Remarks by Angel Gurría
16 September 2019 - Reykjavik, Iceland
(As prepared for delivery)
Minister Benediktsson and Minister Alfredsdottir, Ladies and Gentlemen,
I am delighted to be once again in Reykjavik to present the OECD’s 2019 Economic Survey of Iceland. I want to begin by thanking Minister Benediktsson and Minister Alfredsdottir for hosting us today, and the Icelandic Government for their support throughout the preparation of this Survey.
Our study highlights a number of key areas where Iceland has made important progress. And I must admit that it’s quite impressive.
Over the past years, favourable external conditions and good macroeconomic policies helped Iceland to nurture high growth, low unemployment, low inflation, and sustainable public finances. Living standards are among the highest in the OECD.
A tourism boom with annual growth rates of 25% between 2012 and 2017, made tourism Iceland’s most important export sector. Knowledge-intensive industries such as data processing and pharmaceuticals are also developing rapidly. At the same time, private debt and non-performing loans are declining.
Iceland is also one of the most egalitarian economies of the OECD thanks to high labour participation, small wage differences, and a well-targeted tax-benefit system that protects citizens against the country’s boom-and-bust cycles. Income inequality and poverty are the lowest of any OECD country. Women are able to realise their potential better than elsewhere, making Iceland a top performer in terms of gender balance. Iceland shows that high economic performance and an egalitarian society can co-exist.
Crucially, growth in Iceland is quite green. Thanks to the extensive use of renewable energy, the country’s environmental impact remains low overall. In an inspiring and commendable initiative, the government has pledged to make the economy largely carbon-neutral by 2040, one of the first in the OECD to undertake such an exemplary commitment.
And finally, this growth effort is also increasingly focused on and guided by wellbeing objectives. Iceland puts much effort in fostering well-being of its citizens, making it a top performer in several areas including life satisfaction and environmental quality. Not surprisingly, Iceland is a founding member of the Network of Wellbeing Economy Governments, launched together with New Zealand and Scotland.
Despite these positive signs, Iceland still faces important structural challenges.
Competitiveness is on a long-term decline as wages are rising faster than productivity. The competitiveness gains achieved after the 2008 crisis have vanished. Wages are much more equal than productivity, which makes for an equal income distribution but tends to create inflationary pressure and reduces incentives for workers to move across sectors or to invest in education. The current sharp downturn after several export shocks, with growth expected to be zero or even negative this year, is an important reminder to Iceland that it needs to reinvigorate reform efforts.
Productivity is lagging, and is held back by stringent regulation both in the domestic sector and on foreign direct investment. For example, Iceland’s restrictions to FDI are third highest in the OECD, dampening employment and productivity gains through international capital and knowledge transfer. Investment and export growth, on the back of a more efficient domestic sector, could raise overall productivity and help share it more widely, which is particularly important, as the country is so small.
The Survey recommends developing the country’s full productivity potential and supporting inclusive growth through regulatory reform. As such, it is certainly encouraging that Iceland is carrying out a comprehensive review of its competition policy in close collaboration with the OECD.
As I mentioned, Iceland has very low wage differences, contributing to low income inequality. However, the wage formation process is often contentious, and wage settlements lead to wage drift and create inflationary pressures. The April 2019 wage agreements are a welcome development that aim to link wage developments to growth of GDP per capita. Yet, the Survey recommends that wages should be closely aligned to productivity growth. In particular, it recommends that non-partisan experts should provide evidence-based, reliable and relevant economic information to help establish wage guidelines and to inform wage settlements.
There is also a need to maintain prudent monetary and fiscal policies. After several years of undershooting the central bank’s target, inflation temporarily rose and became more volatile. The central bank increased interest rates in November 2018 but eased policy in May, June and August in the wake of the rapidly weakening economy and declining inflation.
Overall fiscal policy has been prudent in recent years, helping to achieve a budget surplus and lower debt. The fiscal plan for 2020 is expansionary, aiming to support to the economy and higher infrastructure and social spending and tax cuts.
The Survey recommends to continue adjusting interest rates in line with inflation developments and to follow strictly the deficit and debt rules set by the 2016 organic budget law, as well as reducing debt further.
Iceland also needs to strengthen skills and to better align them with labour market needs.
Iceland’s PISA results are weak in international comparison and have been sliding over the past decades, revealing low proficiency levels among students, despite high expenditure on education. While Iceland’s education system is very equitable, a large divide remains between immigrant and native students. We strongly encourage Iceland to continue its ongoing reforms to improve students’ performance and teacher competency framework.
Iceland should encourage work- and school-based training, vocational education, lifelong learning programmes and improve the integration of immigrants into the labour market. These adjustments will be crucial to respond to future skill demands. Finally, university funding should be linked to the quality and relevance of the curriculum rather than the number of students.
Last but not least, the role of public finances in promoting inclusive growth has declined since the 2008 crisis. In particular, public investment is too weak, weighing on productivity, and reform of the disability system should shift the focus from paying benefits towards return to work. To address this issue, the Survey puts forward three concrete recommendations, among others:
First, extending spending reviews to core policy areas like education or health care, to improve effectiveness of spending as required by the Icelandic organic budget law.
Second, applying more stringent cost-benefit analysis to make the best out of new transport, energy and digital infrastructure.
And Third, reforming the disability system by shifting the focus from paying benefits towards increasing labour participation.
Ladies and Gentlemen,
Iceland’s recent socioeconomic achievements are impressive and point the way for many other countries. It now remains paramount to keep the momentum going. The OECD is confident that Iceland has the determination and the reform state of mind to keep improving and keep leading the way.
The OECD stands ready to support you in your unceasing efforts to promote more inclusive and sustainable growth, focused on human wellbeing, and through the implementation of better for better lives. Thank you.
Press release: Iceland’s slowdown underlines the need to fix structural issues