The OECD assessment and recommendations on the main economic challenges faced by Iceland are available by clicking on each chapter heading below.
Key challenges
This chapter discusses the major challenges facing the Icelandic economy against the backdrop of the large scale aluminium related investment projects that are underway. Given their sheer size — including power plants they are equivalent to about 30% of one year's GDP over 2003-08 — maintaining economic stability over the next few years will be a demanding task for macroeconomic policymakers. But there are also challenges for structural policies, notably in the labour market and environmental areas. In a longer term perspective, the question arises as to what further changes to the economic structure and policy settings would be conducive to maintaining a high level of prosperity by international comparison. Sustaining the recent improvement in Iceland's productivity performance would seem to require further action in the education and competition policy fields, in particular.
Macro policies to maintain economic balance
This chapter discusses the factors driving the current expansion, the economic outlook and the macroeconomic policy settings in place to maintain economic stability. The recovery from the mild 2002 recession has been stronger than expected as the stimulatory effect of the large scale aluminium related investment projects has been reinforced by buoyant household demand. With the economy projected to continue to grow at a rapid pace over the next two years, there is a clear risk that tensions and imbalances — in particular inflation pressures and a large external deficit — of a magnitude similar to those that caused the previous downturn will re emerge. Monetary policy has been tightened since mid 2004, but the new inflation targeting regime will be put to a severe test in the period ahead. Budgetary policy has also become restrictive, following a substantial loosening in 2003. However, with tax cuts scheduled for 2005-07, the fiscal stance may not be tight enough to prevent a recurrence of the overheating episode that took place a few years ago.
The role of structural policies
This chapter deals with the role structural policies will have to play if the benefits of the expansion of power intensive industries are to be reaped. Immigration policy has been quite flexible in allowing foreigners to be employed at the construction sites. Vocational training of Icelanders has remained modest. Despite a substantial increase in public spending, educational attainments are still unsatisfactory, although there are signs of improvement. The authorities have attempted to limit damage to the environment by imposing design changes to the investment projects.
Product market competition and economic performance
This chapter discusses the current state of product market competition in Iceland, including the legal and regulatory framework, and suggests directions for further improvement. Given the size of the economy, efficiency considerations dictate high concentration in many markets, and preventing abuse of market dominance is therefore a challenging task. Changes to competition law since the early 1990s have strengthened competitive forces in many sectors of the economy, and proposed amendments to that law would further improve market surveillance. The changes in the regulatory framework for telecommunications have helped vigorous competition to develop in most segments, but there remain problems in pricing of access to the local loop. In the still publicly owned electricity sector, however, competition in generation and sales is so far virtually non existent despite new legislation. Other policies discussed include agricultural support, policies towards foreign direct investment, and public procurement and provision of publicly funded services.
See also ECO Working Paper 426 Product market competition and economic performance in Iceland
