COMMISSION OF THE EUROPEAN COMMUNITIES studies The Danish economy ECONOMICAND FINANCIAL SERIES - 1980 14 COMMISSION OF THE EUROPEAN COMMUNITIES The Danish economy by Anders Ølgaard Professor of the Institute of Economics at the University of Copenhagen COLLECTION STUDIES Economic and Financial Series No 14 Brussels, August 1979 Cataloguing data can be found at the end of this publication © Copyright ECSC - EEC - EAEC, Brussels and Luxembourg, 1980 Printed in Luxembourg Reproduction authorized, in whole or in part, provided the source is acknowledged. ISBN: 92-825-0494-8 Catalogue number: CB-NI-79-014-EN-C - 3 PREFACE Following the establishment of the European Economic Community, a Committee of Experts was set up under the Chairmanship of Pierre Uri to prepare studies of the economic conditions of the member countries. The 'Report on the econ• omic situation in the countries of the Community' was published in 1958. Following the accession in 1973 of Denmark, Ireland and the United Kingdom, the Commission of the European Communities considered that it would be valu• able to supplement the Uri Report with a study on each of the new Member Sta• tes. On this occasion, however, the Commission followed a somewhat different procedure and commissioned separate studies from independent experts in each of the three countries. The studies 'The United Kingdom Economy' and 'The Irish Economy' appeared in 1975, as numbers 9 and 10 of 'Economic and Finan• cial Series', published by the Commission of the European Communities. The present study of the Danish economy was prepared by Professor Anders Ølgaard of the Institute of Economics at the University of Copenhagen. Unfor• tunately, the preparation of this study has taken more time than originally envisaged because of interruptions for personal and professional reasons, in• cluding advisory work for the Danish Government. The author would like to record his gratitude to his colleagues with whom he is teaching the subjects dealt with in the present study, to other colleagues at the Institute and to the staff of the Danish Economic Council - especially Mr. Arne Mikkelsen - for valuable comments and criticisms of draft chapters. He is indebted to Mrs. Else Haugebo for careful typing of drafts. Thanks are also due to Mr. K.I. Roberts, Principal Administrator at the Commission of the European Communities, for advice on editorial matters. The responsibility for the final version remains, however, with the author. Contents Chapter I: STRUCTURAL PROBLEMS OF THE DANISH ECONOMY 9 Introduction 9 Population 12 The labour force and participation rates 14 Growth rates and industrial structure, 1950-73 18 The structure of domestic demand, 1950-73 24 Unemployment 28 The balance of payments 30 Summary 30 Appendix tables 32 Appendix: Real product, real income and terms of trade 35 Introduction 35 Concepts 36 Relationships between concepts 37 A numerical example 38 Some additional comments on the Danish figures 42 Chapter II: AGRICULTURE 45 Historical background prior to the 1930s 45 Decades of crisis, war and post-war protectionism 48 From the British to the Continental system of agricultural pricing ... 52 Chapter III: MANUFACTURING INDUSTRIES 55 Introduction 55 The size structure of the individual enterprise 58 Markets 62 Employment 63 Wages and profits 64 Output, value-added and wages by type of industry 66 6 - Danish proposals with respect to 'Workers' Participation ' 68 Chapter IV: BUILDING AND CONSTRUCTION 71 Value-added of the building and construction industry 71 Residential construction, 1960-73 74 The stock of residential units, 1970 76 Historical trends in the structure of residential investment 80 Housing policies 81 Appendix tables 84 Chapter V: PRIVATE SERVICES 89 Chapter VI: THE GOVERNMENT SECTOR AND FISCAL POLICY 93 Government services, share of GDP 93 Number of employees in government services 94 Institutional structure of the government sector 99 Post-war trends in expenditure of the central government 100 Total public expenditure, including local authorities, 1967-1973 .... 103 New strategies in budget management 105 Post-war trends in central government revenue 107 Total public sector revenue, including local authorities, 1965-1973 . 109 Prospects for future revenue from taxation of commodities and income . 110 A need for new sources of revenue? 113 Overall budgetary position of the central government 117 Chapter VII: ECONOMIC POLICY 1967-1973 119 Introduction 119 Fluctuations of main economic indicators 1967-1973 119 Sector surpluses reconsidered 123 Was economic policy sufficiently tight? 125 Chapter VIII: MONETARY INSTITUTIONS AND POLICY 127 Lending institutions 127 The central bank 131 Instruments of monetary policy 132 The discount rate and other interest rates 132 - 7 - Open market operations by the central bank 135 Central bank lending to private banks 137 Bond rationing 139 Private bank lending 140 The money supply 141 Problems in monetary policy 143 Appendix tables 147 Appendix: Providing consistent data for monetary analysis 151 Introduction 151 The monetary base 152 The money stock 153 Balance sheets of private banks 154 Sources to appendix tables 154 Chapter IX: INFLATION, INCOME DISTRIBUTION AND INCOMES POLICY 157 Introduction 157 Rates of increase in prices and money wages 158 Institutional arrangements with respect to wage agreements 159 Legislation on prices and monopolies 163 The functional income distribution 164 The distribution of personal income 165 Effects of holding assets and liabilities during periods of changing rates of inflation 167 Incomes policy, the Danish experience 168 Incomes policy, some general remarks 169 Changes in the pattern of wages as a reflection of structural economic problems 170 Have money wages increased too fast? 172 Chapter X: FOREIGN TRADE AND BALANCE OF PAYMENTS 175 Introduction 175 Current account of the balance of payments, 1950-1973 175 Exports by products 178 Exports by markets 181 Imports by products 183 Prices in foreign trade and the terms of trade 185 Balance of payments, services and transfers 186 8 - Financing of the balance of payments deficits 187 The exchange rate 190 Chapter XI: FROM GROWTH TO RECESSION, 1973-1977 195 Population and labour force 195 Fluctuation of main economic indicators 200 The industrial pattern 203 Components of domestic demand 206 Unemployment and labour supply 208 Agriculture 210 Manufacturing industries 212 Building and construction 214 Residential investment 216 The stock of residential units 217 Fiscal policy 219 Public expenditure 220 Public revenue 224 Surpluses of the government and the private sector 226 Overall budgetary position of the central government 228 Monetary policy 230 Price and wage inflation 236 Income distribution 238 The balance of payments, summary 241 Exports 241 Imports 241 Prices in foreign trade 246 Services and transfers 246 The net foreign debt 248 The exchange rate 250 Appendix tables 252 Chapter I STRUCTURAL PROBLEMS OF THE DANISH ECONOMY INTRODUCTION 1. Rather frequently, the Danish economy is referred to as one based mainly on agriculture. It is, indeed, true that agricultural produce dominated export earnings until a few decades ago. During the last quarter of the 19th century, the Danish economy - like the Dutch - adjusted to the international decline in prices of grain, etc. by rapidly increasing the production of animal prod• ucts such as bacon, beef, and butter. This structural change was greatly helped by the new cooperative movement. While output of grain continued to increase, it was now mainly used as input for animal products, providing the base for increasing exports of these products to the more industrialized economies of the UK, Germany, and others. From 1890 onwards, the terms of trade of agriculture improved, and just before 1930 agricultural exports ac• counted for 75 per cent of total exports, while well over 20 per cent of gross domestic product (GDP) was attributable to agriculture. Before the First World War, Danish manufacturing industry started to develop slowly, mainly in the field of small-scale import substitution, following the pattern typical of the first phases of industrialization. However, a few ex• port industries did emerge, one of which was ship-building. 2. During the 1930s, declining export possibilities mainly hit agriculture, the largest exporting sector, and from the early 1930s onwards, the share of agriculture in exports - and employment - started to decline, the latter even in absolute terms. As in other European countries, quantitative import restrictions were intro• duced in order to stimulate employment in manufacturing, the unemployment rate being substantial - reaching a peak of 32 per cent (average) in 1932. With the benefit of hindsight, it is doubtful whether this policy formed part of an industrial strategy designed to shift the basis of the economy from primary to secondary industries. Be this as it may, the outcome was very much along these lines. At the beginning of the 1950s, manufacturing industry was ready for, and able to accomplish, a major expansion of industrial exports, covering a wide range of products. 10 - It has been argued that the development of manufacturing industry from the early 1930s onwards represents an example of a successful 'infant industry' policy. The fact that the reconstruction problems after the German occupation during the Second World War were rather small, at least compared with those of most of our neighbouring countries, probably contributed to this success. Thus, Danish exporters