News and Events
TWO TOP ECONOMISTS PRAISE THE STRENGTH AND PROMISE OF ICELAND’S ECONOMY
NEW YORK, May 3, 2006
Iceland’s economic fundamentals are strong, and despite recent commentary Iceland is “not going down traditional routes to financial instability,” Professor Mishkin of Columbia asserted in a meeting hosted by the Iceland Chamber of Commerce in New York today. Present were over 100 top international banking and financial executives.
“Recent volatility in Iceland’s asset markets has raised concerns about the fragility of Iceland’s economy,” comment Frederic S. Mishkin and his co-author Tryggvi T. Herberrtsson in their report, “Financial Stability in Iceland.” But these concerns, particularly those that raise comparisons with certain financial issues in emerging market countries, are “misguided.”
“The sources of financial instability that triggered [those] financial crises are just not present in Iceland,” the economists stated.
Moreover, the country “has a strong fiscal position that is far superior to what is seen in the United States, Japan and Europe. Iceland's financial sector has undergone a substantial liberalization, which was complete over a decade ago, and its banking sector has been transformed from one focused mainly on domestic markets to one providing financial intermediation services to the rest of the world, particularly Scandinavia and the UK.”
The report further notes that “Iceland is an advanced country with high-quality institutions. GDP per capita (adjusted for PPP) ranks fifth highest in the world; longevity is the highest for females and second highest for males; unemployment is almost non-existent and way below the natural rate; net government debt is almost nil, labor force participation among older workers the highest in the world, and of women the highest in the OECD (almost 80%, compared with 56% on average in the OECD).”
Dr. Mishkin, the Alfred Lerner Professor of Banking and Financial Institutions at Columbia University and Dr. Herbertsson, the Director of the Institute for Economic Studies at the University of Iceland, prepared the analysis for the Iceland Chamber of Commerce.
“There has been good and bad news for the Icelandic economy,” the economists wrote. “The good news is that it is receiving a lot of attention. The bad news is that it is receiving a lot of attention.”
The authors examined “three traditional routes to financial instability”: financial liberalization with weak regulation and supervision, severe fiscal imbalances, and imprudent monetary policy.
“None of these routes describe the current situation in Iceland,” they state.
Erlendur Hjaltason, Chairman of the Iceland Chamber of Commerce, said, “In light of the international attention focused on the Icelandic economy, we felt it was important to obtain a balanced academic evaluation. We are pleased that renowned economists of Dr. Mishkin and Dr. Herbertsson’s stature were able to devote the time and intellect to such a thorough examination and deliver this valuable report. We appreciate their investment in this analysis and look forward to sharing their findings with the international financial community.”
Drs. Herbertsson and Mishkin explained that Iceland is unique in being the smallest economy in the world to have its own currency and a flexible exchange rate. “[Iceland] has experienced high current account deficits before, but rapid adjustment has taken place without significantly stressing the Icelandic financial system,” they write. “Iceland is an advanced country with excellent institutions (low corruption, rule of law, high education and freedom of the press.)”
To underscore Iceland’s financial stability, the report notes that, “Unlike many other countries Iceland is not threatened by a looming pension crisis. A reform of the pension system, which began in 1969, is not only responsible for the stable outlook for future pensions but has also been an important stimulus to the rapid expansion of the country's banking system since 1996.
The economists do recommend four policy measures to bolster confidence in the Icelandic economy and financial system, including consolidating financial supervision inside the Central Bank, encouraging more disclosure by Iceland’s commercial banks, minimizing the influence of housing price fluctuations on inflation measures, and a more formal fiscal rule by the government to dampen the Icelandic business cycle.
Chamber President Hjaltason concluded, “Iceland has always taken pride in having a strong vision and commitment to economic growth and participation in the global economy. We take comfort from the optimistic perspective of these renowned experts while making careful note of the thoughtful recommendations they have rendered.”
