Iceland’s slowdown underlines the need to fix structural issues

iceland3

Kirkjufell, Iceland (Joshua Earle, Unsplash)

This article is brought to you in association with OECD.


Sound macroeconomic policies and favourable external conditions have enabled Iceland’s economy to emerge stronger from a decade of post-crisis management. Yet the impact on growth from a drop in tourist arrivals and seafood exports underlines the need for reforms to open up and diversify the economy and improve its resiliency to sectoral shocks, according to the latest OECD Economic Survey of Iceland.

The Survey, presented in Reykjavik by OECD Secretary-General Angel Gurría alongside Finance Minister Bjarni Benediktsson and Minister of Education, Science and Culture Lilja Dogg Alfredsdottir, takes stock of Iceland’s progress on improving fiscal and monetary policy, reducing debt and building up financial buffers. Today Iceland enjoys sustainable public finances, high employment and one of the lowest levels of income inequality of OECD countries.

A lack of structural reform has left Iceland heavily dependent on volatile sectors however. Tourism ballooned over the past decade, overtaking aluminium and fishing to account for 40% of export income and 10% of GDP, but has stalled since the insolvency of a low-cost Icelandic airline. Seafood exports are also down. After several years above 3%, the OECD projects Iceland’s GDP growth will drop to 0.2% in 2019 before rebounding to 2.2% in 2020.

“Iceland’s resurgence since the financial crisis to reach some of the highest living standards of OECD countries has been remarkable. It is a beautiful example of how a robust economy can co-exist with an egalitarian society,” said Mr Gurría. “However this slowdown shows that now is the time to go structural and to further open up the economy. Iceland should focus on reducing regulatory red tape and restrictions on foreign investment.”

Among Iceland’s structural challenges, competitiveness is declining as wages rise faster than productivity. The competitive edge gained after the 2008 crisis has vanished. Foreign direct investment is low, due in part to a high regulatory burden.

The Survey recommends reducing over-regulation, especially in services and for foreign investment, where restrictions are among the highest in the OECD, and lightening the administrative burden for start-ups. Iceland is already working with the OECD to improve its competition policy. Wage settlements across the economy should be in line with productivity growth, and fiscal prudence should be exercised through the current slowdown in order to further reduce the public debt.

In the tourism sector, the Survey suggests considering measures to improve sustainability given that – whether the downturn proves to be temporary or longer lasting – Iceland is already at six foreign tourists a year for each resident and may already have reached a point where the negative social and environmental impacts exceed the economic benefits.

On public finances, the Survey notes that the contribution of public spending to growth has declined since the 2008 crisis. It recommends extending spending reviews to core policy areas like education and health care, and applying more rigorous cost-benefit analysis to spending plans as two ways to improve the effectiveness of public investment.

The Survey also discusses the need to address a decline in high-school student performance and better match adult skills to the labour market. Iceland has a highly equitable education system and a large share of its workforce educated to tertiary level, but it could increase vocational training and make the education system more responsive to the labour market to avoid having people overqualified or possessing the wrong skills for jobs.

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

What the COVID-19 pandemic teaches us about cybersecurity – and how to prepare for the inevitable global cyberattack

DR Congo: Ebola outbreak spreads to eastern ‘no-go’ zone surrounded by rebels

Mozambique’s Beira city ‘returning to life’, elsewhere UN teams assess damage, deliver assistance

Technology is a force for peace and prosperity. Don’t let its challenges obscure this

There isn’t a single country on track to make the UN’s targets for gender equality

Are we sleepwalking into a new global crisis?

How the EU’s new data-sharing strategy could benefit companies

Inegalitarian taxation on labour haunts Europe’s social model

The built environment has a huge role to play in improving health and wellbeing

Why South Africa is on a path of economic renewal

Why the world is not as globalized as you think

Failure to open accession talks with Albania and North Macedonia is a mistake

How one change to shipping goods could change the way we live

EU citizens disenchanted with Economic and Monetary Union over rising poverty and high unemployment

End Syria fighting to avoid ‘even greater humanitarian catastrophe’

5 shocking facts about inequality, according to Oxfam’s latest report

Nearly $4 billion needed to protect 41 million children from conflict and disaster

Better training ‘a necessary and strategic investment’ in peacekeeping that saves lives: Guterres

Central African Republic: UN chief hails signing of new peace agreement

Wednesday’s Daily Brief: Women boost work profits, saving biodiversity, UK loses Chagos Islands vote, Gaza funding, malaria-free in Argentina, Algeria

Data show EU Economy in a stubbornly subdued state

These 5 start-ups are shaping the future of Africa’s cities

Alcohol abuse kills three million people a year, most of them men – WHO report

Business leaders join UN to rev up sustainable development investments

Job automation risks vary widely across different regions within countries

Victim-centred laws ‘paramount’ to combat online sexual abuse against children

Mosquitoes kill more people every day than sharks do in a century

FROM THE FIELD: Stopping aquatic hitchhikers to safeguard environments at sea

UN chief hopes for new agreement after Israel concludes international observation mission

South Korea once recycled 2% of its food waste. Now it recycles 95%

World food security increasingly at risk due to ‘unprecedented’ climate change impact, new UN report warns

Campaign kicks off with High-level Event on #FairInternships

This is what great leadership looks like in the digital age

800,000 people commit suicide every year: WHO

These are the most innovative cities in the world

Indigenous peoples ‘lag behind on all social and economic indicators’: UN deputy human rights chief

MWC 2016 LIVE: Ford trumpets new in-vehicle system, “fundamentally rethinks” transportation

UN envoy says he ‘is ready to go to Idlib’ to help ensure civilian safety amid rising fears of government offensive

UN migration agency: young Rohingya girls, largest group of trafficking victims in camps

Human rights ‘core to sustainable development’: deputy UN chief

A UN-backed boost for women-run businesses in the developing world

Conflict, climate change among factors that increase ‘desperation that enables human trafficking to flourish’, says UN chief

Camino de Santiago – a global community on our doorstep

European Youth cries out: Sustainable Development Goals ambitious, but lack focus on youth

“A divided Europe is not in China’s interests”, Ambassador Zhang of the Chinese Mission to EU welcomes Brussels

Why we need to redefine trust for the Fourth Industrial Revolution

How two colossal Assyrian icons were recreated using digital tech

Things are bad and getting worse for South Africa. Or are they?

6 of the world’s 10 most polluted cities are in India

Iceland won’t talk with Brussels about EU accession

Competing with Apple and leading innovation: Google’s world replies to EU on android charges

Workers want flexibility. After COVID, they just might get it: Poll

Myanmar Government side-lining democratic reform, resorting to military era repression: UN expert

It’s just electronic cigarette, don’t worry?

Europe must remember its past to build its future

Haitian Foreign Minister calls for development reboot to close ‘striking gap’ between promises and action on ending poverty

How Germany strives to mold ECB’s monetary policy to her interests

‘Informing is not a crime’ UN chief calls for better protection of journalists, press freedom

Idai disaster: Stranded victims still need rescue from heavy rains as UN scales up response

Stop violence against women: Statement by the European Commission and the High Representative

More Stings?

Advertising

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s