Transcript Principles of Economic Growth

From Dependence
to Diversification:
The Case of Iceland
Thorvaldur Gylfason
History:
Three key dates
1904 Home rule


Icelandic Minister for Icelandic affairs,
responsible to the Althing
Supreme executive power transferred from
Copenhagen to Reykjavík
1918 Sovereignty


Royal union with Denmark
Foreign affairs still handled by Denmark
1944 Independence

Controversial: some wanted to wait
Iceland’s economic
development since 1900
Rapid economic growth: Revolution


Iceland: 2½% per year 1900-2000
Denmark: 2% per year 1900-2000
Major sources of rapid growth

Institutions: Democracy, liberty, equality

Investment

Education

Trade

Diversification away from fish
Iceland’s economic
development since 1900
Further sources of rapid growth
 Escalating foreign debt
Living beyond our means
Question of sustainability


Hard work

Need long hours to make ends meet


Mixed blessing: Sign of costly inefficiency
Rural interests are overrepresented in the Althing


Special-interest politics has delayed modernization
in the direction of a wide-open market economy
A common misconception
about fish in Iceland
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 employment: less than 8%
In exports: less than 40%
Natural consequence of rapid growth


Fish stocks are fixed while other sectors of
economy continue to grow
Log
61 500
Income Per Head and Economic Diversification 2001
Africa
40 000
America
s
GDP per capita, PPP (current international $)
20 000
Arab
countries
10 000
Asia
7 000
Europa
5 000
3 000
2 000
1 000
500
210
0.000001
20
30
40
50
60
70
Manufactures exports (% of merchandise exports)
80
105
90
Lin
Log
61 500
Income Per Head and Agriculture 2001
Africa
40 000
America
s
GDP per capita, PPP (current international $)
20 000
Arab
countries
10 000
Asia
7 000
Europa
5 000
3 000
2 000
1 000
500
210
0.07
20
30
40
50
60
Agriculture, value added (% of GDP)
70
95.5
80
Lin
Foreign trade is key
Goods, services, capital, labor

“Four freedoms” (EEA)
Ideas, technology, innovations

Trade is education
Fierce debate in Iceland …

… since 1843, when Jón
Sigurðsson published his
first treatise on trade
Foreign trade is key
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?

Iceland vs. Norway
Foreign trade is key
Iceland’s entry into EEA ten years later

33 MPs of 63 voted for EEA agreement
Substantial and diverse gains

Backbone of Iceland’s economic
liberalization in the 1990s
But, for Iceland, EEA is not enough

Local oligopoly hurts consumers
Even EU membership is not enough

National currency hinders trade
Foreign trade is key
In these debates,



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
Some want a mixture of both


Beware of false contrasts

Openness can be a source of strength
Foreign trade is key
Trade is key to diversification, which
also matters greatly for growth
Major challenge





Develop human resources through
education and vocational training
Iceland’s success derives from its welleducated people, not fish in the sea
Natural-resource dependence has proved
to be a mixed blessing around the world:
question of education, inter alia
These slides can be viewed on my
website: www.hi.is/~gylfason
In conclusion
The key to lasting
economic success is a
market economy based
on free trade, diversified
economic activity, welleducated labor, and
sound policies and
institutions
Jón Sigurðsson
“When trade was free in
ancient times, the country
lived its golden age.”
(1843)
Foreign trade restrictions
were lifted in 1855
GDP per capita 1975-2002
(US$, constant 1995 prices, ppp)
35.000
Denmark
30.000
Iceland
25.000
20.000
15.000
10.000
5.000
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
0
Denmark and
Iceland’s growth
performance since
1975 is almost
indistinguishable
GDP per capita 1975-2002
(US$, constant 1995 prices, ppp)
35.000
Denmark
30.000
25.000
Iceland
Ireland
20.000
15.000
10.000
5.000
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
0
Denmark and
Iceland’s growth
performance since
1975 is almost
indistinguishable
Ireland caught up,
and surpassed us
Investment 1960-2002
(% of GDP)
Similar investment
behavior in
Iceland and
Denmark since
mid-1980s
40
35
30
25
20
15
Denmark
10
5
Iceland
Ireland
19
6
19 0
63
19
6
19 6
69
19
7
19 2
75
19
7
19 8
8
19 1
84
19
8
19 7
90
19
9
19 3
96
19
9
20 9
02
0
Before, egged on
by high inflation,
Icelanders
invested more
Tertiary education 19702000 (% of cohort)
70
Denmark
60
Iceland
50
Ireland
40
30
20
10
19
7
19 0
7
19 2
7
19 4
7
19 6
7
19 8
8
19 0
8
19 2
8
19 4
8
19 6
8
19 8
9
19 0
9
19 2
9
19 4
9
19 6
9
20 8
00
0
Denmark remains
ahead of Iceland in
higher education
Recently, spurred
by proliferation of
different colleges,
some private,
tertiary education
enrolment has risen
Exports 1960-2002
(% of GDP)
100
90
Denmark
80
Iceland
70
Ireland
60
50
40
30
20
10
19
6
19 0
63
19
6
19 6
6
19 9
7
19 2
75
19
7
19 8
8
19 1
84
19
8
19 7
9
19 0
9
19 3
96
19
9
20 9
02
0
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
Foreign direct investment
1974-2002 (% of GDP)
50
45
40
35
Denmark
Iceland
Ireland
30
25
20
15
10
5
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
0
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
High-tech exports 19882002 (% of total exports)
60
50
40
30
Denmark
Iceland
Ireland
20
10
0
88 989 990 991 992 993 994 995 996 997 998 999 000 001 002
9
1 1 1 1 1 1 1 1 1 1 1 1 2 2 2
Iceland has not
been at the
forefront of the
high-tech
revolution
Manufacturing has
been hurt by
preferential
treatment of
fisheries
Primary exports 1962-2002
(% of merchandise exports)
Iceland has begun
to diversify its
economic base
120
100
80
60
40
20
Denmark
Iceland
Ireland
Greenland
Faeroe Islands
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
0
Fisheries account
for 40% of
exports and less
than 10% of GDP
and the labor
force
Current account balance
1980-2006 (% of GDP)
2
0
-2
-4
-6
-8
-10
-12
-14
80 981 982 983 984 985 986 987 988 989 990 991 992 993 994 995 996 997 998 999 000 001 002 003 004 005 006
9
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Foreign debt 1980-2004
(% of GDP)
180
160
140
120
100
80
60
40
20
0
GDP per hour of work 2002
(US$ at 1999 prices)
Norway
Belgium
France
Ireland
Netherlands
Germany
United States
Denmark
Austria
Italy
Switzerland
Finland
Canada
Sweden
United Kingdom
Australia
Japan
Spain
Iceland
New Zealand
Greece
Portugal
Turkey
0
10
20
30
40
50
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Fish exports 1980-2003
(% of total exports)
60
50
40
30
20
10
0