ECONOMY

The strength of the Icelandic economy is also its weakness. It is a small economy, it is thin and it is snappy. However, the last year was not the best one in our economic history, the GDP Growth was 4.9% 2007 and the Current Account Balance was -15.4% of GDP which was much better than the year before.

For the last few years, the Icelandic economy has been doing quite well and has been in the spotlight of late. According to Frederic S. Mishkin and Tryggvi T. Herbertsson, authors of a thorough report on the subject, Financial Stability in Iceland, this is good news in some ways and bad news in others. However, last year was terrible for both Iceland, the land of Ice and Snow, and Icelanders, and the next two years will be the same. The main reason for the crisis in Iceland is corruption.

According to the statistics, there is no corruption in Iceland, (according to Transparency International) but as we Icelanders know, at least now, the Icelandic society is like Rumania just before Ceausescu left 1989! Let's hope that the same fate will not befall the Icelandic politicians... According to the International Monetary Fund, IMF, the dept of Iceland will amount to 108% of GDP for the next two years (2009 and 2010), but according to Moody's, it will be much higher, or 150% of GDP.

Iceland is the smallest economy in the world to have its own currency and a flexible exchange rate. Ups and downs, in other words. Flexibility has been an asset. Iceland is also considered to have excellent institutions, high education and freedom of the press. Furthermore, the country’s financial regulation and supervision is generally considered efficient. Iceland’s fiscal position is superior by far to that seen in countries such as the United States, Japan and Europe.

Iceland is a small and young economy, and therefore vulnerable when the impact of financial flows is taken into account. A small change (as a percentage of overall flows in international markets) can have a huge impact, and flexibility is not always an option.

To put it bluntly: Icelandic economy is unique in size, its framework is outstanding, its fiscal position has been pretty strong so far, and its financial system is quite unique. The outlook used to be bright, but is very bleak for the moment. The International Monetary Fund, IMF, is running the country, like in the old days, when we had to sit and stand just like the Danish king told us to!

In other words, Iceland was an advanced country with excellent institutions. Its GDP per capita, adjusted for PPP, ranked fifth highest in the world. Other figures speak for themselves: longevity is highest for males and the third highest for females. Unemployment used to be unknown, much lower than the natural rate, but the crisis has changed that too. Net government debt used to be close to nil, labour force participation among older workers the highest in the world, and that of women the highest in the OECD (nearly 80%, compared to an average of 56% in the OECD).

According to figures published by Statistics Iceland, 71.1% of children aged 0 – 5 placed in day care spent 8 hrs. per day or more in day care centers in the year 2005. compared to 40.3% in 1998.

Iceland’s fiscal position has been strong during the last decade or so. The government has shown a surplus in the budget for most years. Iceland is not threatened by a pension crisis, as a reform of the pension system, initiated in 1969, has led to stability and had a healthy influence on the banking system. However, the baby-boomers are now starting to retire and we will have some trouble with the working force, yet less than the countries in "old" Europe!

Every wage earner must contribute at least 4% of his earnings to an occupational fund of his choice, most of the time one indicated by his trade union. The employer, on the other hand, contributes 8% of the total contribution. The risk of poverty is low in Iceland and the standard of living is very high. Therefore, the labour cost is high in Iceland, but the Icelandic workers keep a greater part of their wages than the workers in the EU.

The financial sector in Iceland is quite unique! In the course of 120 years, it has grown from a primitive barter market to a full-fledged liberal market. What happened? Well, the EEA-agreement was the key factor, but the overall liberalization of the economy, privatization, and globalization have had an impact as well. However, the privatization was done the Russian way, i.e. the politicians actually gave banks and companies to their friends, who started a kind of money laundering machine and moved all the nation's treasury to the Cayman Islands!