Iceland's economy, once primarily agricultural, is now based overwhelmingly on fishing. Crop raising plays a small role, since most of the land is unsuitable for cultivation and the growing season is short. Sheep raising and dairying are the chief agricultural activities, with horse breeding also substantial. Iceland is generally self-sufficient in meat, eggs, and dairy products, but sugar and cereal products must be imported. Since Iceland has almost no known mineral resources and has had no concentrations of population until recent decades, industry is small-scale and local, depends heavily on imported raw and semimanufactured materials, and cannot compete favorably with foreign industry, especially with imports from low-income countries.
Although the economy is based on private ownership and operates mainly on a free-enterprise basis, public enterprises account for a sizable share of GDP (about 30% in the mid-1990s). The cooperative movement is important in rural trade, and the national and local governments own some productive facilities in certain fields requiring large amounts of capital not available from private sources. The economy developed rapidly after World War II, with a rate of capital investment so high at times as to strain available resources. GNP growth fell from 9% in 1977 to -3% in 1983 but recovered to 9% in 1987. After that, it averaged -0.4% through 1993. From 1992–2001 the economy grew impressively. GDP per capita reached one of the highest levels among OECD countries. This performance was largely due to market liberalization, privatization, and other factors that spurred entrepreneurship and investment.
For a time, inflation ran rampant, rising from 30 to 45% in the late 1970s to nearly 50% annually during 1981–85. It then moderated, dropping to only 3.7% in 1991 and 1.7% in 1998; it rose again to 9.4% at the beginning of 2002. Unemployment, traditionally low, was 2% in 1999 and 3.2% in 2002.
After 2001, the overheated economy slowed. The government tightened monetary policy and exercised fiscal restraint to reduce domestic demand. The krona went through a period of devaluation and inflation rose. However, the weak currency resulted in a surge in exports, which was also helped by increased production. Aluminum exports were up 22% in 2002. Iceland is in the process of reducing its dependence upon fishing, and the aluminum industry is one sector that is contributing to the diversification of the economy; in addition, the government is taking advantage of Iceland's inexpensive and abundant supply of geothermal energy. Iceland was in a mild recession in 2002, but the economy was expected to recover by 2003 or 2004.