Ræða á spánsk-íslenska viðskiptadeginum 18. september 2000 í Bilbao
The Minister's speech to the Spanish - Icelandic Chamber of Commerce, September 18. in Bilbao
Ladies and gentlemen,
It is with great pleasure that I address this seminar here in Bilbao and I am pleased to have the opportunity to witness first hand the good business relations between the two countries. These relations date back a long time and it is interesting to see from the list of members of the Spanish-Icelandic Chamber of Commerce how diverse the business between the two countries has become over the years. It used to be mostly baccalá and tourists coming from Iceland to Spain, but now there is even a Spanish-Icelandic joint venture film production company located in the south of Spain.
As Minister of Finance I should be particularly thankful for one episode in Spanish-Icelandic trade history and could argue that indeed the Spanish are to thank for securing an important source of revenue for the Icelandic state, namely the Alcohol tax! That was in the year 1922 when prohibition was abolished in Iceland due mainly to a demand from Spain that Iceland should import wine from Spain in return for the baccalá that the Spanish were importing from Iceland. Iceland had agreed to ban the import of alcohol in a national referendum in 1908 and prohibition had come into effect in 1912. Fortunately, we don't have these kinds of restrictions any longer and now one can buy Spanish wines as well as Spanish yogurt in stores in Iceland. And to further facilitate modern-day trade between our two countries a final draft of an Agreement to Prevent Double Taxation was completed between the two countries in June of this year, and will hopefully be finalised and signed officially later this year. The Double Taxation Agreement should come into effect on January 1, 2002. This agreement has been found wanting for some time and will hopefully prove beneficial for both countries.
The Icelandic economic situation
Let me now turn to the situation in Iceland. There have been dramatic changes in the economic environment in Iceland in recent years, and large - almost gigantic - steps taken to improve the economic and financial system. The current coalition Government is now in its second four-year term, and the Independence Party, of which I am the Vice-Chairman, is in its third term. A decisive policy was launched less than ten years ago, when we took office, towards greater liberalization and deregulation where the overriding emphasis of the Government was to strengthen the macroeconomic stability in the economy. Significant progress has been achieved during the past eight years, and those achievements have placed Iceland firmly among the most economically advanced nations.
Before I go further into the current situation, let me give you a brief overview of what the Icelandic economy looked like a couple of decades ago to give you a better view of the extensive changes that have taken place. At that time the Icelandic economy was highly dependent on the fisheries sector which resulted in an unstable economic environment subject to fluctuations in both fish prices and fish catches. This also meant that economic policy was almost entirely directed towards alleviating the immediate effects of fluctuations within the fisheries sector with little or no room for conducting a responsible fiscal and monetary policy. There was also admittedly a widespread lack of understanding of the possible benefits of an open market economy. The inevitable consequence of this situation was a highly unstable economic environment with rampant inflation. In addition, the economy was highly regulated and there were restrictions on trade and especially capital movements in and out of the country.
Much has happened since then, and apart from the changes resulting directly from Government policy, one of the more important events was Iceland's participation in the European Economic Area. By becoming a part of the European Single Market, developments moved faster than otherwise would have been the case. The EEA was the extra impetus that was needed to move the economy towards more openness, as well as the deregulation and liberalization of markets, in particular the financial markets. Significant structural reforms have also been implemented in the public sector with corporatization of public enterprises and privatization which is well under way and has been highly successful.
The results have been impressive. Rapid economic growth, price stability, almost non-existent unemployment, and greatly improved living standards have all gone hand in hand. Over the past five years economic growth has been about 4S-5 percent per year, well above the OECD average, and real disposable income per capita has risen by more than twenty percent. Unemployment has been around 2 percent, the lowest rate in the OECD countries, and is now in fact closer to 1 percent. Inflation has for several years been in the range of 1.5 to 2.5 percent, although somewhat higher this year, largely due to a rise in real-estate prices and the price of imported oil products. Recent price data, however, indicate that the rate of inflation is on the decrease again and inflation will be less than 4 percent in 2000 and hopefully lower in 2001. Most importantly, the economic growth of recent years has been broadly based, and not merely the result of a good fishing year. Our single most important economic problem at the moment is the deficit on the current account of the balance of payments. There we must do better.
The Government's fiscal budget maybe gives the clearest view of the economic transformation that has taken place. I unfortunately cannot disclose anything from the budget for the year 2001, as it will be presented for the Parliament in only two weeks. The statistics from the current budget are, however, very telling and I would like to point out to you just a few indicators. This year's budget was presented with a larger surplus that has been seen ever in Iceland, irrespective of whether it is measured in absolute terms or in relation to GDP. The revenue surplus of the Treasury is projected to be more than 3 percent of GDP. The same was true in 1999 including revenue from privatisation. An equally important figure is the net financial surplus, which shows the surplus available to the Treasury for the retirement of debt or otherwise improving the Treasury's position. The net financial surplus for the years 1998-2000 is close to 9 percent of GDP. This has led to a sharp decline in Treasury debt, which is estimated to equal around 30 percent of GDP at the end of this year, compared to 51 percent at the end of 1995. These figures are much better than in general in the OECD area and will come further down during the next few years in accordance with the Government's policy to control the expansion in the economy and ensure continued stability.
Strong and vibrant economy.
These changes and the increased economic stability that has followed have resulted in a stronger economy and a much more vibrant business sector, more competitive than ever. The improved business climate has led to more profitability, a rapidly growing export sector and a higher level of investment. As a result, Icelandic enterprises and pension funds have increased their investment activity abroad, and so have foreign enterprises in Iceland. I can add that in a 1999 study by the World Economic Forum regarding the access and quality of the business environment for start-up companies, Iceland receives a mark of 5,7 out of a possible 7,0. Iceland is there right behind the United States and New Zealand, and well ahead of the other Nordic countries.
Furthermore, the diversity of the Icelandic economy has increased in recent years. The fisheries sector, although much more efficiently managed than before and without any government support, is not as dominant in the economy as before. It is of course the most important single part of the Icelandic economy, however it is by no means a single-product industry but rather a multi-faceted and a highly diversified one. Other industries have also increased in both importance and volume. These include power-intensive industry based on clean hydro and geothermal energy, tourism, biotechnology, and the very rapidly growing information technology. The strong growth in the recent years has especially been in the new and dynamic "New Economy" industries.
What are the main signs of a new economy?
The question of the new economy is very interesting and especially relevant in Iceland right now. Although the discussion has mainly focused on the US economy, because of its exceptionally strong and long-lasting growth performance based on rapid productivity increases, it seems increasingly clear that these new economy effects have been noted in other countries as well, including Iceland. We have experienced significant productivity gains from the new technology, especially in high-tech and knowledge based industries which, in turn, have been reflected in strong output growth leading to a stronger than expected overall growth in the economy. To explore this interesting issue further, I will be hosting a conference on the subject in November in Iceland, where the Keynote Speaker will be Dr. Martin Baily, the Chairman of the US Council of Economic Advisors.
Is the "New Economy" a temporary or a lasting phenomenon?
The question has been raised as to whether this "New Economy" productivity increase is a temporary or a lasting phenomenon. Although the rapid productivity gains experienced in the new industries may not be a lasting phenomenon, we are quite confident that when the effects of the new technology filter through to other more traditional industries we will experience a lasting productivity increase.
I think the Government has an important role to play in this context. Most importantly, the Government should provide a framework that enables entrepreneurship to flourish. To this end, the Government should provide a competitive environment, remove tax distortions and make sure that the regulatory framework does not hamper further development in this area. This is our policy.
The new economy does not solve all problems
It is, however, important to note that the new economy does not replace the old economy. It does not mean that the old problems have gone away. We still have to worry about inflation and check domestic demand pressures. There will still be ups and downs. We should look at the old and the new economies as two sides of the same coin. The task is to get the most out of both sides without losing sight of the overall framework of the economy.
An Economic Challenge for a small country
Iceland is without any doubt a leading nation in technological development. The information technology is ideal for a country such as Iceland, a small island in the middle of the North Atlantic. Distances become smaller and the new information technology has revolutionized the field of communication, paving way and giving true meaning to the word "globalization". This increases Iceland's competitiveness not only globally, but more importantly also domestically. Let me explain this a bit further.
One of the most important challenge facing authorities of a small state, such as Iceland, is the economic challenge. It is the responsibility of providing the population with acceptable living standards or rather by providing the framework for this to happen. In the Icelandic case we strive to provide an equal or an even better standard of living than in the countries that we compare ourselves to and compete with. In other words, we try to make sure that Iceland is, and continues to be, an attractive place to live in. I consider this to be an over-riding objective and this simply means that we have to hold on to our young, educated people by offering interesting opportunities. In the global economy people have become increasingly mobile, and young people in our part of the world are today truly presented with multiple choices as to where they could and would like to live, unlike before when people used to live where they were born for the rest of their lives, largely because they had no other choice. Our big challenge is, therefore, to attract them back if they choose to study or live abroad for a period of time. In fact the real challenge is to get them to want to move back. By providing the suitable framework for competitive business environment the Government does its part in attracting them back.
EU membership not on the current agenda
One important part of further internationalization is a stronger link between companies across national boundaries. In this context, it is worth noting that although Iceland has decided not to apply for membership of the European Union at this time we follow with great interest what is happening in the Union, particularly the developments of the Euro. We realize that without becoming an EU member Iceland will not be able to participate directly in the European Monetary Union. While certain future possibilities have been studied carefully there is no immediate need for any specific action with respect to the relationship between the Icelandic króna and the Euro. We believe that the EEA agreement is ideal for us at the moment but we do keep a close eye on developments.
Positive international verdict.
The developments of the past few years bear clear witness to the fact that the Government's economic policy has yielded considerable results. Iceland has joined the ranks of those nations that have been most successful in their economic and fiscal developments in recent years. Remarkable success has been achieved, as is attested to both in the assessment of the OECD and the IMF. The same verdict comes from international credit rating agencies that have assessed Iceland's credit rating, these include Moody's, Standard & Poors and Fitch IBCA. The positive verdicts of credit rating agencies have yielded tangible results in the form of lower interest rates on foreign credits in general, since the credit rating on government debt serves as a benchmark for other Icelandic debt issuers.
So, what is the conclusion of all of this? In the world economy you don't have to be big to be successful. And that Iceland is a good place to invest and do business in. That is the message that I would like to leave you with.