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16 OECD Economic Surveys: Iceland 2019

image of OECD Economic Surveys: Iceland 2019

Iceland has rapidly caught up with the richest OECD economies. Favourable external conditions and good policies helped create inclusive growth, low unemployment, low inflation, and sustainable public finances. The economy is very egalitarian, and living standards are among the highest in the OECD. Yet growth is now turning sharply due to a rapid decline in tourist arrivals and weak marine exports, with growth projected to slow to around zero in 2019. Wages are rising faster than productivity and the competitiveness gains, achieved after the 2008 crisis, are exhausted by now. Regulation is stringent. The government should set up a comprehensive action plan for regulatory reform, prioritising reforms that foster competition, level the playing field between domestic and foreign firms and attract international investment. Linking wages more closely to productivity developments could also help maintain competitiveness. A comprehensive skills strategy that builds strong foundation skills and provides the right skill mix would help Iceland to prepare for rapid technological change. The quality of public spending has declined since the 2008 crisis. Providing a better nexus between spending and performance targets in various policy areas could help increase public sector effectiveness.

SPECIAL FEATURES: SKILLS; PUBLIC FINANCE

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Key policy insights

Small, remote and subject to eruptive geology, Iceland has nonetheless converged towards the wealthiest economies of the OECD since independence 100 years ago (). Rapidly rising productivity and export orientation of the fishing industry were the core drivers of economic growth for decades, supported by a comprehensive quota management that helped maintain the sustainability of the fishing grounds (Haraldsson and Carey, 2011[1]). In the 1960s Iceland started to exploit its abundant renewable energy sources and attracted energy-intensive industries such as aluminium production, which boosted productivity further and improved the external balance. Regulatory reform, exchange rate liberalisation and tighter monetary and fiscal policy in the 1990s unleashed productive potential including the rise of the financial sector.

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