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 mostly 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?
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?
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%,
Iceland's Finance Minister, Geir H. 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.
"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.
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.
Some observations:
1. Iceland is a small isolated community with few natural resources apart from geothermal and Hydro-electric power. Although smaller 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.
© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.
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