Iceland was the world’s seventh most productive nation per capita (US$54,858) in 2007, and the fifth most prolific by GDP at purchasing power parity ($40,112) in 2007. Domestically generated renewable energy sources account for around 85% of Iceland’s total primary energy supply. Iceland is the world’s biggest energy generator per capita because to plentiful hydropower and geothermal power. The 2016 Global Green Economy Index placed Iceland among the top ten greenest economies in the world as a consequence of its commitment to renewable energy. Iceland’s economy used to be highly reliant on fishing, which still accounts for 40% of export profits and employs 7% of the workforce. The economy is susceptible to falling fish populations and decreases in global prices for its major material exports, which include fish and fish products, aluminum, and ferrosilicon. Whaling has a long and illustrious history in Iceland. Iceland is still highly reliant on fishing, although its significance is waning, having dropped from 90% of exports in the 1960s to 40% in 2006.
Iceland was one of Europe’s poorest nations until the twentieth century. It is now one of the most developed nations in the planet. Iceland had been rated first in the United Nations’ Human Development Index report for 2007/2008 due to strong economic development, but due to the economic crisis, its HDI ranking had dropped to 14th position in 2011. Nonetheless, according to the 2011 Economist Intelligence Index, Iceland has the world’s second best quality of life. Iceland has one of the lowest rates of income disparity in the world, according to the Gini coefficient, and its HDI ranking rises to fifth place when corrected for inequality. Since the crisis, Iceland’s unemployment rate has steadily decreased, with 4.8 percent of the labor force jobless in June 2012, compared to 6.1 percent in 2011 and 8.1 percent in 2010.
Many political groups oppose Iceland’s entry into the EU, mainly because Icelanders are concerned about losing control of their natural resources (particularly fisheries). The Icelandic króna is the country’s official currency (ISK). The adoption of the Canadian dollar (CAD) is supported by almost 70% of Icelanders, more than any other currency in the world.
According to a Capacent Gallup survey published on March 5, 2010, 31% of respondents were in favor of adopting the euro, while 69 percent were against. A Gallup survey published in February 2012 showed that 67.4 percent of Icelanders would vote no in a referendum on EU membership.
In the past decade, Iceland’s economy has diversified into industrial and service sectors, including software development, biotechnology, and finance; industry accounts for around a quarter of economic activity, while services account for over 70%. Tourism is growing, particularly in ecotourism and whale-watching. Annually, Iceland gets approximately 1.1 million tourists, which is more than three times the population of the country. Potatoes, green vegetables (grown in greenhouses), mutton, and dairy products make up the majority of Iceland’s agricultural sector, which accounts for 5.4 percent of GDP. Borgartn in Reykjavk is the financial center, with a significant number of businesses and three investment banks. The Iceland Stock Exchange (ISE), Iceland’s stock exchange, was founded in 1985.
Iceland is rated 27th in the 2012 Index of Economic Freedom, down from previous years but still among the world’s most free countries. It is ranked 29th in the World Economic Forum’s Global Competitive Index in 2016, down one spot from 2015. Iceland is the 11th most inventive nation in the world, according to the INSEAD Global Innovation Index. Iceland has a flat tax system, unlike other Western European countries: the primary personal income tax rate is a flat 22.75 percent, and when coupled with municipal taxes, the overall tax rate is no more than 35.7 percent, not counting the many deductions available. The corporation tax rate is a flat 18 percent, making it one of the world’s lowest. A value added tax is also in place, although the net wealth tax was abolished in 2006. The labor market is one of the freest in the world, and employment laws are reasonably liberal. Iceland has strong property rights, and it is one of the few nations where they are used to manage fisheries. Taxpayers, like those in other welfare states, pay different subsidies to one another, although at a lower rate than in other European nations.
Agricultural aid is the largest among OECD nations, despite low tax rates, and may be a barrier to structural reform. Furthermore, by OECD standards, health-care and education expenditures have low returns, notwithstanding recent advances in these sectors. Iceland’s currency and macroeconomic policy problems were emphasized in the OECD Economic Survey of Iceland 2008. In the spring of 2008, there was a currency crisis, and on October 6, trade in Iceland’s banks was halted as the government fought to rescue the economy. Iceland has made progress in many areas, including creating a sustainable fiscal policy and restoring the health of the financial sector, according to the most recent OECD assessment; however, challenges remain in making the fishing industry more efficient and sustainable, as well as improving monetary policy to combat inflation. Iceland’s public debt has reduced since the economic crisis, and it is now the world’s 31st largest in terms of national GDP as of 2015.
Because of the collapse of its banking system and the ensuing economic crisis, Iceland was particularly severely affected by the Great Recession, which started in December 2007. Glitnir, Landsbanki, and Kaupthing, the country’s three biggest banks, had a combined debt of almost six times the country’s gross domestic product of €14 billion ($19 billion) prior to their collapse. The Icelandic parliament enacted emergency measures in October 2008 to mitigate the effects of the financial crisis. The Icelandic Financial Supervisory Authority utilized emergency legislation to take over the domestic operations of Iceland’s three biggest banks. Icelandic authorities, notably central bank governor Dav Oddsson, have indicated that the government has no intention of taking over the banks’ overseas loans or assets. Instead, new banks were formed to take over the banks’ domestic activities, and the old banks were forced into bankruptcy.
The Icelandic government increased interest rates to 18% on October 28, 2008 (from 7% in August 2010), a decision prompted in part by the conditions of obtaining a loan from the International Monetary Fund (IMF). Following the rate increase, open market trading of the Icelandic króna resumed, with a valuation of approximately 250 ISK per Euro, less than one-third of the 1:70 exchange rate seen during much of 2008, and a substantial decrease from the 1:150 exchange rate seen the week before. The Nordic nations agreed to give Iceland $2.5 billion on November 20, 2008.
The coalition government fell apart on January 26, 2009, as a result of popular outrage over how the financial crisis was handled. A week later, a new left-wing administration was established, and it went about ousting Central Bank governor Dav Oddsson and his associates from the bank via legislative amendments. Following demonstrations outside the Central Bank, Dav was dismissed on February 26, 2009.
Thousands of Icelanders have fled the nation since its demise, with many of them settling in Norway. In 2005, there were 293 individuals who migrated from Iceland to Norway; by 2009, the number had risen to 1,625. The conclusions of the Special Investigation Commission of the Icelandic Parliament were released in April 2010, showing the degree of control fraud in this crisis. Landsbanki has paid off approximately half of the Icesave loan by June 2012.
Iceland, according to Bloomberg, is on track to have 2% unemployment as a consequence of crisis-management choices taken in 2008, such as allowing banks to collapse.