Economic history of Iceland
The economy history of Iceland covers the development of its economy from the Settlement of Iceland in the late 9th century until the present.
Animal husbandry was a major livelihood. Wide areas were used for grazing and scattered meadows were used for haymaking.
The Industrial Revolution started in Iceland at the beginning of the 20th century. At the same time diversified significantly.[clarification needed] The developments in the areas of fisheries, manufacturing and services turned the stagnant agricultural economy into a modern industrial state.
World War I
In the quarter of a century preceding the War, Iceland prospered. Iceland became more isolated during World War I and suffered a significant decline in living standards. The treasury became highly indebted, there was a shortage of food and fears over an imminent famine.
Iceland traded significantly with the United Kingdom during the War, as Iceland found itself within its sphere of influence. In their attempts to stop the Icelanders from trading with the Germans indirectly, the British imposed costly and time-consuming constraints on Icelandic exports going to the Nordic countries.
The War led to major government interference in the marketplace that would last until the post-World War II period.
The Great Depression
Icelandic post-World War I prosperity came to an end with the outbreak of the Great Depression, a severe worldwide economic depression. The Depression hit Iceland hard as the value of exports plummeted. The total value of Icelandic exports fell from 74 million kronur in 1929 to 48 million in 1932, and was not to rise again to the pre-1930 level until after 1939. Government interference in the economy increased: "Imports were regulated, trade with foreign currency was monopolized by state-owned banks, and loan capital was largely distributed by state-regulated funds". Due to the outbreak of the Spanish Civil War, which cut Iceland's exports of saltfish by half, the Depression lasted in Iceland until the outbreak of World War II when prices for fish exports soared.
World War II
In 1991, the Independence Party, led by Davíð Oddsson, formed a coalition government with the Social Democrats. This government set in motion market liberalisation policies, privatising a number of small and large companies. At the same time economic stability increased and previously chronic inflation was drastically reduced. In 1995, the Independence Party formed a coalition government with the Progressive Party. This government continued with the free-market policies, privatising two commercial banks and the state-owned telecom Síminn. Corporate incomes tax was reduced to 18% (from around 50% at the beginning of the decade), inheritance tax was greatly reduced and the net wealth tax abolished. "Nordic Tiger" was a term used to refer to the period of economic prosperity in Iceland that began in the post-Cold-War 1990s.
The welfare state
The social expenditure as a percentage of GDP in Iceland lagged considerably behind the social expenditures in the other Nordic states during the 20th century. There are two primary reasons in the academic literature for why Iceland lagged behind:
- "The absence of a strong social democratic party" - Whereas labor unions were fairly strong in Iceland, votes on the left were split between several leftist parties, which meant that the leftist tendencies did not translate into political power.
- "A stronger emphasis on individualism and self-help"
Icelandic financial crisis
The "Nordic Tiger" period ended in a national financial crisis in 2008, when the country's major banks failed and were taken over by the government.
Following sharp inflation in the Icelandic króna during 2008, the three major banks in Iceland, Glitnir, Landsbanki and Kaupthing were placed under government control. A subsidiary of Landsbanki, Icesave, which operated in the UK and the Netherlands, was declared insolvent, putting the savings of thousands of UK and Dutch customers at risk. It also transpired that over 70 local authorities in the UK held more than £550 million of cash in Icelandic banks. In response to statements that the accounts of UK depositors would not be guaranteed, the British governments seized assets of the banks and of the Icelandic government.
On 28 October 2008, Iceland's central bank raised its interest rate to 18 per cent to fight inflation.
Following negotiations with the IMF, a package of $4.6 billion was agreed on 19 November, with the IMF loaning $2.1 billion and another $2.5 billion in loans and currency swaps from Norway, Sweden, Finland and Denmark. In addition, Poland has offered to lend $200 million and the Faroe Islands have offered 300 million Danish kroner ($50 million, about 3 per cent of Faroese GDP). The Icelandic government also reported that Russia has offered $300 million. The next day, Germany, the Netherlands and the United Kingdom announced a joint loan of $6.3 billion (€5 billion), related to the deposit insurance dispute. (Dollar values are US dollars.)
Iceland is the only country in the world to have a population under two million yet still have a floating exchange rate and an independent monetary policy.
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