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Economy of Iceland

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Through Iceland, Mixed economy and Gross domestic product

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The nation has high levels of free trade and government intervention. However, government consumption is lower compared to other Nordic countries. 100% of Iceland's electrical grid is produced from renewable sources. Geothermal and Hydropower are the primary sources of energy in Iceland. A founding member of the OECD, Iceland has the third lowest Not in Education, Employment, or Training (NEET) rate among the youth.

The 2008–2011 Icelandic financial crisis produced a decline in GDP and employment, which has since been reversed entirely by a recovery aided by a tourism boom starting in 2010. Tourism accounted for more than 10% of Iceland's GDP in 2017. After a period of robust growth, Iceland's economy slowed down according to an economic outlook for the years 2018–2020 published by Arion Research in April of 2018.

In the 1990s Iceland undertook extensive free market reforms, which initially produced strong economic growth. As a result, Iceland was rated as having one of the world's highest levels of economic freedom as well as civil freedoms. In 2007, Iceland topped the list of nations ranked by Human Development Index and was one of the most egalitarian, according to the calculation provided by the Gini coefficient.

From 2006 onwards, the economy faced problems of growing inflation and current account deficits. Partly in response, and partly as a result of earlier reforms, the financial system expanded rapidly before collapsing entirely in the 2008–2011 Icelandic financial crisis. Iceland had to obtain emergency funding from the International Monetary Fund and a range of European countries in November 2008. The economy has since rebounded since 2010, and continues to grow to this day.

History

In medieval Iceland, trade was traditionally conducted through barter. The traditional nationalistic historical narrative says that Iceland had experienced a golden age from 874 until the 11th century, when the country came under foreign rule and "suffered humiliation" as its economy declined. There is very little evidence to support this narrative.

Iceland had among the lowest GDP per capita out of all the Western European countries at the start of the 20th century. An assessment by economists at the Central Bank of Iceland stated that the country's "post-World War II economic growth has been both significantly higher and more volatile than in other OECD countries", and that "the Icelandic business cycle has been largely independent of the business cycle in other industrialised countries." Iceland has had a total of twenty financial crashes since 1875, according to Reuters.

Fishing became a large part of the Icelandic economy after the 1880s, partly due to expanded fishing with sailing smacks. During the Second World War, the UK imposed trade sanctions on Iceland to prevent them from trading with Germany. After the British and later American occupations of the island, the economy was boosted by a substantial amount, and Iceland went from one of the poorest countries in Europe to one of the wealthiest. This was furthered by Iceland being included as part of the post-WWII Marshall Plan, receiving the largest amount per capita between 1948 and 1951, almost double the amount of the next highest recipient.

Towards the end of the 20th century, Iceland's economy continued to grow. A coalition between the Independence and Progressive parties led to the privatization of state-owned banks and telecommunications. Corporate income tax was reduced to 18%, inheritance tax was greatly reduced, and the net wealth tax was completely abolished. The term "Nordic Tiger" became heavily used refer to the period of economic prosperity in Iceland that began in the 1990s.

The "Nordic Tiger" period came to a sudden end as a result of the 2008 financial crisis. Iceland went from being the 10th richest country in the world in 2007 to the 21st in 2010. Banks made risky loans and manipulated markets, with the country's regulators understaffed and not properly supervising them. The Icelandic króna underwent sharp inflation, with the three largest banks in the country being placed under government control. Iceland's central bank raised its interest rate to 18% in an attempt to combat the inflation.

With help from the International Monetary Fund (IMF), Iceland's economy stabilised and managed to pay off all of its loans by the end of 2015. Economists Ásgeir Jónsson and Hersir Sigurjónsson said that "Iceland was treated differently from developing countries and former IMF clients. There was no call for Iceland to adopt sharp austerity measures at the inception of the joint economic plan. Instead, the government would be allowed to maintain large public deficits in the first year – 2009 – allowing fiscal multipliers to counteract the output contraction that was underway. Iceland also was not asked to downsize its Scandinavian-type welfare system."

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