Iceland is a country most people know only by name. indeed, the name itself is one of the reasons so few tourists visit, given that they tend to look for warmer climes, and Iceland is clearly not in that hemisphere. Also, Iceland has few well-known tourist attractions or even historical sites of import. The country was settled by Norwegian and Celtic immigrants during the late 9th and 10th centuries a.D. The country does have the world’s oldest functioning legislative assembly, the Althing, established in 930. Iceland was independent for more than 300 years before being ruled by Norway and Denmark. The economy was devastated by the effects of fallout from the Askja volcano of 1875, producing widespread famine, and over the next quarter century, 20% of the island’s population emigrated. Most went to Canada and the United States. Denmark granted limited home rule in 1874, and Iceland gained complete independence in 1944 (“Iceland,” the CIA World Fact Book).
Iceland today has a Scandinavian-type economy that is basically capitalistic, though it also has an extensive welfare system (including generous housing subsidies), low unemployment, and remarkably even distribution of income. There are few other natural resources (except for abundant geothermal power) than the fishing industry, which is the nation’s mainstay. The fishing industry provides nearly 70% of export earnings and employs 6% of the workforce. The economy is thus sensitive to declining fish stocks and to fluctuations in world prices for its main exports: fish and fish products, aluminum, and ferrosilicon. Government economic policies include efforts to reduce the current account deficit, limitations on foreign borrowing, containing inflation, revising agricultural and fishing policies, and diversifying the economy. The government has been opposed to EU membership and remains so largely because of the concern of Icelanders about losing control over their fishing resources. Iceland’s economy has been seeking diversification into manufacturing and service industries in the last decade, and the country is monitoring new developments in software production, biotechnology, and financial services. The tourism sector is also expanding, benefiting from recent trends in ecotourism and whale watching. Since 2000, economic growth has varied from -1% in 2002 to 8% in 2004. Even the 2006 closure of the U.S. military base at Keflavik had little impact on the national economy because Iceland’s low unemployment rate aided former base employees in finding alternate employment (“Iceland,” the CIA World Fact Book).
The society is stable since the time when emigration was high, and though unemployment is low, the population faces limited economic growth to date after a period of negative economic growth in the 1990s. The country is relatively small but also has limited resources, and any economic theory applied to this small population has to account for development in light of this lack of resources and lack of existing industry, outside of the fishing industry, which itself is subject to the vagaries of weather and shifts in the size of the fish population in the region. Iceland is part of Europe in certain terms but is also geographically separate from mainland Europe.
Because of its colonial past, Iceland might be considered in terms of dependency theory, a theory more often applied in regions like Latin America. The relationship between the developed and the developing world has been explained in a variety of ways, one of which is on the basis of dependency, holding that the developing states have been made dependent on the developed world and that this shapes the course of change in the developing world and even prevents much of that world from fully developing at the pace that it might. Dependency theory provides a way of seeing the relationship between the First World and developing countries such as those of Latin America both during and after the colonial era. There are different ways to approach dependency theory, and two of the perspectives are the Marxist approach and the neo-Marxian approach, with different emphases on aspects of the issue.
Dependency theory refers to the theory that development involves the dependency of the Third World on the developed world in a relationship defined by the exploitation of resources. Dependency theory was developed as an explanation for the patterns of development found in Latin America, finding that this pattern had been conditioned by the incorporation of the region into the capitalist mode of production. Development and underdevelopment are seen in terms of dependency theory as part of the same process and not as separate entities. Dependency theory was fashioned to explain the patterns of development in Latin America and held that this development had been conditioned by the incorporation of the region into the capitalist mode of production. The dependency of the Third World on the developed capitalist nations involves an interaction that explains the economic and social-class formations that have emerged in places like Latin America and also the structure of trade, technology, and investment between the developed and the developing world (Gilbert and Gugler 1-3).
Andre Gunder Frank offers a variant on neo-Marxist thinking on poverty in the form of his version of “dependency theory.” Frank performed a historical analysis of Chile and Brazil in the context of the world’s capitalist system, first criticizing “modernization theory” by objecting to the dual society thesis which claimed that underdevelopment represented a feudal tradition and a lack of modernization. Rather, Frank stated that underdevelopment must be understood in the context of world capitalism which had transformed the earlier feudal system and used the surplus for its own benefit, a thesis in agreement with Baran. It was Frank who divided countries into metropolitan/satellite or center/periphery, and “underdevelopment in Frank’s theory is not an original condition, nor does it result from the archaic institutions surviving in isolated regions. Rather it is generated by the same process which develops the center; in particular, underdevelopment in the periphery results from the loss of surplus which is expropriated for the investment in the center” (Peet 47). Frank sees underdevelopment as a process rather than a condition, following his term “the development of underdevelopment.” Frank sees many Third World countries as being located in the periphery.
Theorists like Baran and Frank argue that capitalism in the underdeveloped world is incompatible with economic growth in any but the most superficial ways. In later periods, theorists like Baran and Frank advanced theories of neoimperialism “which sought to rework the classic analysis in the new context of U.S. hegemony, the Cold War and a relatively stable inter-imperialist system” (Radice). The dependency school of Baran and Frank was contrasted with the world-systems theory of Wallerstein, another broadly Marxist tradition.
Baran argued that the underdeveloped countries of the world were characterized by dual economies, a large agricultural sector and a small industrialized sector (Martinussen 86). Baran further emphasized class relations and the impact they had on the utilization of economic surplus and its distribution of power. These are seen as primary barriers preventing development, making the crucial point the internal conditions of the given Third World country. Baran recommended that to escape from dependency, what was needed was the application of extensive state intervention to promote nationally controlled industrialization as a precondition leading to the evolution of other industrial sectors (Martinussen 87).
Frank’s main thesis, on the other hand, identifies the causes of underdevelopment, or what he calls “the development of underdevelopment,” as being found in the idea of metropoles and satellites, with metropoles being the target of merchant capital and with the satellites existing simply to feed the requirements of the metropoles. The crucial mechanism for aching this is trade and other kinds of exchange of goods and services, at all levels. His proposed solution to the problem of dependency was to require Third World countries to de-link from the world market, thus allowing the country to develop Martinussen 88-89). In this way, Frank blames external factors, differentiating him from the Modernization School, which assumed that causes were to be found inside the Third World countries themselves, such as culture, overpopulation, reduced investment, or simply a lack of motivation on the part of the people.
In Iceland, the dependency that has resulted has been less a conscious decision of exploitation than the fact that the region has limited resources and so is dependent on the fishing trade with the more developed world. This places Iceland more in the modernization school of Wallerstein, and indeed the economic problems facing Iceland do seem more a condition than a process.
The history of Iceland in the era before independence has been noted above, and that history does not show the sort of dependence and exploitation cited by authors on dependency theory. As noted, the primary issue from the first has been the lack of any natural resources except fish. The population eked out a living under difficult conditions and managed well so long as the fishing was good and the market for catch remained stable or increased. Any problems in these areas produced a reduction in GDP, though generally not enough to reduce employment possibilities. The one time during which the country suffered major negative economic change was after the volcanic eruption in 1875, a devastating event that produced widespread famine and population loss. 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.
Frank, a.G. Capitalism and underdevelopment in Latin America; historical studies of Chile and Brazil. New York, Monthly Review Press, 1967.
Gilbert, Alan and Josef Gugler. Cities, Poverty, and Development. Oxford: Oxford University Press, 1990.
Iceland.” The CIA World Fact Book. April 24, 2007. https://www.cia.gov/cia/publications/factbook/geos/ic.html#Intro.
Martinussen, John. Society, State & Market ? A guide to competing theories of development. New York: Zed Books, 1997.
Peet, Richard. Global Capitalism, London: Routledge, 1991.
Radice, Hugo. Globalization, State Failure and Underdevelopment: Imperialism? 2001. April 23, 2007. http://www.sussex.ac.uk/Units/CGPE/Failed%20States/radice.pdf.
Wallerstein, Immanuel. “New Revolts Against the System.” New Left Review, No 18 (2002).
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