Iceland’s growth dynamics have vastly improved since its policies changed course in the 1990s, shifting towards financial stabilisation and market liberalisation. Economic expansion since the middle of the last decade has considerably bettered that in the OECD and in particular in other European countries. With productivity growth picking up, Iceland’s per capita income has risen faster than abroad, partly reversing its previous decline relative to an OECD benchmark, and is now, in level terms, among the highest in the area. However, while output variability has declined, it remains high, with a history of...

This chapter discusses the major challenges facing the Icelandic economy against the backdrop of the large-scale aluminium-related investment projects that are underway. Given their sheer size – including power plants they are equivalent to about 30% of one year’s GDP over 2003-08 – maintaining economic stability over the next few years will be a demanding task for macroeconomic policymakers. But there are also challenges for structural policies, notably in the labour market and environmental areas. In a longer-term perspective, the question arises as to what...

This chapter discusses the factors driving the current expansion, the economic outlook and the macroeconomic policy settings in place to maintain economic stability. The recovery from the mild 2002 recession has been stronger than expected as the stimulatory effect of the large-scale aluminium-related investment projects has been reinforced by buoyant household demand. With the economy projected to continue to grow at a rapid pace over the next two years, there is a clear risk that tensions and imbalances – in particular inflation pressures and a large external deficit – of a magnitude similar to those that caused the previous downturn...

This chapter deals with the role structural policies will have to play if the benefits of the expansion of power-intensive industries are to be reaped. Immigration policy has been quite flexible in allowing foreigners to be employed at the construction sites. Vocational training of Icelanders has remained modest. Despite a substantial increase in public spending, educational attainments are still unsatisfactory, although there are signs of improvement. The authorities have attempted to limit damage to the environment by imposing design changes to the investment projects.

This chapter discusses the current state of product market competition in Iceland, including the legal and regulatory framework, and suggests directions for further improvement. Given the size of the economy, efficiency considerations dictate high concentration in many markets, and preventing abuse of market dominance is therefore a challenging task. Changes to competition law since the early 1990s have strengthened competitive forces in many sectors of the economy, and proposed amendments to that law would further improve market surveillance. The changes in...