The Economic Council Report 2017

Aningaasaqarnermut Siunnersuisoqatigiit The Economic Council

Nunatta aningaasaqarnera I Greenland's Economy 2017 1

The Economic Council was set up by the Government of Greenland in 2009. This is its eighth report.

The Council is headed by a chairmanship of eight people. The chairmanship consists of a Chairman, Vice Chairman and four other members, all appointed by the government. No changes have been made to the chairmanship since the publication of the last report.

Apart from the chairmanship, the council consists of members of stakeholder organisations, the government's administration service and scientific institutions. Members representing organisations and scientific institutions are appointed by the relevant organisations. Other members are appointed by the government. Council members can comment on the report's content, but only the chairmanship has the final responsibility for compiling the report and its content.

The secretariat function for the council is provided by the Ministry of Finance and Taxes and Danmarks Nationalbank (Denmark's central bank). The Economic Council's duties consist of making regular appraisals of the state of the economy and sustainability of financial policies.

The chairmanship consists of:

Chairman: Torben M. Andersen, PhD. Professor of economics at Aarhus University and former chairman of the Taxes and Welfare Commission. He was chief economic adviser to the Danish Economic Council between 2001 and 2003, and is still active as a specialist expert.

Vice Chairman: Ulla Lynge, MSc in Public Administration from Ilisimatusarfik. Managing Director of the Sermersooq Business Council and has previously worked for the Greenland Government Authorities, the Municipality of Nuuk and the pension fund SISA.

The other members of the chairmanship:

Anders Møller Christensen, MSc in Economics. Former vice governor of Danmarks Nationalbank. Member of the Consultative Committee for Greenland's Economy between 1988 and 2009.

Anders Blaabjerg is the Head of Statistics at Statistics Greenland and has an MSc in Economics. He has formerly been employed at the Ministry of Finance and Taxes, formerly the Department of Economy.

Søren Bjerregaard, MSc in Economics, head of securities and balance of payments statistics with Danmarks Nationalbank. Previously a member of the Consultative Committee for Greenland's Economy.

Ida Helliesen, BCom, has considerable executive experience from Norwegian trade and industry and from directorships, including Norges Bank and the former "Petroleumsfondet".

Claire Armstrong, PhD in fisheries economics. She is a professor at the University of Tromsø and has extensive scientific production.

Najaaraq Christiansen, MSc in Public Administration from Ilisimatusarfik. Has worked at Statistics Greenland for a number of years.

Members of the Economic Council:

Brian Buus Pedersen, Director at Greenland Business Association (Grønlands Erhverv) Jess G. Berthelsen, Chairman of SIK Karl Frederik Danielsen, Chairman of IMAK and appointed by IMAK, AK, PIP and PPK Martin Kviesgaard, Director of Grønlandsbanken (Bank of Greenland) and appointed by the banks Suzanne Møller, acting Rector of Ilisimatusarfik (University of Greenland) Lars Geraae, Office Manager, Statistics Greenland Pétur Gudmundsson, Senior Consultant, KANUKOKA Jørgen Isak Olsen, Permanent Secretary at the Ministry of Fisheries, Hunting and Agriculture Jørn Skov Nielsen, Permanent Secretary at the Ministry of Industry, Labour, Trade and Energy Nikolai Sten Christensen, Permanent Secretary at the Ministry of Finance and Taxes

The report was finalised on 21 August 2017.

Front cover illustration: Ivínguak` Stork Høegh © Published by the Economic Council, September 2017.

Table of contents

Summary 4 Chapter 1 Economic prospects 7 Chapter 2 Current economic policies 18 Chapter 3 Vocational skills in schools 29 Chapter 4 The fishing industry and its administration 40

Summary Economic activity is increasing. Growth reached almost 7% in 2016, and even though this extraordinarily high rate cannot be sustained, healthy growth is expected in 2017 and 2018 of 3.9% and 2.6% respectively. One of the main reasons is the buoyant fishing industry. Shrimp quotas have been increased and prices have stayed high. Building and construction have also contributed to economic growth. Private consumption has also been on the rise.

Greater activity has boosted employment. The level of employment for people with vocational qualifications is high, and this group has zero unemployment in practical terms. Unemployment for other groups has also fallen, but employment levels continue to be lower for these groups. Unemployment here is of a structural nature, as unskilled labour is also in demand, with some types of jobs being filled by imported labour.

Economic expansion can be ascribed to extraordinary conditions and is not an indication of a solution for the underlying structural problems or the development of new business opportunities. Mining has returned to the country with the ruby mine at Qeqertarsuatsiaat, which is good news, but it is not enough to make any difference to the economic situation. Tourism remains at a consistent level.

The current situation is subject to a number of risk factors. Dependence on and therefore sensitivity to trends in prices and catches within commercial fishing is considerable. In recent years, trends with respect to prices and catch volumes have been on the increase. But experience has shown that things can quickly change. There are a number of different plans for investment in airports, tourist facilities and accommodation in the pipeline. Because of almost full employment, the initiation of such activities at this time could lead to the economy overheating, with rising prices and wages as a result. The absence of structural reforms puts severe limitations on options for further economic growth.

An increase in employment is of vital importance to increasing wealth, improving social conditions, ensuring a better distribution of income and improving the public finances. Employment is not currently constrained by the lack of jobs, but by three structural factors – qualifications, incentives and mobility. The problem of unemployment is concentrated around the unskilled, many of whom have no economic incentive to find employment and domestic mobility in pursuit of work is modest. Improvements within all three areas will make it politically possible to do something to increase employment – and the effect will be quickly realised.

The finances of the government and municipalities are healthy, primarily as a result of rising tax revenues generated by economic growth. Higher tax revenues and surpluses in government-owned enterprises are earmarked in the Budget Act Bill for working capital in Kalaallit Airports A/S. The projects to build new airports in Ilulissat, Nuuk and Qaqortoq are not viable for private investors, and would therefore be unable to cover interest costs and repayments on borrowing to build them. They can therefore only be realised by a capital injection from the government, but that will increase the risk for the government's finances. Consolidation in good years should be able to cover the bad years. This will not be achieved by the proposed Budget Act Bill, and a change in the economic situation could thus lead to major problems for Landskassen. Building airports not only concerns construction but also running them. Given that the airport package as a whole is not viable for

4 private investment, it will also mean that operating subsidies will be needed, causing a drain on the public finances. The fact that there are no socio-economic analyses of the projects on which a political decision can be based is a problem.

The sustainability problem for the public finances has not been resolved. The Budget Act Bill for 2018 sets forth a status report on the Sustainability and Growth Plan, stating planned but not yet initiated analyses, areas where activities are in the preparation phase, and accepted proposals. The overview presents a picture of a wide range of activities with considerable analysis and preparation work involved, but still with only a few initiatives that have actually been put into action. It is striking that discussion of the plan's status does not relate to achieving its requirements for returns, which is a major precondition for the plan as a whole.

Proposals have been put into action or presented within a couple of specific areas – old age and early retirement pensions, child support and housing benefit. In both reform areas, increases in benefits have been implemented, causing further tightening of the financing requirements. The specific proposals reflect political prioritising, but we note that there is more progress in relation to cost-incurring reforms compared to those for solving the financing problems. The fact that no decisive steps have been taken to solve the sustainability problem undermines the credibility of the Sustainability and Growth Plan.

An example is educational policy, where the fundamental problems are well-known and discussed in a number of reports. The Budget Act Bill proposes that significant decisions should await a reform to achieve a more cohesive education system. Preparatory work will not be complete before 2019, meaning that a political decision will not be made until 2020 or 2021. This is a very distant horizon given the well-known and significant problems – not least in primary and lower secondary schools. The cost of such a drawn-out process is that several years of school leavers will be lost through the education system. The binding limitations to progress in the education field do not require major institutional reform. There is no evidence that this is the biggest problem in the education system.

The main problem is the basic academic skills in primary and lower secondary schools, and thus the opportunity for obtaining good exam results and the basis for going further in the education system. This is made very clear in a new analysis made for this report of the academic skills of students in primary and lower secondary schools. It is well known that a large proportion of school leavers leave school without the academic skills needed to go on to further education. The trends revealed in an individual student's performance all the way through school are very strong. Students who do well in the 3rd grade will usually achieve good exam results, and progress to further education. Things are very different for those who do not do so well in the 3rd grade. This emphasises the importance of early intervention in primary and lower secondary schools to give students an academic boost and to

5 reduce different barriers to the individual student's learning opportunities and motivation. If these problems are not resolved better than they are today, the educational problems will remain, and it will be very hard to correct them after leaving school. The same applies to an institutional reform of the education system. The biggest challenge is to do something about such problems – and ensure collaboration between parents, teachers and politicians to create the foundations needed for improvements within the area.

Despite progress in recent years within commercial fishing, there are several development problems and vulnerability is high. The industry is subject to uncertainty caused by market trends, biological conditions and political factors. The government submitted a new Fisheries Act Bill for consideration in August 2017. The objective is to reduce growing disparity and protect jobs, and to give more fishermen a larger share of the proceeds generated by community-owned resources. Key elements of the bill concern shrimp fishing.

Comments to the bill indicate that it will have a very negative impact on public finances and activity within the community. Employment figures will benefit in the short term, but there will be no effect in the long term. Efficiency will decline, and workers will be bound to fishing, which will curtail the chances of more wealth and commercial development in other areas. The Economic Council agrees in principle with these expectations. But it is also hard to define the basis for the values given, as no details are provided for criteria, calculation methods, etc. Even though the main objective of the bill is to ensure a fairer distribution of income, the comments include no evaluation of the effects on income distribution. Given that this is a very wide-ranging bill, the absence of a more detailed analysis of the consequences as input to the political debate is regrettable.

Clear, transparent rules and administration of the same are vital, to reduce uncertainty. The bill as presented will cause a great deal of uncertainty for several reasons. It is incomplete, as the future rules for revoking and redistribution of licences are unknown. Depending on the formulation, there will be a considerable element of uncertainty for anyone active in this area moving forwards. It will be impossible to know for sure whether and when licences will be revoked, and whether the rules will be changed again. This will have a number of consequences. Uncertainty will influence investment in commercial fishing, and will make it harder for new entrants to establish themselves. Lenders will be concerned about the fact that licences can be revoked. The bill is therefore not conducive to investment, efficiency and ensuring the best possible return for the community from marine resources. The uncertainty linked to rule changes can have a knock-on effect on commercial development as a whole, as it undermines the stability and credibility of rules, etc.

One of the objectives is to ensure a better distribution of the wealth generated by fishing. Resource interest taxation is a suitable instrument to ensure that the value of marine resource exploitation will benefit the community as a whole. Because Greenland is a trendsetter, and has good experience within this area, looking at the structure and level of resource interest taxation will be appropriate, to ensure the best possible return for the community. The bill as presented will work to increase the income of certain people receiving newly-issued licences, but will be a very imprecise policy for distribution and will have a lottery element to it in relation to who will be given the opportunity. Meanwhile, tax and duty revenues will fall with negative consequences for the rest of the community, either in the form of increases in other taxes and duties, or cuts in public budgets. As such, whether the bill will help reduce social imbalance is uncertain.

Chapter 1 Economic prospects

In economic terms, 2016 was an exceptionally good year. Economic growth was very strong at around 7% adjusted for price rises. Shrimp catches increased significantly, and the price of fish and shellfish remained at 2015's high level. The price of imports fell, particularly with regards to energy, thus improving yields. Private consumption and investment in building and construction contributed to growth.

Growth remains high in 2017, but lower than 2016 and is due to a further increase in shrimp quotas expected to be caught, more investment in building and construction and private consumption, plus the minor effect of the resumption of mineral mining.

Economic growth in 2018 is expected to be around 2%. The export of minerals will boost growth. Some of the planned airport projects can also be expected to get going.

Table 1.1: Supply balance, annual real growth in %.

Share 2012 2013 2014 2015 2016 2017 2018 of GDP in 2015 Forecast Private consumption 43.7 -1.3 -2.3 -1.7 2.1 4.6 2.4 1.9 Public consumption 49.5 0.6 2.4 -0.8 -1.9 0.7 0.7 0.4 Gross investment 25.3 -40.1 -21.1 -24.0 11.7 3.0 8.0 12.9 Export of goods and services 32.1 -2.0 3.5 -6.3 -10.9 10.4 7.8 4.1 Total final use 150.5 -13.8 -4.1 -6.5 -0.7 4.0 3.9 3.9 Import of goods and services 50.5 -29.8 -5.7 -15.6 -5.2 -1.5 3.8 6.6 Gross Domestic Product 100 1.5 -3.0 -0.8 1.7 6.9 3.9 2.6 Note: 2012-13 final figures; 2014-15 provisional figures; 2016-18 Economic Council estimate. Real growth indicates progress adjusted for price rises. Source: Statistics Greenland and our own calculations

The upward trend cannot disguise that there are still considerable unresolved structural problems in the form of a very narrow industrial base and a poorly-educated workforce. A drop in the price of fish and shellfish will create major economic problems. The same applies to a drop in catches of the most important species of fish. A fact of life for commercial fishing is that volumes and/or prices fluctuate. A continued increase can be hoped for, but a decline from the current level is more likely. A wider industrial base is the sure way to avoid fluctuations in the fishing industry dominating the economy as a whole. It will also lead to a higher level of prosperity.

1.1. Fishing

The fishing industry has had several good years. Compared with export value, prices for the three main species (shrimps, halibut and cod) were 25% higher in 2015 than in 2014. Prices stayed high with only slight variations from quarter to quarter in 2016. See figure 1.1. Prices in Q1 2017 fell by an average of 5%. The price of halibut fell more than the average, but the price of cod rose.

Figure 1.1. Average prices for fish and shellfish

Index,Indeks 20102010=10 = 100 250

200

150

100

0 2011 2012 2013 2014 2015 2016 2017

CodTorsk HalibutHellefisk RejerShrimp

Note: Last observation made in Q1 2017 Source: Statistics Greenland.

There was considerable volume growth in 2016. See figure 1.2. This applied in particular to shrimp and cod, but halibut and mackerel also experienced growth, and catches of herring were also becoming significant.

The Greenlandic fleet landed a little over 75,000 tonnes of shrimp in 2016, an increase of 18% compared to 2015. Several years of falling catches were reversed, and another increase is expected in 2017. The quota has been increased and corresponds to Naturinstituttet's (Greenland Institute of Natural Resources) recommendation of 90,000 tonnes. This was the same recommendation for 2016. The politically-determined quota for shrimp roughly corresponds to the biological recommendation, but every effort is made to avoid fluctuations in the quota from one year to the next being too large. See chapter 4. Because shrimp are by far the most important export commodity, the combination of higher volumes and prices influences the entire economy, but mostly those working in the industry itself.

Shrimp catches in the first months of 2017 were, however, lower than the previous year, which can be attributed mainly to the hard winter.

Figure 1.2 Catches by Greenlandic fishermen and vessels in Greenland's waters TonnesTons 120.000

100.000

80.000

60.000

40.000

20.000

0 2012 2013 2014 2015 2016

HalibutHellefisk ShrimpRejer CodTorsk MackerelMakrel

Source: Statistics Greenland.

Halibut catches rose by 12% in 2016 due to a big increase in inshore fishing as a result of increased quotas and volume growth was of over 20% compared to the previous year. The increase was 13% compared with 2014, when the winter did not hamper fishing to the same degree as in 2015. Halibut is mainly fished inshore. Offshore halibut fishing accounted for less than 20% of total catches for this species in 2016.

Inshore halibut fishing got off to a bad start in 2017 especially in the first few months of the year, which could be interpreted as a consequence of the hard winter, but the drop can also be seen in the last few months for which statistics are available. A drop in volume can therefore be expected for the whole of 2017, but offshore halibut fishing rose a little in Q1 compared to the previous year. Offshore halibut fishing achieved MSC certification as sustainable. Naturinstituttet is concerned about excessive inshore catch levels. The politically-determined quotas clearly exceed the institute's recommendation. See chapter 4. Neither are they a real restriction on commercial fishing, as they are often raised when the fish are landed. There are also zones in which unlimited fishing is permitted in the areas covered by quotas. Naturinstituttet noted that the halibut landed are becoming smaller and smaller, which means they are caught younger and younger. A drop in the inshore halibut population will not affect the sustainability of offshore fishing.

Cod catches rose by 25% in 2016, a slightly smaller increase than in preceding years. But volumes were almost four times the size of 2012 and the Naturinstituttet fears that over-fishing is taking place preventing the build-up of a breeding stock at sea.

1.2. Tourism

Growth in tourism in recent years has been weaker than expected. This is particularly apparent with regard to cruise liners. The number of passengers fell significantly from 2011 to 2014, leading to the former passenger fee of DKK 750 per passenger being replaced by a port fee at a level that should be competitive with similar fees on Iceland and Svalbard. The number of cruise liner passengers rose by

9 over 20% in 2015, but the increase did not continue into 2016 when there was a slight drop. See figure 1.3. The drop may be due to tougher rules on safety at sea, which include mandatory use of a pilot for all but the smallest cruise ships.

On the other hand, the number of hotel guests rose considerably in 2016, but the rise of just over 10% mainly reflects an unchanged number of foreign visitors (including Danes) and a strong increase in the number of domestic hotel guests. Given that domestic guests have opted to be tourists in their own country and at their own expense instead of going abroad, they are of course just as important for the tourism industry as foreigners. Analysis of the balance of payments will show foreigners as a tourism income, whilst Greenlanders taking their holidays in Greenland instead of abroad will appear as a minor expense for tourism.

During the first six months, the number of hotel guests is once again 10% higher than the previous year, which can be mainly attributed to more domestic guests.

The number of air passengers on international routes has been consistent for several years at around 80,000, but rose by 10% in 2016. Statistics on country of residence began to be compiled in 2015, but there are major fluctuations in the number of passengers with no country of residence stated, meaning the statistics do not provide a good indication of where tourists are coming from.

The number of passengers in the first two quarters of 2017 was 6% down on 2016, indicating that a big part of the increase in 2016 is due to participants in the Arctic Winter Games, held in Nuuk in March that year.

Figure 1.3 Tourism 2003-2016

No.Antal of personer people 70.000

60.000

50.000

40.000

30.000

20.000

10.000

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 GreenlandicHotelgæster hotelfra Grønland guests HotelgæsterForeign hotel fra guests udland CruiseKrydstogstpassagerer ship passengers

Source: Statistics Greenland.

The Government of Greenland wants to boost the tourism industry. It has set out its policy in the national sector plan for tourism, presented in the spring of 2016, and through the setting up of a wholly-owned company, Kalaallit Airports A/S, later the same year (see chapter 2). The company will build, own and run the planned new facilities or expanded airports in Qaqortoq, Nuuk and Ilulissat.

Alongside these corporate investments, there are plans to build airports at Tasiilaq and Ittoqqortoormiit.

1.3. Mining

LNS Greenland Gems began to mine rubies and sapphires in early 2017 near to the Qeqertarsuatsiaat district. Operations were expected to begin in 2016, but the original owner of the mining permit, True North Gems Greenland, went bankrupt in the autumn of that year, whereupon the new operator took over the project and started mining in the first half of 2017. The project is expected to employ around 80 people.

Mining is therefore once again under way after a break since the gold mine in Southern Greenland closed in 2013.

Hudson Greenland's anorthosite project at Kangerlussuaq fjord, intended to employ around the same number of people in the mining phase as the ruby mine, was expected to start this year, but the company announced in the summer of 2017 that this has been postponed until 2018.

Mining permits have also been granted for zinc and lead at Citronen fjord in Northern Greenland, but whether operations will start has not yet been confirmed. The project is expected to employ almost 500 people in the operations phase.

There are two advanced projects in Southern Greenland concerning the mining of rare minerals, etc. One, close to Narsaq, will produce uranium as an unavoidable by-product. The terms for exporting materials with uranium content have been agreed between the Danish and Greenlandic governments. Mining permits for the projects have not yet been granted.

Costs for mineral prospecting have been going down for several years after the high level of activity within hydrocarbon exploration around 2010-11. See figure 1.4. There was a slight increase in 2015, which may be an indicator that mineral prospecting will be able to generate activities at a measurable level moving forwards.

Figure 1.4. Costs for hydrocarbon and mineral prospecting, 2003-2015 MDKKMio. kr. 6.000

5.000

4.000

3.000

2.000

1.000

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Note: The figures for 2003-2013 are final. 2014-2015 are provisional figures. Source: Statistics Greenland.

Prices on the world market for minerals do not indicate that there will be a large increase in prospecting activity. The IMF index for metal prices has dropped in 2017 after a moderate rise during 2016. See figure 1.5. The IMF believes that this is mainly due to a fall in demand from China for metals that will last for some time to come. The picture is unclear at this time. Shares in several of the companies supplying mining equipment have performed better than the general market in 2017. Figure 1.5 IMF's metal prices index, 2012-2017 Index,Indeks, 2005=100 2005 = 100 250

200

150

100

0 2012 2013 2014 2015 2016 2017

Note: Average index price in USD for copper, aluminium, iron ore, tin, nickel, zinc, lead and uranium. Last observation made in June 2017.

Source: IMF Primary Commodity Price System

1.4. Investment

The Government of Greenland's investment in construction has traditionally been made by drawing on the Anlægs- og Renoveringsfonden (Construction and Renovation Fund) for a large element of total building and construction investment. As other investors have come along, the government is making more of its investments via companies, meaning that the importance of the Anlægs- og Renoveringsfonden has declined. Drawings from the fund in 2014 totalled just over 20% of total building and construction investment according to the national accounts, compared to close to 40% in 2011 and 2012.

In 2016, drawings from the fund fell to the same low level as in 2014. See figure 1.6. Nevertheless, a clear rise in total building and construction investment is expected, including as a result of the building of a new container port in Nuuk by the government-owned Sikuki Nuuk Harbour A/S and the Danish government's building of a high-security prison in the same town. Potential developers report problems getting projects started, and there are indications that the building and construction sector is reaching full capacity. The commissioning of large-scale projects such as airports therefore risks creating a bottleneck, resulting in rising costs.

Figure 1.6 Disbursements from the Anlægs- og Renoveringsfonden, 2012-2017

MDKKMio. kr. 1.200

1.000

800

600

400

200

0 2012 2013 2014 2015 2016 2017

Note: Total over 12 months. Last observation made in March 2017. Source: Statistics Greenland

Based on mortgage credit institution lending in Greenland, the building of private housing is deemed to be very modest. See figure 1.7. Total lending for housing has consistently been on a par with the level of new loans equating to redemption of old loans. The very limited building activity within housing is expected to continue in 2017. The rise in total mortgage lending is overwhelmingly due to bank loans in existing rental properties being converted to mortgages.

TELE Greenland has decided to extend the seabed cable northwards to Maniitsoq, Sisimiut and Aasiaat, strengthen the radio link in the Disko Bay and extend the link from Uummannaq to Upernavik. The investments required are expected to mainly be made in 2017.

The good times being enjoyed by the fishing industry will mean more investment in all vessel types and in equipment. This is not yet reflected in the foreign trade statistics, and will not immediately affect activities as most purchases will be imports. The opportunity is there to rationalise the industry, thus helping boost profitability in the future. Some trawler owners have put planned investments on ice however, until more information on a proposed new Fishing Act is available.

Figure 1.7. Mortgage credit institution lending to Greenland

MDKKMio. kr. 3.500

3.000

2.500

2.000

1.500

1.000

500

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ITotal alt EjerboligerHousing

Note: Last observation made in Q2 2017.

Source: Statistics Greenland.

1.5. Consumption

Comparison with other countries highlights the fact that private consumption is lower than the public sector's. There are barely any other market economies where this is the case. Consequently, trends within private consumption make less of an impact on economic trends than in other countries, whilst investment and export are of proportionately greater importance to economic fluctuations. Parts of private consumption can be illuminated in sales figures for the three biggest retail chains. See figure 1.8. Retail sales in 2016 were 7% higher than in 2015, an indication of a strong increase in volume. Consumer prices rose about 1% from 2015 to 2016. One of the chains bought out a competitor in 2015 that was outside of the chains, meaning that a smaller element of the increase in 2016 reflects that the chains have collectively won market share.

We note that the Tax Agency calculated that total earnings excluding the corporate sector rose by almost 10% in 2016 based on payment of A and B taxes. Earnings rose again in the first few months of 2017 compared with the same period in 2016, but due to changes in the tax rules (including the abolishment of deductions for contributions to foreign pension funds), the size of the increase is uncertain.

Figure 1.8 Retail sales, seasonally adjusted

Indeks,Index, 20102010 == 100 100 125

120

115

110

105

100

2010 2011 2012 2013 2014 2015 2016 2017 Note: Note: Last observation made in Q2 2017. Source: Statistics Greenland.

Import duties on motor vehicles rose steeply in 2016. See figure 1.9. This is yet another indicator of strong increases in spending and earnings in 2015 and 2016.

Figure 1.9 Import duties on motor vehicles Mio.MDKK kr. 60

2010 2011 2012 2013 2014 2015 2016 2017

Note: Total of the last four quarters. Last observation made in Q1 2017. Source: Statistics Greenland.

1.6. The job market

Assessment of the job market from month to month can only be based on statistics for the number of registered unemployed. The statistics show the total number of people who have contacted the municipality in a single month because of unemployment. The statistics are influenced by the administrative practice of each of the municipalities and are therefore difficult to interpret.

The number of registered unemployed has fallen steeply since 2014. See figure 1.10. The drop seems to have levelled out during the first 6 months of 2017. It covers a continued fall in the towns, whilst there has been a corresponding rise in the number of unemployed in the settlements. It is tempting to ascribe developments in the settlements to the poor state of inshore fishing, especially for halibut, in the first six months of 2017, ref. section 1.1. If it turns out to be a consequence of the hard winter, the differences between towns and settlements will even out in the second six months.

Figure 1.10 Registered unemployed

TotalAntal 5.000

4.500

4.000

3.500

3.000

2.500

2.000 Jan Feb Mar Apr Maj Jun Jul Aug Sep Okt Nov Dec 2013 2014 2015 2016 2017

Source: Statistics Greenland.

Statistics Greenland publishes annual register-based statistics of unemployment amongst resident 18-64 year-olds. The statistics do not include anyone who has been in paid work and registered themselves as unemployed in the same month. The number of unemployed in 2015 reached 2,438, equivalent to an unemployment rate of 9.1% of the workforce compared to 10.3% in 2014 and

10.1% in 2013. Judging from the trend in the number of registered unemployed, unemployment will be lower in 2016 and 2017 than in 2015, probably in the region of 7-8%.

Unemployment is particularly high among those with no further education. The registered figures for 2015 show that unemployment in this group was 13.9% compared to 4.7% for those with a vocational qualification, and 0.8% for the highly qualified.

Another example of the major structural problems on the job market is the continued import of unskilled labour, despite the high level of unemployment amongst the group with no further education. The figures also indicate that increasing the level of education among residents is the sure way to bring down unemployment.

Chapter 2 Current economic policies The current economic situation is good, which is clearly reflected in employment figures, public finances and other economic indicators, ref. chapter 1. This beneficial trend provides some room for manoeuvre, but also implies risk in the form of postponement of urgently needed reforms, failure to consolidate public finances and decision-making, which can increase dependence on foreign financing.

Section 2.1 looks at trends in the public finances as a whole in the light of the target figures of the Budget Act, whilst section 2.2 contains an update on the sustainability of public finances. The need for reform to make the economy more self-sufficient is dealt with in section 2.3, whilst ways of boosting employment are looked at in section 2.4.

2.1 Trends in the public finances The public finances (OI balance) show a surplus in 2015 and 2016, with a further surplus forecast for 2017. See figure 2.1. The bill for the Budget Act 2018 (FFL2018) predicts the OI balance for 2018- 2021 at close to zero. The Budget Act's criterion that the public finances as a whole (the OI balance) must show break even or surplus is therefore fulfilled. The beneficial situation also applies to the municipalities, all of whom achieved a surplus in 2015 and 2016.

Figure 2.1. OI balance 2010-2021

250

200

150

100

0 MDKK

MDKK 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 -50

-100

-150 Realised Budget -200 Realiseret Budget

-250

Note: Positive figures indicate surplus. Source: Budget Act Bill for 2018.

Surpluses for the public finances are mainly due to the favourable economic conditions. This is illustrated by the expectation of deficits in 2016 and 2017 when the Budget Act for 2016 was presented in 2015. A healthier economic climate naturally means higher income. As such, favourable economic conditions naturally mean improvements in public finances can be expected. Seen in relation to trends in economic activity, the surpluses made in 2016 and 2017 are actually relatively modest. When the Budget Act Bill for 2018 projects an OI balance close to zero and fulfils the four-

18 year break even criterion, it is due to the expected positive budgetary effects of reforms that have yet to materialise – within the fields of taxation and housing – yielding an overall surplus of DKK 250 million for the years 2018-2021.

The fact that consolidation of the public finances is not being done in these times of economic buoyancy is a problem. Consolidation in good years makes it easy to get through the bad years. Experience from previous years clearly shows the major problems of stretching the public finances in bad years, when an insufficient buffer has been built up in the good years.

According to the Budget Act, extraordinary revenues from e.g. corporation taxes from foreign companies engaged in prospecting and construction should be transferred to a fund for long-term investment. Variations in public finances caused by economic fluctuations are not extraordinary in this respect, as the surplus in good years is balanced out by a deficit in bad years. However, the Budget Act Bill interprets profit from government-owned enterprises and Landkassen as extraordinary income that can be used to build airports (as working capital for Kalaallit Airports A/S, see below). This not only reduces ways of building a buffer to cope with economic fluctuations, but also implies a risk of a bigger drain on the public finances. It also raises a question of principle concerning use of the profits from such enterprises. Profits from utilities such as TELE Greenland are not freely utilisable funds available to society. Profit could be used in other areas, e.g. for cutting charges that will benefit the consumer and businesses.

FFL 2018 states that the construction costs for the airports at Qaqortoq, Ilulissat and Nuuk are estimated at around DKK 3.6 billion, a capital requirement that has to be covered by an equity capital in Kalaallit Airports A/S amounting to DKK 1-1.6 billion and by borrowing the balance. Given that borrowing according to the Budget Act is contingent on profit to cover interest and repayments, and that none of the airports are expected to be profitable, a relatively large amount of working capital is required. The capital will be raised by supplementing the equity already in place with an injection based on temporary and extraordinary income (profits from government-owned enterprises and in Landskassen). The airports are not only a question of construction, but also running them. If the operations cannot continuously cover overheads (including provisions for maintenance) as recognised in relation to the need for working capital for construction, there will be a future drain on public finances in the form of the need for direct or indirect subsidies. The fact that the projects are being planned without any complete overview of the knock-on consequences for public finances is a problem. The concentration of profitable and non-profitable activities in the same company is also a problem, and results in loss of transparency when the profit-making activities help finance the loss-making ones. The current buoyant economic climate presents an opportunity to ensure sufficient capital to start the three airport projects, but in time, they will become a drain on the public finances.

The Budget Act is an appropriate instrument for better management and planning of the public finances. It contains explicit political financing rules. Apart from the break even criterion referred to above, the total costs incurred by the municipalities and Greenland Government Authorities for operation are subject to a requirement that the annual maximum limit for real growth is 1.5%, and cannot exceed 2% over a four-year period (i.e. 0.5% on average per year). The idea behind this part of the Budget Act is to give it an appropriate instrument to control costs. But this is applied in a problematic manner, as the requirement is defined in terms of real growth, which is not recognised

19 when budgeting and is only subsequently calculated by Statistics Greenland. As such, it is politically impossible to determine how the Budget Act Bill or other plans for political discussion stand in relation to the limits of the Budget Act. This is further emphasised by the fact that real growth in cost for operation is neither estimated nor commented on in the Political-Economic report 2017, nor in the Budget Act Bill for 2018. Reformulation of the cost management target is needed – e.g. an upper limit measured in DKK for the total cost growth incurred by the municipalities and government for operations – so that it can be included in the political process, thereby helping create transparency and an ongoing check as to whether targets are being achieved.

2.2 Sustainability of financial policies The Government of Greenland has laid out a proposed reform process towards a more sustainable economy in the Sustainability and Growth Plan. The plan is designed to be both specific and non- specific at the same time. It specifically states the political priorities and certain main themes for tackling problems. The plan's objective is to boost public finances by over DKK 1 billion by 2030, most of which (DKK 650 million from the current expenditure level of around DKK 7,400 million) will come from modernisation of the public sector via rationalisation and increases in productivity. It is non-specific in that no precise proposals and measures are stated for realising its targets. As such, a lot of work is still required to determine and implement political measures to achieve the plan's targets and priorities, ref. section 2.3.

The Economic Council evaluates the sustainability of public finances each year, based on economic policies that are in place, the Budget Act Bill for the year to come and economic trends. Its evaluation does not include the effect of announced but unresolved reforms. The significance of modernisation of the public sector and reform of welfare programmes in the Sustainability and Growth Plan are therefore not included in the evaluation. Projections for the public finances shows a major sustainability problem. See figure 2.2. Evaluation of the sustainability problem has not changed to any major degree in relation to previous years, as no reforms have been implemented that improve the sustainability of the public sector's economy overall.

Permanent improvement of the public finances to the tune of around DKK 1 billion over the next 15- 20 years is needed to ensure a sustainable economy. The problems involving public finances are well-known. More pensioners and fewer young people will cause expenditure to rise faster than income, putting pressure on public finances. Reforms of the welfare state to close the gap between expenditure and income are therefore essential. This will require multiple new initiatives, which the Sustainability and Growth Plan also sets out, with rationalisation and savings in the public sector at the forefront. Public expenditure is very high regardless of how it is measured: the level compared to other countries, compared to private consumption potential or size of the economy. It will therefore be necessary moving forwards to make full use of the options provided in the Budget Act to curb the growth of public expenditure.

Figure 2.2 Projection of public income and expenditure as a proportion of gross domestic product, 2017-2040

Forecast 2017 2017-2018-2018 Projection 2020 2020-2040 -2040 70

62 % of GDP of % % % GDP of 60

54 2017 2018 2020 2025 2030 2035 2040

OffentligePublic income indtægter OffentligePublic expenditure udgifter

Note: the figure shows public income and expenditure exclusive of interest and dividends for public services and administration (the Greenland Government Authorities, municipalities and state). The state's expenditure is balanced by refunds (i.e. income) in the table and does not therefore affect the public balance. However, regular transfers in the form of block subsidy, EU payments, etc., do affect the public balance. The figures are compiled in the national accounts form, from Public Finances, Statistics Greenland.

2.3 The need for reform and a self-sufficient economy The overall objectives for economic policies are to ensure stable and geographically-balanced development with higher living standards and welfare, along with less disparity on a long-term sustainable basis, and which gradually reduce dependence on the block grant1, ref. the Political- Economic Report 2017.

Even though the economy is currently buoyant, the underlying structural problems remain. The most important criterion for ensuring a more self-sufficient economy is the development of commerce, with mining and tourism as key areas. Further development of commercial fishing should be concurrent. Meanwhile, there is a large unresolved sustainability problem linked to the public finances. See figure 2.2.

1 The block grant is adjusted annually, based on price and wage trends in Denmark. The rate of price and wage rises is estimated in FFL 18 for 2018 to be less than in Denmark, which increases the real value of the block grant. The historic rate of price and wage increases has been higher than in Denmark, and a lower rate than in Denmark cannot be expected in the long term.

The need for reform

There is a major need for reform to achieve the many political objectives. Reforms are needed to strengthen commercial development and thus living standards and social equality. There is also a major need for reform to ensure sustainability of the public finances.

The need for reform has been discussed for years, and a political strategy has been devised with the Sustainability and Growth Plan. There are four main themes to the plan: i) a higher level of education, ii) boost growth and conversion to a multi-faceted economy, iii) modernisation of the public sector, and iv) greater self-sufficiency through reforms of welfare benefits, the tax system and housing.

The Budget Act Bill for 2018 (FFL 2018) sets forth a status report on the Sustainability and Growth Plan, stating planned but not yet initiated analyses for each of the four main themes, areas where activities are in the preparation phase, and accepted proposals. The overview presents a picture of a wide range of activities with considerable analysis and preparation work involved, but still with only a few initiatives that have actually been put into action. FFL 2018 also indicates continued work on a number of sector plans, including for education and infrastructure, where the analysis phase has been followed by political proposals and initiatives. It is striking that discussion of the plan's status does not relate to achieving its requirements for returns, which is a major precondition for the plan as a whole.

When appraising the Sustainability and Growth Plan, political consideration of a large number of extremely complicated problems should be included. All of them require careful consideration and discussion. The biggest problem with the plan is that it creates political overload due to the demand for reforms in a wide range of areas within a short timeframe. This will be difficult to realise, and there is therefore considerable risk of hasty decisions, a zig-zag course and uncertainty about future economic policy. It would be more appropriate to identify a few key reform areas such as education and employment, where key objectives could be formulated that can be followed closely to ensure progress. Other reform areas can be similarly dealt with later. An example is educational policy, where the basic problems are well-known and discussed in a number of reports. FFL 2018 proposes that significant decisions should await a reform of the entire education system to achieve more cohesion. Preparatory work will not be complete before 2019, meaning that a political decision will not be made until 2020 or 2021. This is a very distant horizon given the well-known and significant problems – not least in primary and lower secondary schools. The cost of such a drawn-out process is that several years of school leavers can be lost through the education system. The most important limitation to progress in the education field is not the institutional framework for primary and lower

22 secondary schools. None of the analyses have identified this as the biggest limitation. The problems lie in the results. The main problem is that many students do not acquire the basic academic skills, and thus miss the opportunity of obtaining good exam results and the basis for going further in the education system. The biggest challenge is to do something about such problems – and ensure collaboration between parents, teachers and politicians to ensure improvements within the area. Specific learning targets can be defined for school pupils, e.g. in the form of results from grade tests. Development within this area can be easily monitored and it is possible to track progress. There are also other problems within the education system, which can be tackled concurrently. They particularly concern the large group of youngsters that fail to go on to further education after primary and lower secondary school. But consideration of the institutional framework should not stand in the way of the absolutely necessary measures that can be taken now. The same applies with regard to employment. See below.

Self-sufficient economy and risk exposure

A process towards a more self-sufficient economy requires strengthening the economy so that national production can support a high living standard, and the public finances are not dependent on the block grant. The direct impact of the block grant on public finances is explained in section 2.2. The block grant (including expenditure on state duties) comprises around half of total public income and is a sure source of income that is not subject to the vagaries of economic fluctuations or biological conditions, as is the case with other sources of income. The block grant also has a number of indirect effects. The block grant allows for a living standard that is higher than the output of the economy. This is reflected in a well-established welfare state and opportunities for equalising differences in living standards between population groups, and a relatively finely meshed social security safety net.

Reducing the importance of the block grant whilst tackling the sustainability problem is a very big economic challenge. Even a highly optimistic scenario for opening mines will not create sufficient returns on resources to replace the block grant as a source of income. A cut in the block grant before other sources of income are developed will have major consequences, and will require either steep tax increases or deep cuts in welfare services. This will have a negative impact on living standards and social equality, and will also lead to increased emigration.

The block grant is also a sign of dependence, and reducing dependence on it therefore has huge political significance. This can be done relatively, via economic progress that will reduce its relative importance, or absolutely by a reduction in or cessation of the grant. Greater commercial activity and thus increased tax revenues will mean that the block grant will represent a lesser element in relation to total national production and total public income. The relative importance of the block grant will thus be diminished. A reduction of the block grant will reduce the financing contribution, and will therefore require absolute adaptation. It is also important in this discussion to be aware of other forms of dependence that can arise in connection with the process of economic development.

Such development requires greater investment in infrastructure and development of commercial projects, which make it necessary to attract foreign businesses, know-how and capital.

Landskassen can be directly involved in such projects, either directly via lending or indirectly via various forms of explicit or implicit guarantees. Infrastructure projects are "systemic" in the sense

23 that society cannot function without them. When new airports are built or expanded at Ilulissat, Nuuk or Qaqortoq, they cannot go bust and be closed in the same way as small businesses or shops. Society can only function if such activities are maintained. This basic premise is something potential lenders are aware of, and will therefore probably demand Landkassen's support in the event of the project running into trouble. Because these are systemically important activities, what's known as a "hold-up" problem arises. Politically, it will not be possible to refuse financial help if the activity in question runs into financial problems. It is important that such factors are analysed thoroughly before the projects are started. It also has implications for profitability requirements, and the structuring and organisation of such projects to ensure that Landkassen is not exposed to unnecessary risk.

This is linked to the question of how much a state (the Greenland Government Authorities and its limited companies) can borrow? A question that has been the subject of much discussion in the wake of the European debt crisis. Experience tells us that borrowing options are critically contingent on economic stability and a country's ability to pay, which ultimately depends on the ability to levy taxes. The ability to repay a loan depends on the ability to generate tax revenues along with income from infrastructure investment. The bill on the budgets and accounts of the municipalities and the Greenland Government Authorities contains a general provision on borrowing. The government can only borrow or give permission to borrow for investment in housing, commercial or infrastructure projects if user payment, reduced public expenditure or indirect extra income for the public sector can, as a minimum, finance the interest payments and repayments of the loan. This provision is key to the management of overall public sector borrowing.

This is also directly apparent from the limits on public borrowing (referred to as 'covenants' in applicable borrowing agreements) that are currently agreed with lenders. They mean that the net interest-bearing debt of the authorities and municipalities cannot exceed 20% of Landkassen's income. Total net interest-bearing debt in the authorities and the limited companies they own cannot exceed 75% of Landkassen's income. The block grant is a significant part of income, and thus of borrowing options.

There are currently many projects which can directly or indirectly involve Landskassen – infrastructure, urban development in Nuuk etc., and there is also a degree of complementarity between them. For example: the development of urban areas in Nuuk gives a better return if transportation is improved, and the return from infrastructure investments improves due to the development in Nuuk. The same applies to investment in hotels, tourist centres and other activities linked to infrastructure, e.g. in Ilulissat. The return on private projects is also influenced by transportation, e.g. mining projects in Southern Greenland.

There is also a high degree of dependence between private projects and the government authorities, even when they are privately financed without any direct or indirect public borrowing. Large-scale projects will have heavy significance for the economy in the form of employment and different forms of taxation revenues. They therefore also have a systemic significance, especially if the block grant is discontinued. This will strengthen the negotiation position of businesses. In reality, the terms for the activities of large foreign businesses are determined through negotiation. Aspects such as taxation, royalties, IBA agreements etc., for instance. And the more the government's economy

24 depends on such projects (the hold-up problem), the weaker the negotiating position and thus the result.

It is important to focus on both the direct and indirect obligations for Landskassen. The weaker the economic situation is, the weaker the negotiating position. There is a current danger of a risk exposure being built up, which can restrict your economic room for manoeuvre in a number of ways. Southern European and Asian countries with debt problems are good examples. The freedom allowed to countries such as Greece has been severely curtailed. The less one is prepared for such setbacks, the greater the risk of building up new dependency.

2.4 Employment

Employment is currently high and unemployment is mainly of a structural nature, ref. chapter 1. There is broad political agreement that economic policies must be designed to increase employment prospects for the population. This is an important factor for creating greater economic equality and ensuring a more self-sufficient economy. There are currently ways of increasing employment which are not dependent on the development of new commercial projects. Employment is currently constrained by three barriers, all of which can be politically influenced: qualifications, incentives and mobility. We will look at these barriers below:

Qualifications There is full employment for people with qualifications that are relevant to the job market, ref. chapter 1. This creates a shortage and the need to attract foreign workers. For all countries – including smaller ones such as the Nordic countries – there will always be a need to attract foreign workers, especially people with specific qualifications, but the situation is particularly acute due to problems within education. As analysed in detail in chapter 3, there is a significant qualifications shortfall, which is clearly reflected in employment prospects. If more people were educated to the required level, there would also be jobs for them! Such jobs have been taken by imported labour, or the jobs themselves have been exported.

It is well known across the OECD that there is a close relationship between qualifications that are relevant to the job market and pay, employment, etc. Figure 2.3a shows, for Greenland and Denmark, employment rates for individuals broken down by the highest completed educational level. A clear relationship can be seen between levels of education and employment. People with a low level of education have much lower levels of employment than those with a medium or high level of education. It is interesting that employment levels for different qualification groups in Greenland are exactly the same as those in Denmark and other OECD countries. On the other hand, there are big differences in the group who have a qualification. See Figure 2.3.b. Less than half of the population of working age have a "medium" or "high" level of education. A large part of the employment problem is therefore often related to the huge qualifications shortfall, refer also to chapter 3.

Figure 2.3 Employment rates and population share for 18-64 year-olds depending on level of education, 2015

(a)(a) EmploymentEmployment ratesrates (b) Share of population, 18-64 year-olds 70 100 60 80 50

60 40 % 30% 40 20 20 10

0 0 Lav Mellem HigherHøj LowLav MellemMedium HigherHøj Low Medium GreenlandGrønland DanmarkDenmark GreenlanGrønland DanmarkDenmark

Note: Low qualification: people with no actual vocational qualification, Medium: vocational qualifications etc., High: higher education qualifications. Our own calculations based on data from Statistics Greenland and the OECD.

Incentives Employment for people with no qualifications that are relevant to the job market (unskilled) is low. Meanwhile, there is demand for unskilled labour from abroad, a clear sign of structural problems. The composition of the social security safety net means that there is little – if any – financial gain to be had from getting a job for many in the low pay bracket according to the Tax and Welfare Commission (2011) and previous reports from the Economic Council.

FFL 2018 states that an analysis is to be commissioned to look at possible ways of solving the incentive and interaction problems in the current social security safety net (unemployment benefits and public assistance).

Proposals are presented for reform of the child and housing benefit schemes to ensure a more appropriate form of allowance. Child and housing benefits are earnings-related to target benefits to the most needy. The proposals remove certain inappropriate steps in allowance calculation (replaced by a sliding reduction model), which create special incentive problems in which an increase in income can result in lower disposable income. Even though they will solve some problems related to interaction, the proposals do not provide a complete solution. The interaction problem has two dimensions: the gain from being in work at all ("can it pay to work") and the gain from a pay increase (e.g. by working more, getting new qualifications, changing job, etc.). The proposal reduces the interaction problem linked to an increase in income but does not increase the gain from being in work (e.g. if both or only one of a couple are in work). This problem is amplified when total benefits paid (child benefit plus housing benefit) are increased for certain low-income groups. The proposal is also expected to mean increased costs of DKK 24 million.

To boost employment incentives, FFL 2018 says that proposals will be set out for the introduction of an employment allowance. The experiences of other countries show that such an allowance can help boost employment levels for specific groups, e.g. single parents. An employment allowance will however raise awkward weighting problems, and the fact that the proposal concerning social benefits and changes to the tax system will not be handled jointly is a problem. As mentioned above, the reform of child and housing benefits have a detrimental effect on employment incentives for certain low-income groups. This can perhaps be remedied with an employment allowance, but the fact that it is appropriate on the one hand to exacerbate the incentive issues and seek to lessen them on the other is less than ideal. The net effect of the employment incentives can be modest, whilst resulting in a strain on public finances. Reforms within the taxation and housing areas are already expected to yield significant gains according to the above, and an employment allowance will further increase this revenue requirement. An employment allowance should be phased-out over an income period, boosting total marginal taxation, which goes against the intentions of the reform of housing and child benefits. If this were to be financed by the top tax rate as stated in FFL 2018, a further aspect will be linked to marginal taxes. This highlights the risk of the lack of cohesion between these reform elements when they are not the result of an overall reform consideration.

The incentives to find employment do not solely depend on the direct economic consequences (amount of disposable income), but also on the criteria for qualifying for benefits. The criteria for availability and job activation play an important role in employment incentives in the Nordic countries, with their relatively generous social benefits. The higher the social benefits due to the political desire to redistribute wealth, the greater the need for formulating and enforcing the criteria for availability and job activation to ensure incentives to be in employment.

Even though there are certain availability criteria linked to social benefits, the concomitant low employment and labour shortage show that these criteria are either insufficiently extensive or not administered sufficiently effectively. The composition of the social security safety net has to reflect the conditions of the country's production potential. Variations in commercial fishing and catches are basic conditions that create variations in employment and earnings. The activation criteria in the social system (including mandatory active job seeking) have to be adapted to the jobs available. Variations in the demand for labour are a basic condition in commercial fishing to which employment policies have to be adapted accordingly – and not the other way around. There is no current relationship between employment focus in fisheries policy (boats, factory facilities) and employment policy. Placing obligations on businesses can be relevant, but problems on the supply side have to be resolved first.

Mobility The geographic spread of the population and its failure to always match job opportunities is a particular problem. A problem that will not lessen if current plans on commercial development are realised. In a country with a very small, thinly spread population and production linked to the exploitation of natural resources, it will be hard to avoid such geographic misplacement problems. There are also other values linked to having a thinly spread population and maintaining towns and settlements. But the fact that mobility between Greenland and Asia is greater than it is within Greenland is something of a paradox.

The consequences of these problems for the community are considerable. To illustrate in figures: the annual effect on the public finances is in the range of DKK 80,000 to DKK 100,000 if a job with SIK's minimum wage is held by a person on public benefits as opposed to imported labour. When the job is held by someone on benefits, there will be a saving in social benefits and an increase in tax revenues, whilst the employment of an imported worker only results in payment of tax. The amounts stated above are an under-estimate of the socioeconomic consequences, as the extra costs incurred by a business, etc., or where the income is spent are not taken into consideration. The consequences of the current situation and the barriers to employment discussed above are thus considerable.

The need to attract labour in a situation with unexploited labour potential at home is a symptom of underlying problems. Restricting the import of labour will not solve such problems, but will hinder commercial development and move activities to other countries (e.g. services that can be provided electronically). The solution is to lower the barriers linked to qualifications, incentives and mobility. In all realistic scenarios, there will be a need for importing foreign labour, especially in relation to the realisation of commercial projects.

Summary An increase in employment is of vital importance to increasing wealth, better social conditions, ensuring a better distribution of income and improving the public finances. Employment is currently constrained by three structural factors – qualifications, incentives and mobility. Improvements within all three areas will make it politically possible to do something to increase employment – and the effect will be quickly realised.

In the long term, employment is strongly dependent on the development of new commercial opportunities. Every country has experienced that economic development is linked to the mobility of labour between sectors, and thus typically across qualification requirements and geographic areas. A large number of jobs are currently linked to commercial fishing and the public sector, and development will require moving labour from these sectors to new occupations. The requirements of the Sustainability and Growth Plan for modernisation of the public sector equates roughly to a reduction of public employment of around 9% or 900 full-time jobs out of a total workforce of over 10,000. Changing employment within sectors requires qualifications and mobility. It is a dynamic process, and does not necessitate that someone from the public sector will have to work in tourism or mining. The number of people on the job market is in constant flux and is highly dynamic. Ushering young people in the direction of future job opportunities is therefore crucial.

Chapter 3. Academic skills in primary and lower secondary schools

The problems in the education sector are well-known. Considerable resources are expended on education, and yet there is a big qualifications shortfall compared to other countries and in relation to political ambition within this field. Too many pupils are leaving primary and lower secondary school with poor chances and motivation to carry on to further education. Evaluation of primary and lower secondary schools in 2015 and teacher training in 2016 highlighted major quality problems.

Poor results in primary and lower secondary schools are a problem for youngsters who do not go on to upper-secondary education or work after school. This is also a problem for society, as education is the best means of achieving an active working life and self-sufficiency. High employment and income are the cornerstones of welfare in the community and for financing the welfare state.

This chapter will look more closely at the academic skills in key subjects for pupils in 3rd, 7th and 10th grade, and the significance they have for their transition from primary and lower secondary school to upper secondary education. We will also look at the significance of certain bridge-building programmes in the form of independent boarding schools and Majoriaq centres. The chapter will conclude with a presentation of the level of education achieved with the current system.

3.1. Education and the national economy. Considerable resources are expended within education. Almost 20% of public expenditure is prioritised for the education system, which is very high in an international context. The result of such heavy investment in education is unsatisfactory, and half of 25-34 year-olds only had primary and lower secondary school as their highest level of education in 2015, a figure that has pretty much remained unchanged since 2002, when national statistics on education began to be compiled. The explanation lies primarily in too many youngsters who do not go on to upper secondary education after primary and lower secondary school. Progress has been made in parts of the education sector, e.g. more students are starting further education, but the dropout rate is high and many trying again have a negative impact on the statistics. Given the scale of the problem, applying resources where they can do most good should be prioritised. More funds for education will not solve the problem alone. The result is a big qualifications shortfall compared to other countries. See figure 3.1.

Getting more out of the resources currently applied to the education sector is key. Wealth is determined by the income of the population. Wealthy countries have high average incomes, which can be due to high average value creation per working hour, and/or high average number of working hours. A country can have high levels of wealth either due to skills (value creation per working hour), or hard work (average number of working hours). The difference between their levels of wealth is linked to differences in these two dimensions – skill and hard work – and wealthy economies often score highly on both.

Figure 3.1. Public expenditure on education and the educational profile of the population for selected countries

Proportion of 25-34 year-olds with Expenditure on education as a primary and lower secondary proportion of total public school as their highest level of expenditure, 2013 education, 2015 25% 60% 20% 50%

15% 40%

30% 10% 20% 5% 10%

0% 0%

Note: expenditure on education is based on national statistics with regard to international comparison. The figures for Greenland are from 2014. Source: Education at a Glance 2016, OECD and Statistics Greenland.

The production result for Greenland, measured as gross domestic product per inhabitant, is at the low end among the countries normally used for comparison2. A higher level of education is necessary in many ways to raise the score for both welfare dimensions. People with a vocational education find employment much easier and at a high hourly wage compared to unskilled workers, ref. chapter 2. A higher level of education is therefore key to greater wealth within society and for financing the welfare state. A population's level of education also influences the distribution of wealth within the country. Disparity becomes less when more people are self-sufficient and in work.

A higher level of education is therefore an important element of a more sustainable economy but is not sufficient on its own. Wealth requires predictable institutional frameworks, stable political conditions and a place in the international distribution of work, where the special advantages of the country can be put to use. Greenland's advantages are linked to natural resources for example, including fishing, trapping, tourism, mining, etc. A well-educated population will increase the chances of being able to make use of natural resources as the base of economic activity for the resident population.

3.2. Academic skills of students Danmarks Evalueringsinstitut (The Danish Evaluation Institute) published critical reports in 2015 and 2016 on both primary and lower secondary schools and teacher training. The message was that primary and lower secondary schools functioned poorly, and that teacher training had serious quality

2 See Growth and Wealth, Policy Brief 2016:1, the Economic Council

30 problems. A poorly-functioning school system with poor quality teaching is harmful to all its pupils, and particularly those who are inherently weak.

The annual grade tests in schools measure the pupils' academic levels in mathematics, Greenlandic and Danish. English is also tested from the 7th grade onwards. These tests have been run since 2006, which makes it possible to follow trends in their results from the 3rd to 7th grade. Test results for 7th grade pupils can also be compared with their results from final examinations prior to leaving primary and lower secondary school.3

No performance scale has been developed for grade tests, and it is difficult to conclude anything from, e.g., the academic levels in mathematics, including whether the results are satisfactory in relation to learning targets for the different grades. The Economic Council has recommended several initiatives including a performance scale for tests to achieve a better impact evaluation of the primary and lower secondary school system.

Test results indicate relatively stable placings from 3rd to 7th grade for pupils. Those with good test results in the 3rd grade often achieve good placings when tested again in the 7th grade. This applies to all subjects. The first column in figure 3.2 indicates that around 60% of pupils with good mathematics results in the 3rd grade go on to achieve good results in the 7th grade, whilst around 30% achieve average results and 10% poor results.

Figure 3.2 Relative placing of pupils in grade test results in 3rd and 7th grade

100%

80%

60%

40%

20%

0% Mat. Grl. Dan.Dan. Mat.Mat. Grl.Grl. Dan. Mat. Grl. Dan. God i 3. klasse Middel i 3. klasse Svag i 3. klasse Good in 3rd grade Average in 3rd grade Poor in 3rd grade GoodGod i 7.in klasse7th MiddelAverage i 7.in klasse7th SvagPoor iin 7. 7th klasse grade grade grade

3Grade tests have been carried out since 2006 in primary and lower secondary schools to measure the pupils' academic levels in mathematics, Greenlandic and Danish. They make it possible to track academic development of pupils through primary and lower secondary school. The Economic Council has built data sets for this purpose. The data sets are documented in Technical background report 2017-1: Course analyses within education, downloadable from the Economic Council's website.

Note: test results from 1,678 pupils leaving 10th grade in 2015, 2016 and 2017. The lowest 30% of test results in a subject are classified as "poor" and the highest 30% as "good". The other test results are classified as "average". Source: the council's own calculations.

There is a certain degree of mobility from the 3rd to 7th grade, especially in the group of pupils with average results in the 3rd grade. Around half also achieve average results in the 7th grade, whilst the rest move up or down in the relative placings of their results. Mobility is less amongst pupils with poor test results in the 3rd grade. Over half of them also achieve poor results in the 7th grade, and less than 10% of them manage to make the jump to a good result in the 7th grade. The same applies regardless of subject.

The results from the final exams indicate that many pupils leave school with insufficient academic skills. There is a very large group of pupils with low academic skills, and the majority of pupils with poor grade test results in the 7th grade achieve a poor final exam result in the 10th grade. Figure 3.3 indicates that 55% of pupils with poor grade tests in mathematics in the 7th grade achieve F (-3) or Fx (0) in their final exam in mathematics in the 10th grade, i.e. a poor final exam result. 42% achieve either E (2) or D (4) in their final mathematics exam. Only 3% achieve C (7) or above.

Figure 3.3 Test results for 7th grade pupils and results from final examinations prior to leaving primary and lower secondary school.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Mat.Mat. Grl. Dan.Dan. Mat. Grl.Grl. Dan. Mat.Mat. Grl.Grl. Dan. GoodGod in i 7th7. klasse grade AverageMiddel in i7th 7. klasse grade PoorSvag in i 7.7th klasse grade

GoodGod afgangsprøve final exam AverageMiddel afgangsprøve final exam PoorSvag afgangsprøvefinal exam

Note: test results and results from final exams from 3,465 pupils leaving primary and lower secondary school between 2011 and 2016. F (- 3 according to the Danish 7 grades scale) and Fx (0) achieved in primary and lower secondary school final exams are classed as "poor"; E (2) and D (4) as "average" and C (7) or above as "good". Source: the council's own calculations.

Test results for 3rd and 7th grade pupils and their results from final examinations are therefore linked. Pupils with good grade test results in the 3rd grade are much more likely to achieve a good final exam than those with poor results in the 3rd grade. What is particularly clear is that pupils with low academic levels in the 3rd and 7th grade are at considerable risk of achieving a poor final exam in the subject, which will not qualify them for further education. This indicates that the quality of teaching and what pupils get out of it fails to live up to targets.

Many youngsters still lack basic academic skills, e.g. in mathematics and Danish, when they leave school with almost 30% of students achieving F (-3) or Fx (0). Just under 30% of pupils achieved grades of F (-3) or Fx (0) in mathematics and Danish, with a percentage of 10% in Greenlandic. 25% of pupils achieved F (-3) or Fx (0) in Danish, which are not qualifying grades for upper secondary education. The high number of poor final exam results is worrying. International research shows, for example, a close relationship between the skills of primary and lower secondary school pupils and national productivity growth, and thereby wealth and welfare as well. Analyses indicate in particular a close relationship between mathematics ability and earnings after completion of their education4. This is probably related to the fact that mathematical skills in the form of systematic and logical thinking can be applied in practice on the job market.

Figure 3.4 Breakdown of grades from final examinations in mathematics, Greenlandic and Danish, 2011-2016.

30%

25%

20%

15%

10%

0% F (-3) Fx (0) E (2) D (4) C (7) B (10) A (12)

MathematicMatematik GrønlandskGreenlandic DanishDansk s Note: the breakdown of grades for mathematics, Greenlandic and Danish for pupils registered for final examinations from 2011 to 2016. A total of 3,465 pupils' final examinations were included in the data set.

Source: the council's own calculations.

3.3. The transition from primary and lower secondary school to upper secondary education The relationship between grade test results and final exam grades shows that those pupils who were performing poorly in the early grades of primary and lower secondary school have a very high chance of achieving a final examination grade that is insufficient to start upper secondary education. The problems with the transition from primary and lower secondary school to upper secondary education are therefore closely related to the quality of teaching in primary and lower secondary schools. Considerable effort is needed in the short term to provide more students with a real chance of progressing in the education system. The Economic Council has built a data set that facilitates

4 Education and Innovation, Analysis report 4, from the Productivity Commission, 2014.

33 analysis of the relationship between the skills of pupils – measured using their average grade in written final exams – and the likelihood of them completing an upper secondary education5.

The school careers of 3,270 pupils can be followed, all of who left primary and lower secondary school between 2010 and 2013, and who are now between the ages of 19 and 22. 1,055 of the 3,270 achieved a low final exam result in 2010-13, 1,336 achieved an average result and 879 achieved a high result. The relationship between their final exam results and educational status in 2017 is shown in figure 3.5.

Figure 3.5 Final exam results from 2010-13 and educational status in 2017

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% LowLavt examprøveresultat result AverageMellem prøveresultat exam result HøjtHigh prøveresultat exam result

IngenNo education uddannelse IncompleteAfbrudt uddannelse AktivActively studerende studying Fuldført uddannelseCompleted education education

Source: the council's own calculations

The relationship between exam result and educational status is clear. 75% of pupils with a high final exam result are actively studying or have completed upper secondary education in 2017. Amongst the others, the majority started further education but have dropped out, and only a small number (6%) have not studied since leaving primary and lower secondary school. The situation is totally different for pupils with low exam results. More than 80% of them did not go on to upper secondary education after leaving primary and lower secondary school, and only 10% are actively studying or have already completed an education in 2017. The status in 2017 of the large group with average final exam results is much more diffuse. 37.5% are actively studying or have completed an education in 2017, but a total of 39% have not started upper secondary education since taking their final exams.

Figure 3.5 and table 3.1 emphasise how important it is to leave primary and lower secondary school with good qualifications. Without them, the likelihood of being able to complete an upper secondary education drops significantly, along with the chance of being self-sufficient later in life.

5 The data sets are documented in Technical background report 2017-1: Course analyses within education.

The entrance criteria for GUX are that the applicant has achieved a grade of E (2) in all compulsory final exams and all continuous assessment grades in 10th grade. The academic level in primary and lower secondary schools means that many pupils fail to achieve the grades they need in all subjects to continue in education. 70.8% of pupils leaving primary and lower secondary school in 2015 failed to achieve the necessary grades in all their final exam subjects6, and therefore have to improve their grades to be able to apply for an upper secondary education. Some of them opted to attend independent boarding schools in Greenland or Denmark and others signed up with Majoriaq. The biggest target group of youngsters – i.e. inactive youngsters who fail to get started with upper secondary education or are in work – indicates that far too many of them fail to go any further after leaving primary and lower secondary school.

Table 3.1 Final exam results from 2010-13 and educational status in 2017

Completed Actively Incomplete No Total education studying education education

Low exam result 46 62 76 871 1,055

Average exam result 213 289 309 525 1,336

High exam result 423 238 165 53 879

Total 682 589 550 1,449 3,270 Note: the test results are calculated as an average of written grades in mathematics and the median of linguistic subjects. An average grade of Fx (0), F (-3) or no record comes under the 'low' group, whilst an average grade of C (7) or above comes under the 'high' group. Other grades are average. Source: the council's own calculations.

Among the 3,270 youngsters taking final exams between 2010 and 2013 and included in the council's data set, 1,409 studied with Majoriaq, 809 attended independent boarding school in Denmark and 510 attended independent boarding school in Greenland. See figure 3.6. The figure indicates that the majority of Majoriaq students achieved low or average final exam results from primary and lower secondary school. Most of these courses are not aimed at a final exam, and there is no statistical information about the content of the Majoriaq courses. Bridge-building courses in the form of independent boarding schools are most common amongst youngsters with high and average exam results, with attendance in Denmark being particularly common amongst those with a high final exam result.

It is hard to assess the effect of the various bridge-building courses, as far from all Majoriaq courses are designed to strengthen the academic skills of pupils. But an impression of the effect of the courses can be gained by looking at the educational status of the youngsters and comparing it with their final exam results. See table 3.2. One of the things that is apparent is that of the 1,055

6 Elementary School by a roundabout route, 2015. Ministry of Education et al.

35 youngsters who left school between 2010 and 2013 with a low final exam result, 591 have attended one (or more) Majoriaq courses. The effect on study activities for the youngsters concerned is limited, as despite attending Majoriaq, 467 of them have not started an upper secondary education since leaving primary and lower secondary school. Only 18 completed an education programme in 2017, whilst 51 are actively studying and 55 have dropped out.

Figure 3.6 Attendance on bridge-building course and final exam results from 2010-13

1600

1400

1200

1000

800

600

400

200

0 MajoriaqMajoriaq Independent boarding Efterskoleschool in Denmark i Danmark Independent boardingEfterskole school i Grønland in Greenland

LavtLow examprøveresultat result MellemAverage prøveresultat exam result HighHøjt prøveresultatexam result

Note: attendance on one or more bridge-building courses after taking primary and lower secondary school final exams and up to early 2017. The same person can attend several types of bridge-building course. Source: the council's own calculations.

The effect of bridge-building courses on educational status cannot be directly compared using the table. Youngsters can attend one or more bridge-building courses – e.g. independent boarding school in Greenland followed by Majoriaq – and thus appear in several of the rows in table 3.2. But it is clear that youngsters with low final exam results from primary and lower secondary school are less inclined than others to start an education programme, even if they do attend one or more bridge- building courses.

This emphasises that investment in primary and lower secondary schools needs to be prioritised highly in educational policy. Without significant improvement in primary and lower secondary schools, no major changes can be achieved within the education sector, and too many resources will be wasted on fixing problems caused by an insufficient level of learning in primary and lower secondary schools. School management and teachers have the pedagogical skills and are therefore responsible for the level of learning in primary and lower secondary schools. It is important that councils hold school management accountable for this aspect and ensure greater transparency concerning school performance in the form of results achieved for student grade tests and final exams, but also greater openness on school teaching times, sick leave statistics, temp hours worked, parent involvement, etc.

Table 3.2 Student test results in 2010-13, number of bridge-building courses and educational status in 2017, number of students and breakdown by percentage.

Completed Actively Incomplete No Total education studying education education

Low exam result 46 62 76 871 1,055 Number of bridge-building courses 25 69 79 581 754 Majoriaq 18 51 55 467 591 Independent boarding school in Denmark 3 9 6 32 50 Independent boarding school in Greenland 4 9 18 82 113

Average exam result 213 289 309 525 1,336 Number of bridge-building courses 171 329 324 598 1,422 Majoriaq 54 155 158 352 719 Independent boarding school in Denmark 87 117 84 96 384 Independent boarding school in Greenland 30 57 82 150 319

High exam result 423 238 165 53 879 Number of bridge-building courses 197 182 121 52 552 Majoriaq 9 35 30 25 99 Independent boarding school in Denmark 164 134 61 16 375 Independent boarding school in Greenland 24 13 30 11 78

Total 682 589 550 1,449 3,270 Note: a student can attend several bridge-building courses after leaving primary and lower secondary school and up to 2017, when education status statistics were compiled. The number of bridge-building courses can be greater than the number of students. Source: the council's own calculations.

3.4 Projection of the population's level of education

A projection model of the population's educational profile was compiled in connection with the publication of the Economic Council's report in 2016, in which the population's highest completed education level was projected based on educational behaviour and population projection.7 The

7 The model for projecting the level of education is described in the technical background report, Projection of level of education, 2-2016, downloadable from the Economic Council's website.

38 projection model is updated with new figures for the population's educational profile and new population projection, which is why the figures have changed since the 2016 report. Projection of the educational model shows how the level of education changes in line with new generations superseding older ones. As new generations have a higher level of education than older ones, the result will necessarily be a gradually higher level of education throughout the country. This well- known effect will be noticeable despite a relatively poor educational performance by the young generations.

Figure 3.7 shows the projection of the level of education for the entire population up until 2040, based on 20158. The projection remains pretty much unchanged in relation to that performed for the preceding Economic Council report. The proportion of the population (16-64 years old) with primary and lower secondary school as the highest completed level of education drops from 63% in 2015 to 52% in 2040. Vocational and professional education courses will increase in particular. The level of education will continue steadily upwards, but in 2040 there will still be a large shortfall for the educational result compared to other high-income, western countries.

Figure 3.7 Projection of level of education, given unchanged educational behaviour

12% 12% 13% 14% 15% 15%

26% 28% 30% 31% 32% 33%

63% 60% 57% 55% 53% 52%

2015 2020 2025 2030 2035 2040 FolkeskolePrimary and Gymnasial,Upper secondary erhvervs- school, vocational og efteruddannelse courses and VideregåendeHigher education uddannelse lower further education secondary Source: the council's own calculations. school

Projection of the level of education is based on a number of presumptions9. The government has initiated a process to facilitate a more detailed projection of the level of education and significance of the educational behaviour of youngsters. This will be in the form of a micro-simulation model, taking into account individual behaviour. The model will be an important tool to determine which initiatives are necessary to realise the ambitious targets of the education plans.

Figure 3.8 shows the number of 16-64 year-olds with an education other than primary and lower secondary school in a number of Nordic countries in 2015. The number is generally high, with Sweden

8 The 15-64 year-old age group in the Nordic countries was used for comparison, as school is compulsory in these countries up to the ninth school year, whilst it is compulsory up to the tenth school year in Greenland. 9 See Projection of the level of education, Technical background report 2016-2, the Economic Council's website.

39 the highest. No less than 80% of 15-64 year-olds have an education other than primary and lower secondary school there. It can also be seen that 68% of 16-64 year-olds have an education other than primary and lower secondary school in Denmark.

The number in Greenland is shown in the figure by the horizontal lines, with the solid line showing the number in 2015, whilst the broken line shows the projected number for the same group in 2040. In the event of unchanged behaviour, the number of 16-64 year-olds with education other than primary and lower secondary school will rise from 38% in 2015 to 47% in 2040, a modest increase over 25 years. The projection thus shows that there will still be a large educational shortfall in 2040 compared to the level in the Nordic countries.

Figure 3.8 The educational shortfall in Greenland compared to the Nordic countries in 2015, and projected to 2040

47%

38% 38% 38% 38% 38%

68% 77% 64% 69% 80%

DenmarkDanmark Finland IcelandIsland NorwayNorge SverigeSweden NordicNordiske countries lande 2015 2015 GrønlandGreenland 2015 2015 GrønlandGreenland 2040 2040

Source: Statistics Greenland and the Nordic Council

The figure shows that it will take a long time to catch up with the other rich, western countries. A bigger improvement in the level of education will require that many more youngsters get an education than is currently the case.

Chapter 4 The fishing industry and fisheries administration

Fishing, the country's most important industry, is complex and varied. It ranges from industrial offshore fishing to inshore, small-scale fishing; from large vertically-integrated government-owned companies to one-man enterprises in open boats; from fishing cooperatives to companies that are partially foreign-owned and investments abroad. Fishing makes a substantial contribution to employment, export earnings and tax revenues. Resource interest taxation is expanded to a level that few or no other countries have yet reached. As such, fishing contributes to the economy directly for people employed within the industry and indirectly via related activities, and to the public finances and national economy as a whole. The importance of fishing to the national economy emphasises the importance of coherent regulation and management of the industry, and ensuring the legitimacy of management of the common resource which fish and shellfish represent for the entire country.

A key aspect is to ensure the maximum possible overall value creation from the industry (economic efficiency) and to ensure a return for society on the use of its resources (resource interest taxation). Fishery policies can also have objectives linked to settlement and employment, causing difficult political trade-offs to arise. To achieve such objectives in the long term, biological sustainability is essential.

Because fish stocks are a common natural resource, unregulated fishing will mean fishing at levels that are more than optimum in a socioeconomic context. Resources will be over-exploited and socioeconomic returns lower than what would be possible with optimum regulation. Public intervention has consequences for sharing the proceeds, and the legitimacy of that regulation requires understanding and acceptance, which in turn requires clear principles and transparency of political decisions.

This chapter includes a brief introduction to three key factors of fisheries management: biological sustainability, economic efficiency and legitimacy. Based on the above, areas are discussed in which fisheries management is particularly vulnerable. They concern the dependency on few stocks, quotas above the recommendation, management of inshore fishing and stability for the framework terms and conditions.

4.1. Biological sustainability, economic efficiency and legitimacy Two key aspects are common to fisheries management in most countries: biologically sustainable exploitation of marine resources and economic efficiency linked to ensuring profitable commercial opportunities. Most countries have other objectives for their policies, such as requirements for employment, settlement, land-based activities, etc. Such considerations are often of major political significance, but also cause conflict between short-term and long-term interests, including socioeconomic effects and biological sustainability. The same applies to fisheries management in Greenland.

Commercial fishing, trapping and farming (primary industries) accounted on average for 12% and 33% respectively of total employment in towns and settlements between 2008 and 2015. If we consider the group that has worked at least one month per year in these industries, the percentages rise to 18% and 44% respectively. This emphasises the importance of these primary industries,

41 especially fishing, for the national economy. The percentages are also relatively stable, with slight decreases from 2009, but subsequent increases from 2012. The fishing industry is of greater importance for employment in the settlements than in the towns.

The industry is also of huge importance to foreign trade. It represented 95% of total exports by value in 2015, broken down into 43% for shrimp and 29% for halibut. Exports from commercial fishing have been on the rise in recent years. These figures also emphasise the importance that fluctuations in price and quantities have for economic development, ref. chapter 1.

The fishing industry has enjoyed good times in recent years in terms of prices and quantities (including new species), ref. chapter 1. Figure 4.1 shows the trends in turnover and profits for 2010- 2015 (latest available data). Turnover has been on the increase throughout that period, in particular since 2014. But profit margins have been unstable. Profit margins for dinghy fishing, which is not included in these figures, are probably much higher on average.

Figure 4.1 Turnover and profit margins in commercial fishing – 2010-2015

6000 13

12 5500

5000 10 MDKK

MDKK 9 Turnover

Turnover 4500 Profit margin, % margin, Profit 8 % margin, Profit 4000 7

3500 6 2010 2011 2012 2013 2014 2015

TurnoverOmsætning (left (venstre axis) akse) ProfitOverskudsgrad margin (right (højre axis) akse)

Note: Turnover and profit (measured as a percentage of turnover) in the Greenlandic fishing industry as a whole – fishing and the fishing industry. The figures only apply to companies that submit their annual accounts to the Tax Agency. Self- employed fishermen (dinghy fishing) are therefore not included. Source: Statistics Greenland.

Because commercial fishing exploits a common resource, payment of a tax for doing so is well- justified (resource interest), in addition to the normal taxation of all value creation. The natural resources of the sea are an input to the fishing industry, and access to or use of this resource has a value. Fishermen have to be rewarded for their work, use of equipment and vessels (return on invested capital) on the same basis as other industries. Without payment for use of the natural resource, there would either be abnormal remuneration (return on investment) in the industry or too many resources will be expended on the catch (the number of boats and crews would increase until the return equals that from other activities). Use of the resource justifies resource interest taxation, as is the case at this time for offshore fishing. That element of profit goes to the fishermen in the inshore industry or is lost through inefficient fishing. Apart from the resource interest taxation, the fishing industry is subject to the same taxation rules as other industries. Figure 4.2

42 shows total tax revenues from the fishing industry between 2010 and 2015. It can be seen that resource interest taxation contributed significant revenues.

Figure 4.2 The fishing industry's direct contribution to public finances, 2010-2015.

600

500

400

300

MDKK MDKK

200

100

0 2010 2011 2012 2013 2014 2015

TaxLønsumsafgift on labour FiskerirelateredeIndustry-related duties afgifter Selskabs-Corporation og andudbytteskatter dividend A-skatPAYE costs taxes

Note: revenues from tax on labour costs, corporation and dividend taxes and PAYE are estimates, revenues from fishing duties are actual figures. Source: Ministry of Finance and Taxes (2017).

Shrimp duty accounts for most of the gross revenue, but in recent years other fishery duties have played a larger role. See Figure 4.3. According to the Budget Act Bill 2018, a proposal for an increase in resource interest taxation on the fishing industry will be set forth.

Figure 4.3 Gross revenues from fishing-related duties, 1991-2015

300

250

200

150

MDKK MDKK 100

2002 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

RejeafgiftShrimp AndreOther fisheryfiskeriafgifter-related duties duty

Source: Ministry of Finance and Taxes (2017).

Economic growth within the fishing industry and related duties can be ascribed to a large degree to higher prices (see Figure 1.1) and new pelagic species.

4.2 Vulnerability Despite progress in recent years within commercial fishing, there are several development problems and vulnerability is high. This also applies to exercising authority within this sector. And as mentioned earlier, socioeconomic dependence is high, and there are risks related to a key industry being dependent on fishing only a few species, uncertainty linked to politically-set quotas or TAC (total allowable catch) above the recommendation, 'Olympic' fishing and unstable and non- transparent framework conditions.

Few, but vitally important species

Shrimp exports accounted for no less than 45% of total export value from commercial fishing, whilst the second biggest species, halibut, contributes 30%10. Along with a doubling in the price of shrimp within just a few years (see Figure 1.1), it is apparent that exports and thus the national economy are highly sensitive to changes in shrimp fishing and market demand for this product. Furthermore, shrimp fishing makes the biggest single contribution to revenues from fishing duties (see Figure 4.3). Ensuring stable, quality parameters for shrimp fishing is a key political task. It is also important to ensure that other types of commercial fishing contribute more to the economy. That will reduce the heavy dependence and thus vulnerability linked to shrimp fishing.

Quotas higher than the biological recommendation

For evaluating the biological sustainability of the fishing industry, advice from Naturinstituttet provides the professional, scientific basis. Over the years, the relationship between Total Allowable Catch (TAC), the politically-determined total quota, and advice from Naturinstituttet has lessened. See Figure 4.4. But it is still important that the TAC for the economically most important fishing of the Pandalus borealis shrimp along the west coast is kept within the limits of sustainability through certification requirements from the Marine Stewardship Council11. In the future, the same will apply for offshore halibut fishing, which is now certified. But the fact that there is a big difference in the advice given by Naturinstituttet for cod and halibut fishing on the west coast is a big problem, given that inshore fishing is the most important for the settlements. If it transpires that fishing is not sustainable, short-term gains will be achieved at the expense of long-term costs in the form of the wrong investment in fishing gear and attraction of labour, both of which could be better deployed in other industries important to the development of a better spread of industries.

10 Source: Statistics Greenland http://www.stat.gl/dialog/main.asp?lang=da&version=201611&sc=SA&subthemecode=o3&colcode=o 11 In Figure 4.4, TAC for shrimp exceeds advice in some years, but reflects the emphasis placed on avoiding large fluctuations from year to year when setting quotas.

Figure 4.4 TAC as a percentage of recommendation, 2009-2016

220

200

180

160

140

120

100

80 2009 2010 2011 2012 2013 2014 2015 2016

RejeShrimp HellefiskHalibut, Disko Diskobugt Bay HalibutHellefisk Uummannaq Uummannaq HellefiskHalibut Upernavik Upernavik

TorskCod inshore indenskjærs

Source: Naturinstituttet.

More investment in inshore fishing

Bigger quotas for halibut and cod, and buoyant prices have made inshore fishing more attractive. The number of inshore vessels with a licence has grown considerably. The number of inshore licences for halibut fishing has increased from 1,274 in 2013 to 2,264 in 2016 (ref. FFL 2018). Looking at total motor power and boat length, there has been an increase of 37% and 20% respectively between 2012 and 2015. This is a significant under-estimate, as dinghy fishing is not included in the figures. As such, there has been a major increase in total potential fishing capacity.

Figure 4.5 Total motor power and average boat length for halibut fishing, 2012-2016, index 2012=1

1,45

1,35

1,25

1,15

Index, 2012=1 Index, Index, 2012=1 Index,

1,05

0,95 2012 2013 2014 2015 2016

TotalSamlet length længde, (LOA) (LOA) TotalMotorkræfter motor power i alt (HK) (HP)

Note: motor power and length of dinghies are not registered and are therefore not included in the figures. Source: Statistics Greenland

Figure 4.6 shows the catch volumes seen in relation to the investment targets for licensed inshore fishing between 2012 and 2016 (dinghies are not included). A slight downward trend is apparent. The trend is weak, but declining catches per unit without major changes in investment can be an indicator of declining fish stocks.

Figure 4.6 Catches of halibut in relation to vessel length and gross tonnage (GT), 2012-2016

10 2012 2013 2014 2015 2016

CatchFangsmængde volume in i forholdrelation til boat bådlængde length (tonnes (ton pr per m) m) FangsmængdeCatch volume per pr BRTGT (tonne (ton pr. per BRT) GT)

Note: vessel length is stated as the length of all vessels. Data for dinghies are not available and are therefore not included in the figures. Source: Statistics Greenland

The 'Olympic' fishing of cod and halibut from vessels with no quota can be an explanatory factor in declining catches in relation to investment. Historical experience from many other countries indicates that even small fishing vessels can apply a lot of pressure to fish stocks when administration is insufficient, and when a significant increase in catch levels occurs.

Furthermore, climate changes can exacerbate local economic consequences if fish stocks migrate northwards leaving a community that has made considerable investment in 'Olympic' fishing.

Unstable parameters

Fishing is a very insecure activity. Market uncertainty is common to all forms of economic activity, but commercial fishing also has the uncertainty related to biological conditions. The administration and policies applied by the authorities add to the uncertainty. Fishing is an export industry exposed to considerable international competition. Greenlandic fish products not only compete with fish on the international market, but also with agricultural products and other food products. Exploitation of fish resources must therefore be based on international market terms and cannot solely be viewed from a national angle. The socioeconomic returns on natural resources are reduced if fishing is less efficient than for our competitors. Many industrialised fishing nations place a heavy focus on efficiency in their fishing industries. Local socioeconomic considerations have to be weighed against global competition within the industry.

Changes to the framework conditions, such as transfer of quota shares between vessel groups, or changes to quota time limits can have numerous consequences apart from the legal aspects, and therefore indirect economic consequences. If rationalisation for a vessel group leads to fewer vessels and subsequent loss of quota share transferred to less efficient groups, it will not only reduce the incentives for rationalisation and investment, but also reduce the socioeconomic returns on the natural resources. Periodically profitable redistribution between vessel groups (as seen for boat owners with seagoing and inshore shrimp vessels) becomes less attractive if it can mean being punished later for losing a quota share. That will reduce the incentives for rationalisation and efficient use of production factors. If there is an abnormal profit in the industry, it can be an indication that the resource interest tax has been set too low. Higher resource interest taxation will be able to redistribute the resource interest in a more socioeconomically appropriate manner than distribution of quota share. Stability is a vital factor for all forms of industry. Investment depends on trust in at least partially known and stable framework conditions. Uncertainty leads to greater risk and variability, and is reflected in less investment and fewer rationalisation programmes. This can also have a knock-on negative signal effect for other industries. If the policies within such a key area as commercial fishing cannot be regarded as stable and credible, it can affect trust in industrial policies in general, with negative consequences for industrial activity.

Greater political uncertainty increases demands for returns on investment, and reduces opportunities for resource interest taxation. Stability therefore makes higher resource interest taxation possible than would be the case if there was politically-caused uncertainty. It also makes resource interest taxation of the fishing industry possible, which has not yet been the subject of duties. As referred to above, the administration of commercial fishing in recent years has varied a lot in scope and not generally followed scientific advice in relation to setting quotas. The political uncertainty thereby also applies in relation to setting quotas. Introduction of so-called harvest

47 control rules (HCR), based on clear principles and reference points, will be able to reduce uncertainty and have been introduced in a number of European countries, including Norway. HCR helps take key elements of uncertainty out of the political process, allowing for an administration that is impervious to short-sighted political aims and forming the basis for a more long-term and stable strategy. Such administration rules will also be able to ensure an arm's length between the political system and anyone able to benefit or lose out due to decisions on resource management. These are particularly important principles in small societies with many close relationships. Such rules help provide transparency and a legitimate administration, and help to ensure sustainable, long-term solutions. In that way, investment becomes more attractive, and in time, such sustainable administration will also mean that larger elements of a fishing industry can be eco-certified, which will help strengthen international market access and thus value creation.

Political stability is often closely linked to legitimacy. Legitimacy in the population does not come automatically. Political choices have to be explained and understood, something which can often require considerable political eloquence in relation to the population. To ensure the living conditions of future generations in addition to the current one, and to protect against short-term political behaviour, politics that contribute to common values have to be communicated and explained to the public over time. This entails the need to explain the principles of sustainable administration at all levels of society — from school to university and within the population in general.

There are currently good opportunities for earning money in the fishing industry, and in the short term, disparity can be reduced by letting more people get a share in the income generated. But doing so is not without its problems. Labour and capital are channelled into the sector, but the same amount of fish could be caught with fewer vessels and personnel, which therefore reduces efficiency. The result is lower overall revenue than what is possible, and thus lower tax revenues, which has secondary consequences for the rest of society. Such a policy therefore has not just the visible effect for those who benefit from the fishing industry, but also an invisible cost for everyone else. Commercial fishing is subject to major fluctuations in price and volumes. In a period of rising prices and volumes, it is tempting to increase access to the industry. But that will create greater dependence when prices and volumes fall or technological developments in competing countries allow them to increase efficiency. This will create greater political pressure for an increase in quotas beyond the biological advice and pressure for financial compensation. Because greater economic sustainability requires the transfer of labour from fishing to other industries, there is a further socioeconomic cost for such policies. What is particularly important is that young people are channelled into an industry with a growing need for labour.

Major changes in industrial policies in an area that makes a significant contribution to society's wealth in terms of taxation and employment, as is the case with commercial fishing, require thorough analyses and consideration to ensure that all the pros and cons are taken into account.

The government submitted a new Fisheries Act Bill for consideration in August 201712. Some of the main points in the bill concern shrimp fishing, including proposing that: (i) ownership of quota shares should be arranged to take into account indirect ownership of quota shares and deciding influence

12 The material was published shortly before the deadline for completion of this report, and this chapter therefore only contains the Council's provisional comments to the bill.

48 on quota shares, (ii) quota distribution for shrimp in western Greenland for inshore and offshore shrimp fishing should be revised from 43/57 to 50/50, whilst the opportunities to sell quota share volumes from the offshore to the inshore fleet component are tightened up, and (iii) at least a 5 year period of notice for open-ended shrimp licences. The specific rules for revoking and redistribution of open-ended licences will be determined later.

The objective is to reduce the growing disparity and protect jobs, and to improve earnings for fishermen. The bill aims to give more fishermen a larger share of the profits generated by community-owned resources.

Comments to the bill indicate that it will have a very negative impact on public finances and activity within the community. Employment figures will benefit in the short term, but there will be no effect in the long term. Labour will be bound to the fishing industry and efficiency will fall. The Economic Council agrees in principle with these expectations. But it is also hard to define the basis for the values given in the remarks, as no details are provided for criteria, calculation methods, etc. Even though the main objective of the bill is to ensure a fairer distribution of income, the comments include no evaluation of the effects on income distribution. Given that this is a very wide-ranging bill, the absence of a more detailed analysis of the consequences as input to the political debate is regrettable.

As highlighted in the discussion above, clear, transparent rules and administration of the same are vital, to reduce uncertainty. The bill as presented will cause a great deal of uncertainty for several reasons. Firstly, it is incomplete, as the future rules for revoking and redistribution of licences are unknown. This also makes it hard to determine the overall socioeconomic consequences of the bill. Secondly, the determining of such rules moving forwards will be subject to some uncertainty. Anyone awarded a licence will never know for sure whether and when it may be revoked, and whether the rules will be changed again. This can have a number of consequences. Uncertainty will influence investment in commercial fishing, and will make it harder for new entrants to establish themselves. Lenders will be concerned about the fact that licences can be revoked. If successful licence holders have a greater risk than others of having their licences revoked, investment and efficiency will be restricted, thus reducing returns for society from the sea's resources. The uncertainty linked to rule changes can have a knock-on effect on other industries, as it undermines the stability and credibility of rules, etc.

One of the main objectives of the bill is to ensure a better distribution of the wealth generated by fishing. As discussed above, resource interest taxation is a suitable instrument to ensure that the value of marine resource exploitation will benefit the community as a whole. Because Greenland is a trendsetter in this area, looking at the structure and level of resource interest taxation will be appropriate. Depending on the design of the award criteria, the bill as presented will be able to increase the income of certain people receiving newly-issued licences, but will be a very imprecise policy for distribution and will have a lottery element to it in relation to who will be given the opportunity. Meanwhile, tax and duty revenues will fall with negative consequences for the rest of the community, either in the form of increases in other taxes and duties, or cuts in public budgets. As such, whether the bill will help reduce social imbalance is uncertain.

References:

Ministry of Finance and Taxes 2017. Report on the resource interest in Greenlandic Fisheries and proposals for new resource interest taxation models. http://naalakkersuisut.gl/da/Naalakkersuisut/Departementer/Finans-Skatter/Ressoucerente-i- fiskeriet

Publications from the Economic Council

Material available via: http://naalakkersuisut.gl/da/Naalakkersuisut/Departementer/Finansdepartementet/Oekonomisk- raad

Reports:

The Economic Council's report, 2010

The Economic Council's report, 2011

The Economic Council's Report 2012, Natural resources as a growth strategy

The Economic Council's Report, 2013, Economic trends, public finances and migration

The Economic Council's Report, 2014, Economic prospects, current economic policies and housing

The Economic Council's Report, 2015, Economic prospects, current economic policies, population trends and regional policies

The Economic Council's Report, 2016, Economic prospects, current economic policies and education

The Economic Council's Report, 2017, Economic prospects, current economic policies, academic skills in primary and lower secondary schools, the fishing industry Background materials:

Technical background report 2014-1: The settlements in a socioeconomic context

Technical background report 2014-2: Demographics and housing requirements towards 2040

Technical background report 2014-3: Updated estimate of finance policy sustainability 2014

Technical background report 2015-1: Finance policy sustainability 2015

Technical background report 2015-2: The public sector economy – DAU and public finances

Technical background report 2015-3: Pension reforms – early retirement and old age pensions

Technical background report 2015-4: Technical report on demography estimates

Technical background report 2016-1: Finance policy sustainability 2016

Technical background report 2017-1: Course analyses within education Policy Briefs:

Policy Brief 2016:1 Growth and wealth

Policy Brief 2016:2 Commercial conditions and efficiency

Policy Brief 2016:3 Experience with state-owned enterprises

Policy Brief 2016:4 The possible implications of mineral mining for Greenland's economy

Policy Brief 2017:1 Economic trend forecasts 2016-18 – current considerations.