Iceland - Growing and Diversifying

Address by the Prime Minister of Iceland,
Mr. Davíð Oddsson
at a seminar on the Icelandic economy: Iceland – Growing and Diversifying
September 17 2001

Icelandic version

Ladies and Gentlemen:

It gives me great pleasure to open this seminar on the Icelandic economy: Iceland – Growing and Diversifying. This theme could actually be used to sum up the economic policy of the current coalition government and those which have been in office since 1991. Over this period, Iceland's economy has been radically transformed. Until that time it differed in many ways from the typical western economy, so much so in fact that one of my predecessors in office seriously claimed that the laws of economics did not work in Iceland. The public sector was a very active player in the economy. Numerous state enterprises operated in various sectors. The banking system was controlled by the state and political credit rationing to industry was common, sometimes on very random principles. There was a sizeable fiscal deficit and the level of public sector foreign debt posed a serious threat to the nation's well-being. Iceland therefore faced a huge task in 1991 when it began work aimed at bringing itself into line with the most advanced economic frameworks elsewhere. A strong fiscal stance was taken, conditions were created in which financial and equity markets could function properly, an extensive programme of privatisation was launched and Iceland became a member of the European Economic Area. Economic policy shifted from specific actions to generic measures aimed at gradually reducing the role of the public sector and relying instead on free market forces. In other words, the same economic policies were introduced as had proved most successful elsewhere in the western world. And this has certainly delivered results. Iceland has witnessed considerably more economic growth than almost all the European Union countries, real wages have increased, an impressive fiscal surplus has been achieved, treasury foreign debt has been rapidly amortised and the entire economic framework is more effective than before.

But the transformation of the economy is an ongoing task, and really a never-ending process. The economy is constantly evolving and needs to be adapted to new conditions as soon as they emerge. The best way to ensure such adaptation is to transfer as much economic power as possible from the state and to the marketplace. No matter how good a government may be, it cannot always sense the rhythm of the age or the forces that shape the incredibly complex mechanism of the free market. The government of Iceland will therefore continue to secure the foundations of the market system so that the economy can remain strong and dynamic. In this context I would like to mention two recent tasks which the government of Iceland has addressed. The first is the new Act on the Central Bank, which grants it full independence. Instead of maintaining the exchange rate within specific limits, the Central Bank has now been set an inflation target. There is no doubt in my mind that Iceland will benefit from this measure in the long run. An independent central bank provides an anchor for the economy and, despite a certain amount of unease in the foreign exchange market recently, this reform will strengthen the Icelandic króna and make it a more secure currency.
The second example is the large-scale privatisation of two of Iceland's most important business sectors, which is currently under way. It is planned to privatise Iceland Telecom, which until now has been entirely state-owned, and two commercial banks which are still partly owned by the state. With the sale of these companies the state will withdraw completely from these sectors, as it certainly should.

In my view these are very exciting investment options, for both Icelandic and foreign investors. The government is committed to creating a framework with clear benefits for Icelandic and foreign businesses alike. I believe that Iceland already has many attractions for outside investors. An educated and dedicated workforce, access to markets on both sides of the Atlantic, a stable economic environment, transparent government and high level of technology – these are all important factors which contribute to a flourishing economy. But there is still scope for improvement. Iceland is a small economy and some way off the beaten track, and we cannot take it for granted that foreign investors will come here on a large scale. In order to retain progressive local companies and attract foreign investment, Iceland needs to provide as good a business environment as the nations with which it compares itself, and preferably a better one. The government firmly emphasises that Iceland's administrative and legal environment must keep pace with the needs of industry and work with it in creating the maximum value. Although Iceland has full access to the European Union's inner market, it is not a member of the community itself, which means that it has more opportunity to tailor its legal environment to suit the businesses that operate here, without needing to comply in all respects with EU directives in fields such as taxation. In the near future the government will make substantial reductions in corporate income tax to make Iceland an attractive location for investment. New legislation is also being drawn up to allow businesses to handle their accounting and pay their taxes in whatever currency they choose. This measure will reduce the local currency risk and should make it much easier for foreign investors to weigh up the advantages of investing in Iceland.

Ladies and Gentlemen

The past decade has been a decade of progress in Iceland. Iceland's potential for taking up the challenges of the future has never been greater. Our history shows us that our prosperity has always gone hand in hand with the level of our foreign trade. This fact is very prominent in Icelanders' minds. We know that future economic growth and prosperity depend on close cooperation with the world around us, and it is in our interests to be a full participant in the global business environment. Signs of this can be seen everywhere in Iceland today. deCode, a biotechnology company which is listed on Nasdaq, bases virtually its entire operations in Iceland, international aluminium producers with smelters here want to expand their production capacity and others want to build new plants, Icelandic banks have begun operating in other countries and a large number of companies in the fisheries, information technology and healthcare sectors have been greatly stepping up their activities abroad. Such developments spawn a dynamic and diverse business community which provides individuals and companies with the opportunity to flourish, and the entire nation with the possibility of prosperity and security. In my opinion, the theme of this seminar, Iceland – Growing and Diversifying, is a fine description of the Icelandic economy today and the opportunities that await us in the future.