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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