A Brief History of the Economy Development in Iceland



The history of economy development in Iceland the last century is like a fairy-tale. It changed from the poorest country in Europe to one of the richest country in the world in only a 50 years!

Although the history of Iceland spans 11 centuries, the economic development started with the 20th century. Like most Europeans, Icelanders had been farmers for centuries, but in the year 1902, the seamen at Westfjords put a motor in a small boat, and the Icelandic industrial revolution began. Now the seamen could go farther from the land to fish, they could fish more than they did before, and the weather was not as big a factor as it used to be. The wheels went on running and a century later, Iceland’s economy boasts one of the world’s top 20 GDP per capita.


Of course, the economic start took some decades and there have been series of ups and downs in the business cycle in Iceland over the last hundred years.

The Vikings settled in Iceland around the year 870. Iceland became part of the Kingdom of Norway 1262. From the year 1380 (The Union of Kalmar) to 1944, Iceland was part of the Danish Crown, it got its constitution in 1874, home rule in 1904 and independence in 1918. Iceland joined the United Nation in 1946, NATO in 1949, The Nordic Council in 1952, EFTA in 1970,  EEA (The European Economic Area) in 1994 and Schengen in 2001.

The Icelandic Republic was established on the 17 June 1944. The President has been Ólafur Ragnar Grímsson since 1996 (The President has no political power); The Prime Minister is Geir Haarde (since 2006); his government has 12 ministers including himself, and there are 63 members of the Parliament. There are 79 communities in Iceland (in 2006, compared to over 200 in the beginning of the 1990s).

The 19th century two decades were very harsh and many fled to America, maybe some of them moved to Colony of Georgia?

In the beginning of the 20th century, there were less than 80,000 Icelanders, 96% of them were farmers. Now they are more than 300,000 and only 2% of them are farmers. The annual GDP growth rates per capita were 4% from 1900 to 2006.

Up until World War I, the economy was very stable and hadn’t changed for centuries. The Parliament changed the tax system in 1877, introduced income tax, and the policies of the Parliament were for a structural surplus, but one has to keep it in mind that the public sector in the beginning of the 20th century was very small, and there was almost no infrastructure in the country. The policy of Parliament was laissez-faire. From 1904 to 1917, there was only one single minister. There was no industry in the country, and all the work could be classified as primary sector –farmers or seamen. The Iceland Statistics Office didn’t start registering unemployment until the 1920s, so when workers were seasonally unemployed, they weren’t counted as unemployed, but said to be temporarily out of work.

There was a recession during World War I, but the economy expanded in the 1920s. The government finished changing the tax system –1921 and 1923- and some infrastructures were built in the country – a telephone network, schools, roads, and even bridges.

After the infamous Wall Street Crash in October 1929, there was a depression throughout the western world. The government in Iceland revised its policy and increased the income tax, but didn’t lower the indirect tax, and introduced protectionist policies like many others governments – the New Deal in US. The government intervened in the field of economy to control the business cycle. With their demand management, they tried to build up a secondary sector by increasing government spending to establish factories. The classical unemployment was high, and went higher because of the civil war in Spain, which affected the market for salt cod.

The second World War saved the economy in Iceland. There was a genuine boom in the 1940s, and corruption followed. The government had to change the money system in 1949 in order to find out how much money people had and how much they should pay in taxes.

This was the war that changed everything in Iceland. The standard of living was much higher than it was before and that cost a lot of money when there was a scarcity of everything. The government tried to keep the economy down, but failed.

In the 1950s there was a series of ups and downs – mostly because of poor fishing catches, strikes and erratic exchange rates. The economy was very low in 1960 and the government had to change the whole economic system:  taxation, currency and the housing policy of the state.

The economy recovered in the 1960s – but the Icelandic economic system is small and when herring fishing failed in 1967 and the Pope allowed the catholic to eat meat on Fridays, many people lost their jobs. Several of them emigrated to Sweden and even to Australia to look for a job.

The economy recovered and reached a peak in 1974, just before the first oil crisis hit the Icelandic economy. In the 1970s and 1980s the inflation was galloping in Iceland.

In the beginning of the 1990s, the government, trade unions and the Union of Employers changed their policy concerning salaries and inflation. They also deregulated the Icelandic economy. From the early 1990s, the inflation has been normal in Iceland (less than 4% per year) – Nevertheless, from the beginning of the 21st century, the financial policy has been shaky and the ghost of inflation could be closer than we think! However, the financial sector is the new backbone of the Icelandic labour market, at least it pays much better than the traditional fish factory. According to Statistics Iceland, only 3% of the labour force work in the financial sector, yet those few persons get 6% of the total salaries paid out in the country. Furthermore, the financial sector now accounts for 8% of the GDP, which is more than the fish industry is accountable for. This change has occurred during the last few years, and the financial sector is growing fast.

The small motorized boat has come a long way.


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