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The myth of Iceland’s economic boom exposed

There was an interesting article in Fréttablaðið a couple of days ago called Endurmat í skugga kreppu [Re-evaluation in the Shadow of the Kreppa] by Sverrir Jakobson, which totally turned over a lot of my latent assumptions. I say latent because I wasn’t really aware that I had those assumptions, but as soon as I read the article, I realized that I did.

In the article Sverrir maintains that the so-called “prosperity” years from 1990 onwards – those years when Davíd Oddsson was Prime Minister and was implementing his economic liberalization policies, including widespread privatization – did not contribute significantly to the advancement of Icelandic society. The years from 1945-1990, on the other hand, accounted for unprecedented advances for the Icelandic nation – despite those “evil” economic restrictions in the 70s, major inflation in the 80s, and suchlike.

Sverrir writes:

During this period [1945-1990], the population of Iceland doubled, while national revenue per capita tripled. This economic growth happened despite the fact that the predecessors of the entrepreneurs that are currently involved in overseas expansion did not enjoy the same tax benefits or other privileges that they do, courtesy of the state. To a large extent it [the economic growth] was funded by the state banks, which it later became fashionable to criticize. During this time Icelanders grew taller than ever before and lived longer. The average life expectancy of newborns increased by nearly nine years and infant mortality decreased by 85%. This was achieved, among other things, through public investment in health care and other preventative measures. The number of doctors per inhabitant doubled, and Icelanders became a nation with one of the longest life expectancies in the world. General secondary education was built up in an amazingly short period of time in a country where compulsory education was still a novelty. […] The link between education and economic growth was then explained to the country’s politicians, who were all in agreement to strengthen the public education system.

All this, Sverrir explains, was more or less financed through income taxes, by workers who denied themselves regular wage increases. Surprisingly, day wages [real wages] of labourers were higher in 1945 than in 1985. And as economic growth continued, Icelanders paid more taxes, but also received an increasing number of services from the public sector. However:

After 1990, authorities began to emphasize that a certain group of people should be able to enjoy these developments more than others, established public firms were privatized and handed over to capital owners to play with. This was meant to increase prosperity, in line with the doctrines of neoliberalism. Growth continued in Iceland for a time, but it was no more than what had been for the duration of the 20th century. The difference, however, was that an increasingly large share went to a small group of tycoons. These individuals were admired by the media and led the overseas expansion, partly through credit supplied by the newly-privatized state banks.

In other words, a case study of the dismantling of an egalitarian society and the increasing gap between rich and poor. And ultimately, of course, the collapse of free-market capitalism. Perhaps we should just be grateful for small mercies: our spectacular economic collapse.

Pretty much the same weather as yesterday – cloudy, with the sun making brave attempts to break through. There’s a cool breeze, with temps of 10°C [50F]. The sun came up at 3.16, will set at 11.38.



Comments on this entry are closed.

  • JoeInVegas June 4, 2009, 5:53 pm

    But, what do we do about it now? The US has started down the road of having the government run private companies, in the big takeover of General Motors. I don’t forsee much good coming out of our tax dollars being redirected more and more to supliment the rich.

  • SkúliSæl June 4, 2009, 7:14 pm

    Nice one Alda. Thanks for pointing the article out for me.

  • Guy June 4, 2009, 10:12 pm

    Well, that’s another way to explain why the Icelandic economy is ruined. I think it’s time for the people in charge to explain us how they going to get us out of it.

  • idunn June 4, 2009, 10:45 pm

    Yes. As painful as it is, the kreppa is surely a blessing for Iceland, for if the last trend only now ended had continued, worse for all (save perhaps a few oligarchs).

    I say this from a US vantage point, a nation which is much farther down such a path, and in many respects an example of what other nations should not do. The comments here only reminded me of what so many people in the US still believe and preach. They often worship the elite, without reflecting on the plight on the many below that so often allow it.

    In this sense I’ve always felt that the Nordic countries set by far the better example in (apparently, and perhaps in fact) seeking a more equable solution for all. In a just society wherein all might enjoy a fair measure of abundance and happiness.

  • Alexander E. June 5, 2009, 12:56 am

    On the other hand, if we compare todays kreppa times with times of first settlements – the population quardo-or tetra – or whatever increased, salary – for sure tenfold higher than in 900 etc. 🙂
    I think it’s irrelevant to compare 1945-1990 to anything. At least we have much more mobile phones per person today than in 1945-1990 years combined…

    As to collapse – all “western world” is stepping in to the ocean of sh*t for sure. Iceland just a “small boy” – so already under the surface. But all other are following – just deeper (not sure if this is a good or bad news)….

  • Lee, UK June 5, 2009, 1:21 am

    Well, I suspect that all economic systems are suspect. And, when reading the “Re-evaluation in the Shadow of the Kreppa”, I’d bear in mind that correlation doesn’t imply causation. But the success of the banks in shifting wealth from the general economy to the banks (their shareholders, employeees, and bondholders) is something to behold. If this comment doesn’t make sense, blame the company pronounced pronounced ɡinis…

  • Magnús Birgisson June 5, 2009, 10:44 am

    It’s funny how it’s possible to present the economic history of the last 60 years in totally different ways, depending on where one stands in politics. I would categorize myself as a right wing liberal so allow me to bring in a different view.

    Sverrir seems to thing that it was the expansion of the state that brought on the economic benefits of the decades betweeen 1945 and 1990. The fact is that the expansion of the state was possible through the expansion of the ecomomy so it’s worthwhile to examine where that expansion came from.

    Iceland came out of WWII with huge currency reserves. It only took us a few years to squander those but luckily we were saved through the Marshall assistance and the build up of the Keflavik Naval base where in a few years 5000 people lived and worked and provided jobs and currency revenue for the economy. At the same time we expanded the fishing fleet and eventually our homewaters were not enough so we expanded the fishing limits up to 200 miles in the 70’s. During those years we also build up our energy infrastructure and the first aluminium smelter was built. However, ever bigger fishing fleet and larger fish catches eventually led to depletation of stocks and the introduction of the quota system in 1983.

    Put in other words…our economy expanded through unsustainable fishing, build up in heavy industries and our exploitation of the US presence in Iceland. Is Sverrir particularly proud of this fact ?

    Now…come 1992….enter Davíð Oddsson. The economy was in a slump due to ever decreasing fish catches. The words ,,black report” enter the language and fishing quotas were slashed year after year. The Soviet Union had crumpled and the US was pulling out of Iceland. By the end of the decade they were down to 1500 and finally left in 2006.

    So where was economic growth supposed to come from ?

    Iceland joined the EEA. Fishing was made more economical through transferable quotas. We picked up where we left off in heavy industrial build up. Tourism became an industry. Failing public companies were privatized, bringing in revenues which were used to buildup infrastructure, mainly roads, schools (universities and secondary schools in the countryside) and telecommunications (GSM and fiber optics). Social benefits also increased during those years (paternity leave etc…) The public sector actually increased as a percentage of GDP during DO’s reign. At the same time the state payed off virtually all foreign debt and was largely debt free when the crash came.

    Let us not forget that the banks were not privatized until 2003 and a lot of good things were done from 1992 until then and even after. An article like Sverri’s is a very simplistic view put forward mainly to further a political point…

    Just my two cents (or a little bit more)…;-)

  • Jim June 5, 2009, 7:05 pm

    It’s always been admitted that a massive wealth divide is unjust, but the justification has been that the injustice is beneficial for all, and therefore tolerable (if not downright desirable). The article you write about exposes the ‘efficiency’ part of the theory for the rubbish it is, and now there is no excuse for not decrying the injustice of the wealth gap.

    Iceland would do well to return to the egalitarian, wealth-spreading days of olde – in short, re-adopt the ‘Nordic model’ of social security; I recommend the excellent book linked below.

    I only wish the UK would adopt the ‘Nordic model’ as well..


  • Gudmundur June 9, 2009, 4:31 pm

    Just to add to this, there’s an interesting discussion on Nei. about what got lost during the boom and the privatization, when “profit” became the magic word: http://this.is/nei/?p=5718

    – overnight service at pharmacies vanished (but 10/11 is open all night long, so you at least can buy candy)
    – the postal service got worse: postboxes vanished and post offices were closed in some towns (presumably not profiable)
    – dental hygiene has gotten much worse
    – the state-owned telephone company, Siminn, was sold. The promise was made to use the “profit” to build a “high-tech hospital” (so the hospitals that we already have are low-tech, then?), but no sign of that yet
    – the city center died. It’s basically dead. The only sings of life are protests and during the summer when the tourists walk around Laugarvegur and Austurstræti
    – public transport in Reykjavik is horrible (it used to be better almosat usable). Now you can only buy fares in two places in the city, you can’t pay the busdriver unless you have the exact amount, and instead of setting up simple automatons so people could buy busfares, the city spent billions on some smart-card system that was supposed to be the shiznits, but that, too, seems to have vanished (icelanders seem to be very good at throwing away money on something cool and useless, but when it comes to using money on something useful (a home for the mentally ill, say) they immediately turn into Ebenezar Scrooge)

  • SkúliSæl June 9, 2009, 5:18 pm

    Well it will always be a question of the hen and the egg. But isn’t a common root of all this the tint of corruption?
    We Icelanders know well how the political figures were accused of bringing all kinds of sevices to their home territory just to buy votes.
    With the Neo-Capitalism it was the buisness firms and their moguls that got the accusing finger of doing all the wrong things to get more money (well also Doddson and his party).
    Seems to me that it is the same corruption but different persons.

  • Bala June 10, 2009, 2:56 pm

    I am not sure if I agree with the article or the analysis posted in this blog. What everyone seems to forget is the amount of money that has been used to fund the infrastructure development of Iceland. It would have been impossible to fund the development without the private capital. Please look at the developing countries like India and China, although they have a heavy emphasis on Government they rely heavily on private capital to build the infrastructure of the country. Icelanders cannot focus on only one side of the balance sheet, all liabilities have if not equal, equivalent assets. Iceland boasts one of the highest connectivity per capita to the Internet, Broadband, Mobile Phone, Geothermal Power plants, cheapest electricity usage etc all these would be have been impossible to achieve without the privatization of the banks. Lets have some balanced discussion, it is very easy to round everyone on one side of the discussion and have the evil “profit” mongering entrepreneurs as scape goats. Let be clear Profit as a motive is a good to the society and not a bad! Without the right incentives you will have societies and communities dwindle, look at what happened to USSR. It was model that failed for good reasons… it strips individuality and entrepreneurship, Iceland has a good history of developing good companies and ideas lets not kill that spirit by these baseless arguments. The only way out of the difficult situation in Iceland is to invest in technology, its people and give them the tools to solve problems. The Government is never the solution…