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The New Economy |
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Written by Ó. M. Lassen
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Thursday, 17 April 2008 |
The past ten years have seen dramatic change in the Faroese economy with wages in the public services sector rising at the expense of the primary industries.
Faroese society has undergone a period of dramatic change in the past decade. During this period, increased activity in the domestic industrial sectors has led to increased activity in the social sectors. The business sectors which have been the prime movers of the economy are construction and the service sectors, including public services. Several other industries have also shown progress and the financial sector is one which has flourished. The current situation of almost zero unemployment has created a demand from the fishing industry, and other businesses, to bring a foreign workforce to the Faroe Islands.
Wages by sector: In general, wage payments have increased in the sectors that operate mainly in the domestic market. On the other hand, wages in the export sectors have fallen as a percentage of the overall wage payments for the country, and it is my belief that this is not due to increased efficiency in the industry.
 Source: Statistics Faroes
The problem is that the industrial structure of the country has changed very little and few steps have been taken to increase revenue from alternative sectors. As shown in the table below, there are no significant new business sectors creating a rise in wage payments. However, we see a fall in the wages paid within the fishing industry whereas there is an increase in the domestic service sectors, and in particular the public service sector.
The continuous growth in the public sector raises the question of how we can continue to finance this sector if we do not get a reasonable balance between the domestic sectors and the wealth-creating export industries.
The table also clearly shows the rate of decline in the wage payments in the primary industries, compared to the public service sectors. For the first few years, the difference was around 200m dkk but in past years the public wage payments have been 800-900m dkk higher than those of our primary industries. So the question is whether an imbalance has arisen in the total spectrum of industrial sectors or if there is an urgent need for alternative industry to support the welfare society.
Export and trade balance: 95 percent of the value of Faroese exports derives from fish products, although in some years this may be slightly lower due to the sale of fishing vessels, etc. Faroese export patterns resemble those of developing countries and this export pattern has characterized the Faroese economy for many decades.
With an increase in domestic industry in the past 5 years, we have experienced a loss in the balance of external trade. The question is when will exports rise to the same level as imports and which export industry will create the difference.
Appropriate industrial sectors: It is natural to expect that increased exports will stem from business closely related to the primary industry, namely equipment for fishing and fish processing. This is what marks industrial progress in many countries: technologies are developed which are closely linked to their main industry. At the same time, it is quite obvious that we should have a vibrant shipping industry where investment is made in ships and in the on-shore support staff as well; but the current situation is that many hundreds of our mariners are employed in neighbouring countries. High fuel prices also raise the question of why there is no public Faroese oil company. These have been established in several neighbouring countries with good results and could likewise be a worthwhile investment here that could yield manifold return.
Desire for globalization: The country has a strong desire to become more global and to increase revenue from diversified industry. This refers to the creation of business within the “experience” economy, such as tourism industry. In the political arena, there has been discussion about increasing research in the public sector and establishing more higher education opportunities within the Faroe Islands.
Politically there is also great interest in innovation and a willingness to devote resources to this end. Faroese society wishes to become more international. This is reflected in the development of closer ties with neighbouring countries — Iceland, Norway and the United Kingdom, both in terms of business ventures and higher education. At the same time, there is a clear political indication that we should be less dependent on direct economic support from Denmark and less reliant on Danish education.
Already globalized: In these times of change, several new companies have been registered in the Faroe Islands, both production and investment companies. As for production companies, two private Faroese upstream oil companies can be mentioned which also operate outside the Faroe Islands, and within the past few years the banks have also started to do more and more business abroad. Within the offshore sector, we have also seen some shipping companies which have initiated new routes and thus stirred hope for a more diversified industry. Clearly, there is a strong desire to develop a Faroese shipping industry. Salmon farming is seeing a resurgence after the economic crisis that hit the industry. Cod has also started to be farmed in the Faroe Islands. Within the fish processing sector, new products are being produced from fish offal. There is also interest in genetic research as part of the new business environment. In the field of Information Technology, there have been mergers of companies and this is also an area with ambition for development.
In our efforts to achieve globalization we seem to have overlooked the fact that the Faroe Islands are already one of the most globalized countries. Approximately 10-20,000 Faroese people are living abroad and thousands of Faroese citizens work and study abroad. A great proportion of the Faroese population is abroad every year.
Trading of companies: In this period of enormous change, many companies are being sold and prices are unusually high. Fishing boats are sold involving foreign interests; downstream subsidiaries of oil companies have been sold; shipyards, building supply stores, wholesale firms and smaller businesses have been changing hands in great numbers. In addition, the Faroese banks have increased their business both at home and abroad.
From savings book to shares: The desire to become more international has also had an effect on individuals, great numbers of whom have started to invest in shares. Also, several Faroese companies are listed on the Icelandic stock exchange and, generally speaking, there is a feeling of optimism in the country as opportunities for both individuals and industry to gain loans have been very good. This has led to a high number of bank loans to individuals and to businesses.
How did it happen? There are several factors which have combined to bring about these changes in ownership and the dramatic increase in the cost of the means of production. One reason is that following the big economic crisis in 1992-93, companies, industrial buildings and boats were traded at very favorable prices for the buyers and hence 10-12 years later, the buyers are in a good position to sell.
Our current situation has likewise been linked to share prices on the international market which have influenced sale prices of Faroese companies, even if these were not registered on the stock exchange. Good liquidity in Faroese banks also made it easy for new businesses to finance expensive industrial projects.
The big question is why the former owners opted to sell their companies. Is this due to an unsatisfactory political framework regulating industries such as fishing? Signs are entrepreneurs within the primary industries, namely fishing and fish processing, feel marginalized.
This seems to indicate a trend in society where the business environment for owners in traditional industrial sectors experience difficult conditions whereas people operating in modern industrial fields receive praise and positive publicity. Such conditions for those involved in the primary industries have resulted in several boat owners opting to sell their boats.
Business in the Faroes 2008-09: The business environment looks positive if one plans to establish a diversified business. Company tax is low, around 18 percent, though there are some indications that the business year 2008-2009 will not be as good as many expect. The global financial crisis is having an impact on us as well; record high oil prices, increasing food prices, increased bank interest charges combined with possible stagnation in fish prices can lead to a combination of circumstances that will have a negative effect on the Faroese economy. In addition, there is the issue of how the two major fishing and fish processing companies will cope since they are the biggest players in the market with regard to the purchase of saithe and haddock for processing. They also process cod, although there are other, smaller factories which also process cod.
A substantial proportion of the haddock is sold abroad, non-processed and fresh. However, for the Faroese community, it is of utmost importance that the two major companies are active in the market. A question which entrepreneurs ask themselves relates to the Faroese banks’ loan capability, liquidity and solvency.
It will be very interesting to see how the companies which have been traded in the past five years will manage to survive.
Another very relevant question is how people with available investment capital will operate. In this context we can mention the seine net fleet, new Faroese investment companies and the New Rich of the Faroe Islands. The question is if they will invest in the Faroe Islands to the extent that the industry can continue to flourish and be the foundation for continuous growth of the welfare society. The greatest assets we have is intelligent and capable people, including young people, who can go to anywhere in the world to work and study. It remains to be seen whether the political system, investors and the finance sector will manage to capture and transform the knowledge that emerges from this so that individuals and businesses have the conditions to create new, sustainable industries in this country.
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Business Environment