the strange death of liberal iceland hannes h gissurarson mont pelerin society new york, 7 march...
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The Strange Death of Liberal Iceland
Hannes H Gissurarson
Mont Pelerin Society
New York, 7 March 2009
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Historical Highlights Settled 874-930 Commonwealth 930-1262 Under the Norwegian, later Danish, king Home rule 1904 Sovereignty, in a personal union with
Denmark, 1918 Republic, 1944
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Main Facts Population 319,368 (1/1/ 2009) 103,000 sq. km (same as East
Germany) GDP per capita (PPP) 1992: $21,278 GDP per capita (PPP) 2004: $33,372 GDP per capita (PPP) 2007: $38,396 Main exports: fish, aluminium
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874-1874, One of the Poorest Could only sustain 50,000 people Famines until 19th century; then
emigration to America Poverty unfairly blamed on Danish
colonial rule Agriculture held down fisheries; ruling
farmers hindered development of resources
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1874-1940, Less than Denmark
0
1.000
2.000
3.000
4.000
5.000
6.000
7.000
1870 1878 1886 1894 1902 1910 1918 1926 1934 1942
GDP per capita in 1990 US$
Iceland Denmark
Source: Hagskinna (Gudmundur Jonsson)
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1940-1991, False Prosperity Profits, both in hot and cold war Wider resource base by four extensions
of EEZ, finally to 200 miles in 1975 Overfishing, first of herring, then of cod Some natural economic growth Signs of economic decline in late 1980s Turning point in 1991
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Liberal Iceland 1991-2004 Cutting subsidies Stabilising economy Liberalising markets Privatising Cutting taxes Developing property rights to natural
resources Strengthening pension funds
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Monetary Stability
0
10
20
30
40
50
60
70
80
90
1980 1983 1986 1989 1992 1995 1998 2001 2004
Inflation in %
Source: Icelandic Bureau of Statistics
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From Deficits to Surpluses
-6
-5
-4
-3
-2
-1
0
1
2
3
1988 1990 1992 1994 1996 1998 2000 2002 2004
Deficit/surplus % of GDP
Source: Icelandic Ministry of Finance
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Fiscal Responsibility
0
5
10
15
20
25
30
35
40
45
50
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
% of GDP
Iceland Net Public Debt OECD Net Average Public Debt
Source: Icelandic Ministry of Finance
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Negligible Unemployment
0
1
2
3
4
5
6
7
8
1998 2000 2002 2004 2006 2008 2010
Unemployment in %
Iceland OECD
Source: Icelandic Ministry of Finance
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Pension Fund Reforms Tax-financed public pension fund since 1930s Compulsory occupational pension funds since
1960s Pay-as-you-go funds replaced by
accumulation funds Voluntary private pension schemes
(supplementary) Pension reforms in 1998
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Pension Fund Assets10 Largest Pension Fund Assets OECD 2005
0 50 100
Netherlands
Iceland
Switzerland
United States
United Kingdom
Finland
Australia
Ireland
Canada
Denmark
% of GDP
Source: OECD (Pension Markets in Focus, 2006)
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Privatisation Travel bureau, printing house, publishing
house, fish processing plant, etc. 1992-2005 Government investment funds 1999, later
merged with others to form Glitnir Bank Landsbanki 2002 Bunadarbanki 2002, later merged with others
to form Kaupthing Bank Icelandic Telephone 2005 Total revenue from privatisation $2 billions
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Tax Cuts Corporate incomes tax from 45% to
18% (15% since 2007) Individual incomes tax from 30.41% to
22.75% Turnover tax abolished High-incomes surcharge abolished Net wealth tax abolished Death duties (estates tax) reduced
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Invisible Tax Cuts Reducing inflation = Cutting the inflation
tax Strengthening pension funds = Cutting
tax on future wealth creators (reducing taxpayers’ liabilities
Reducing public debt = Cutting tax on future generations
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Corporate Incomes Tax Cut
0
5
10
15
20
25
30
35
1991 1993 1995 1997 1999 2001 2003 2005 2007
Tax Revenue, Billions ISK
0
5
10
15
20
25
30
35
40
45
50
Tax Rate in %
Tax Revenue, Billions ISK Tax Rate %
Source: Icelandic Ministry of Finance
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Example of Laffer Curve?
0
20
40
60
80
100
120
Tax Rate in %
Tax Revenue in $
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Development of ITQ System Open access to fishing grounds led to
overfishing 1975, individual quotas (% of total
allowable catch) in herring fishery 1984, individual quotas in cod and other
demersal fisheries Gradually, quotas became transferable 1990, ITQ system made universal
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Efficient Fisheries Initial allocation on basis of catch history:
owners of fishing capital bought out, not driven out
Much resentment; compromise in 2002: nominal resource use fee
Total value of quotas about 350 billions ISK (appr. $5 billions)
Reduction of fishing effort; stronger and fewer fishing firms
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Fishing Firms Profitable
-15
-10
-5
0
5
10
15
20
1981 1984 1987 1990 1993 1996 1999 2002
Inflation-adjusted Profit/Loss
Source: Icelandic Association of Fishing Vessel Owners
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All Groups Benefited Average annual increase in purchasing
power after tax 1995-2004 4.8% Annual increase of lowest 10% group
2.7% OECD average of lowest 10% group
1.8% (1996-2000)
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Risk of Poverty 2nd Lowest
0 2 4 6 8 10 12 14
Sweden
Iceland
Slovenia
Czech Republic
Norway
Netherlands
Finland
Austria
Denmark
Slovakia
% at risk of poverty
Source: Eurostat and Icelandic Bureau of Statistics
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Income Distribution
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
Sweden Denmark Finland Norway Ireland UnitedKingdom
Iceland
Gini Coefficients in 2004
Source: Eurostat and Icelandic Bureau of Statistics
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Liberal Iceland in 2004 One of 5 richest countries in the world One of 10 freest countries in the world Relatively even distribution of income Almost no poverty Negligible unemployment Almost no crime What went wrong?
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Bank Expansion Banks privatised 1999-2002 Since 2002, total turnover of banks
almost 10-folded Total foreign assets 10-fold GDP Oversized in terms of Iceland, but not of
the EEA
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Expansion Partly Sustainable Hernando de Soto: From dead to living
capital ITQ system: New capital Capital gains from privatisation Stronger pension funds Icelandic banks with no worse assets
than other European banks
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Abuse of Power? European banks did not like Icelandic
competitors 2007-8, central banks, including the
Fed, refused to help the Icelandic Central Bank
October 2008: Gordon Brown used anti-terrorist laws against Icelandic banks
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Who are the Terrorists? Icelandic Ministry of Finance, Central
Bank and Landsbanki put on official list of terrorist organisations, with Al-Qaeda and the Talibans!
Payments through London stopped Disastrous for an open economy like
Iceland Bank sector collapsed
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Small is Dangerous Gordon Brown: Icelandic authorities
would not honour their legal obligations No evidence for that British authorities: Last-minute transfers
from London to Iceland Remains to be seen, but denied by
Icelandic banks
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A Tale of Two Countries Lehman Brothers: Last minute transfers
of 4.4 billion GBP from London to US US Treasury, or the Fed, not put on list
of terrorist organisations! Swift: “Laws are like cobwebs, which
may catch small flies, but let wasps and hornets break through“
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Structural Flaw in EEA Gordon Brown forced Iceland to go
beyond its legal obligations 100% of GDP, while German
reparations payments after 1st WW: 85% of GDP
EEA: One economic area, without one system of lender-of-last-resort
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Hope Against Hope Infrastructure intact, unlike after war Natural resources, fish stocks,
waterfalls and hot springs Human capital Danger: Wrong lessons learned Free market discredited Only hope: Mises’ and Hayek’s
longevity!