1. Thorvaldur Gylfason From Dependence to Diversification: The Case of Iceland

2. 1904 Home rule Icelandic Minister for Icelandic affairs, responsible to the Althing Icelandic Minister for Icelandic affairs, responsible to the Althing Supreme executive power transferred from Copenhagen to Reykjavík Supreme executive power transferred from Copenhagen to Reykjavík 1918 Sovereignty Royal union with Denmark Royal union with Denmark Foreign affairs still handled by Denmark Foreign affairs still handled by Denmark 1944 Independence Controversial: some wanted to wait Controversial: some wanted to wait History: Three key dates

3. Rapid economic growth: Revolution Iceland: 2½% per year 1900-2000 Iceland: 2½% per year 1900-2000 Denmark: 2% per year 1900-2000 Denmark: 2% per year 1900-2000 Major sources of rapid growth Institutions: Democracy, liberty, equality Institutions: Democracy, liberty, equality Investment Investment Education Education Trade Trade Diversification away from fish Diversification away from fish Iceland’s economic development since 1900

4. Further sources of rapid growth  Escalating foreign debt Living beyond our means Living beyond our means Question of sustainability Question of sustainability  Hard work Need long hours to make ends meet Need long hours to make ends meet  Mixed blessing: Sign of costly inefficiency Rural interests are overrepresented in the Althing Rural interests are overrepresented in the Althing  Special-interest politics has delayed modernization in the direction of a wide-open market economy Iceland’s economic development since 1900

5. Iceland is no longer a fish-based economy  Share of fisheries in economic activity is less 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 growth Fish stocks are fixed while other sectors of economy continue to grow Fish stocks are fixed while other sectors of economy continue to grow A common misconception about fish in Iceland

8. Goods, services, capital, labor “Four freedoms” (EEA) “Four freedoms” (EEA) Ideas, technology, innovations Trade is education Trade is education Fierce debate in Iceland … … since 1843, when Jón Sigurðsson published his first treatise on trade … since 1843, when Jón Sigurðsson published his first treatise on trade Foreign trade is key More on trade and diversification

9.  For example, debate in 1920s about whether to import foreign workers to “enlarge” Iceland  Those in favor stressed efficiency gains from industrial expansion  Those against emphasized threat to Iceland’s national identity  Debate continues To join or not to join the EU? To join or not to join the EU?  Iceland vs. Norway Foreign trade is key

10. Iceland’s entry into EEA ten years later 33 MPs of 63 voted for EEA agreement 33 MPs of 63 voted for EEA agreement Substantial and diverse gains Backbone of Iceland’s economic liberalization in the 1990s Backbone of Iceland’s economic liberalization in the 1990s But, for Iceland, EEA is not enough Local oligopoly hurts consumers Local oligopoly hurts consumers Even EU membership is not enough National currency hinders trade National currency hinders trade

11.  In these debates, there are those who look outward and want to make Iceland more like other countries nearby, and larger … there are those who look outward and want to make Iceland more like other countries nearby, and larger …... and there are also those who look inward and wish to be on guard against foreign influences and want to keep Iceland different, and small... and there are also those who look inward and wish to be on guard against foreign influences and want to keep Iceland different, and small  Some want a mixture of both Beware of false contrasts Beware of false contrasts  Openness can be a source of strength Foreign trade is key

12.  Trade is key to diversification, which also matters greatly for growth  Major challenge Develop human resources through education and vocational training Develop human resources through education and vocational training Iceland’s success derives from its well- educated people, not fish in the sea Iceland’s success derives from its well- educated people, not fish in the sea Natural-resource dependence has proved to be a mixed blessing around the world: question of education, inter alia Natural-resource dependence has proved to be a mixed blessing around the world: question of education, inter alia Foreign trade is key

13. In conclusion The End The key to lasting economic success is a market economy based on free trade, diversified economic activity, well- educated labor, and sound policies and institutions These slides can be viewed on my website: www.hi.is/~gylfason Political sovereignty, then full independence, helped Iceland achieve these goals

14. “When trade was free in ancient times, the country lived its golden age.” (1843) Foreign trade restrictions were lifted in 1855 Jón Sigurðsson “You think that someone may swallow us up. Let them gobble, in the sense that they trade and do business with us.”

15. GDP per capita 1975-2002 (US$, constant 1995 prices, ppp) Denmark and Iceland’s growth performance since 1975 is almost indistinguishable

16. GDP per capita 1975-2002 (US$, constant 1995 prices, ppp) Denmark and Iceland’s growth performance since 1975 is almost indistinguishable Ireland caught up, and surpassed us

17. Investment 1960-2002 (% of GDP) Similar investment behavior in Iceland and Denmark since mid-1980s Before, egged on by high inflation, Icelanders invested more Quantity vs. quality

18. Tertiary education 1970- 2000 (% of cohort) Denmark remains ahead of Iceland in higher education Recently, spurred by proliferation of different colleges, some private, tertiary education enrolment has risen

19. Exports 1960-2002 (% of GDP) Exports from Iceland have been stagnant relative to national income since 1870 Exports equivalent to one third of GDP: too small for such a small country

20. Foreign direct investment 1974-2002 (% of GDP) Iceland has also been a reluctant recipient of FDI This reflects a general reluctance to engage in free trade, as witnessed by Iceland’s unwillingness to join the EU

21. High-tech exports 1988- 2002 (% of total exports) Iceland has not been at the forefront of the high-tech revolution Manufacturing has been hurt by preferential treatment of fisheries

22. Primary exports 1962-2002 (% of merchandise exports) Iceland has begun to diversify its economic base Fisheries account for 40% of exports and less than 10% of GDP and the labor force

23. Current account balance 1980-2006 (% of GDP) Forecasts

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

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

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