However, the country recovered well and has improved its GDP considerably in the past decade.
The economic performance of Iceland has been good in recent years, with a growth in GDP over the past decade of 4% per annum, significantly bettering OECD growth over that period. Because of this, per capita GDP has recovered most of the ground lost in a preceding period of sluggish growth, making the country the fifth-wealthiest in the OECD on that benchmark:
Most of the rise in trend growth reflects productivity gains following the implementation of widespread structural reforms, which opened the economy and enhanced competition. Financial-market liberalization and privatization have unleashed entrepreneurial dynamism. Many companies have expanded abroad, and the country now plays a role that belies the small size of its economy. Labor markets have been increasingly opened to foreign participants, helping to reduce labor market tensions. ("Economic survey of Iceland 2006" para. 1)
In spite of this good performance, a number of indications bode ill for future development. One problem has been high demand and output volatility and recurrent sizeable macroeconomic imbalances, which have tended to increase. The current level of excess demand is found to be larger than in the previous boom in the late 1990s, and this is also true for the current account deficit, which stood at 161/2 per cent of GDP in 2005 and so is easily the highest in the OECD. At the same time, households and firms have become highly indebted, leading to concerns and considerable financial market turbulence. The exchange rate and stock prices both dropped sharply this year, though down from historically high levels. Inflation has reached 8%, caused by rising import prices and capacity pressures in goods and labor markets:
Excess demand not only reflects large-scale aluminium-related investment projects, but also surging household spending (on both consumption and housing). With hindsight, the response of macroeconomic policies to signs of overheating was insufficient. Secretariat projections suggest that, despite a slowdown in domestic demand due to higher interest rates and the gearing down of the investment projects, inflation pressures and external deficits will remain substantial in the near-term. The recent wage agreement is intended to reduce uncertainty about the inflation outlook but will increase inflation in the short-term. Against this backdrop, a further currency depreciation and an additional build-up of inflationary pressures cannot be excluded, implying a harsher adjustment process. ("Economic survey of Iceland 2006" para. 2)
Certain priorities are noted by analysts for how to maintain growth. The priority in the near-term is intended to ensure the swift restoration of macroeconomic balance through a coordinated effort of monetary and fiscal policy. The economy has shown a high degree of resilience and the impressive capacity to adjust following the overheating episode of the late 1990s, but at this time, the imbalances are more severe. Without swift and vigorous policy action, financial market stability could be at risk. Also, there is room for strengthening the framework of monetary and fiscal policy alike to make implementation more effective, moves which would reduce the risk of a reemergence of economic imbalance in the future ("Economic survey of Iceland 2006" para. 3).
An issue related to both the short- and long-term outlook for the economy is the timing of further large-scale investment projects, and a second challenge is to make sure that the financial sector continues to contribute to good economic performance both by minimizing risks to stability and by completing liberalization (in particular in the housing market). Finally, it is stated that adapting the education system to changing economic requirements is necessary for achieving higher standards of living over the long-term ("Economic survey of Iceland 2006" para. 3).
The prospects for Iceland are good but will depend on the ability to develop the necessary technological infrastructure to help develop information industries that can be of particular service to Europe, Canada, and America. Many underdeveloped parts of the world are seeking the same sort of technological fix today, some more successfully than others. Iceland may have to import more technologically-oriented workers in the short-term but can train its own workers once the process is more advanced. The ecotourism that has become more important in recent years also offers a chance for increasing GDP for the region, and Iceland has a number of geographical features that appeal to ecotourists, including suffering some of the effects of global warming as more and more of the ice sheets in the area begin to melt and cause the sea level to rise. The volcanic activity in the area is another point of attraction for ecotourists. The country would do well to give more attention to developing whatever infrastructure is needed for this type of industry, including hotels and restaurants as well as tours and the like. The country simply must increase its economic reach beyond the fishing industry and fid ways to make use of its unique geographic location and topographical features.
Economic Survey of Iceland 2006." April 23, 2007. http://www.oecd.org/document/39/0,2340,en_2649_201185_37217255_1_1_1_1,00.html.
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