Thorvaldur GylfasonThorvaldur Gylfason

Independence Independence and Opennessand Openness

The Case of IcelandThe Case of Iceland

19041904 Home rule Home rule Icelandic Minister for Icelandic affairs, Icelandic Minister for Icelandic affairs,

responsible to the Althingresponsible to the Althing Supreme executive power Supreme executive power transferred from transferred from

Copenhagen to ReykjavíkCopenhagen to Reykjavík

19181918 Sovereignty Sovereignty Royal union with DenmarkRoyal union with Denmark Foreign affairs still handled by DenmarkForeign affairs still handled by Denmark

19441944 Independence Independence Controversial: some wanted to waitControversial: some wanted to wait

History: History: Three key datesThree key dates

Jón SigurðssonJón Sigurðsson (1811-1879) (1811-1879) Father of the RepublicFather of the Republic Iceland’s first economist, strong advocate of Iceland’s first economist, strong advocate of

free trade, education, and other liberal causesfree trade, education, and other liberal causes

Valtýr GuðmundssonValtýr Guðmundsson (1860-1928) (1860-1928) Initiated movement leading to Home Rule Initiated movement leading to Home Rule Stressed economic and technological progress Stressed economic and technological progress

before full, formal independencebefore full, formal independence

Hannes HafsteinHannes Hafstein (1861-1922) (1861-1922) First minister, revered poetFirst minister, revered poet

Politics:Politics:Three key Three key personspersons

19041904 Upswing across the boardUpswing across the board Local bank and telephone, wave of optimismLocal bank and telephone, wave of optimism

19181918 SovereigntySovereignty19441944 IndependenceIndependence19461946 UN, founding memberUN, founding member19491949 NATO, founding memberNATO, founding member

Did not ask: What’s in it for us? Did not ask: What’s in it for us?

19701970 EFTA, ten years too lateEFTA, ten years too late19941994 EEA, key to upswing ever sinceEEA, key to upswing ever since

Counterhistory: What Counterhistory: What might might notnot have have happenedhappened

Rapid economic growth: RevolutionRapid economic growth: Revolution Iceland: 2½% per yearIceland: 2½% per year 1900-20001900-2000 Denmark: 2% per year 1900-2000Denmark: 2% per year 1900-2000

Major sources of rapid growthMajor sources of rapid growth Institutions: Democracy, liberty, equality, Institutions: Democracy, liberty, equality,

…… InvestmentInvestment EducationEducation TradeTrade Diversification away from fishDiversification away from fish

Iceland’s economic Iceland’s economic development since 1900development since 1900

Further sources of rapid growthFurther sources of rapid growth Escalating foreign debtEscalating foreign debt

Living beyond our meansLiving beyond our means Question of sustainabilityQuestion of sustainability

Hard workHard work Need long hours to make ends meetNeed long hours to make ends meet

Mixed blessing: Sign of costly inefficiency Mixed blessing: Sign of costly inefficiency Rural interests are overrepresented in the Rural interests are overrepresented in the

AlthingAlthing Special-interest politics has delayed Special-interest politics has delayed

modernization in the direction of a wide-open modernization in the direction of a wide-open market economy market economy

Iceland’s economic Iceland’s economic development since 1900development since 1900

Iceland is no longer a fish-based economyIceland is no longer a fish-based economy Share of fisheries in economic activity is Share of fisheries in economic activity is

less than many seem to thinkless than many seem to think In GDP: less than 10%In GDP: less than 10% In employment: less than 8%In employment: less than 8% In exports: less than 40%In exports: less than 40%

Natural consequence of rapid growthNatural consequence of rapid growth Fish stocks are fixed while other sectors of Fish stocks are fixed while other sectors of

economy continue to groweconomy continue to grow

A common A common misconception about misconception about fish in Icelandfish in Iceland

GD

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Log

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61 500

Manufactures exports (% of merchandise exports) Lin

0.000001 1055020 30 40 60 70 80 90

500

1 000

5 000

10 000

40 000

20 000

7 000

3 000

2 000

Africa

Americas

Arab countries

Asia

Europa

Income Per Head and Economic Diversification 2001Income Per Head and Economic Diversification 2001

GD

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Log

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61 500

Agriculture, value added (% of GDP) Lin

0.07 95.55020 30 40 60 70 80

500

1 000

5 000

10 000

40 000

20 000

7 000

3 000

2 000

Africa

Americas

Arab countries

Asia

Europa

Income Per Head and Agriculture 2001Income Per Head and Agriculture 2001

Goods, services, capital, laborGoods, services, capital, labor ““Four freedoms” (EEA)Four freedoms” (EEA)

Ideas, technology, innovationsIdeas, technology, innovations Trade Trade isis education education

Fierce debate in Iceland … Fierce debate in Iceland … … … since 1843, when Jón since 1843, when Jón

Sigurðsson published his Sigurðsson published his first treatise on tradefirst treatise on trade

Foreign trade is Foreign trade is keykey

More on trade and diversification

For example, debate in 1920s For example, debate in 1920s about whether to import foreign about whether to import foreign workers to “enlarge” Icelandworkers to “enlarge” Iceland

Those in favor stressed Those in favor stressed efficiency efficiency gainsgains from industrial expansion from industrial expansion

Those against emphasized threat Those against emphasized threat to Iceland’s to Iceland’s national identitynational identity

Debate continuesDebate continues To join or not to join the EU?To join or not to join the EU?

Iceland vs. Norway Iceland vs. Norway

Foreign trade is keyForeign trade is key

Foreign trade is keyForeign trade is keyIceland’s entry into EEA eleven years agoIceland’s entry into EEA eleven years ago

33 MPs of 63 voted for EEA agreement33 MPs of 63 voted for EEA agreement

Substantial and diverse gains Substantial and diverse gains Backbone of Iceland’s economic Backbone of Iceland’s economic

liberalization since the mid-1990sliberalization since the mid-1990s

But, for Iceland, EEA is not enoughBut, for Iceland, EEA is not enough Local oligopoly hurts consumersLocal oligopoly hurts consumers

Even EU membership is not enough Even EU membership is not enough National currency hinders tradeNational currency hinders trade

In these debates, In these debates, there are those who there are those who look outwardlook outward

and want to make Iceland more like and want to make Iceland more like other countries nearby, and larger … other countries nearby, and larger …

... and there are also those who ... and there are also those who look look inwardinward and wish to be on guard and wish to be on guard against foreign influences and want to against foreign influences and want to keep Iceland different, and smallkeep Iceland different, and small

Some want a mixture of bothSome want a mixture of both Beware of false contrastsBeware of false contrasts

Internationalism and nationalism are sisters Internationalism and nationalism are sisters

Foreign trade is Foreign trade is keykey

Trade is key to Trade is key to diversificationdiversification, , which also matters greatly for growthwhich also matters greatly for growth

Major challengeMajor challenge Develop Develop human resourceshuman resources through through

education and vocational trainingeducation and vocational training Iceland’s success derives from its well-Iceland’s success derives from its well-

educated people, not fish in the seaeducated people, not fish in the sea Natural-resource dependence has proved Natural-resource dependence has proved

to be a mixed blessing around the world: to be a mixed blessing around the world: question of question of educationeducation, inter alia, inter alia

Foreign trade is Foreign trade is keykey

In conclusionIn conclusion

The EndThe EndThe key to lasting The key to lasting economic success is a economic success is a market economy market economy based on free trade, based on free trade, diversified economic diversified economic activity, well-educated activity, well-educated labor, and sound labor, and sound policies and policies and institutionsinstitutions

These slides can be viewed on my website: www.hi.is/~gylfason

Political sovereignty, Political sovereignty,

then full then full

independence, independence,

helped Iceland helped Iceland

achieve these goals achieve these goals

““When trade was free in When trade was free in ancient times, the ancient times, the country lived its golden country lived its golden age.age.” (1843)” (1843)

Foreign trade restrictions Foreign trade restrictions were lifted in 1855were lifted in 1855

Jón Sigurðsson Jón Sigurðsson

““You think that someone may swallow You think that someone may swallow

us up. Let them gobble, in the sense us up. Let them gobble, in the sense

that they trade and do business with that they trade and do business with

us.”us.”

ValtýrValtýr

Hannes Hannes HafsteinHafstein

GDP per capita 1975-GDP per capita 1975-2002 2002 (US$, constant 1995 (US$, constant 1995 prices, ppp)prices, ppp)

Denmark and Denmark and Iceland’s growth Iceland’s growth performance performance since 1975 is since 1975 is almost almost indistinguishablindistinguishablee

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

Denmark

Iceland

GDP per capita 1975-GDP per capita 1975-2002 2002 (US$, (US$, constant 1995 constant 1995 prices, pppprices, ppp))

Denmark and Denmark and Iceland’s growth Iceland’s growth performance performance since 1975 is since 1975 is almost almost indistinguishablindistinguishableeIreland caught Ireland caught up, and up, and surpassed ussurpassed us

0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

Denmark

Iceland

Ireland

Investment 1960-Investment 1960-2002 2002 (% of GDP)(% of GDP)

0

5

10

15

20

25

30

35

40

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

Denmark

Iceland

Ireland

Similar Similar investment investment behavior in behavior in Iceland and Iceland and Denmark since Denmark since mid-1980s mid-1980s

Before, egged Before, egged on by high on by high inflation, inflation, Icelanders Icelanders invested moreinvested more

Quantity vs. quality

Tertiary education Tertiary education 1970-1970-2000 2000 (% of cohort)(% of cohort)

0

10

20

30

40

50

60

70

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

Denmark

Iceland

Ireland

Denmark Denmark remains ahead of remains ahead of Iceland in higher Iceland in higher educationeducation

Recently, Recently, spurred by spurred by proliferation of proliferation of different different colleges, some colleges, some private, tertiary private, tertiary education education enrolment has enrolment has risen risen

Exports 1960-2002 Exports 1960-2002 (% of GDP)(% of GDP)

0

10

20

30

40

50

60

70

80

90

100

Denmark

Iceland

Ireland

Exports from Exports from Iceland have Iceland have been stagnant been stagnant relative to relative to national income national income since 1870since 1870

Exports Exports equivalent to one equivalent to one third of GDP: too third of GDP: too small for such a small for such a small country small country

Foreign direct Foreign direct investment 1974-2002investment 1974-2002 (% of GDP)(% of GDP)

Iceland has also Iceland has also been a reluctant been a reluctant recipient of FDIrecipient of FDI

This reflects a This reflects a general general reluctance to reluctance to engage in free engage in free trade, as trade, as witnessed by witnessed by Iceland’s Iceland’s unwillingness to unwillingness to join the EUjoin the EU

0

5

10

15

20

25

30

35

40

45

50

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

Denmark

Iceland

Ireland

High-tech exports 1988-High-tech exports 1988-2002 2002 (% of total exports)(% of total exports)

0

10

20

30

40

50

60

Denmark

Iceland

Ireland

Iceland has not Iceland has not been at the been at the forefront of the forefront of the high-tech high-tech revolutionrevolution

Manufacturing Manufacturing has been hurt has been hurt by preferential by preferential treatment of treatment of fisheriesfisheries

Primary exports 1962-Primary exports 1962-2002 2002 (% of merchandise (% of merchandise exports)exports)

0

20

40

60

80

100

120

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

DenmarkIcelandIrelandGreenlandFaeroe Islands

Iceland has Iceland has begun to begun to diversify its diversify its economic baseeconomic base

Fisheries Fisheries account for 40% account for 40% of exports and of exports and less than 10% less than 10% of GDP and the of GDP and the labor forcelabor force

Current account Current account balance 1980-2006 balance 1980-2006 (% (% of GDP)of GDP)

-14

-12

-10

-8

-6

-4

-2

0

2

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

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2000

2001

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2003

2004

2005

2006

Forecasts

Foreign debt 1980-Foreign debt 1980-2004 2004 (% of GDP)(% of GDP)

0

20

40

60

80

100

120

140

160

180

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

GDP per hour of work GDP per hour of work 2002 2002 (US$ at 1999 prices)(US$ at 1999 prices)

0 10 20 30 40 50

TurkeyPortugal

GreeceNew Zealand

IcelandSpainJapan

AustraliaUnited Kingdom

SwedenCanadaFinland

SwitzerlandItaly

AustriaDenmark

United StatesGermany

NetherlandsIrelandFrance

BelgiumNorway

Fish exports 1980-2003 Fish exports 1980-2003 (% of total exports)(% of total exports)

0

10

20

30

40

50

60

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

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2001

2002

2003