Ræðismannaráðstefna: Geir H. Haarde

Ráðstefna fyrir kjörræðismenn Íslands erlendis
Reykjavík, 2.-5. September 2001

Ræður og erindi

Geir H. Haarde, fjármálaráðherra,
"The Icelandic Economy: Current Status and Future Developments"

3 September, 2001

(Check against delivery)


Ladies and gentlemen.

First, I would like to say that I am delighted to have the opportunity to address this audience today. I believe the consular corps that serves Iceland all around the globe is one of the country's greatest assets when it comes to protecting our interests abroad. I have several friends in this group who have been helpful to me personally in the past and I would like to thank you all for your excellent work on behalf of Iceland.

This, I'm told, is the first consular conference for some years. Since the Icelandic economy has developed dramatically in recent years, I thought it might be appropriate to give you a brief overview of what I consider to be the most significant changes in the recent past as well as the challenges facing us today and in the immediate future.

And as we Icelanders tend to do when discussing today's situation and even future prospects, we first take a glimpse back. As one of our greatest poets, Einar Benediktsson, put it in the early part of the last century: "When building the future, look towards the past".

Background
However, some more general points to start with. The first thing to notice with respect to the Icelandic economy is its size. Or rather the lack thereof. It is one of the smallest economies in the world in absolute terms, its GDP this year estimated at 7,1 billion US dollars. The US economy is about 1200 times bigger, that of Japan 400 times bigger and the smallest Nordic economy, Norway, is roughly sixteen times bigger.

But you don't have to be big to be successful. This comparison does not tell the whole story. It ignores the population factor. Small economies can be rich or poor depending on the population size. Today we can say without hesitation that ours is small and rich. When measured in terms of GDP per capita Iceland was in 1999 number seven in the world outpacing most of our bigger European neighbours. This measure tells us that the overall living standard here is now among the highest in the world. We have come a long way in this respect in a relatively short period of time. At the beginning of the 20th century Iceland was one of the poorest places in Europe. This achievement, however, has not come about all by itself and the authorities and the people have had to overcome many important challenges.

The second characteristic of the Icelandic economy is its relatively high dependence on one industry, i.e. fishing and fish processing. Although this has changed dramatically over the past few decades as a result of systematic diversification of the economy, this industry still accounts for almost a half of total export income from goods and services. But even that number is a little deceptive as Icelandic fishing companies today are no longer today monolithic enterprises. They now produce a highly varied assortment of products from different species using different processing methods developed for markets with different tastes all over the world. And in the fisheries sector we have developed a management scheme, a system of transferable quotas, which, although not perfect, both serves to protect the fish stocks from depletion and to maximise the value derived from them.

The most fundamental challenge for any nation, it seems to me, is to secure its own economic livelihood, as it is for any individual or family. It is the responsibility of the authorities in any modern state to provide the means or the framework to meet this challenge. For a small country in a world where labour is increasingly mobile this task is even more important. If living conditions are not competitive with the rest of the world the best part of the labour force simply leaves, usually the young and the most educated, the best and the brightest. I consider this to be a daunting challenge for Icelandic authorities: How to make sure the young people stay or come back after studying or working for some time abroad.

In recent years I think we have done reasonably well in this respect. We have been successful in creating a living standard comparable to the best elsewhere and we have provided interesting and well paid employment opportunities in a variety of fields both in the so-called new economy sectors and in more traditional ones.

Past experience
Let me now give you a brief overview of what our economy looked like a couple of decades ago. The Icelandic economy's dependence on fisheries resulted in an unstable environment subject to fluctuations in both fish prices and fish catches, sometimes both negative at the same time. This also meant that economic policy was almost entirely directed towards alleviating the immediate effects of fluctuations within the fisheries sector with little or no room for conducting responsible long-term fiscal and monetary policies on a more general basis. The inevitable consequence of this situation was instability and rampant inflation. In addition, the economy was highly regulated and there were restrictions on trade and especially capital movements in and out of the country. There was also, admittedly, a widespread lack of understanding of the possible benefits of a more open market economy.

Much has happened since then. Apart from the changes resulting directly from government policy towards greater liberalisation, deregulation and other structural reforms, one of the more important milestones was Iceland's participation in the European Economic Area in the mid 90's along with its partners in the European Free Trade Association and the members of the European Union. By becoming a part of the European Single Market developments moved much faster than otherwise would have been the case. The EEA was the extra impetus needed to move the economy towards more openness.

Recent reforms
The Icelandic economy is basically sound at present. This is both the result of sensible fiscal and monetary policies, as well as structural measures undertaken in recent years to improve economic conditions both of industry and households.

Tax reforms have been enacted in order to improve the competitive position of industry. We hope more of that may be on the horizon soon.

The financial market has been liberalised and modernised to increase the freedom of capital movements within the country as well as to and from abroad. This has markedly enlarged the domestic financial market which now offers a variety of new products and instruments. Old-style credit rationing is gone and interest rates are determined in the market place, but of course with reference to the basic rate of the Central Bank.

The pension fund system has been reorganised with the aim of strengthening the financial position of the funds and thereby of future pensioners in addition to strengthening financial saving.

Finally, earlier this year the Government took decisive steps in order to increase the Central Bank's independence and make low inflation the sole target of monetary policy.

Current conditions
These measures and the increased economic stability that has followed have resulted in a stronger economy and a much more vibrant business sector, more competitive than ever. Furthermore, this has paved the way for new sectors in the area of information technology, telecommunications and biotechnology, to name a few. As a result, Iceland is no longer dependent on one industry. Productivity has increased and economic growth has been higher in Iceland in recent years than in most neighbouring countries. Icelandic enterprises and pension funds have also increased their investment activity abroad and so have foreign enterprises in Iceland, especially but not solely, in the energy sector. The purchasing power of households has in turn increased rapidly while unemployment has fallen.

There has been a surge in domestic demand, but also a temporary hike in inflation and a widening current account deficit. This trend has now been reversed. The latest indicators point towards a considerable slowdown in domestic demand, most noticeably reflected in the current account deficit which appears to have peaked. Also, inflationary pressures seem to be residing after an unusually strong upsurge earlier this year, mainly because of the sharp decline in the króna exchange rate.

In this context, it is important to note that the current account deficit is not due to deficit-spending on behalf of the central government, but exclusively the result of increased private sector borrowing. This reflects the private sector's confidence in the government's economic policy and continued economic stability. The strength of treasury finances, with one of the highest surplus in the OECD area, represents a significant counterbalance against the impact of private sector indebtedness upon domestic demand. This has enabled us to systematically reduce the treasury debt.

The strength of fiscal developments in the past few years has contributed significantly towards stability in the Icelandic economy. The surplus is not, however, attributable solely to the strong economic upswing since the structural surplus has also been growing. We plan to continue along the same path, both through strong fiscal finances and privatisation.

The Government has recently announced its next steps in privatising government stakes in various enterprises, most significantly in the telecommunications and banking sectors. This will bring considerable proceeds to the treasury and foster increased competition and productivity gains. In recent years, proceeds from the sale of government assets have been used to reduce treasury debt and future government pension commitments, as well as for some infrastructure projects. We believe the privatisation program of the Icelandic Government offers many interesting opportunities for foreign investors and would much welcome their participation in this transformation.

Some conclusions
In this country we know that size is neither a necessary nor a sufficient condition for good policies or results. Smaller countries can solve the problems required of modern society as efficiently as the bigger one, sometimes more easily and often they have fewer problems to solve. They stand to benefit more from a clearer international division of labour, from specialisation, and obviously from free trade based on universally accepted rules. In the case of Iceland, which has a rich natural endowment base in terms of fisheries and energy resources, we have managed to move away from the wasteful policies of the past into a more enlightened policy framework. The opportunities for further economic development are everywhere, not least in power-intensive industries which rely on our under-utilised, renewable energy resources.

Still, many challenges lie ahead and we are not always our own masters in the modern world of globalisation and inter-dependence. Our relationship with the European Union, for example, is well defined and codified in the agreement on the European Economic Area and does not in my view call for a particular re-examination. Yet developments with respect to the Euro may at some time in the future require closer attention on our part, say if the UK, Sweden and Denmark all were to join the Euro and thus bring two thirds of our foreign trade into the Euro zone instead of the current one third.

But the knowledge of economic science in this country has improved greatly in recent years and so has the capacity to analyse and solve new problems. I am confident that we will be able to continue to improve our lot, making the best of what we have in good cooperation with our friends, neighbours and trading partners whom all of you represent.

Thank you.