum ismelters, and the recent impopition of -epa,erit requirements on imports irvto Britain fhav.e especially affect.ed -Noyegian industries. Table 2: N0'Tf4EIAN 'IERCANDISE EXPORTS, 1949 To 1966 (1955 Prices) 1949 1953 1958 1961 1966 mill. krone % mill. krone maill. krone ill. krone % mill. krone % Primary Activities 3.59 13.0 567 1h.6 658 12.7 697 10.9 751 7.6 Crops and livestock 29 1.1 84 2.2 132 2.5 200 3.1 308 3.1 Fishing and vualing 212 7.7 289 7.4 301 5.8 236 3.7 113 1.1 Forestry 42 1.5 50 1.3 25 0.5 29 0.5 16 0.2 Mining 76 2.? 144 3.7 200 3.9 232 3.6 314 3.2 tnterwediate Products at Lower Levels of Trannforition 2,144 77.8 2,863 73.L 3,555 68.4 4,224 65.6 6,090 61.3 Processed food 59 2.2 89 2.3 115 2.2 170 2.6 160 1.6 Processed fish 684 24.8 856 21.9 952 18.3 917 14.2 1,334 13.k Puip and paper 74k 27.0 936 24.0 1,054 20.3 1,274 19.8 1,503 15.1 NMn-ferrous imtals 304 11.0 510 13.1 8bU 16.2 1,102 17.1 1,874 18.9 Perroalloys 150 5.4 1`3 4.7 243 4.7 301 4.B 443 .5 Fertilisers and carbide 203 7.A 289 7.h 3b7 6.7 460 7.1 776 7.8 Manufactured Goods 255 9.2 469 12.0 9S0 18.9 1,520 23.5 3,093 31.1 .Werchandise Exports 2,758 100.0 3,899 100.0 5,193 100.9 6,4i1 100.0 9,934 100.0 -2-reet Norzagian input-out tables. Table 1: THM SECTORAL DISTRIMJTION OF JALUT LDDED IN T.4-_ COw-tODITY PRODUCING SECTOPS IN NORHAY, 1949 TO 1966 (1955 Prices) 19i9 1953 1958 1961 1966 EiA.1 L rona fid1l I rone 53 ir dll. kLonrt ra lQ lrone 3 uill Irona PydzVxy act1iVtio0 ),h81 421,6 3S623 3705 3D654 3309 3D654 2909 3D693 26Lt C?Oop4 cind ll'uastock 1D701 2003 1D812 1008 1D786 1605 1,865 L53 1D672 U10 Aabhing cnd w-haling 633 706 728 705 709 6.6 649 5;3 883 5.8 r?crstry 818 908 791 802 839 708 779 6.- 631 t.2 H32IiDg 329 309 292 3,0 320 300 361 209 507 30k !LszT -1cP Tm'nsfoy- -stioD 1,780 2103 2,302 23,9 29U.7 2207 2D922 2400 4, 131 2702 '9cCQs3d £:?c 763 9.1 963 1000 539 7.8 1,097 9,0 1D383 901 ?~~,Ccecc-cd gis'a1142 1,7 27E 2.9 298 2,7 2hJ 2.0 392 2,6 lhilp cyi pop-r t32 5.2 501 5,2 583 e4 681 526 352 520 2G6 205 258 207 329 30.D 38a 352 62? 4a ldz95P@2).5.FJS )J4 .05 55 SOa 115 1t,2 133 7,.i .1 1,1 17ytili1iOrS cd cerbi6a 193 2,3 220 203 283 207 379 3 66i 4 VcwXcct. ed Goods 3,134 3701 3;716 3;.6 S693 430; .4617 4651 7,337 40__ ~c: t F 2SoctZ,os 8,36S5 1co.o ,)6141 1DO,!a lo279Z D,10. 12D193 13M), D 15i.6. S OoO Seowca loruegian inRt-oueput tables, Table 3: SELMEC7D DATA H '0RP1EA1b "AEUFACTURIb5 iNDUSTSI-S, 1909, 1956 AND 1966 (1955 Prices) Sxports/Production imports/Cunsuirption Production Exoorts Imnorts Percent Percent will. krone Mill. krone Mill; crone ae rVST'a mara-inal average margina1 l9i~9 195d 19b6 1949 19'1 19t6 1919 195s itS 1 9L9 __ 1 8 19h5-5c 1Y958066 Textiles 848 870 1,235 4 61 160 511 572 1,137 9.5 7.0 13.0 259.1 27.1 37.7 41.14 51.4s 225.9 68.1 Clothing 674 928 1,172 - 11 55 32 114 377 3 1.2 a.7 4.3 18.0 4.5 11.1 25.2 25.3 56.7 Footvar 397 316 bOO - 1 6 2 15 :1 9 9.4 1.5 n.d. 6.0 0.5 4.5 17.1 n.d. h5.5 Leather and Leather Products 197 126 122 - Ir 2E 3t 31 71 D 3.4 23.0 n.d. n.d. 16.2 20.4 52.8 n.d. 285.7 Wood and Cork Products 1,218 1,386 2,154 33 87 146 54 78 253 2.7 6.3 6.8 31.4 7.7 4.4 5.7 11.2 16.8 16.a Wallboard and Paper Products 270 422 721 13 47 ;7 19 31 13'. 5e.? 11.1 12.3 *2.4 14.3 3.7 7.6 17.5 15.0 28.7 Printing, Publishing 503 777 1,051 1 2 15 1 15 '9 ).2 ).2 l.u 3.5 5.7 0.7 1.9 7.1 6.3 19.7 Pubber Products 165 167 302 3 19 55 33 ) i4 1.: 12. 1'.2 ,30.0 26.7 16.9 2b.6 37.3 207.7 46.8 Other Cheuideals Las 959 2,445 55 159 639 563 990o 2,U14 12.3 .-.7 26.1 20.1 32.1 55.9 55.8 57.2 -. 2 58.2 Nonme.tallic rineral Products 358 591 921 17 29 199 6. 12b 222 4.r U.9 11.8 5.2 2a.2 19.3I 18.3 21.5 21.3 2d.3 Iron and Steel 1S7 462 975 19 136 471 433 !5S /33 11.L. 23.. ac.3 39.7 65.3 74.5 58.3 64.9 ll.4 72.a Engineering Produc-s 1,3j2 2,295 3,859 53 279 671 5i- 1,171 7,,2-7 3.7 12.2 13.4 24.0 25.1 33.5 37.1 48.3 u2.7 63.4 Electrical Yaachinery 495 720 1,537 S 7a 203 202 315 727 2.0 19.2 16.9 21.3 22.8 33.7 32.7 36.3 31.G 39.5 ShipbuilVing 661 1,395 1,835 49 c2 2652 F2 123 27 '.1 i. l5.i: 3.7 31.1 7.6 13.6 17.1 14.2 27.8 Miscellaneous Manrfac-ures 206 335 :'1 3 1. 13 - 1 _ 611 1.1 '' 12.L 1Z.' 16.' 1if? 36.7 44.S 54.9 49.4 Manufactured 3oos, ,otal ',357 ll,a39 19,590 255 9 3,393 ?,697 u,33)- ja 13 15. 23. 25.; ?5.9 29.2 38.9 36.8 59.6 n.d. - not defined so-rce: Ncroe-i-at inP:.,t-cUt'7 .tales.