Perhaps this will become the new paradigm approach to monetary and financial stability in Asia, but elsewhere I have chosen to call this a “band aid” approach. Coming from Hong Kong, the freest economy in the world, where by law we are not allowed to impose any foreign exchange control policies and our currency must be freely convertible, I am reluctant to accept ad hoc limitations to financial openness. But I can quite understand the plight of other emerging markets in Asia. When the undesirable elements of international finance assume a predatory character and look us fiercely in the eye there is simply a need for self-defence, and temporary or discreet changes in the rules of the game are at times effective. Let me turn to the sixth characteristic of Asian finance that I wish to draw your attention to, and this concerns exchange rate policy. You are, no doubt, aware of the fact that the exchange rates of currencies in Asia have become more flexible, as an outcome of the financial crisis of 1997-98. Whether or not this is a desirable outcome remains to be seen, although my view probably represents the exception rather than the mainstream opinion. I say this not for the purpose of justifying the maintenance of a fixed exchange rate for the Hong Kong dollar. I shouldn’t have to. The fixed exchange rate has served Hong Kong very well and, with currency board arrangements and a very flexible economy, I do not see any insurmountable difficulty in sustaining it.
The income settlements in 1974/75 and 1986 in particular, but also the settlements in 1998 and 2000, contributed to higher cost inflation and weaker demand for labour. We have seen that income formation is affected by labour market conditions and profit trends in the business sector. This is also true of wage and income developments among managers, salaried employees and the liberal professions. The structural changes that now seem to have occurred in income determination for these groups has probably also been important for the outcome of the ordinary wage settlements. Through the last part of the 1990s, factor income rose as a share of labour costs. Over time, a balance will probably be reached between labour costs and the portion of income that goes to servicing capital. To some extent the process will be self-regulating. High profits tend to lead to stronger growth in wages. Lower earnings prompt companies to cut costs. This may take the form of increased work effort, or possibly workforce reductions, in order to increase productivity. Companies may also reduce growth in business fixed investment. Since 1997, price inflation has been higher in Norway than among our trading partners. The most important reason for higher price inflation in Norway is that we have had a tight labour market for many years. This has also led to high growth in wages and labour costs.