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July 13, 2007

Economic development and Iceland

Although I have only spent two whole days in Iceland on my way to the UK and then to Italy, I thought, to keep the site alive, that it would be worth making a quick comment on the significance of Iceland's development. Iceland is a developed European country but if looked at in a certain light, it shares, historically at least, many of the charcteristics of today's developing countries. Are there any lessons to be learned from considering its development?

Iceland was for a very long period of time a colony governed by the kind of mercantilist economic policy that Adam Smith analysed and rejected in the Wealth of Nations. The islanders sought constitutional progress over many years and eventually achieved indepependence. The economy is and was initially based on natural resources with fish and fishing being the original basis for economic life. To protect their primary economic base and regulate the fishing industry Iceland twice fought, and indeed won, the 'Cod Wars' with Britain. By extending the exclusion zone around the country, British fishermen were excluded from using Icelandic waters. This act secured a significant primary basis for the economy.

Next, the strategic significance of Iceland (recognized very much during the Second World War) was put to domestic and civilian purposes. Iceland is now a significant centre as a hub of airline connections between Northern Europe and the United States. It has taken time and energy to make the links work commercially but there is no doubt that the progress is enormous. The international airport has just under gone a significant refurbishement and business in all senses is brisk. On the basis of the airlinks, a significacnt and efficient tourist industry has developed with stopovers, longer term and also seaborne tourists all anxious to see hot springs, steam vents, volcanoes and glaciers and other aspects of nature in the raw.

With all this inflow of foreign visitors and the currency transactions involved in airline activities, banking has also emerged as a modern, efficient and growing aspect of service sector development in the country. As a result the economy, though still based on natural resources either directly or indirectly is much more balanced and hence growth is much more consistent that it has been historically. This is largely an urbanized country with a highl level of services.

Geothermal power has also significant applications in Iceland. Cheap electricty has made possible the development of aluminium processing: electricity costs being significant in industry location. Heat from geothermal sources also assists the development of cultivation under glass as well as being a source for domestic heating. A signifcant addition to tourist development has been the making of the artificial 'Blue lagoon' where tourists and locals can bathe year round in hot, mineralized water (more green than blue) that has already passed through a geothermal power station. Even tourists at the International Airport for only a few hours can be shuttled backwards and forwards from the airport to the 'lagoon'. The facility, which sits in the middle of an old and desolate lava flow, is currently being expanded. Such a succes is simply astounding: essentially turning waste into wealth!

Iceland is a high cost economy but with strategic thinking it had developed its economic base, diversified its economy and increased its standard of living in a remarkably quick period of time. It is not usually thought about in terms of economic development, but the country shows that is possible to achieve significant and diversified development within a natural resource base. Iceland is worthy of a second trip and I hope to go back for a longer period of time and for a more systematic look.