Iceland

Cristian Vilches Pizarro

Prof. Andreas Lenel International Economics Relations I (SS 20123)

[Company Address]

Table of Contents
1.- Introduction ...........................................................................................................3
1.1.- Motivation..........................................................................................................................................................3 1.2.- Structure of Paper ..........................................................................................................................................3

2.- Country Background...............................................................................................4

2.1.-Geography ...........................................................................................................................................................4 2.2.- Population..........................................................................................................................................................4 2.3.- Political System & History...........................................................................................................................5 2.4.- Social Issues ......................................................................................................................................................6

3.- Economy Policy ......................................................................................................6

3.1.- Development policy approach ..................................................................................................................6 3.2.- Participation of government in economy .............................................................................................7 3.3.- Fiscal policy .......................................................................................................................................................8 3.4.- Monetary policy...............................................................................................................................................8 The objective of monetary policy ...................................................................................................................... 8 Monetary policy instruments ............................................................................................................................... 9

4.- Current Macroeconomic Situation ..........................................................................9

4.1.- GDP growth .......................................................................................................................................................9 4.2.- Inflation ........................................................................................................................................................... 10 4.3.- Unemployement ........................................................................................................................................... 10

5.- Economic Structure .............................................................................................. 11

5.1.- Agricultural sector ...................................................................................................................................... 11 Marine Products from Iceland ..........................................................................................................................11 Food and Beverages from Iceland ................................................................................................................11 Agriculture Products from Iceland .................................................................................................................12 5.2.- Industry sector.............................................................................................................................................. 12 5.3.- Service sector ................................................................................................................................................ 12 5.4.- Areas / Branches of high importance / competitiveness ........................................................... 13

6.- International Economic Relations ......................................................................... 13

6.1.- Foreign trade broken down by major regions / countries ......................................................... 13 6.2.- Foreign trade broken down by commodities................................................................................... 14 6.3.- Foreign direct investment........................................................................................................................ 15 6.4.- Participation in customs unions / free trade reas ....................................................................... 16 6.5.- Foreign Exchange policy ........................................................................................................................... 17

7.- Major Problems and Potentials of Economy ......................................................... 18 Bibliography ............................................................................................................. 19 Table of Figures ........................................................................................................ 20

1.- Introduction
1.1.- Motivation
The main motivation for this work is because Iceland caught my attention from the moment I saw the documentary "Inside Job" by Charles Fergunson, documentary which discloses the economic crisis emerged as 2008 and as the free market model and achieving economic deregulation unbalance the political and social stability of the country. Furthermore, what is interesting about this country is that it was the first in the world to democratically elect a woman president, Vigdis Finnbogadttir, in 1980, and in 930 formed the first parliamentary assembly, which was then suspended in 1799, since Iceland became Danish crown colony to finally reappear during 1845 but only advisory to the Danish monarch, before we can say that Iceland has the "parliamentary democracy" world's oldest. It should be noted that his name comes out of the ordinary, as it is directly related to its climate, and during the months of November and December only have a maximum of four hours of sun and one can enjoy the wonderful northern lights during the winter.

1.2.- Structure of Paper

Throughout this paper carries a broad overview of the most important aspects of Iceland.

2.- Country Background

2.1.-Geography
Iceland its located in Northern Europe, island between the Greenland Sea and the North Atlantic Ocean, northwest of the United Kingdom, geographical coordinates 65 00 N, 18 00 W, Because of its location in the MidAtlantic Ridge, is a country with great volcanic activity and geologic, this factor greatly affects the landscape of Icelandic territory. The capital city is Reikiavik.1

Chart 1: Iceland location

Total rea 103,000 km, 100.250 km corresponds to land surface (97,3%) and 2.750 km corresponds to wter surface (2.7%), the coast line is 4.970 km and average altitude of about 500 m above sea level, 11% of the country is covered by glaciers, including Vatnajkull, the largest glacier in Europe.2 Maritime claims is territorial sea 12 nm, exclusive economic zone 200 nm and his continental shelf 200 nm or to the edge of the continental margin, about the weather Iceland is warmed by the Gulf Stream and has a temperate climate despite a high latitude just outside the Arctic Circle.3

2.2.- Population
The total population Iceland is 321.857 4 , place in the world rank is 179th, this country have the lower population density across Europe, also verified that from 2007 to the present population growth rate has declined significantly. as discussed below in the following graph, data based on Iceland Statistic.

Chart 2: Population growth 2000 2013, own creation, source www.statice.is.

1
2

Wikipedia (1) http://es.visiticeland.com (1) 3 cia.gov (1) 4 statice.is (1)

We can see that the population pyramid of Iceland becoming more assimilated to European, consequently this country we are facing an increasing life expectancy and fertility rate decreases.5

Chart 3: Population Europe Iceland

2.3.- Political System & History

Iceland's history dates back to 874 which records the first human settlement made by Inglfur Arnarson, who was the first settler established his home in the city of Reykjavik known today, Gradually coming to Iceland settlers mainly from Norway, but also from other more distant regions, including Ireland, England and Scotland, the country's inhabitants were organized into clans, each with its own head, around the year 930, met all Icelandic chieftains and created the "Althing" an assembly parliamentary type, was where were discussed the most important issues for clans, established new laws, conflicts resolved and judged offenders. The laws were not written, but were saved by the "logsogumar" (the one that says the laws). This is considered the oldest of all parliamentary assemblies worldwide, which makes for a country ahead of its time, also was this very board who decided in 1000 to submit to Christianity. Iceland was an independent republic until 1262, since due to civil infighting and decided to submit to the Norwegian krone to the signing of "Gamli sttmli" (old pact), but then these countries were conquered by the Danish krone, also is ended the "Althing" in 1799. In 1814, Norway was separated from the Danish krone and Sweden joined, but Iceland remained under Danish rule and in 1845 returns to be founded on " Althing", but only with a consultative status to the Danish monarch. In 1915, equal rights with men (and women exercised by Danish) was granted to Iceland, who were entitled to vote and be elected to political positions. In 1918, Iceland became an Associated State to Denmark until, in 1944, regained its independence and proclaimed the republic again.6

5 6

the following paragraph is based on Mannfjldarun 2012 (available 09.04.2013) The following paragraph is based on http://www.verislandia.com/historia-islandia.html

Today its political system is the famous Alingi it currently has 63 members, elected for a maximum period of four years, the congress was before both houses but since 1991 is one. The 63 senators are elected in their province. For elections Iceland is divided into six zones and the area has more people have more senators. The president is elected by popular vote for a term of four years. The elections for president, the Althing and local municipal councils are all held separately every four years.7

2.4.- Social Issues

Among the problems which owns Iceland is its geographical location as it has too much volcanic activity, which has caused major disasters through its history, on average, every five years is prone to a volcanic eruption, between 1963 and 1968, the material ejected by Surtsey volcano eruption, created a new island that still ranks among the youngest in the world. The 2010 eruption of Eyjafjallajkull, forced hundreds of people to flee their homes and the ash cloud resulting from the eruption caused the closure of airspace over much of Europe. Concerning the public sphere, there is a strong sense of community and high levels of civic participation in Iceland, where 98% of people believe that they know someone they could rely on in time of need, higher than the OECD average of 91%. Voter turnout, a measure of public trust in government and of citizens participation in the political process, was 84% during recent elections. 87% of people saying they have more positive experiences in an average day than negative ones. This figure is higher than the OECD average of 80%, making Iceland one of the happiest countries in the OECD.8 From the year 2000 due to the problems begin economic deregulation, privatized 3 Iceland's largest banks, the result One of the most purest experiments in finnancial desregulation Conducted ever, in a five year period, This 3 tiny bank wich its never operated outside from iceland, borrowed 120 billion dollars, ten times the size of Iceland economy, was created a bubble, the stock market value was Multiplied by 9 and the value of homes has Doubled. When Iceland Banks collapse in 2008, unemployement triple in six months, because of this the people of Iceland took the streets with your Kitchenware Revolution, was so achievement right to overthrow the government of the January 23, 2009.9 Iceland actually no major social problems or economic level, perhaps the biggest problem from my point of view is that in November and December, only have a few hours of sun.

3.- Economy Policy

3.1.- Development policy approach
The Strategy identifies international development cooperation as one of the key pillars of Icelands foreign policy. The guiding principles for developmen cooperation are responsibility, credibility and results. Icelands development policy is rooted in the

7 8

Wikipedia (2) http://www.oecdbetterlifeindex.org (1) 9 The following paragraph is based on the documental Inside Job (available 25.03.2010)

fundamental rights of all people as set out in the Charter of the United Nations, emphasising tolerance, justice, solidarity and cultural diversity. The Strategy builds on the Millennium Development Goals, focusing on the fight against poverty and hunger, as well as highlighting human rights, gender equality, democracy, peace and security. To overcome the crisis of 2008 economic policy focused on Increasing credibility, Improving democracy, Relief for the country's households, Stimulating business and industry, Job creation, Bringing future dividends.10

3.2.- Participation of government in economy

In the period 1997-2007, the central government pursued an extensive programme of privatisation. After the privatisation process came to an end, the States most important business holdings were in Landsvirkjun, the Housing Financing Fund (HFF), and a few smaller financial institutions, which were responsible for a combined 10% of credit in the economy at the end of 2007. After the financial collapse in October 2008, the State recapitalised the banking system by establishing new banks. The original plan was that the new banks would initially be Government-owned, but according to agreements reached with the estates of the old banks, the estates took a significant equity stake in the new banks. Currently, the State holds 81% in Landsbankinn, 13% in Arion Bank, and 5% in slandsbanki, at a cost of 1.3 billion euros. The State also owns shares in several savings banks.11 Local government holdings are mainly in geothermal production of heating and electricity, as the municipalities own almost all of the geothermal power companies, which supply heating to most homes in Iceland and, on an increasing scale, electricity to the aluminium industry. Several local governments also own operating companies for harbours. The central government taxes the financial incomes of persons (dividends, rents, interest and capital gains). The tax rate is 20% in 2012, and an interest income exemption or zero bracket of 630 euros per person per year has been added. The corporate income tax is 20% in 2012, and the payroll tax is 7.79% of the applicable wage bill. Taxation of property and financial transactions consists of four main parts. Local governments charge property taxes averaging around 0.3% of the assessed value of residential structures and 1.6% of commercial structures. The central government collects a stamp tax; an inheritance tax on estates, with a main rate of 10%; and a tax on the net wealth of individuals. The net wealth tax applies to individuals, with a tax-free limit of 474 thousand euros for singles and 632 thousand euros or couples, with a 1.5% rate up to 948 thousand euros for singles and 1,264 thousand euros for couples. Above these limits, the rate is 2% and only applies at the very top of the wealth distribution. In 2011, tax payers paying the net wealth tax were around 2% of those being assessed the flat local government income tax (before rebate).12

10

The following paragraph its based on Ministry of Finance and Economic Affairs of Iceland, http://eng.fjarmalaraduneyti.is. 11 12 Sedlabanki Islands

The largest source of central government revenue is the value-added tax, yielding 8% of GDP in 2011. A rate of 25.5% is charged on most goods and services, while food, indoor heating, books, newspapers, magazines, and some services are taxed at 7%. A few specific categories of goods and services are exempt, notably financial services, education, health services, and passenger transportation. A general excise tax is levied on a range of goods at three rates of 15%, 20% and 25%, while unit fees are charged on some goods. Customs duties range from 0% to 30% of the cif value, although most imports from the EU as well as Icelands EFTA partners (Norway, Liechtenstein, and Switzerland) are exempt. For protection purposes, however, much higher excises are charged on various agricultural products. Taxes are levied on the use of motor vehicles and on access to State radio/television broadcasts, as well as various other activities. Excise taxes, tariffs, and user taxes account for around 13% of central government revenues. Some taxes have been raised since the crisis and new taxes have been introduced, notably a new tax on carbon fuel along with a resource tax on geothermal energy and the use of electricity. In total, the central and local government taxes and social security contributions described above accounted for 84% of general government revenues and 97% of tax revenues in 2011. Other taxes accounted for 2% of revenues and non-tax revenue accounted for 16%, mostly in the form of service charges, dividends, and interest income13

3.3.- Fiscal policy

Iceland has made progress in many areas, particularly in creating a sustainable fiscal policy and restoring the health of the financial sector; however, challenges remain in making the fishing industry more efficient and sustainable. The main fiscal policy goals were to balance the general government primary budget (i.e., without interest paid or received) by 2012 and balance the overall budget a year later.

3.4.- Monetary policy

The objective of monetary policy The Central Bank of Iceland was established as a separate institution in 1961. The current Act on the Central Bank of Iceland entered into force in May 2001 and included substantial changes from the previous Act. In the new Act, maintaining price stability was defined as the Banks single main objective. The Bank was also granted policy instruments and financial independence, and any direct access by the Government to Central Bank financing was prohibited. In a joint declaration issued by the Government and the Central Bank of Iceland on 27 March 2001, the price stability goal was further defined as an inflation target of 2 %, measured in terms of the twelve-month rate of change in the consumer price index (CPI). The declaration requires the Central Bank to keep inflation as close to the target as possible, on average. If inflation deviates from the target by more than 1% in either direction, the Bank is obliged to submit a report to the Government, explaining the

13

Sedlabanki Islands

causes for the deviation, how the Bank intends to respond, and when it expects the inflation target to be reached again.14 Monetary policy instruments The Banks monetary policy instruments are its interest rates on transactions with credit institutions, open market operations, decisions on minimum reserve requirements, and intervention in the foreign exchange market. Financial institutions subject to reserve requirements commercial banks, savings banks, and credit institutions are eligible for Central Bank facilities. Icelandic branches of foreign financial institutions are eligible as well. According to the Rules on Central Bank Facilities for Financial Undertakings, securities issued in Icelandic krnur by the Republic of Iceland are the primary instruments eligible as collateral for Central Bank facilities. Financial institutions regular transactions with the Central Bank can be divided into two categories: standing facilities and open market operations. Financial institutions may avail themselves of standing facilities at any time and on their own initiative. The facilities offered by the Central Bank are deposits to a current account with the Bank and overnight loans against acceptable collateral. Interest on overnight loans forms the ceiling of the Central Banks interest rate corridor, while current account interest determines the floor. The Banks open market operations generally take place once a week on Wednesdays. at a fixed interest rate in the centre of the interest rate corridor. In addition, the Central Bank offers certificates of deposit (CDs) for sale when it considers this necessary. The Central Bank offers seven-day collateralised loans15

4.- Current Macroeconomic Situation

4.1.- GDP growth
The Gross Domestic Product (GDP) in Iceland expanded 0.50 percent in the fourth quarter of 2012 over the previous quarter. GDP Growth Rate in Iceland is reported by the Statistics Iceland. Historically, from 1997 until 2012, Iceland GDP Growth Rate averaged 0.71 Percent, the highest point is 8 Percent in 2004 reaching an low of -7 Percent in June of 2012. Iceland's Scandinavian-type social-market economy combines a capitalist structure and free-market principles with an extensive welfare system, including generous housing subsidies. Prior to the 2008 crisis, Iceland had achieved high growth, low unemployment, and a remarkably even distribution of income. The economy depends heavily on the fishing industry, which provides 40% of export

14 15

Sedlabanki Islands

Chart 4: GDP Growth 1998 2013, own creation, source http://databank.worldbank.org.

earnings and employs 5% of the work force. Iceland's economy has been diversifying into manufacturing and service industries in the last decade, with new developments in software production, biotechnology, and tourism.16

4.2.- Inflation
The inflation rate in Iceland was recorded at 3.30 percent in April of 2013. Historically, from 1989 until 2013, Iceland Inflation Rate averaged 5.71 Percent reaching an all time high of 25.20 Percent in December of 1989 and a record low of -0.06 Percent in November of 1994. In Iceland, the inflation rate measures a broad rise or fall in prices that consumers pay for a standard basket of goods.17

Chart 5: Annual % Inflation 1998 2013, own creation, source http://databank.worldbank.org.

4.3.- Unemployement
Unemployment Rate in Iceland increased to 6.40 percent in March of 2013 from 4.70 percent in February of 2013. Unemployment Rate in Iceland is reported by the Iceland Directorate of Labour. Historically, from 1970 until 2013, Iceland Unemployment Rate averaged 2.20 Percent reaching an all time high of 9.30 Percent in February of 2010 and a record low of 0.10 Percent in August of 1972. In Iceland, the unemployment rate

16 17 18

The next paragraph is based on The World Bank

Chart 6: Annual % Unemployment 1998 2013, own creation, source http://databank.worldbank.org.

measures the number of people actively looking for a job as a percentage of the labour force.18

5.- Economic Structure

5.1.- Agricultural sector
Environmental purity and sustainable management policies give Iceland unique advantages as a supplier of raw materials to food processing industries where natural quality counts above all else. Historically, Iceland's main livelihood has always been as a food-producing nation, and by keeping up-to-date with both new technology and consumer demands in the international marketplace, its diverse export-orientated food sector makes an attractive proposition for investors who want to go straight in at the high end of the market. Food is the most important industry in Iceland, accounting for half of the country's industrial production, one-fifth of its GDP and more than 80% of its merchandise exports one of the highest levels in the world. Iceland therefore has the facilities and services needed by food processing companies. Marine Products from Iceland The living marine resources in Icelandic waters constitute the backbone to Icelands economy. In recent years, total Icelandic catches have ranged from 1,5 to 2,1 million tonnes. In 2003 Iceland was the 12th largest fishing nation in the world with around 2% of world catches. Total export values of Marine products from Iceland state approximately the same between 2003 and 2004 came in with around ISK 113 billion or 62% of total export of goods and just over 42% for goods and services. Food and Beverages from Iceland Food and beverages is one of the main categories under manufacturing products. It accounts for approximately 1,2 % of the total export value for all manufacturing products from Iceland.

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Agriculture Products from Iceland Iceland's staple meat is lamb, still farmed the traditional way, which conforms to the very latest in organic production standards. Sheep graze freely in pollution-free mountain areas in summer, and hormone implants and antibiotic feed additives are both prohibited. Icelandic Lamb has been exported on a limited scale for some years, mainly to the USA and Northern Europe. Dairy farming is another segment in Iceland, with a high level of product development and innovation, a strong reputation for purity and wholesomeness, and extensive use of quality systems. Vegetables are also cultivated on a scale that would seem unthinkable in such a northerly country - using geothermal heating in greenhouses. Aquaculture Products from Iceland Aquaculture has been a small scale industry in Iceland since the 1980s; high potential exists in Iceland for developing both land- and sea-based farming. Major advantages include ample supplies of clean fresh water and economical geothermal water for heating, which means that farming of warm-water species, is equally viable, for example abalone, sea bass and turbot. One of the key advantages of aquaculture in Iceland is the virtually disease-free environment. It is the only country in Europe to be A-graded nationwide according to EU regulations. Know-how is very advanced in the industry, as shown by the success achieved in hatching, smolt and fingerling production and rearing of difficult species such as halibut. The increase in ocean temperature is also a positive impact on aquaculture. In recent years, major fisheries companies have moved into aquaculture and investing in salmon and trout farming and in research on cod farming.

5.2.- Industry sector

The industry sector in Iceland has been through major changes over the past few years. Innovation has been stimulated, primarily by a more liberal business climate and rapid progress in science and technology, particularly information and communications technology. This has provided Icelandic industry with numerous opportunities to create a variety of jobs in new and demanding areas, and enabled it to play an active and profitable role in international trade. The largest commodity export within manufacturing products was aluminium, medicinal products and Medical products.

5.3.- Service sector

Freedom in all business activities has increased dramatically in Iceland and in recent years the Icelandic economy has undergone significant transformations, largely caused by market liberalization. As a member of the 28-nation European Economic Area (all EU states and three of the four EFTA states), Iceland implements the same basic liberal business philosophy as the European Union. Except in a few limited areas, all EU commercial legislation and directives take effect in Iceland. Consequently, Iceland makes an ideal springboard for tariff-free access to the major EU market area, as well as a fully competitive location for EU companies to operate. Visitors to Iceland often marvel at the wide variety of foreign merchandise on offer in a country that perhaps prides itself most on its ancient culture and close contact with an

unspoiled environment. Here you can find all the best-known names in fashion, cars, electronic equipment and food and beverages. The fact is that Iceland has become a very consumer-conscious nation with one of the highest standards of living in the world. The most common and economically important type of business in Iceland is the limited company. Other structures are partnerships, cooperative societies, businesses run by the self-employed and branches of foreign limited companies. Iceland's operating environment is competitive with leading countries in the industrial world. With its low tax structure, high education levels and competitive costs for skilled labour, land and electricity. Iceland has a number of export companies with very interesting products and the service industries are playing a bigger role in exports with the Icelandic economy becoming more service-oriented. Two-thirds of the working population are employed in the service sector, both public and private and is that level comparable to those in the other OECD countries.

5.4.- Areas / Branches of high importance / competitiveness

Most important area at this time to Iceland is still fishing, its derivatives and Icelandic travel and tourism is one of the fastest-growing sectors of the Icelandic economy. Today, tourism in Iceland accounts for approximately 13% of the countrys income from foreign sources. It is estimated that the travel and tourism sector provides 5,400 jobs and that the volume of Icelandic tourism accounts for about 4,5% of the GNP.

6.- International Economic Relations

6.1.- Foreign trade broken down by major regions / countries
Five of the largest trading countries in 2011 bought 65% of total exports of goods from Iceland (67% in 2010). The Netherlands was the biggest buyer of Icelandic goods in 2011, as two previous years. The value of exports of goods to the Netherlands amounted to 200,900 million ISK in 2011 or 32.4% of total exports of goods. Aluminium and aluminium products made up the largest share, 76.2% of the exports to the Netherlands. In external trade the partner country is by classification the country of final destination of the export. Regarding the exports of aluminium and aluminium products to the Netherlands it is known that a large part of the export is redirected to other countries unknown at the time of export, and therefore Netherland is the importing country but not the country of final destination. Figures for exports of aluminum and aluminium products to the Netherlands should be viewed with that in mind. Germany was the second largest buyer of Icelandic exports of goods in 2011 but as the year before. Exports of goods to Germany amounted to 92,800 million ISK, 15% of total exports. Manufacturing products, mainly aluminium and aluminium products, made up the largest share of exports of goods to Germany, 85%. The

13

United Kingdom was the third largest buyer of Icelandic exports in 2011 as the year before. Sales to the UK amounted to 55,900 million ISK or 9% of total exports. The share of marine products of the total exports to the UK were 79.9%,

Chart 7: Exports of goods by market areas 20072011, source Trade in goods, page 7 (available 16.05.2012)

mainly cod, haddock and shrimp.19 The EEA20 was the largest market area for Icelandic products in 2011. The share of exports of goods to the EEA was 82.7% in 2011, increased from 78.3% in 2007. The share of the EEA countries in total imports of goods was 61.9% in 2011 and 61% in 2010 in comparison to almost 65% in 2007-2009. Exports of goods to EU countries was 78.3% of total exports of goods.

6.2.- Foreign trade broken down by commodities

During the latest years, the share of exported manufacturing products has increased while the share of exported marine products has decreased. The value of manufacturing products increased by 7.9% in 2011 (24.500 million ISK). The largest export product was aluminium and aluminium products, 233,000 million ISK (37.6% of total exports of goods), increased by 3% (6,700 million ISK at current prices). Next in line to the exports of aluminum was the export of ferro-silicon, 24,000 million ISK, and medicinal products, 14,300 million ISK. Marine products were 40,6% of all exports of goods and exported marine products accounted for 251,600 million ISK, an increase of 14.1% from 2010 (31,100 million ISK at current prices). In 2011, the largest export category within marine products was that of demersal fish products, 22% of total exports. Within demersal fish products, the largest category was exports of cod which amounted to 12.4% of all

19
20

Trade in goods in 2011 (available 16.05.2012) (1) EEA countries are all 27 EU countries and Iceland, Norway and Liechtenstein.

exports (77,200 million ISK). Next in line were mackerel (24,100 million ISK), haddock (24,100 million ISK), redfish (19,400 million ISK) and capelin with 18,400 million ISK export. Exports of marine products increased, mainly due to increased in the exports of dermersal fish products, mainly mackerel.21

Chart 8: Exports of goods by commodities 18402011, source Trade in goods, page 6 (available 16.05.2012)

6.3.- Foreign direct investment

Foreign direct investment, net outflows (% of GDP) in Iceland was -19.73 as of 2010. Its highest value over the past 24 years was 50.06 in 2007, while its lowest value was 22.49 in 2008.22 Definition: Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows net outflows of investment from the reporting economy to the rest of the world and is divided by GDP.

21 22

Trade in goods in 2011 (available 16.05.2012) (2) The next paragraph is based on Indexmundi

15

Chart 9: Direct Investment 19862010, sourcehttp://www.indexmundi.com/facts/iceland

he large drop in foreign direct investment due to the economic crisis of 2008 and the large number of rules imposed Iceland to avoid a situation such as occurred during the crisis, as noted by the following text. The Icelandic government professes it welcomes foreign investment in most sectors, but has been criticized for its lack of support for certain potential projects and for a deteriorating investment climate. The majority of past investment has been in energyintensive industries, such as aluminum smelting, that take advantage of the country's abundant renewable energy resources. The current coalition government is less receptive to heavy industry and seeks to attract green projects that provide a large number of high paying jobs. As part of its investment promotion strategy, the state operates the "Invest in Iceland Agency," which facilitates foreign investment and provides information to potential investors.23

6.4.- Participation in customs unions / free trade reas

Iceland is a member of the Nordic Council and specialised institutions such as the Nordic Investment Bank. Iceland became a member of the United Nations in 1946 and is an active participant in most of its affiliated agencies. It is a founding member of the Bretton Woods institutions established in 1945, the International Monetary Fund (IMF), and the International Bank for Reconstruction and Development (World Bank). Iceland is one of the original members of the Organisation for Economic Cooperation and Development (OECD) and of the European Bank for Reconstruction and Development (EBRD). It joined the Council of Europe in 1950 and has participated in the Organisation for Security and Cooperation in Europe since the organisations inception in 1975. In 1964, Iceland became a party to the General Agreement on Tariffs and Trade (GATT), the predecessor to the World Trade Organization (WTO). Iceland joined the European Free Trade Association (EFTA) in 1970 and entered into a free trade agreement with the European Economic Community in 1972. In May 1992, the member states of EFTA and the European Union signed an agreement to establish a zone for the free movement of goods, services, capital and persons, the European Economic Area (EEA), which took effect on 1 January 1994. Through its EFTA membership, Iceland participates in numerous Free Trade Agreements (FTAs) with the following countries; Albania, Canada, Chile, Colombia, Croatia, Egypt, the Gulf Cooperation Council (GCC), Hong Kong, Israel, Jordan, Lebanon, Macedonia, Mexico, Montenegro,

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http://www.state.gov/

Morocco, the Palestinian Authority, Peru, Serbia, Singapore, the South African Customs Union (SACU), the Republic of Korea, Tunisia, Turkey, and Ukraine. In addition, ratification of Free Trade Agreements with Colombia is awaited. Work is in progress on FTAs with Algeria, Bosnia and Herzegovina, the Central American States, India, Indonesia, Russia, Belarus and Kazakhstan, Thailand, and Vietnam. Furthermore, Iceland has enacted bilateral Free Trade Agreements with Greenland and the Faeroe Islands. On 9 June 2010, the Peoples Bank of China and the Central Bank of Iceland signed a three-year bilateral currency swap agreement, with a possible extension. Iceland is a founding member of the North Atlantic Treaty Organization (NATO), established in 1949. The United States maintained a permanent military presence at a base in Iceland from 1951 until 2006. However, the bilateral defence agreement between Iceland and the United States continues to remain valid. In July 2009, Iceland submitted a formal application for accession to the European Union after Parliament voted in favour of applying for membership. A year later, in July 2010, Icelands accession negotiations with the European Union were formally opened.

6.5.- Foreign Exchange policy

The Central Bank maintains the nations foreign exchange reserves. The reserves are intended to enhance security in transactions between Iceland particularly the State and parties with a State guarantee and other countries, and they are handled in accordance with maintenance rules set by the Governor and confirmed by the Supervisory Board. The Central Bank is authorised to borrow funds in order to reinforce the foreign exchange reserves and to participate in international co-operation, in part for this purpose. The Central Bank of Iceland administers domestic and foreign borrowings and debt management for the Treasury. Because of the extraordinary circumstances that developed after the banks collapse in the fall of 2008, exchange rate stability (achieved in part through restrictions on capital outflows) became one of the key factors in the monetary policy devised jointly by the Government, the Central Bank, and the International Monetary Fund (IMF). The Bank oversees the capital controls following amendments to the Foreign Exchange Act. Furthermore, the Bank has taken on new tasks related to domestic payment intermediation and now owns the company Greisluveitan ehf., which handles the operational aspects of important payment intermediation systems. It also owns the Central Bank of Iceland Holding Company ehf. The Central Bank is required to publish reports on its monetary policy, as well as on monetary, exchange rate and foreign exchange developments and its measures in these areas. In its quarterly Monetary Bulletin, the Bank reports on the economic and monetary outlook. Monetary Bulletin is also issued in Icelandic under the title Peningaml. The Banks monetary policy instruments are its interest rate decisions, specified transactions with credit institutions, decisions on reserve requirements, and foreign exchange market transactions intended to influence the exchange rate of the krna.

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One of the Central Bank of Icelands legally mandated tasks is to maintain the foreign exchange reserves. The foreign exchange reserves limit and mitigate the effects of external risks related to changes in Access to foreign credit and fluctuations in capital flows to and from Iceland. The reserves enable the Bank to help the Treasury meet its need for foreign currency and fulfil its foreign debt obligations. Sufficiently large reserves create confidence in the market that Iceland is able to service its foreign debt. They can also be used to support monetary policy.

7.- Major Problems and Potentials of Economy

The biggest problems are right now distrust foreign investment and lack of diversification of economic sectors, but I think Iceland has no major problems at this time, I think it is an economic and political model worthy of emulation, desire to travel there, and feel their culture, now more than before, I think this job is just to open your eyes to new business models and ways of governing, with a focus dirigo to unity and individualization.

Bibliography
2012 Investment Climate Statement Iceland (available 03.05.2013)

http://www.state.gov/e/eb/rls/othr/ics/2012/191165.htm

Annual Report 2012 (available 15.04.2013)

http://www.cb.is/library/Skrarsafn---EN/Annual-Report/Annual%20Report%202012.pdf

Foreign direct investment (available 03.05.2013)

http://www.indexmundi.com/facts/iceland/foreign-direct-investment

Economy of Iceland (available 15.04.2013)

http://www.cb.is/library/Skrarsafn---EN/Annual-Report/Annual%20Report%202012.pdf

Foreign Exchange (available 03.05.2013)

http://staff.cbs.dk/JRangvid/Iceland_and_its_choice_of_exchange_rate_policy.pdf

Historia de Islandia (available 03.05.2013)

http://www.verislandia.com/historia-islandia.html

Iceland better life (available 03.05.2013)

http://www.oecdbetterlifeindex.org/countries/iceland/

Iceland trade directory (available 03.05.2013)

http://www.icetradedirectory.com/icelandexport2/english/ Sedlabanki Islands Central Bank (available 03.05.2013)

http://www.cb.is/the-bank/

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Statistic Iceland (available 03.05.2013) The World factbook Iceland

http://www.statice.is

https://www.cia.gov/library/publications/the-world-factbook/geos/ic.html

Trade in goods in 2011 (available 03.05.2013)

http://www.statice.is/lisalib/getfile.aspx?ItemID=13886

Visit Iceland (available 03.05.2013)

http://es.visiticeland.com

Wikipedia (available 03.05.2013)

http://es.wikipedia.org/wiki/Islandia

Table of Figures
Chart 1: Location of Iceland adapted from Worldatlas. http://www.esacademic.com/pictures/eswiki/69/Europe_location_ISL.png Chart 2: Population Growth 2000 2013, own creation, source www.statice.is. http://www.statice.is/?PageID=1170&src=/temp_en/Dialog/varval.asp?ma=MAN00000% 26ti=Population+%2D+key+figures+1703%2D2013+++++++++%26path=../Database/ma nnfjoldi/Yfirlit/%26lang=1%26units=Number Chart 3: Population in Europe and Iceland by age and sex 1 January 2012, official document, page 7. (available 09.04.2013) http://www.statice.is/lisalib/getfile.aspx?ItemID=14991 Chart 4,5 and 6: Own creation in World Bank (available 03.05.2013)
http://databank.worldbank.org

Chart 7 and 8: Graphs from Trade in goods 2011 (available 16.05.2013) http://www.statice.is/lisalib/getfile.aspx?ItemID=13886 Chart 9: Chart 9: Direct Investment 19862010 (available 03.05.2013) http://www.indexmundi.com/facts/iceland

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