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OECD Economic Surveys: Iceland 2017

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Iceland is the OECD's fastest growing economy. It has made a remarkable turnaround from the crisis, helped by booming tourism, prudent economic policies and a favourable external environment. Iceland has an egalitarian society with strong trade unions, very low inequality and high gender balance. Nevertheless, as a very small open economy Iceland is prone to boom and bust cycles. Prudent fiscal and monetary policy are warranted in the current economic boom.

The spectacular growth in tourist numbers has provided new jobs, boosted tax revenues and attracted currency inflows, but there are some growing pains with social pressures emerging. Growing tourist numbers are putting pressure on the environment, infrastructure and housing. Furthermore, the strengthening króna has created difficulties for other internationally-exposed sectors.

Iceland is the most highly unionised OECD country and the wage-bargaining system has contributed to high living standards and an inclusive society. Nevertheless, recent disruptive strikes and high wage awards have intensified inflationary pressures and threaten competiveness. Fostering trust among the social partners and increasing wage coordination would make collective bargaining more effective and help sustain the benefits of the system for future generations.

SPECIAL FEATURES: SUSTAINABLE TOURISM; EFFECTIVE LABOUR RELATIONS

 

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Sustaining nature-based tourism in Iceland

Iceland has been experiencing a tourism boom. The number of tourists visiting annually has quadrupled since 2010 and shows continued strength. The tourism sector is now the major export earner and is also creating new jobs and supporting new businesses. The government budget has also benefitted from high tax revenues. The surge in tourism supported growth after the crisis and the sector has become a major pillar of the economy. But, the breakneck growth of tourism has created a number of challenges. Growing pains have emerged as accommodation supply has lagged in the wake of unexpectedly large number of tourists, contributing to pressure on the local housing market. The environment, particularly in some popular sites, has also come under pressure. The government has reacted to these environmental and social impacts and has worked with the industry to agree on a path forward. Sustaining a nature-based tourism for Iceland will require more co-ordinated policy across government and a long-term strategic plan that builds on Iceland’s strengths. Protecting the unique environmental attractions of Iceland – while mitigating adverse social impacts – will lay the basis for the healthy development of a new important sector.

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