Transcript The Icelandic Economic Miracle

The Icelandic
Economic Miracle
Hannes H Gissurarson
Professor of Politics
University of Iceland
Adam Smith: No Miracles
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Wealth of Nations:
Division of labour
and free trade
Limited government
One’s profit not
another’s loss
Coordination without
commands
Historical Highlights
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Settled 874-930
Commonwealth 930-1262
Under the Norwegian, later Danish, king
Home rule 1904
Sovereignty, in a personal union with
Denmark, 1918
Republic, 1944
Main Facts
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Population 307,672 (1/12/ 2006)
103,000 sq. km (same as East
Germany)
GDP per capita (PPP) 2004: $33,641
GDP per capita (PPP) 2005: $36,363
Main exports: fish, aluminium, financial
services
874-1874, One of the Poorest
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Could only sustain 50,000 people
Famines until 19th century; then
emigration to America
Poverty unfairly blamed on Danish
colonial rule
Agriculture held down fisheries; ruling
farmers hindered development of
resources
1874-1940, Less than Denmark
Iceland
Denmark
GDP per capita in 1990 US$
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1870 1878 1886 1894 1902 1910 1918 1926 1934 1942
Source: Hagskinna (Gudmundur Jonsson)
1940-1991, False Prosperity
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Profits, both in hot and cold war
Wider resource base by four extensions
of EEZ, finally to 200 miles in 1975
Overfishing, first of herring, then of cod
Some natural economic growth
Signs of economic decline in late 1980s
Turning point in 1991
The Icelandic Model 1991
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Cutting subsidies
Stabilising the economy
Liberalising markets
Privatising
Cutting taxes
Developing property rights to natural
resources
Strengthening pension funds
Monetary Stability
Inflation in %
90
80
70
60
50
40
30
20
10
0
1980
1983
1986
1989
Source: Icelandic Bureau of Statistics
1992
1995
1998
2001
2004
From Deficits to Surpluses
8
Deficit/surplus % of GDP
6
4
2
0
-2
-4
-6
1988 1990
1992 1994 1996
Source: Icelandic Ministry of Finance
1998 2000
2002 2004
Fiscal Responsibility
Iceland Net Public Debt
OECD Net Aver age Public Debt
50
45
40
% of GDP
35
30
25
20
15
10
5
0
1998
1999
2000
2001
Source: Icelandic Ministry of Finance
2002
2003
2004
2005
2006
2007
No Unemployment
Iceland
OECD
8
7
Unemployment in %
6
5
4
3
2
1
0
1998
2000
Source: Icelandic Ministry of Finance
2002
2004
2006
2008
2010
Pension Fund Reforms
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Tax-financed public pension fund since 1930s
Compulsory occupational pension funds
since 1960s
Pay-as-you-go funds replaced by
accumulation funds
Voluntary private pension schemes
(supplementary)
Pension reforms in 1998
Pension Funds: Large Assets
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2005, total assets of occupational pension
funds 1,200 billions ISK, 120% of GDP
2004, private pension schemes savings 13
billions ISK
2004, public pension fund paid out 19.3
billions ISK; occupational pension funds 20.4
billions (to 90% of pensioneers)
2004, average individual pension about
$2,000 per month (154,000 ISK)
Pension Fund Assets
10 Largest Pension Fund Assets OECD 2005
Denmark
Canada
Ireland
Australia
Finland
United Kingdom
United States
Switzerland
Iceland
Netherlands
0
50
% of GDP
Source: OECD (Pension Markets in Focus, 2006)
100
Privatisation
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Travel bureau, printing house, publishing
house, fish processing plant, etc. 1992-2005
Government investment funds 1999, later
merged with others to form Glitnir Bank
Landsbanki 2002
Bunadarbanki 2002, later merged with others
to form Kaupthing Bank
Icelandic Telephone 2005
Total revenue from privatisation $2 billions
Tax Cuts
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Corporate incomes tax from 45% to
18%
Individual incomes tax from 30.41% to
22.75%
Turnover tax abolished
High-incomes incomes tax abolished
Net wealth tax abolished
Death duties (estates tax) reduced
Corporate Incomes Tax Cut
Tax Rate %
40
50
35
45
40
30
35
25
30
20
25
15
20
10
15
10
5
5
0
0
1991 1993 1995 1997 1999 2001 2003 2005 2007
Source: Icelandic Ministry of Finance
Tax Rate, %
Tax Revenue, Billions ISK
Tax Revenue, Billions ISK
Example of Laffer Curve?
Tax Revenue in $
120
100
80
60
40
20
0
Tax Rate in %
1992-2008: Share of GDP 32%
Government Total Revenue
Municipalities Total Revenue
40
35
% of GDP
30
25
20
15
10
5
0
1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Icelandic Ministry of Finance
Development of ITQ System
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Open access to fishing grounds led to
overfishing
1975, individual quotas (% of total
allowable catch) in herring fishery
1984, individual quotas in cod and other
demersal fisheries
Gradually, quotas became transferable
1990, ITQ system made universal
Overfishing with Open Access
Total Cost
Total Revenue
120
100
80
60
40
20
0
0
2
4
6
8
10 12 14 16 18 20
Fishing Effort (Number of Boats)
Source: H. S. Gordon, Journal of Political Economy, 1954
Icelandic Debate on Fisheries
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How to reduce boats from 16 to 8?
(a) Pigovian economists: government auction
of ITQs
(b) Property rights theorists: ITQs permanent,
universal and freely transferable, initial
allocation on basis on catch history
(b) Pareto-optimal change: No-one worse off
Efficient Fisheries
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Initial allocation on basis of catch history
meant owners of fishing capital bought out,
not driven out
Much resentment; compromise in 2002:
nominal resource use fee
Total value of quotas about 350 billions ISK
(appr. $5 billions)
Reduction of fishing effort; stronger and fewer
fishing firms
Fishing Firms Profitable
Inflation-adjusted Profit/Loss
20
15
10
5
0
-5
-10
-15
1981 1984 1987 1990 1993 1996 1999 2002
Source: Icelandic Association of Fishing Vessel Owners
Strong Financial Sector
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Since 2002, total turnover of banks increased
more than 7-fold
2005, total assets of banks 7,700 billions ISK,
7-fold GDP
2005, net worth of banks 530 billions ISK,
about 50% of GDP; in 2000, net worth 7% of
GDP
More than 50% of total income from abroad
Change of Icelandic Economy
Quantity indices (100 in 2000)
Manufacturing
Retailing, etc.
Financial services, pension funds, insurance
200
180
160
140
120
100
80
60
40
20
0
1973 1977 1981 1985 1989 1993 1997 2001 2005
Source: Icelandic Bureau of Statistics
Whence Came the Money?
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First: ITQ system
Second: Capital gains from privatisation
Hernando de Soto: Previously “dead
capital” became registered,
transferable, and usable as collateral
Third: Pension funds
The New Vikings: Ventures
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Brewery in Russia, sold to Heineken
Arcadia, sold to investors
Actavis investments in Bulgaria and Malta
Bakkavor’s acquisition of Katsouris Fresh
Food in United Kingdom
Kaupthing’s acquisition of Danish and Dutch
banks
Novator investments in Eastern Europe
Economic Growth in Iceland
9
8
7
% of GDP
6
5
4
3
2
1
0
1995
-1
1997
1999
Source: Icelandic Bureau of Statistics
2001
2003
2005
2007
10 Richest Countries, 2006
80000
GDP per capita $PPP
70000
60000
50000
40000
30000
20000
10000
0
LuxembourgNor way
Source: World Fact Book
Ir eland
United
States
Iceland
Denmark Hong Kong Canada
Austria Switzerland
All Incomes Groups Benefit
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Average annual increase in purchasing
power after tax 1995-2004 4.8%
Annual increase of lowest 10% group
2.7%
OECD average of lowest 10% group
1.8% (1996-2000)
1996-2000: Lowest 10% Income
1,8
OECD average
0,4
United States
0,3
Canada
United Kingdom
1,9
Norway
6,9
2,7
Iceland
Denmark
0,5
Sweden
1
Finland
2,3
0
2
4
6
8
% av erage annual increase
Source: Icelandic Bureau of Statistics (Stefan Olafsson); OECD (Michael Förster)
Risk of Poverty 2nd Lowest
Slovakia
De nmark
Austria
Finland
Ne the rlands
Norway
Czech Republic
Slovenia
Iceland
Sweden
0
2
4
6
8
10
% at risk of poverty
Source: Eurostat and Icelandic Bureau of Statistics
12
14
Income Distribution in Europe
0,4
0,35
0,3
0,25
0,2
0,15
0,1
0,05
0
Sweden
Denmark
Finland
Norway
Ireland
Gini Coefficients in 2004
Source: Eurostat and Icelandic Bureau of Statistics
United
Kingdom
Iceland
Rawls: Worst-Off Best-Off
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Which system would
we choose, if we did
not know our own
position in it?
Where worst-off best
off (maximin rule)
Chosen: neither the
Nordic nor the
Anglo-Saxon model,
but the Icelandic?
The Way Ahead
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Cutting corporate incomes tax to 10%
Cutting personal incomes tax
Cutting VAT
Cutting import charges
Continuing privatising
In place of enforced equality, creating
opportunities