By Thomas Malcolm
University of Wisconsin–Madison
Iceland has an incredibly spotty history in regard to its economy. After Iceland’s latest economic crash of 2008, its name actually began to be associated with crisis and economic disaster.1 This notion, however, is more appropriate than one may come to believe from the crash of 2008 alone. For the last century, Iceland has been riddled by a cycle of economic expansion and collapse. However, I believe that despite its history, in today’s world it is possible for Iceland to finally stabilize itself. That is, only if it has learned from its past mistakes.
Based off of early US economic studies of Iceland (see Sorensen 1928 and Bureau of Labor Statistics 1956), one should first understand the unique isolation of Iceland before diving into the economy. Iceland, located in the Northern Atlantic Ocean between the north latitude lines of 63º 24’ and 66º 32’, is an island of volcanic beginnings featuring environmental extremes such as hot springs, glaciers, deserts, and mountains.2,3 Coast to coast, measuring distance between closest coastal points of each nation, from Iceland to Norway and Iceland to England are both greater than 500 miles. This distance is even larger (nearing 1,000 miles) when taking into account that the large ports are not the closest coastal points. This rather isolated island has a total land area of 39,760 square miles.4 American reports often compare Iceland’s size to the states of Virginia or Kentucky. This decently sized, isolated nation is for the most part barren of natural resources, has a limited amount of arable land (most of which is used for cattle grazing), and has a complete lack of timber. To say that Iceland is isolated and has a unique foundation to try and build an economy upon is an understatement.
Before the twentieth century, Iceland did not have much of anything to actually call an economy. In 1262, Iceland came under Norwegian rule due to internal dissonance.5 When Norway came under Danish rule in 1380, Iceland came under the Danish crown as well, where they stayed until their eventual break with Denmark in 1944. Being under the Danish Crown, Denmark controlled many things including Iceland’s international trade. Due to Denmark’s mismanagement of Iceland and its trade, Iceland’s economy was stifled for many centuries.6 This coupled with the country’s isolation left Iceland in a state similar to feudalism until the late nineteenth century.7
When Iceland began actually enlarging its economy, it was primarily based upon the export of fish. This is significant, considering that in the 1880s, the primary occupation was agriculture.8 The expansion of the fishing industry came at the expense of the agricultural industry. In 1900, Iceland caught roughly 14,897,000 fish (cod, small cod, haddock, ling, and “other”), and by 1920, this number had become 35,883,000 fish.9 The fishing industry simply continued to grow. In 1920, Iceland exported 945 tons of herring oil bringing in 673,000 crowns, and by 1924, this had increased to 2,568 tons and 1,985,183 crowns.10 The fishing industry is so incredibly important for the Icelandic economy that it was stated in 1954 that “Iceland’s economy is based on fish and fish products which constitute 90 percent of the country’s exports.”11 One might argue that without the fishing industry, Iceland may have taken longer to industrialize.
Fishing was a huge part of the Icelandic economy, but it is dangerous to put all your eggs in one basket. For example, Íslandsbanki was established in 1904 and invested heavily in the fishing sector, but “…a single bankruptcy of a fishing company in 1914 almost killed off Íslandsbank when it lost more than [a] quarter of its equity.”12 Fortunately for Iceland, with the outbreak of World War I, it saw the revenue from fish exports increase sharply, and because of this, Íslandsbanki managed to pull through.13 Although the world was in peril, the increased cost of food saved the bank. Iceland’s economy was similarly fragile due to its dependence on a single industry.
Even though Íslandsbanki had been saved by the outbreak of World War I, Iceland’s economy was still fragile and its economic rollercoaster was only beginning. With the end of World War I, Iceland was hit economically with more than one event. Firstly, the price of fish and fish products dropped dramatically at the end of 1920, and correspondingly, so did Iceland’s profits.14 This drop can be seen clearly from the numbers on herring oil. In 1920, Iceland exported 945 tons of herring oil and brought in 637,000 crowns, but in 1921, they exported merely 300 tons and brought in 75,106 crowns.15 Not only had their exports dropped to a third of what they had been, prices also dropped to roughly a third of what they had been, meaning that their gross was one-ninth of the prior year on herring oil alone. Secondly, at the end of World War I, Iceland did away with tying their currency to the gold standard, and the central banks were then allowed to print new currency freely. This in turn allowed inflation to set in.16 A great way to see this inflation is to look at the average hourly wage of an unskilled male. In 1939, the average hourly wage of an unskilled male worker was 1.45 kronur, by 1950 this was 9.99 kronur, and in 1955 it had reached 16.85 kronur.17 Unions were pushing for higher wages constantly to try and keep up with inflation, which in turn increased the cost of exported goods. As the prices of their goods increased, they became less competitive on the international market the government had to intervene by subsidizing goods to keep them competitive.18 This was probably a large contributor to the inflation itself, thus intensifying the cycle. The rapid devaluation of the currency can also be seen in the Icelandic Krona to US Dollar exchange rate. In 1938, one krona was equivalent to 22.01 cents, by 1956 one krona had become equivalent to 6.140 cents.19 This trend continued for many years. The economy would grow and then fall, and as the cycle continued, the devaluation of the ISK continued as well.20
During the mid-1990s, Iceland’s economy entered another expansion phase. By the early 2000s, this expansion had gained momentum and was accelerating quickly. However, in 2008, it peaked and turned into a nosedive. In 1994, Iceland entered into the Single European Market, and shortly after, in 1998, they began privatizing the financial system.21 Iceland had been seduced by the American Wall Street, and these developments in the mid– to late 1990s were just the beginning of Iceland’s massive deregulation of the financial sector. Money was now flowing into Iceland. Companies were even using Iceland as a tax haven by having their “headquarters” there – their headquarters typically being an office with a conference room connected and multiple businesses being listed under the address. Iceland was rolling in cash and did not see it as something that would collapse. Young confident “Viking” investors were flooding privatized banks and investing wildly abroad.22 At the same time, there was expansion and massive investment in aluminum smelting plants in Iceland.23 One of the arguments for investing in aluminum was that it would increase jobs, and it would also give Iceland another product to export.24 However, Iceland did not have any raw aluminum, so it had to import it first from Australia.25 Problems were on the horizon. The torrent of incoming cash flow suddenly reversed in 2008.26 Towards the end of 2008, the price of aluminum began to drop off. The combined effect of flopping foreign investments and dropping export profits was hugely detrimental, so much so that the banks were beginning to fail.
In the late afternoon of Monday 6 October 2008, Prime Minister Geir Haarde addressed the nation on TV: the state would not be able to bail out the banks. Over the following three days, the entire financial system collapsed – Landsbanki on Tuesday, Glitnir on Wednesday and finally Kaupthing on Thursday.27
The damage was done; a domino effect had begun. The economy was a speeding car on icy roads, doomed to crash.
It has been a little less than seven years now since the crash, and Iceland is rebuilding. They eventually managed to reach settlements with countries, such as England, whose population had invested in Iceland.28 The reputation of Iceland has been hurt, but the country can recover. In my opinion, there are three main things Iceland can do to stabilize its economy: investing in tourism, investing in expanding alternative energy, and diversifying exports.
Tourism is a great way to bring money into an isolated economy. The idea is to attract people, to have them come and spend money inside your borders. Iceland is incredibly unique in terms of its geography, history, and culture. This is very attractive to many people, and traveling internationally has becoming easier, financially speaking, than it has ever been throughout history. Iceland is currently capitalizing on this. They have lowered the price of round trip tickets to Reykjavik from select large airports. They have also introduced a direct option of a “stop-over” to wherever one’s destination is, so one can stop-over in Iceland and then continue on one’s journey. With its arts, culture, hot springs, and mystifying landscape, Iceland has the potential to attract a diverse range of people. Iceland has the ability to develop tourism into a sizeable income.
The second thing Iceland can do is expand its alternative energy programs, and with the technological advances we have compared to fifty or sixty years ago, the country has no reason not to. Granted, Iceland has a fairly large alternative energy program as is. They have been a testing ground for many energy solutions over the years simply because of its geographic uniqueness. Investing to expand their geothermal and wind energy sources could reduce further their dependence on imported fossil fuels. Thus, instead of having money leaving the economy for energy imports, the money would stay within the country.
Lastly, Iceland needs to diversify its industrial base of exports. They have seen multiple times what happens when they put all of their eggs in one basket, with the near crash of Íslandsbanki in 1914 or the aluminum fiasco in 2008 and the ensuing economic collapse. They need to develop multiple industries of importing natural resources and exporting products of greater value, like furniture, cars, fishing boats, or any other product. They have the energy to power industry, they should develop an industrial workforce of varying expertise. That way, if one export drops in value for a period of time it does not adversely affect the economy to a large degree.
Iceland has had an incredibly unstable economy in the past, marked by specific narrow investments, expansions, and collapses. However, there are three main industries that they can utilize to bring money in and stabilize their economy. Iceland has a history of rapid expanses and even faster busts, but in today’s age, the nation has ample opportunity to expand intelligently and stabilize itself. To borrow from Thomas Edison, Iceland has not failed, it has simply found a multitude of ways of how not to run its economy.
Bibliography
Barnes, Jonathan, and Peter, Reina. “Largest Iceland Investment Draws Environmentalist Fire.” ENR: Engineering-News Record 250, no. 13 (2003): 18.
Bergmann, Eirikur. Land Use and Urban Form. Houndsmills, Basingstoke: Palgrave Macmillan,2014.
Hálfdanarson, Guðmundur. “Iceland: A Peaceful Secession.” Scandinavian Journal of History 25, no. 1-2 (2000): 87-100.
“Iceland: The Danger of Hydro.” The Ecologist 31, no. 9 (2001): 16.
Magnússon, Magnús S. Iceland in Transition: Labour and Socio-Economic Change before 1940. Lund: Ekonomisk-historiska föreningen i Lund, 1985.
Motavalli, Jim. “Iceland’s Abundance of Energy.” The Environmental Magazine 19, no. 2 (2008): 14-16.
Sorensen, Harry, and United States Bureau of Foreign and Domestic Commerce. Iceland: A Brief Economic Survey. Washington: Government Printing Office, 1928.
United States Bureau of Labor Statistics. Labor in Iceland. Washington, D. C., 1956.
Endnotes
1 Eirikur Bergmann, Land Use and Urban Form (Houndsmills, Basingstoke: Palgrave Macmillan, 2014), 5.
2 Harry Sorensen and United States Bureau of Foreign and Domestic Commerce, Iceland: A Brief Economic Survey (Washington: Government Printing Office, 1928), 1.
3 United States Bureau of Labor Statistics, Labor in Iceland (Washington, D. C., 1956), 1.
4 Ibid.
5 Ibid., 2.
6 Guðmundur Hálfdanarson, “Iceland: A Peaceful Secession,” Scandinavian Journal of History 25, no. 1-2 (2000): 96.
7 Eirikur Bergmann, 29.
8 Magnús S. Magnússon, Iceland in Transition: Labour and Socio-Economic Change before 1940 (Lund: Ekonomisk-historiska föreningen i Lund, 1985), 16.
9 Harry Sorensen and United States Bureau of Foreign and Domestic Commerce, 5.
10 Ibid.
11 United States Bureau of Labor Statistics, 3.
12 Eirikur Bergmann, 30-31.
13 Ibid, 31.
14 Ibid, 32.
15 United States Bureau of Labor Statistics, 5.
16 Eirikur Bergmann, 32.
17 United States Bureau of Labor Statistics, 22.
18 Ibid, 5.
19 Ibid, 30.
20 Eirikur Bergmann, 32.
21 Ibid, 68.
22 Ibid.
23 Jonathan Barnes and Reina Peter, “Largest Iceland Investment Draws Environmentalist Fire,” ENR: Engineering-News Record 250, no. 13 (2003): 18.
24 Jim Motavalli, “Iceland’s Abundance of Energy,” The Environmental Magazine 19, no. 2 (2008): 14-16.
25 “Iceland: The Danger of Hydro,” The Ecologist 31, no. 9 (2001): 16.
26 Eirikur Bergmann, 97.
27 Ibid, 110.
28 Ibid, 7.