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Download The Icelandic Economic Miracle - Hannes Hólmsteinn Gissurarson
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The Strange Death of Liberal Iceland Hannes H Gissurarson Mont Pelerin Society New York, 7 March 2009 Historical Highlights 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 Population 319,368 (1/1/ 2009) 103,000 sq. km (same as East Germany) GDP per capita (PPP) 1992: $21,278 GDP per capita (PPP) 2004: $33,372 GDP per capita (PPP) 2007: $38,396 Main exports: fish, aluminium 874-1874, One of the Poorest Could only sustain 50,000 people Famines until 19th century; then emigration to America Poverty unfairly blamed on Danish colonial rule Agriculture held down fisheries; ruling farmers hindered development of resources 1874-1940, Less than Denmark Iceland Denmark GDP per capita in 1990 US$ 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 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 Liberal Iceland 1991-2004 Cutting subsidies Stabilising 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 Source: Icelandic Bureau of Statistics 1989 1992 1995 1998 2001 2004 From Deficits to Surpluses 3 2 Deficit/surplus % of GDP 1 0 -1 -2 -3 -4 -5 -6 1988 1990 1992 Source: Icelandic Ministry of Finance 1994 1996 1998 2000 2002 2004 Fiscal Responsibility Iceland Net Public Debt OECD Net Average 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 Negligible Unemployment Iceland OECD 8 Unemployment in % 7 6 5 4 3 2 1 0 1998 2000 Source: Icelandic Ministry of Finance 2002 2004 2006 2008 2010 Pension Fund Reforms 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 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 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 Corporate incomes tax from 45% to 18% (15% since 2007) Individual incomes tax from 30.41% to 22.75% Turnover tax abolished High-incomes surcharge abolished Net wealth tax abolished Death duties (estates tax) reduced Invisible Tax Cuts Reducing inflation = Cutting the inflation tax Strengthening pension funds = Cutting tax on future wealth creators (reducing taxpayers’ liabilities Reducing public debt = Cutting tax on future generations Corporate Incomes Tax Cut Tax Revenue, Billions ISK Tax Rate % 50 45 30 40 25 35 30 20 25 15 20 15 10 10 5 5 0 0 1991 1993 1995 Source: Icelandic Ministry of Finance 1997 1999 2001 2003 2005 2007 Tax Rate in % Tax Revenue, Billions ISK 35 Example of Laffer Curve? Tax Revenue in $ 120 100 80 60 40 20 0 Tax Rate in % Development of ITQ System 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 Efficient Fisheries Initial allocation on basis of catch history: 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 All Groups Benefited 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) Risk of Poverty 2nd Lowest Slovakia Denmark Austria Finland Netherlands 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 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 Liberal Iceland in 2004 One of 5 richest countries in the world One of 10 freest countries in the world Relatively even distribution of income Almost no poverty Negligible unemployment Almost no crime What went wrong? Bank Expansion Banks privatised 1999-2002 Since 2002, total turnover of banks almost 10-folded Total foreign assets 10-fold GDP Oversized in terms of Iceland, but not of the EEA Expansion Partly Sustainable Hernando de Soto: From dead to living capital ITQ system: New capital Capital gains from privatisation Stronger pension funds Icelandic banks with no worse assets than other European banks Abuse of Power? European banks did not like Icelandic competitors 2007-8, central banks, including the Fed, refused to help the Icelandic Central Bank October 2008: Gordon Brown used antiterrorist laws against Icelandic banks Who are the Terrorists? Icelandic Ministry of Finance, Central Bank and Landsbanki put on official list of terrorist organisations, with Al-Qaeda and the Talibans! Payments through London stopped Disastrous for an open economy like Iceland Bank sector collapsed Small is Dangerous Gordon Brown: Icelandic authorities would not honour their legal obligations No evidence for that British authorities: Last-minute transfers from London to Iceland Remains to be seen, but denied by Icelandic banks A Tale of Two Countries Lehman Brothers: Last minute transfers of 4.4 billion GBP from London to US US Treasury, or the Fed, not put on list of terrorist organisations! Swift: “Laws are like cobwebs, which may catch small flies, but let wasps and hornets break through“ Structural Flaw in EEA Gordon Brown forced Iceland to go beyond its legal obligations 100% of GDP, while German reparations payments after 1st WW: 85% of GDP EEA: One economic area, without one system of lender-of-last-resort Hope Against Hope Infrastructure intact, unlike after war Natural resources, fish stocks, waterfalls and hot springs Human capital Danger: Wrong lessons learned Free market discredited Only hope: Mises’ and Hayek’s longevity!
