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An Analysis Of Iceland Economics Essay

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Published: Mon, 5 Dec 2016

Iceland is a European island country in the North Atlantic Ocean on the Mid-Atlantic Ridge. It has a population of about 320,000 and a total area of 103,000 km2 (39,769 sq mi). The capital and largest city is Reykjavík, with the surrounding areas in the southwestern region of the country being home to some two-thirds of the national population. Iceland is volcanically and geologically active. The interior mainly consists of a plateau characterized by sand fields, mountains and glaciers, while many glacial rivers flow to the sea through the lowlands. Iceland is warmed by the Gulf Stream and has a temperate climate despite high latitude just outside the Arctic Circle.

Geologically, Iceland is a part of the Mid-Atlantic Ridge, the ridge along which the oceanic crust spreads and forms new oceanic crust. In addition, this part of the mid-ocean ridge is located atop a mantle plume causing Iceland to be sub aerial. Iceland marks the boundary between both the Eurasian Plate and the North American Plate since it has been created by rifting, and accretion through volcanism, along the Mid-Atlantic Ridge-where the two plates meet.

Moving towards the biodiversity of Iceland, there are around 1,300 known species of insects in Iceland, which is a rather low number, compared with other countries. The only native land mammal when humans arrived was the Arctic Fox. On rare occasions, bats that have been carried to the island with the winds can be seen, but they are not able to breed there. Polar bears have also showed up through the history, yet they are just visitors, and no Icelandic populations exists. There are no native or free living reptiles or amphibians on the island.

PESTEL ANALYSIS OF ICELAND:

POLITICAL SCENARIO: Iceland has been an independent constitutional republic since 1944. Politically, the nation has been relatively stable and has the world’s oldest functioning legislative assembly, the Althingi, established in 930 A.D. Iceland’s government is led by a President, who assembles a cabinet based on input from the various parties and this cabinet stays in power until the next general election.

Substantial political discontent arose after Iceland’s banking system collapsed in October 2008 under the weight of billions of dollars and Euros in foreign loans. Daily protests highlighted by banging of pots and pans in the streets demanded the resignation of Prime Minister Geir Haarde, himself a former central banker. Despite unemployment rates of 8%, the resilient islanders have been rallying their historically collective feelings and forsaking what has been termed “the Greed Society,” a period where the gap between the rich and the poor grew substantially since 2003.

These collectivist leanings were evident when a new leftist prime minister and a leftist coalition government was elected in April 2009, including a majority of parliamentary members who advocate immediately applying for membership in the European Union. Though not a member of the European Union, Iceland is party to a number of international political and economic organizations. Among its memberships are the North Atlantic Treaty Organization, European Economic Area, European Free Trade Association, Organization for Economic Co-operation and Development, Interpol, World Trade Organization, United Nations, and the Arctic Council.

ECONOMICAL SCENARIO: Iceland’s economy was the ¬rst casualty of the global ¬nancial meltdown begun in 2008. Iceland has a social-market economy, combining a capitalist structure and free-market ideals with a robust social welfare system, including housing subsidies. According to the International Monetary Fund, GDP was $12.353 billion in 2007, up from $12.01 billion in 2006 but it fell to $12.664 billion in 2008. The IMF projects a further decline of 9.8% in 2009, to $11.424 billion, minimal growth of 0.2% in 2010, 4% in 2011, and an average of 4.9% annually through 2014. The domestic economy is largely service based. The wholesale, retail, repair, real estate, and ¬nancial segments account for nearly 30% of all workers. Other services account for 38%. About 7% work in the agriculture and ¬shing industries while about 9% work in manufacturing. Social and health services accounts for nearly one of out every seven jobs. In 2007, the labor force totaled 181,500, and was 54.5% male, 45.5% female. Unemployment in 2007 was a low 2.3%, but by February 2009 had reached 8.2%. The Directorate of Labor estimates unemployment will peak at 9.6% in May 2009. Agriculture accounts for 5% of GDP, industry 26.5%, and services 68.5%.

Expenditures on government operations were 37% of GDP in 2008. Public debt was 29% of GDP in 2007 and 23% of GDP for 2008. However, with the recent nationalization of major banks and increased spending on social programs, gross government debt could rise to an astounding 109 percent of GDP for 2009. Despite the majority of employees working in service industry, Iceland is a thriving producer of goods for export. Along with ¬sh and software services, the exports include aluminum pharmaceuticals and medical products, petroleum and petro products, and food processing equipment, etc. Iceland’s major task at the moment is to make it through the current ¬nancial crisis and maintain its valuable importing and exporting relationships.

SOCIAL SCENARIO: Icelanders enjoy freedom of religion under the constitution though the National Church of Iceland, a Lutheran body, is the state church. Icelanders were divided into religious groups as follows:

80.7% members of the National Church of Iceland.

6.2% members of unregistered religious organizations or with no specified religious affiliation.

4.9% members of the Free Lutheran Churches of Reykjavík and Hafnarfjörður.

2.8% not members of any religious group.

2.5% members of the Roman Catholic Church

2.9% includes around 20-25 other Christian

Icelandic culture has its roots in Norse traditions. Icelandic literature is popular, in particular the sagas and eddas which were written during the High and Late Middle Ages. Iceland’s best known classical works of literature are the Icelanders’ sagas, prose epics set in Iceland’s age of settlement. The most famous of these include Njáls saga, about an epic blood feud. The distinctive rendition of the Icelandic landscape by its painters can be linked to nationalism and the movement to home rule and independence, which was very active in this period. Icelandic music is related to Nordic music, and includes vibrant Electronic music, folk and pop traditions, including medieval music group Voces Thules, alternative rock band The Sugar cubes, singers Björk and Emiliana Torrini; and Sigur Rós.

TECHNOLOGICAL SCENARIO: The Icelandic innovation system has gained considerable ground in recent years. Most international comparative studies on innovation performance praise Iceland’s innovation and economic performance in the last five to seven years. Patenting levels, as measured by triadic patents remain below average, as do graduation rates in science and engineering and shares of foreign PhD students in Iceland. While firms appear to fund a significant share of public sector R&D, they report limited co-operation with universities. The Global Entrepreneurship Monitor (2005), reports that Iceland is performing very well in terms of entrepreneurial activity and spirit, and levels of venture capital appear high as a share of GDP.

R&D, which is an important element of Iceland, its overall performance has improved considerably over the past decade. Although absolute funding levels are low compared to other OECD countries, Iceland has the highest level of government-funded R&D in the OECD when measured as a share of GDP.

ENVIRONMENTAL SCENARIO: Because of Iceland’s sparing use of hydrocarbon fuels, its air is cleaner than that of most industrialized nations. However, its water supply is polluted by excessive use of fertilizers. Population increases in the cities also contribute to water pollution. Iceland has 170 cu km of renewable water resources with 6% used for industrial purposes. The nation’s cities produce about 0.1 million tons of solid waste. Industrial carbon dioxide emissions totaled 2.1 million metric tons per year in 1996. Protected lands, which account for 9.5% of Iceland’s total land area, include four national parks, with a total area of 619,300 ha (1,530,315 acres) and 27 nature reserves, covering 256,861 ha (634,714 acres). Principal environmental responsibility is vested in the Ministry of Social Affairs. As of 2001, one mammal species and one plant species were endangered. Endangered species include the leatherback turtle and four species of whales. The great auk has become extinct.

LEGAL SCENARIO: Iceland has a civil law legal system and thus Icelandic law is characterized by written law. Major sources of law in Iceland include the Constitution, statutory legislation, and regulatory statutes. Other legal resources are precedent and customary law.

The Constitutional Act represents the highest national legal authority. Iceland received its first Constitution in 1874 and the current Constitution of 1944. Except with respect to constitutional issues, legislation enjoys primacy as a source of law.  With the increasing complexity of economic and social life, the amount and importance of legislation has even increased.  Frequently, statutory acts give the administration the authority to issue regulations. As sources of law, statutory acts prevail over regulations.  Public executive regulations and directives are published in the Legal Gazette, section B. In Iceland, a custom can acquire the force of law, i.e., become a source of law.  For instance, customary law has been an important source of law in Constitutional matters.

PORTER’S DIAMOND:

Factor conditions are the factors of production and infrastructure necessary to compete in a particular industry. They include the labor skills and natural resources that in early stages of development can provide an advantage. Porter (1998) distinguishes between basic and advanced factors. The first factors are related to natural resources and endowments, abundant cheap labor, and geographic location, among others. The second ones are created by the nation such as a base of skilled workers, high tech infrastructure, research and development in institutions and universities, among others. In general, it is expected that the second ones will provide a more sustainable source of competitive advantage than the first.

Demand conditions are the pressures based on buyers’ requirements about quality, price, and services in a particular industry. This will prepare the industry to compete internationally in future stages. For instance, Japanese car buyers exert pressure on Japanese car makers with regard to high quality standards forcing them to improve the quality of their products, processes, and practices, which in turn prepares the entire industry to compete internationally.

Related and supporting industries are the networks of suppliers and distributors that cooperate with the industry to support it in international competition. This is especially the case where these supporting networks already compete internationally themselves. It is difficult to compete if the industry does not have access to networks that both reduce costs through efficient supply chain management and produce raw materials and components of high quality. Vertical integration is an alternative but this is rarely feasible across an entire industry.

Firm strategy, structure and rivalry capture the robustness of domestic competition. Whether an industry is highly competitive domestically will influence the increase in productivity needed to compete internationally. In some Latin American countries, for example, where a tolerance for monopoly practices and a closed economy exist, it is common to find the presence of very few competitors which undermines the possibility of high quality standards and efficient production.

The Role of Chance is the likelihood that external events such as war and natural disasters can affect or benefit a country or industry, but these events are entirely out of the control of the governments or managers within the industries. For instance, the heightened border security, resulting from the September 11 terrorist attacks on the US undermined import traffic volumes from Mexico, which has had a large impact on Mexican exporters.

The Role of Government, all the policies and regulations made by policymakers at all levels of government can benefit or adversely affect the competency of a country and an industry. A paternalistic government that protects indigenous firms from foreign firms is not encouraging increases in productivity or quality. Thus, when the free market does take place, these firms are not prepared for that challenge. On the other hand, a government that is working to reduce bureaucratic red tape and facilitate the process of opening a new business will encourage the entrepreneurial spirit. Similarly, government encouragement of joint ventures with foreign firms will facilitate the transfer of technology.


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