Iceland - Overview of economy

Iceland's economy is similar to that of its Scandinavian neighbors. It is mainly capitalistic, but the republic

has an extensive welfare system, low to no unemployment due to labor shortages, and a wide distribution of wealth. Poverty is practically non-existent. Overall, Iceland's economy is strong and Icelanders enjoy a standard of living similar to many European countries.

Iceland's use of its natural resources has been central to its economic success. The country has achieved a high standard of living and many years of economic stability from the profits of its fish and energy resources. Given Iceland's dependence on fishing and fisheries, the economy is profoundly affected by declines in the number of fish living in its seas and in the Atlantic Ocean. The economy is also sensitive to drops in world prices for its main exports of fish and fish products, aluminum, ferrosilicon, equipment and electronic machinery for fishing and fish processing, and woolen goods.

Foreign trade also plays an important role in Iceland's economy. Exports and imports account for two-thirds of the GDP. Most of Iceland's exports go to the European Union (EU) and ETFA (European Free Trade Association) countries, the United States, and Japan.

Stability is a key aspect of the Icelandic economy, and the performance levels of the economy are not expected to change anytime soon. The policies adopted by Prime Minister Olafur Ragnar Grimsson's center-right government effectively reduced the budget and government deficits, restricted foreign borrowing, controlled rising inflation , and revised agricultural and fishing policies while diversifying the economy and selling state-owned industries. The economy should continue to prosper in the future.

However, one factor that remains the subject of great debate is whether Iceland should join the European Union (EU). The main reservation against EU membership is the fear of losing direct control of Iceland's fishing resources. History plays an important role in this debate, as Iceland was under Danish control for 5 centuries and only became an independent republic in 1944. Therefore it is understandable that freedom and control over their country's own natural resources is an important issue to Icelanders, and does not make EU membership very alluring.

The Icelandic economy has several strong, growing sectors outside of its economic mainstay of fishing. Since the 1990s, the economy has been branching out into the manufacturing and service industries. The financial services, biotechnology, and computer software industries are especially strong and growing. Tourism is another important industry that is increasing. The number of international visitors has risen greatly in 2000, as people are intrigued by the natural wonders of Iceland. Whale watching, visiting hot springs, and horseback riding are popular tourist activities.

Since 2000 one of the government's top priorities has been to manage and control Iceland's booming economy. To ensure stability, the government has adopted conservative fiscal policies and reduced its public debt. Privatization is another policy adopted by the government to better manage Iceland's economy. In the early 1990s, the government launched its privatization policy by selling off many state-owned industries to private buyers. In 2001, Iceland's privatization program continued with the sale of state banks and a state telecommunications company. Monetary policy will continue to focus on price stability and increases are expected in interest rates in order to contain accelerating inflation.