The recent OECD survey of Iceland’s economy suggests that the country is doing rather well. It has done so by ignoring both fashion and etiquette. For at least the past decade or so, open economies have been where it’s at. Get rid of those unfashionable trade barriers and embrace globalisation or risk becoming a pariah, say the pundits. Likewise, it really is not the done thing for states to refuse to pay investors, even if those investors did put their money into what were then private companies, or to let banks collapse without some kind of state intervention. Default is a dirty word. Even the suggestion of it will get you ostracised by polite society – or polite ratings agencies, at least.
But, as Stephanie Flanders explains, ignoring fashion and flouting etiquette is just what Iceland did.
[W]atching the Greek crisis grind toward its umpteenth “crunch point”, you can’t help wondering why we hear so much about the country that’s been desperately trying to win the markets’ confidence for nearly two years, but so little about the country that, at the height of the crisis, basically told international investors to shut up and wait their turn.
As the report makes clear, there are still enormous challenges ahead for Iceland. One of the largest is how it will dismantle the capital controls it imposed in 2008 to prevent foreign creditors departing the country with a large chunk of Iceland’s GDP.
But in basic economic terms, Iceland appears to have come out of the crisis better than the other two European countries who came into it with clearly unsustainable amounts of private or public debt: the Irish Republic and Greece.
Putting up a wall and telling foreign creditors to go and run is really not the done thing. It’s the economic equivalent of turning up to a party wearing a dress and shoes that are 5 years out of date, then telling un-PC jokes and passing the port the wrong way. Actually, Iceland didn’t just pass the port the wrong way; she reached across the table, grabbed it, poured a bit for herself and then ignored everyone else.
Some people get away with fashion faux pas and breaches of etiquette, usually because they do it often and full-on. People can be very forgiving, “Oh, that’s just Iceland – no dress sense or manners but charming in her own way.” The more brazenly a person ignores etiquette, the more likely they are to get away with it. Somehow, whatever they do at parties, such people seem to get invited back time and time again.
Of course, Iceland’s appalling behaviour has been noted but it doesn’t seem to have done her much harm:
[D]espite a financial crisis that has cost the government around 20% of GDP, Iceland is expected to have a budget surplus by 2013.
Iceland still has junk bond status in the eyes of the ratings agencies. But, in the words of the IMF mission chief earlier this month, “the most adverse effects (of the country’s sweeping capital controls) have not materialised”.
The OECD does not have much to say on that pleasant surprise. It draws no conclusions about that aspect of Iceland’s experience, which I for one find pretty interesting and that the IMF essentially endorsed by approving a standby arrangement for Iceland. Though, like the IMF, the OECD report has plenty to say about when and how these controls might be removed.
Instead, the OECD’s economists focus on that surprising conclusion I mentioned at the start: that Iceland should now rush to join the single European currency.
In other words, the OECD’s advice to Iceland is to start behaving in a more acceptable and ladylike manner. This, as Stephanie says, is all a bit odd. Iceland sorted itself out by doing what it wasn’t supposed to do. Had it been a member of the strictly policed monetary club, it would not have been able to do any of the things that got it out of the hole it was in.
But it is strange that the OECD is so uninterested in the lessons from Iceland’s decision to call time on a chunk of its foreign liabilities, and put a financial wall around its economy to stop investors getting out.
These were pretty drastic steps, with complicated consequences, but they do not seem to have caused the heavens to open up over Iceland, to wipe the country from the face of the earth (unless you’re counting all those erupting volcanoes).
The OECD does not go in for alternative histories, but presumably the authors of the report think things would have gone better for Iceland if it had been in the single currency.
Of course, had Iceland been in the Euro, strict aunt Germany would have made sure she followed the prevailing fashions and behaved properly. And she’d still be in a mess and thoroughly miserable as a result.
Surely the lesson from Iceland is that, at times, and especially times of extreme crisis, flouting convention may be the best way to survive.
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forgive me if my rudimentary understanding of economics means I’ve misunderstood, but isn’t it the case that although Iceland’s actions were rational for her own case, for others to draw lessons and act in the same way would be systemically disastrous? widespread protectionism, whether industrial or financial, would grind global trade to a halt – so although Iceland herself may have escaped the fate of Greece, everyone responding in the same way wouldn’t be a good thing.
Having said that, of course, the opposite applies too – drastic Greek-style austerity measures implemented by all players would equally spell disaster, perhaps for different reasons. The lesson I suppose is that there needs to be a mix of responses to the crash, some fiscally loose, others tight, so that there’s balance overall.
There is an interesting aside to the Iceland vs Greece debate – the Greek people seem helpless in the face of austerity measures imposed upon them in a largely undemocratic fashion, whereas Iceland has managed to stand up to its creditors without too much trouble – a reflection perhaps on the strength of democracy in those two countries…? just a thought…!
Prateek, you’re right – I was being a bit facetious here. As with everything else, rules and conventions serve a purpose. I’m not suggesting that everyone puts up trade walls, though if countries feel that free trade and globalisation is unfair on them, who can blame them for doing so?
Iceland’s case is interesting because the dire consequences predicted for countries that flout the rules, especially small countries, didn’t happen. The Icelanders told the rest of the world to bugger off and got away with it. It would not surprise me if a few more countries try something similar in future.
As you say, this isn’t a prescription for Greece and Ireland either. Being members of the Euro, they have a lot less room to manouvre than Iceland. Greece’s problems also go back way before the financial crash, whereas Iceland and Ireland would have been fine but for the banking collapse.
Your point about democracy is an interesting one. Icelanders seem to be very much behind their government while Greeks don’t. Again, this seems to have been the case before the financial crisis too.
I like your logic – but this is partly because Iceland runs a giant trade surplus based on the fact that fish and electricity are very cheap there (controls some of the few non-depleted Atlantic cod grounds, has near-unlimited hydro and geothermal power) – it needs to trade exports for imports, but it doesn’t need the global financial system, so the debt that its crazy banks incurred is irrelevant. Greece is still running a primary deficit, so needs to borrow money *now*, and a default would mean that it couldn’t do so. Ireland probably should’ve followed Iceland’s path, but that’s another story.
Just realised the last comment missed the obvious “how the hell does Iceland export electricity” point. They ship bauxite from Canada, electrolyse it into aluminium, and export it to (Europe/China).
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