Transcript Principles of Economic Growth

The Macroeconomics
of Icelandic Fisheries
Management
Thorvaldur Gylfason
Overview
I. Background
II. Regulation by price

Five macroeconomic arguments for
fishing fees
III. A roadmap of reform

How to depoliticize fisheries policy
IV. Conclusion
Declining weight of fish
In Iceland, fish is a macroeconomic
concern, but its weight is declining
1)
2)
3)
Share of fisheries in GDP:
from 17% to 10% since 1980
Share of fisheries in exports:
from 60% to 40% since 1980
Share of fisheries in labor force:
from 14% to 9% since 1980
Fish rent: 5% of GDP each year
Per capita earnings from
fisheries 1999 (USD)
Iceland
Norway
Japan
Korea
Australia
Canada
European Union
United States
Mexico
2970
282
85
73
58
38
16
13
10
From free access to fair
and efficient management
Catch
1883
Challenge to policy:
Rotate the cost curve
back northwest. How?
Cost curve I
A
1933
B
Cost curve II
C
Rent
1983
Cost curve III
Production function
Effort
From free access to fair
and efficient management
Sequence of policy undertakings
1) Free access
Overfishing
2) Technical restraints
Wasteful
3) Total allowable catches
Inefficient
4) Individual transferable quotas
Unfair as well as inefficient
5) Logical conclusion: Fees
Catch and fleet 1945-2000
2500
Fleet
1945 = 100
2000
Catch
1500
1000
500
0
1945 1952 1959 1966 1973 1980 1987 1994
Five macroeconomic
arguments
1) Public finance
 Efficiency of revenue collection
2) Transparency
 Elimination of hidden subsidies
3) Dutch disease
 Getting the real exchange rate right
4) European Union
 Access to resources vs. markets
5) Fairness
1. Public finance
Replace inefficient taxes by user fees
 Marginal income tax is above 40%
 Value added tax rate is 24.5%
Substantial efficiency gains from
reducing tax distortions
Moreover, education and health care
are financially undernourished
Norway takes in 80% of the oil rent
Alaska pays out $2,000 per person per year
2. Transparency
Allocation of quotas free of charge
amounts to a huge hidden subsidy
Nothing new
Before: Direct subsidies, preferential access
to subsidized loans from state banks,
devaluation on demand, etc.
When interest rates were set free in mid1980s, quota system was put in place
Subsidies are conducive to inefficiency
3. Dutch disease
Stagnant exports
Around one-third of GDP since 1870
Too low for such a small country
Dutch disease: Misnomer
Other symptoms of Dutch disease




Systemic overvaluation of currency
Little foreign direct investment
Declining domestic investment
Insufficient commitment to education
4. European Union
Yet another symptom of Dutch disease
People want to join, politicians don´t
 Norway in reverse
Regional policy concerns dominate
 Electoral bias gives rural areas
overrepresentation in parliament
Fishing fees could remove the main
obstacle to EU membership
 Access to resources vs. access to markets
5. Fairness
Supreme Court ruled the quota
system unconstitutional in 1998
 “violates the constitutional provision
protecting the general principle of
equality”
Court reversed its ruling in 2000
Social injustice, if perceived to be
excessive, can jeopardize
macroeconomic performance
Roadmap of reform
Full efficiency and fairness call for
regulation by price rather than
quantity
Objection: Politicians would squander
the revenue
Solution: Depoliticize fisheries policy
 Set up Open Market Fisheries Committee
 Precedent: Modern central banking
legislation
Independent central banks
These slides can be
viewed on my website:
www.hi.is/~gylfason
Conclusion
Evolution of fisheries policy
First generation:
 Quantitative restrictions
Second generation:
 Individual transferable quotas
Third generation:
 Regulation by price: fishing fees – e.g., by auction
 Not easy, as it involves abolition of indirect subsidy to
a politically powerful lobby
 Yet, regulation by price is important, also for the
overhaul of Europe´s Common Fisheries Policy