.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Search

Contact:
Foundation for Economic Growth,
P.O. Box 10-282,
Wellington, N.Z.
Email

Iceland
By
Jun 15, 2004, 14:10

Email this article
 Printer friendly page
One interesting economic phenomenon of recent times is that a large number of countries have adopted the “Open Market” style after many years of tight government controls and an all encompassing “Welfare State”.

It seems that the socialist model for running a country cannot work in the long run and there are many examples of socialist states falling apart under the weight of central government. The only unreformed socialist state left in the world is North Korea, and that country serves as a very good example of how not to run a nation state.

However, what may be of more interest to us and more benefit is to examine nations that have converted from socialist type controls to a market economy with reducing tariffs, free money flows and other elements of freedom for the citizens.

The first country I have had a look at is Iceland. I chose Iceland because in 1970 it was number 17 in the world wide wealth stakes and New Zealand was number 18. At that time we were both under strict government controls and in the 1980s these controls were lifted; starting first in New Zealand and five years later in Iceland.

What interests me is that by the year 2000, Iceland had climbed to number 14 in the world wide wealth stakes and New Zealand had declined to number 37; a sad state of affairs for us.

Is it because Iceland has vast mineral resources? No. In fact they have little or no mineral resources at all. Perhaps they have a much larger population? Well, no again. We have 14 times as many people. Maybe they have vast agricultural exports? Again, no. Only 0.5% of the land is cultivated with potatoes and swedes and the rest is for the most part tundra, ice and snow. It is not called Iceland for nothing! Fruit and vegetables are grown in hothouses.

They are energetic fishermen and it was this that gave them their livelihood over the last century and before. But in 1990 the fish stocks in the North Atlantic collapsed and this gave them major problems. Perhaps this was the catalyst that spurred them into opening up their lives to the market economy.

How can a small country with no natural resources become the 14th wealthiest nation in the world? I have done a little research using that most brilliant of all time encyclopaedias – the World Wide Web – and I would like to show you what I have found.

First of all I found out something about the people themselves. Here is a little history:

Although her presidency will be remembered as a considerable landmark, the nation has long held an enlightened attitude toward the status of women. From the time of the first Althing (parliament) in 930AD, women have held equal rights under Icelandic law, including rights to divorce and rights of property. Women's emancipation may possibly date to even earlier times. The sagas, the literary record of the myths, legends, and characters of Iceland's settlement, tell occasionally of women as powerful as any man in an often violent world.

The Icelandic sense of egalitarianism has resulted in women holding every public office of significance in recent years. It is also reflected in the genuine lack of any pretensions of social class structure in the country. This is an apparently classless society where all are known by their first name, even on formal occasions. People are often identified by their occupations (i.e., "Vigdis the president" as distinguished from "Vigdis the seamstress"), and the phone book is actually organized according to first names. One employer did grumble quietly to me about the informality that this practice fosters, but he was quite the exception among the Icelanders I met, and even he quickly tempered his comments.

The use of first names is significant. Icelanders do not maintain family surnames, and women keep their last names after marriage. All first names are, by law, traditional Icelandic names and often are used recurrently in family lines. For surnames, children are given their father's first name with the addition of the possessive son (son) or d—ttir (daughter). Thus, Skuli Jonson and Kristen Jonsd—ttir would be the son and daughter of Jon Sveinnson and Inga Skulisd—ttir.

It is not uncommon to encounter nuclear families with as many as four surnames per household. Even children born out of wedlock may be named after their father. This practice reflects a surprisingly tolerant attitude toward illegitimacy in an otherwise conservative, predominantly Lutheran society. However, men are expected to take proper financial responsibility for their children, and neither society nor the law will tolerate malingerers. The "deadbeat dad" is almost unknown, although there are a growing number of single parents seeking welfare, according to the Reykjav’k department of social affairs.

Iceland's patronymic tradition is perhaps unique, but Icelanders are very conscious of their respective genealogies and this is a considerable topic of conversation and literature. Some Icelanders can even trace their lineage to the mythic figures of the time of the island's first settlement.

This was an interesting snippet I gleaned from my armchair travels. They are an egalitarian society much as ours but they seem to have much greater social cohesion and don’t tolerate people who won’t pull their weight. Can this be a clue?

Now a little more history. They have not had it easy in the transfer to the market economy:

Iceland's economy is prone to inflation but remains rather broad-based and highly export-driven. The 1970s oil shocks hit Iceland hard. Inflation rose to 43% in 1974 and 59% in 1980, falling to 15% in 1987 but rising to 30% in 1988. Since 1990, due to economic reforms and deregulation, inflation has dramatically fallen, averaging only 4.85% from 1990-2000. Due to several years of strong economic growth, Iceland experienced the best economic period in its history in the 1990s. However, the economy fell into recession in late 2001 and inflation began to escalate. In March 2001, the Central Bank adopted an inflation target exchange rate policy instead of an index rate policy with the aim of managing the value of the Icelandic Krona to keep inflation below a certain level. In addition, the government urged municipalities, labor unions, and private parties to unite in keeping inflation down.

Unemployment more than doubled to 2.6%, and inflation that spiked above 9% threatened to give labor unions leverage to abrogate national wage agreements. The government took monetary and fiscal measures that brought inflation down close to the current target rate of 3%. Inflation remained moderate in 2002, but with slightly negative GDP growth. The government expects a return to positive growth in 2003.
Wow, unemployment shot up to 2.6%. I wonder how accurately that is calculated? I wonder how accurately our own rate is calculated!

Some more information for you:

Iceland has few proven mineral resources, although deposits of diatomite (skeletal algae) are mined. Abundant hydroelectric and geothermal power sources allow about 90% of the population to enjoy heating from these natural resources. The Burfell hydroelectric project is the largest-single station with capacity of 240 mw. The other major hydroelectric stations are at Hrauneyjarfoss (210 mw) and Sigalda (150 mw). Iceland is exploring the feasibility of exporting hydroelectric energy via submarine cable to mainland Europe and also actively seeks to expand its power-intensive industries, including aluminum and ferro-silicon smelting plants. Nordural Aluminum is a wholly owned investment by Columbia Ventures of Washington State. The plant employs more than 150 people and recently expanded to 90,000 tons per year capacity, which is planned to double before the end of the decade. Power projects in the connection with Alcoa's 322,000 tons per year capacity aluminum smelter have already taken off. The smelter will be opened for production in 2007 at which point over $2 billion will have been invested in this largest project in Icelandic history.

Aluminium. Sounds familiar. They seem to have plenty of electricity. With all our water and wind this should not be too difficult. What is stopping us? Ah! Here comes the nub: (Tongue firmly in cheek)!

Iceland has no railroads. Organized road building began about 1900 and has greatly expanded in the past decade. The current national road system connecting most of the population centers is largely in the coastal areas and consists of about 13,000 kilometers (8,125 mi.) of roads with about 3,955 kilometers (2,547 mi.) were paved. Regular air and sea service connects Reykjavik with the other main urban centers.

The national airline, Icelandair, flies from Iceland to Europe and North America, and is one of the country's largest employers. Iceland became a full European Free Trade Association member in 1970 and entered into a free trade agreement with the European Community in 1973. Under the agreement on a European Economic Area, effective January 1, 1994, there is basically free cross-border movement of capital, labor, goods, and services between Iceland, Norway, and the EU countries.

A free trade agreement with Europe must be beneficial but you notice that they don’t want to join the EU. Perhaps this is because they think that they would have to pay more than they would receive.

So much for the background. Let us have a look at what they are doing now. Here is speech at the Consular Conference given by Geir H. Haarde the Minister of Finance in September 2001:

The Icelandic Economy: Current Status and Future Developments.

Ladies and gentlemen.

First, I would like to say that I am delighted to have the opportunity to address this audience today. I believe the consular corps that serves Iceland all around the globe is one of the country's greatest assets when it comes to protecting our interests abroad. I have several friends in this group who have been helpful to me personally in the past and I would like to thank you all for your excellent work on behalf of Iceland.

This, I'm told, is the first consular conference for some years. Since the Icelandic economy has developed dramatically in recent years, I thought it might be appropriate to give you a brief overview of what I consider to be the most significant changes in the recent past as well as the challenges facing us today and in the immediate future.

And as we Icelanders tend to do when discussing today's situation and even future prospects, we first take a glimpse back. As one of our greatest poets, Einar Benediktsson, put it in the early part of the last century: "When building the future, look towards the past".

However, some more general points to start with. The first thing to notice with respect to the Icelandic economy is its size. Or rather the lack thereof. It is one of the smallest economies in the world in absolute terms, its GDP this year estimated at 7,1 billion US dollars. The US economy is about 1200 times bigger, that of Japan 400 times bigger and the smallest Nordic economy, Norway, is roughly sixteen times bigger.

But you don't have to be big to be successful. This comparison does not tell the whole story. It ignores the population factor. Small economies can be rich or poor independent of the population size. Today we can say without hesitation that ours is small and rich. When measured in terms of GDP per capita Iceland was in 1999 number seven in the world outpacing most of our bigger European neighbours. This measure tells us that the overall living standard here is now among the highest in the world. We have come a long way in this respect in a relatively short period of time.

At the beginning of the 20th century Iceland was one of the poorest places in Europe. This achievement, however, has not come about all by itself and the authorities and the people have had to overcome many important challenges.

The second characteristic of the Icelandic economy is its relatively high dependence on one industry, i.e. fishing and fish processing. Although this has changed dramatically over the past few decades as a result of systematic diversification of the economy, this industry still accounts for almost a half of total export income from goods and services. But even that number is a little deceptive as Icelandic fishing companies today are no longer today monolithic enterprises. They now produce a highly varied assortment of products from different species using different processing methods developed for markets with different tastes all over the world. And in the fisheries sector we have developed a management scheme, a system of transferable quotas, which, although not perfect, both serves to protect the fish stocks from depletion and to maximise the value derived from them.

The most fundamental challenge for any nation, it seems to me, is to secure its own economic livelihood, as it is for any individual or family. It is the responsibility of the authorities in any modern state to provide the means or the framework to meet this challenge. For a small country in a world where labour is increasingly mobile this task is even more important. If living conditions are not competitive with the rest of the world the best part of the labour force simply leaves, usually the young and the most educated, the best and the brightest.

I consider this to be a daunting challenge for Icelandic authorities: How to make sure the young people stay or come back after studying or working for some time abroad.

In recent years I think we have done reasonably well in this respect. We have been successful in creating a living standard comparable to the best elsewhere and we have provided interesting and well paid employment opportunities in a variety of fields both in the so-called new economy sectors and in more traditional ones.

Let me now give you a brief overview of what our economy looked like a couple of decades ago. The Icelandic economy's dependence on fisheries resulted in an unstable environment subject to fluctuations in both fish prices and fish catches, sometimes both negative at the same time. This also meant that economic policy was almost entirely directed towards alleviating the immediate effects of fluctuations within the fisheries sector with little or no room for conducting responsible long-term fiscal and monetary policies on a more general basis. The inevitable consequence of this situation was instability and rampant inflation.

In addition, the economy was highly regulated and there were restrictions on trade and especially capital movements in and out of the country. There was also, admittedly, a widespread lack of understanding of the possible benefits of a more open market economy.

Much has happened since then. Apart from the changes resulting directly from government policy towards greater liberalisation, deregulation and other structural reforms, one of the more important milestones was Iceland's participation in the European Economic Area in the mid 90's along with its partners in the European Free Trade Association and the members of the European Union. By becoming a part of the European Single Market developments moved much faster than otherwise would have been the case. The EEA was the extra impetus needed to move the economy towards more openness.

The Icelandic economy is basically sound at present. This is both the result of sensible fiscal and monetary policies, as well as structural measures undertaken in recent years to improve economic conditions both of industry and households.

Tax reforms have been enacted in order to improve the competitive position of industry. We hope more of that may be on the horizon soon.

The financial market has been liberalised and modernised to increase the freedom of capital movements within the country as well as to and from abroad. This has markedly enlarged the domestic financial market which now offers a variety of new products and instruments. Old-style credit rationing is gone and interest rates are determined in the market place, but of course with reference to the basic rate of the Central Bank.

The pension fund system has been reorganised with the aim of strengthening the financial position of the funds and thereby of future pensioners in addition to strengthening financial saving.

Finally, earlier this year the Government took decisive steps in order to increase the Central Bank's independence and make low inflation the sole target of monetary policy.

These measures and the increased economic stability that has followed have resulted in a stronger economy and a much more vibrant business sector, more competitive than ever. Furthermore, this has paved the way for new sectors in the area of information technology, telecommunications and biotechnology, to name a few. As a result, Iceland is no longer dependent on one industry. Productivity has increased and economic growth has been higher in Iceland in recent years than in most neighbouring countries.

Icelandic enterprises and pension funds have also increased their investment activity abroad and so have foreign enterprises in Iceland, especially but not solely, in the energy sector.

The purchasing power of households has in turn increased rapidly while unemployment has fallen.
There has been a surge in domestic demand, but also a temporary hike in inflation and a widening current account deficit. This trend has now been reversed. The latest indicators point towards a considerable slowdown in domestic demand, most noticeably reflected in the current account deficit which appears to have peaked.

Also, inflationary pressures seem to be residing after an unusually strong upsurge earlier this year, mainly because of the sharp decline in the króna exchange rate.
In this context, it is important to note that the current account deficit is not due to deficit-spending on behalf of the central government, but exclusively the result of increased private sector borrowing. This reflects the private sector's confidence in the government's economic policy and continued economic stability. The strength of treasury finances, with one of the highest surplus in the OECD area, represents a significant counterbalance against the impact of private sector indebtedness upon domestic demand. This has enabled us to systematically reduce the treasury debt.

The strength of fiscal developments in the past few years has contributed significantly towards stability in the Icelandic economy. The surplus is not, however, attributable solely to the strong economic upswing since the structural surplus has also been growing. We plan to continue along the same path, both through strong fiscal finances and privatisation.

The Government has recently announced its next steps in privatising government stakes in various enterprises, most significantly in the telecommunications and banking sectors. This will bring considerable proceeds to the treasury and foster increased competition and productivity gains. In recent years, proceeds from the sale of government assets have been used to reduce treasury debt and future government pension commitments, as well as for some infrastructure projects. We believe the privatisation program of the Icelandic Government offers many interesting opportunities for foreign investors and would much welcome their participation in this transformation.

In this country we know that size is neither a necessary nor a sufficient condition for good policies or results. Smaller countries can solve the problems required of modern society as efficiently as the bigger one. Sometimes more easily and often they have fewer problems to solve. They stand to benefit more from a clearer international division of labour, from specialisation, and obviously from free trade based on universally accepted rules.

In the case of Iceland, which has a rich natural endowment base in terms of fisheries and energy resources, we have managed to move away from the wasteful policies of the past into a more enlightened policy framework. The opportunities for further economic development are everywhere, not least in power-intensive industries which rely on our under-utilised, renewable energy resources.

Still, many challenges lie ahead and we are not always our own masters in the modern world of globalisation and inter-dependence. Our relationship with the European Union, for example, is well defined and codified in the agreement on the European Economic Area and does not in my view call for a particular re-examination. Yet developments with respect to the Euro may at some time in the future require closer attention on our part, say if the UK, Sweden and Denmark all were to join the Euro and thus bring two thirds of our foreign trade into the Euro zone instead of the current one third.

But the knowledge of economic science in this country has improved greatly in recent years and so has the capacity to analyse and solve new problems. I am confident that we will be able to continue to improve our lot, making the best of what we have in good cooperation with our friends, neighbours and trading partners whom all of you represent.

Thank you.

Geir Haarde may have learned from the New Zealand experience in 1984. Maybe we can learn from them 20 years later.


Now let us shift forward 16 months and see what their Prime Minister has to say:

Address by Davíð Oddsson, Prime Minister of Iceland,
on the establishment of the Icelandic Chamber of Commerce in Japan Tokyo, 14 January 2003

Ladies and Gentlemen:

It is a pleasure and an honour for me to be present for the establishment of the Icelandic Chamber of Commerce in Japan. Chambers of commerce make an excellent forum for strengthening business contact between countries and the establishment of this one now is a major milestone in the history of Icelandic-Japanese relations. I would like to take this opportunity to discuss briefly Icelandic affairs and relations between our countries.

Next year, one hundred years will have passed since the first Icelandic government minister took office. That event marked a turning point in the history of Iceland, restoring the political centre of gravity to it after almost 700 years of being ruled first by Norway and later by Denmark. And in 1918 Iceland became a free sovereign state under a union with the Danish king.

This new-found political freedom launched a period of great advances in most fields and some of the greatest progress was made in the economy. In the space of a few decades Iceland managed to break out from centuries of poverty and now ranks with the nations that can offer their citizens some of the highest living standards in the world.

Economic progress in the twentieth century was based on fisheries which is still one of the main pillars today although the economy now is much more diversified than before.

Iceland has large energy resources in its waterfalls and geothermal fields, which have provided a basis for rapidly growing aluminium production by foreign investors. Tourism has also become a major industry.

One of the characteristic features of Icelandic economic policy in the last century was extensive government intervention in the economy. This was not confined to Iceland, the same happened in most European countries. In Iceland, however, this trend was taken so far that the economy was to a large extent officially controlled.

Banks were owned by the state, the exchange rate and interest rates were decided by the government, and there were numerous state-owned enterprises. Even though the economy grew rapidly for most of the century, this arrangement caused the Icelandic economy to be very prone to swings and left its foundations quite unstable in the long run.

A major turnaround took place in this respect in the last decade of the century. Throughout the nineteen-nineties, a systematic programme to reduce government influence on the economy was put into effect. State enterprises of all sizes have been sold, the privatisation of the banking system is nearing completion, the Central Bank – which was recently granted full independence – determines interest rates, and the exchange rate of our currency, the króna, is determined by market forces.

These changes, along with the treasury budget surplus that has been achieved for many years recently, have led to strong economic growth and at the same time laid a firm foundation for increased growth in the future. And international comparisons confirm the great success we have achieved in this field.

The annual report for 2002 by The Economic Freedom of the World network clearly shows the development that has been taking place. In 1990 Iceland was ranked number 30 in the world in terms of economic freedom, in 1995 it was number 18 and in 2000 it had reached eleventh place. This is a gratifying testimony to our success and encourages us to continue on this path and do even better.

Looking ahead to the coming years for the Icelandic economy, we can see that good fundamentals are in place for ongoing growth. The foundation is solid and forecasts have been made for substantial growth in the next few years. A particularly positive trend has been that national savings are increasing, and are estimated to have been 19% last year.

In 1944 Iceland received full independence and the Republic of Iceland was established. Foreign policy, which until then had been in the hands of Denmark, thereby came under Iceland's own control. From the outset it was the main policy of Icelandic governments to play a full part in international cooperation.

Iceland joined the United Nations in 1946 and was a founding member of NATO in 1949. In 1951 a defence agreement was signed with the USA, we soon join the OECD and began taking part in the work of the International Monetary Fund. Iceland signed the GATT treaty in the nineteen-sixties and became a member of EFTA, the European Free Trade Association, in 1970.

In 1994 we became part of the European Union's single market through the European Economic Area agreement, which was signed between the EU and EFTA, but did not accept an invitation to join the Community. This may sound strange, given how eager European countries are to join the EU, and possibly even stranger in light of the fact that the it is by far the largest market for Icelandic exports, and virtually all our European neighbours and allies belong to it.

One reason for this standpoint is that the roots of Iceland's economic independence lie in the rich fishing grounds surrounding the country. The European Union's Common Fisheries Policy, which is based on transferring decisions on fishing issues from member countries to the central EU authorities, is therefore completely unacceptable to Iceland.

Membership of the European Union would not serve Icelandic interests for various other reasons. One because adopting the euro could cause severe difficulties for economic policy implementation. Although Iceland's economy, like that of most other countries in Europe, is based on market forces and free trade, the fact is that swings in the Icelandic economy are in many ways determined by other factors than those which predominate on the continent. In the view of economic experts this makes it vital for us to keep control over the instruments that accompany an independent monetary policy. It is necessary for the exchange rate of the króna to reflect the state of the economy and for interest rates to be in line with the economic situation at any time.

Although Iceland chooses to remain outside the European Union and is located where the continents of Europe and America meet, Icelanders regard themselves as an entirely European nation. This is logical, given our history and culture, and we have greater economic political interests to safeguard in Europe than anywhere else, and rely heavily on peace and stability in the continent. This made it necessary to ensure close and positive relations between Iceland and the European Union. The European Economic Area Agreement secured Iceland's access to the EU single market. As a result, Iceland can now be said to enjoy the benefits that membership would bring, but at the same time we have every opportunity to make the most suitable possible arrangements for ourselves at any time and are not too restricted by the burden of regulations which is so very characteristic of the European Union.

Increasing globalisation of business and trade is a positive and important development for us. It is crucial for the Icelandic government to create an economic framework that will enable us to take advantage of the opportunities that present themselves. We need to ensure that Icelandic companies which operate in international markets and run their activities from Iceland will continue to want to do so.

At the same time we need to attract foreign businesses to our country.

In order to boost Iceland's competitive position, the government recently cut corporate income tax from 30% to 18%, thereby making Iceland an exciting option for businesses that want to enjoy low tax rates but still have full and unrestricted access to the EU single market.

An additional factor is that businesses are now allowed to keep their accounts in whatever currency suits them, thereby greatly reducing all currency risk.

In recent years, Icelandic businessmen have to a greater degree than before been looking beyond Europe in order to diversify their exports and markets and to obtain more tourist traffic from other parts of the world. In Asia, and especially here in Japan, there are already important markets for Icelandic companies, but also long-term opportunities for increasing the share of these markets in our national exports.

Besides seafood, Icelandic companies have the potential to win ground in foreign markets by selling their experience and expertise in fisheries and equipment for fishing and fish processing, which is already a dynamic manufacturing industry in Iceland.

Iceland and Japan have long enjoyed good relations and have now set up embassies in each other's countries which opens up new possibilities to strengthen relations. The decision to open a Japanese embassy was made following a visit by the late Prime Minister Keizo Obuchi to Iceland in June 1999 and his personal interest in the matter.

Prime Minister Obuchi came to Iceland to meet the Prime Ministers of the Five Nordic countries to discuss international issues and other common interests, and also to make a short official visit to Iceland at my invitation. Two years before, Prime Minister Ryutaro Hashimoto had met the Nordic Prime Ministers at their summer meeting which was held in Bergen, Norway.

Shared values and interests give Iceland and Japan opportunities for international cooperation in various fields. These include the conservation of the oceans and their living resources against overfishing and pollution. Iceland became a member of the International Whaling Commission again last year after ten years' absence.

Our membership now is made with a reservation against the ban on commercial whaling, and the Japanese government deserves our most heartfelt thanks for their invaluable assistance in enabling us to rejoin with this condition. On becoming a member Iceland undertook not to begin commercial whaling until 2006 at the earliest, but scientific whaling could start earlier. As ever, because of the small size of our home market it is a precondition for whaling off Iceland that it must be able to export the products, and in this respect we naturally look to Japan as our traditional market for them.

A considerable amount of trade takes place between Iceland and Japan. Our imports from Japan in recent years have amounted to about 5% of our total imports, and our exports to Japan to between 5 and 6% of the total. Tourism between our countries is also considerable and Iceland is interested in signing an air transport agreement with Japan, which is regarded as an important precondition for further increasing travel between our countries.
I would like to end by congratulating you on the establishment of the Icelandic Chamber of Commerce in Japan.

I am convinced that Icelandic-Japanese relations will continue along the excellent lines we know today, and that trade between our countries will flourish even further. I am certain that the Chamber will make a strong contribution towards achieving that.

Thank you.

*****************************************

Well now, I am not about to advocate going whaling with the Japanese. But I do see in this speech a distinct determination to enhance the wealth of Icelandic citizens and there doesn’t seem to be any indication of stopping for a “cup o’ tea”!

Company tax reduced from 30% to only 18%.

Whatever next.

It is interesting to note that the IRD funded a study into tax rates by an international expert some years ago and he found that we could maximize our growth rate if we reduced our tax rate to about 18%. If we maximize our growth rate then we will all be richer. Our current Labour Government have stated that they want to see us back in the top half of the OECD wealth list by 2010 and then changed the date to some unspecified time in the future. It is a strange project which doesn’t have a completion date!

Can we learn from Iceland? Let us not get too concerned about the scientific basis for economic laws or hypotheses but rather look at other countries and copy the best practice we can find.


Here is an article by Jurgen Hecker after an interview with the Finance Minister when these tax cuts were promulgated:

REYKJAVIK, May 6 (AFP) - Iceland's Finance Minister, Geir H. Haarte, said on Tuesday that his government's election promise of massive tax cuts was justified by the economic outlook and would not affect his country's international credit ratings.

"If Iceland were a company which has been producing profits, then it would be time to pay out the dividends," Haarte said in an interview with AFP ahead of Saturday's general election in Iceland.

Haarte said his centre-right coalition government's policies of privatisation and deregulation were expected to produce GDP growth of 2.75 percent this year and 3.75 percent in 2004.

"Behind our tax cut promises is a fundamentally solid position. The windfall for the Treasury gives us the rare opportunity to lower taxes by more than we have ever done before," Haarte said.

Prime Minister David Oddsson will slash personal income tax and value-added tax on food and basic necessities and hopes to eliminate property tax altogether in a package worth a total of 22 billion Icelandic kroner (299.5 million dollars) if he wins a fourth consecutive term Saturday, Haarte said.

"This is an ambitious plan, a bold plan, but it can be done. The secondary effects will ultimately be highly beneficial," he said, adding that Iceland's sovereign credit ratings would not be allowed to suffer. "We will do this in a responsible way," he said.


The reign of Oddsson, who has been in power since 1991, is often compared to that of former British Prime Minister Margaret Thatcher, and Haarte has no problem with comparing economic policies.

"We have learned from the experience of the UK during the Thatcher period. But whoever is in charge, a policy of privatisation and tax cuts is a very sound policy," he said.
Haarte said he expected "healthy growth" of between three and four percent annually for the next few years, coupled with low inflation and low unemployment, which is projected to drop to just two percent of the workforce next year from an estimated three percent in 2003.

Against this rosy backdrop, Iceland sees no reason why it should join the European Union, although it is a member of the European Economic Area (EEA). "The costs would outweigh the benefits," Haarte said. "The EEA already gives us 90 percent of the benefits of joining the EU."

Some three-quarters of Iceland's GDP is based on fishing. "We have fought very hard to control our own resources, and we don't want to hand them over to Brussels," he said.

"The very thought of sharing them with distant EU members is unacceptable," he said.

Iceland would also not benefit from participation in the EU's Common Agricultural Policy and would become a "significant net contributor" to the EU's budget and "receive little in return."

Membership of the euro would also be detrimental to Iceland's economy because the European Central Bank sets rates mostly according to conditions in large EU member states, Haarte said.

"The thought that the ECB would decide according to economic conditions in Iceland is absurd," he said, adding that the Icelandic economic cycle depends essentially on fish catches and rarely moves in sync with the euro zone.
When issuing bonds, the Icelandic treasury spreads its risk between euros and dollars, but even this exposure to the large reserve currencies will end in the face of Iceland's improving financial position, Haarte said with a smile of satisfaction. "We don't really borrow that much anymore," he said.

According to the latest polls, Oddsson's coalition government looks set to win a narrow majority in the 63-seat Icelandic parliament, possibly giving it just one more seat than the opposition.

Well it will be interesting to see how they go in the election. I wonder if the opposition is proposing a tax increase?

The last interesting point to make about Iceland is that although they kill whales with the Japanese and reduce taxes like Roger Douglass they also have a “Green” side:


Iceland shifts to hydrogen economy.

Amidst escalating signs of global climate change, Iceland has become the first country to undertake a shift to a hydrogen energy economy. If the project succeeds, the island nation expects to gain complete freedom from dependence on oil or coal by 2030. In doing so, it will also eliminate its main sources of greenhouse gas emissions.
Hydrogen fuel cells, which Iceland will use to power electric cars, buses and boats, as well as to heat and light buildings, can be made from non-polluting, renewable energy sources – primarily geothermal and hydroelectric.

While other countries don’t have Iceland’s abundant volcanic "vents" and waterfalls, most could turn to other renewables – such as wind, solar, or tidal – to achieve similar ends, says Seth Dunn, a research associate at the US-based Worldwatch Institute, who visited Iceland recently to investigate the country’s plan.

He met with leaders of a new joint venture of the public and private sectors, who have made Iceland into what Dunn describes as a "39,000-square mile lab space for conducting their ambitious experiment."

Iceland is currently dependent on imported oil for 38 per cent of its national energy use. Its plan is to reduce that dependence to zero.

Fuel cells are under rapid development throughout the industrial world, so Iceland will not be alone in its quest. But it is the first country to make a full commitment to a sustainable, non-polluting energy system of the kind needed to stabilise the global climate. "While other industrial countries agonise about their oil dependence and carbon dioxide omissions, Iceland is going ahead with the bold kind of change we’re all going to have to face sooner or later," said Seth Dunn.

Fuel cells provide a solution to the problem of how to convert intermittent renewable sources like wind and sun into reliable power. By using the energy of thermal vents or falling water, it is possible – though the process of electrolysis – to split water into hydrogen and oxygen. The energy can then be stored and transported, initially, in the form of hydrogen fuel cells and eventually through an infrastructure of hydrogen pipelines and fuelling stations.

Other countries may need to take an intermediate step, notes Dunn. "Because they have not developed their renewable energy resources as fully as Iceland has, they may first use natural gas as a ‘bridge’ to hydrogen, which can be extracted from natural gas as well as from water. The ultimate step, though, is producing the hydrogen from renewable energy and delivering it through a hydrogen infrastructure – which is exactly the challenge Iceland is facing."

Iceland unveiled its plans for a fleet of hydrogen-powered fuel cell buses and a hydrogen filling station in Reykjavik, on March 1, 2001. When built, three buses will operate on the Municipal Bus Corporation's normal service.

Source: Worldwatch magazine, November/December 2000, published by the Worldwatch Institute.


So this is Iceland. Can we learn anything from this brief sketch of life in a small cold island in the North Atlantic? And how does their experience impinge on our life in New Zealand?

Some observations:

1. Iceland is a small isolated community with few natural resources apart from geothermal and Hydro-electric power. Although smaller in this sense it is not too dissimilar from New Zealand.

2. The people form a homogeneous society with roots going back to 930AD. In contrast, New Zealand has become rather fractured recently with Maori aspirations causing many people to ask very basic questions of democracy and citizenship.

3. Iceland started the move to a Market Economy later than New Zealand but they didn’t stop for a "Cup o’ Tea" along the road and neither have they changed their parliamentary constitution in such a radical manner.

4. Iceland is still moving towards greater competitiveness in the market place with a move to reduce company tax rates to 18%. Our taxes are going up.

5. A thriving market economy is an advantage when promoting the shift to a "hydrogen" based economy. It costs money so the richer we are the easier it is to afford it.

6. Icelanders think that free trade agreements and removal of tariffs and other government controls combined with the privatisation of government bodies is a necessary part of obtaining a fully functional market economy. The current New Zealand government still maintains State Owned Enterprises and has recently started up a retail bank.

7. Iceland has moved up the wealth stakes from 17th to 14th while New Zealand has moved down from 18th to 37th in 2000 and now down to 38th.

© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.

Top of Page

Creating Wealth and Keeping it

The New book by Phil Scott, President of the Foundation for Economic Growth.

"This book is good, damn good and no statistics!" Lindsay Gordon, MA, MSC, PHD.

Every serious economics student should have a copy and read this ground-breaking foundation of clear economic thinking. Real Economics explains how human actions shape our world and why so much seems to be going wrong for Western economies. This book will bring enlightenment for the general reader who will see why a few very wealthy are becoming exceedingly rich and the middle classes are on the road to serfdom.

See more: www.realeconomics.co.nz