Foundations for Growth and Competitiveness 2026

Iceland

Iceland ranks among the wealthiest countries in the OECD, driven by high participation and employment and above-average productivity per worker. Productivity per hour is on an upward trajectory, supported by increasing investment. However, hourly productivity in the domestic goods and services sector continues to lag. Moreover, Iceland’s heavy reliance on natural resources highlights the importance of opening and diversifying the economy to secure sustainable long-term growth.

A key policy challenge is to improve the business climate. To encourage entrepreneurship, Iceland should reduce entry barriers for both domestic and foreign firms and strengthen international trade facilitation. Streamlining administrative procedures would boost electricity production. Enhancing public effectiveness frameworks would foster both productivity and public trust. A broad-based education reform could help lift foundational skills.

Economic performance

Gaps to the average of the upper half of the OECD countries

Source: Panel A: OECD, Economic Outlook database; Panel B: OECD, Labour Force Statistics database; Panel C: OECD, Economic Outlook and Productivity databases; Panel D: OECD, Economic Outlook and Annual National accounts, GFCF by assets databases.

Selected policy gaps

Source: OECD calculations based on the Foundations for Growth and Competitiveness database.

Openness: Foster foreign direct investment and facilitate trade

Regulations on foreign direct investment (FDI) and services trade are stringent, limiting market entry for foreign firms and slowing access to the global technological frontier. Certain sectors are subject to strict foreign equity restrictions. The authorities can also screen FDI on economic interest grounds in a discretionary manner. Trade is hampered by relatively complex and untransparent administrative procedures.

Recommendations

✓ Review and remove restrictions on foreign direct investment and services trade where appropriate.

✓ Specify the criteria against which FDI undertakings are evaluated and limit the discretionary power to screen FDI.

✓ Facilitate international trade by setting up a one-stop shop for customs proceedings, while strengthening coordination among the agencies involved.

Competition: Reduce regulatory barriers to firm entry

Despite some improvements in the tourism and construction sectors, barriers to firm entry remain high. High administrative and regulatory hurdles to start a business undermine entrepreneurship and slow productivity growth. Access conditions to occupations and professions are stringent. Business licencing can be cumbersome, involving multiple authorities with sometimes inconsistent decisions. Insolvency procedures can be long and expensive for small firms.

Recommendations

✓ Review the policy objectives for business and occupational licences and retain only those that are necessary for service integrity and consumer protection.

✓ Simplify administrative procedures for business licensing, such as establishing a one-stop-shop for entrepreneurs.

✓ Set up pre-insolvency procedures for firms in difficulties and introduce a simplified insolvency regime for small firms.

Energy: Increase electricity supply

Abundant domestic electricity has long been a mainstay of economic development in Iceland. Yet growing demand driven by decarbonisation efforts and the digital transition is straining the power system. Supply constraints are biting more frequently, affecting export revenues, and prices are rising. The ageing transmission grid is reaching its capacity limits. Tedious permit and licensing procedures, and weak financial incentives for municipalities, are holding back new generation and transmission projects.

Recommendations

✓ Invest in additional transmission capacity based on comprehensive cost-benefit analysis and well-coordinated with generation projects.

✓ Establish a 'fast track' administrative procedure for electricity projects that have been prioritised by parliament.

✓ Strengthen the municipal share in revenues from power generation, for instance by sharing royalties, fees, and dividends.

Governance: Foster public sector effectiveness

Iceland’s institutions are of high quality yet strengthening public sector effectiveness could further enhance productivity. Evaluation practices could be made more transparent, and the use of evidence-based problem analysis and diagnostic tools become more widespread. Action plans should include financial considerations, such as cost estimates. Although a digital platform has been introduced (Island.is), there remains potential to further develop digital government services.

Recommendations

✓ Strengthen the strategic framework to increase public sector effectiveness, especially by enhancing evaluation practices and evidence-based problem analysis.

✓ Accelerate progress towards digital government and a data-driven public sector and simplify access to public data.

Education: improve foundational skills

Over the past two decades, the quality of compulsory education has declined markedly, potentially reducing productivity in the long term. While the decentralised school system offers many advantages, the absence of standardised testing limits the central government's ability to effectively monitor school and student performance. The PISA score gap between native and immigrant students is among the widest in the OECD. Teaching quality is relatively low.

Recommendations

✓ Set up a framework for standardised testing to inform student outcomes and teaching practices, and strengthen central monitoring of school performance.

✓ Support immigrant students, notably by expanding systematic and targeted language training.

✓ Improve and adapt the teacher competency framework.

Recent progress on structural reforms

While progress has been relatively limited in recent years, some reforms were nonetheless implemented. Regulations were eased in the transport and construction sectors. The electricity sector has undergone significant modernisation, with the full separation of generation, transmission, and distribution, and the establishment of two wholesale markets. Additionally, efforts to strengthen public integrity have been undertaken, including the introduction of legislation to protect whistleblowers.