Geir H. Haarde
Minister of Finance
The Challenge of Being Small in a Global Economy
The Case of Iceland
Address at the University of Manitoba, 23. February, 2001
(Check against delivery)
Ladies and gentlemen,
It is with great pleasure that I address this audience here in Winnipeg – the city which could be referred to as the Icelandic capital in Canada. The ties between the two countries go back a thousand years as we were reminded of last year with the millennium celebrations of the discovery of North America by Leifur Eiríksson, both here in Canada and in the United States.
It was, however, roughly 125 years ago that the systematic Icelandic migration to Canada began and laid the foundation for the strong cultural ties between the two countries. Icelanders were of course only a small fraction of the many million immigrants who came from Europe to Canada. But it is estimated that emigration from Iceland to Canada amounted to about a quarter of the total Icelandic population. So it was very significant for us. Furthermore, I am told that the total number of people of Icelandic descent living in Canada right now is close to 200 thousand, compared to the 280 thousand people living in Iceland at present. So, there is no wonder that we Icelanders feel there is a very special relationship between our countries. It is important to foster this heritage.
Since this is the time of the winter Olympics, I have to mention that the closest we Icelanders have come to winning an Olympic gold medal was in 1920 when the Canadian icehockey team became Olympic champions. Not only was the winning team Canadian but also from Winnipeg, called the Falcons, and all except one were of Icelandic origin. Furthermore, their captain and most talented player, Frank Frederickson, was also a pilot and as such was among the first to operate an airplane in Iceland during the summer of 1920, right after the Olympics.
It is also interesting to think about the effects of the emigration from Iceland to Canada on Icelandic society, both economically and socially. One aspect of this, which has received little attention up to now, relates to the inflow from Canada to Iceland of technological know-how in various industries more than one hundred years ago. Perhaps the most important innovation related to fish freezing. These methods had long been used by fishermen around the Lake of Winnipeg but only became known in Iceland when one of them returned to Iceland bringing with him this knowledge. This innovation was to revolutionise the fishing industry in Iceland and significantly contribute to the rapid economic development at the beginning of the 20th century.
Other important examples can be mentioned, mostly in transportation and communications. For instance, the foundation as early as 1914 of Iceland's first and by far the most important shipping company even today, The Icelandic Steamship Company Ltd, was made possible by strong participation of some of the most prominent Icelanders in the Winnipeg business community, providing about a quarter of the capital needed to establish the company.
But there were also missed opportunities. An Icelander, Frímann B. Arngrímsson or Freeman B. Anderson as he called himself after moving to Canada in 1874, became the first West-Icelander to graduate from University, first from Toronto University and then, yes, from the University of Manitoba! He returned to Iceland in 1894 and, having worked for General Electric, came with an offer from that very company to start utilising the enormous energy resources in Iceland, the waterfalls, in order to produce electricity and literally speaking light up the Icelandic society. This was a first in Iceland. Unfortunately, we were not ready at that time to jump on this bandwagon which probably meant several years' delay in our economic progress.
Turning to more recent times, Iceland and Canada have had good relations throughout the years and Canada is one of Iceland's important trading partners. Several Icelandic companies have invested here directly and have Canadian subsidiaries. Good transportation is of course important for the relationship of the two countries. That is clear to Icelandair which has increased it's service to Canada in recent years with Halifax as their Canadian hub.
The Icelandic Government has decided to open an embassy in Ottawa later this year, but up until now the embassy of Iceland in Washington DC has been in charge of diplomatic affairs. The new embassy in Canada will, apart from traditional activities relating to political, commercial and cultural relations, have the role of increasing still further Iceland's ties with Canadians of Icelandic descent, and build on the excellent work of the first Icelandic Consul-General in Winnipeg, Ambassador Svavar Gestsson and his wife, Guðrún. The Canadian Government will also open an embassy in Iceland this year on a reciprocal basis.
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Now to the subject, ladies and gentlemen. My subject matter is titled "The Challenge of Being Small in a Global Economy". Let me define this challenge in terms of economic objectives, political values and international responsibilities.
The world has developed in remarkable ways since the end of World War II. One striking feature has been the rapid increase in the number of nation states, in particular smaller states. The statistics are amazing. The number of independent nation states has risen annually by three on average during the last decade, mostly through break up of other states. There are now close to 200 independent states in the world, of which 87 have fewer than 5 million people. Of those, 35 have fewer than 500 thousand people.
While becoming bigger, the family of nations has at the same time become more integrated as trade and investment flows have increased manifold. Distances have become smaller and the new information technology has revolutionised the field of communication, giving true meaning to the word "globalisation" or "mondialisation" as you say in your other Canadian language.
But, how can smaller states pursue their own objectives in a globalised world? Is there any inherent conflict between goals pursued by larger and smaller nations, or is size perhaps irrelevant in terms of agreed success criteria?
These are a few of the questions that I will try to answer, mostly with reference to the case of my own country, Iceland, and by giving you examples of how we try to cope in a rapidly changing world.
Economic challenge
The first and maybe the most important challenge facing the authorities of a small state is the economic one. That is the responsibility of providing the population with acceptable and competitive living standards, or rather, by providing the framework for this to happen. In Iceland we strive to provide a standard of living equal to or an even better than in the countries that we compare ourselves and compete with. In other words, we try to make sure that Iceland continues to offer attractive living conditions relative to others, in particular our neighbouring countries. I consider this to be an overriding objective. In the global economy people have become increasingly mobile, and young people in our part of the world are today truly presented with multiple choices as to where they could and would like to live. Before, people used to live where they were born for all of their lives, largely because they had no other choice. Now, people can move away if they want to, permanently or temporarily. We consider it very important for our young people to study or live abroad for a period of time. Our challenge is to attract them back and take advantage of their education and experience. In fact, the real challenge is to get them to want to move back. Attractive economic conditions are key to that. Every society is expected to provide its citizens with certain basic services; education, health-care, transportation, culture, etc. Small societies cannot afford to fail in fulfilling those expectations. Many are surprised to see how smaller states manage to do this either on their own or in cooperation with others. Iceland, for example, basically has and has to have all the infrastructure and services that you expect a large country to have.
Political challenge
The second challenge facing small states is a political one. The challenge of preserving national independence and sovereignty and to maintain whatever is traditionally unique in an increasingly integrated global context. Non-economic determinants of nationhood, such as language, history and cultural identity are important national treasures in most countries. Improved technology, better transportation and communication, as well as the influence of popular culture that knows no boundaries, makes it even more of a challenge than before for small states to protect their own, while at the same time avoiding being isolationist or xenophobic. A good example of this concerning Iceland is that a few years ago the Microsoft company decided to stop making special computer keyboards with the several characters unique to the Icelandic language. They had a valid reason – the market was too small to warrant the extra cost. This was strongly objected to both by our Government and private companies. In the end an agreement was reached respecting the special characteristics of our language. In return, Microsoft was promised government cooperation in uprooting software piracy. Both parties, therefore, had something to gain in this case. But in general, this political challenge can be difficult for many smaller nations to meet since it has both a cultural and a linguistic component that are hard to quantify or measure.
International responsibilities
The third point I would like to mention is the importance for small states to take an active part in the community of nations – and more than that – to make a constructive contribution internationally. By this I mean taking an institutional part in the international system through the UN family, through security organisations, trade arrangements such as the WTO, or regional agreements of different types. Furthermore, by taking a responsible part in helping solve the problems of the world through humanitarian aid, development assistance, peacekeeping, etc. Iceland is an active member in the international community in this sense and so are many smaller states. One can even argue that many small countries have had more international influence than their size merits, as evidenced in the UN system. In theory, any of the smaller NATO countries could have vetoed NATO's involvement in Kosovo two years ago since the decision making process within NATO requires full consensus between the members. This could have happened despite the fact that Iceland doesn't even have a military of its own and Luxembourg hardly any to speak of. But even though everyone realises that the smaller countries will never play the same role internationally as e.g. the United States, they nevertheless have their own role to play within the international framework.
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The economic situation in Iceland
I would now like to turn my attention in more detail to the economic situation in Iceland, and give you a chance to evaluate whether we have met the challenges of being small in a global economy.
There have been dramatic changes in recent years in the economic environment in Iceland, and large steps taken to improve the economic as well as the financial system. The current center-right coalition Government is now in its second four-year term, and the Independence Party is in its third term. A decisive policy was launched in the beginning of the last decade, when we took office, towards greater liberalisation and deregulation where the overriding emphasis of the Government was to strengthen the macroeconomic stability in the economy. Privatisation of State enterprises has also been an important part of the Government's policy. Significant progress has been achieved during the past ten years, and those achievements have placed Iceland firmly among the most economically advanced nations.
Overview
Let me give you a brief overview of what our economy looked like a couple of decades ago. The Icelandic economy was then highly dependent on one industry, fisheries, and that resulted in an unstable economic environment subject to fluctuations in both fish prices and fish catches. 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 a responsible fiscal and monetary policy on a more general basis. There was also admittedly a widespread lack of understanding of the possible benefits of an open market economy. The inevitable consequence of this situation was a highly unstable economic environment with 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.
EEA Agreement
Much has happened since then, and apart from the changes resulting directly from Government policy, one of the more important events was Iceland's participation in the European Economic Area along with its partners in the European Free Trade Association and the fifteen 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 that was needed to move the economy towards more openness, as well as deregulation and liberalisation of markets, in particular the financial markets.
Impressive results
The results have been impressive, both due to more sensible fiscal and monetary policies, as well as the other aforementioned 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 by reducing marginal tax rates. The financial market has been deregulated and liberalised to increase the freedom of capital movements within the country as well as to and from abroad, thus strengthening the domestic financial market. The pension fund sector 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.
New industries
These measures have helped strengthen Icelandic industry and paved the way for new sectors such as information technology, telecommunications and biotechnology. Information technology is an ideal industry for a country like Iceland because modern communications technology erases the disadvantages of distance.
Iceland is no longer dependent on one industry. As a result, productivity has increased and economic growth has been higher in Iceland in recent years than in most neighbouring countries. The purchasing power of households has also increased rapidly and unemployment has been all but wiped out. Stability in the labour market has been achieved by the conclusion of wage agreements running for three to four years which will contribute to a better operating environment for enterprises and wage earners as well as the economy as a whole.
Strong fiscal outcome
The strength of fiscal developments in the past few years has served to curb domestic demand and thereby significantly contribute towards stability in the Icelandic economy. The revenue surplus of the public sector is one of the highest in the OECD area and the same applies to the net financial surplus. There is now a structural surplus which will not disappear as the current economic upswing recedes. This enables us to systematically and rapidly reduce the Treasury debt.
Continuing tight fiscal policy
The main emphasis of the Icelandic Government's economic policy is to continue along the same path and pursue a tight fiscal policy in the medium-term. The Government has recently announced its next steps in privatising government stakes in various enterprises, most significantly in the telecommunications and banking sectors, which will render considerable proceeds to the Treasury as well as fostering increased competition and productivity gains. In recent years, proceeds from the sale of government assets have been used to reduce Treasury debt as well as future government pension commitments by raising the equity of the Government Employees Pension Fund. This policy will be continued.
A number of tax measures have in recent years strengthened Icelandic industry, particularly new economy sectors, and additional reforms are underway.
Strong and vibrant business sector
These changes 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. The improved business climate has led to more profitability, a rapidly growing export sector and a higher level of investment. As a result, Icelandic enterprises and pension funds have increased their investment activity abroad, and so have foreign enterprises in Iceland. I can add that in a 1999 study by the World Economic Forum regarding the access and quality of the business environment for start-up companies, Iceland receives a mark of 5,7 out of a possible 7,0. Iceland is there right behind the United States and New Zealand, and well ahead of the other Nordic countries.
One important part of further internationalisation is a stronger link between companies across national boundaries. In this context, it is worth noting that although Iceland has decided not to apply for membership of the European Union at this time we follow with great interest what is happening in the Union, particularly the developments of the Euro. We realise that without becoming an EU member Iceland will not be able to participate directly in the European Monetary Union. While certain future possibilities have been studied carefully there is no immediate call for action with respect to the relationship between the Icelandic króna and the Euro. At this time we believe that the costs of full membership of the EU would out-weigh the benefits from joining. This has primarily to do with the Union's fisheries policy and goes beyond the scope of this talk. The EEA agreement is ideal for us at the moment but we do keep a close eye on developments.
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Conclusion
So, what is the conclusion of all of this? In the world economy you don't have to be big to be successful, but you do have to do the right things. Size is neither a necessary nor a sufficient condition for good policies or results. There are also both rich and poor small countries. Smaller countries can solve the problems required of modern society as efficiently as others, sometimes more easily and often they have fewer problems to solve. The smaller states stand to benefit more from a clearer division of labour, specialisation, and obviously from free trade. In general, from internationally accepted rules. In the case of my country, 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. Clearly, a lot depends on proper domestic policies but also on a proper political, democratic framework. Political democracy, pluralism and the rule of law, coupled with the best that the market economy has to offer is the recipe for success. We in Iceland and you in Canada are fortunate to have peacefully developed all the necessary institutions for this. The rest is up to the policy makers and the public.
