Iceland has a Scandinavian-type economy that is primarily capitalistic, yet there is an extensive welfare system that includes generous housing subsidies and the nation's domestic economy is characterized by low unemployment and a remarkably even distribution of income. (Iceland 2006: 7) The national economy depends heavily on the fishing industry, which provides more than 60% of total export earnings and employs 12% of the work force. The government is very sensitive to the issue of declining fish stocks as well as to fluctuations in world prices for its main exports: fish and fish products, aluminum, diatomite and ferrosilicon. (Economy of Iceland 2006: 4) Iceland's economy has been diversifying into manufacturing and service industries in the last decade and new developments in software production, biotechnology, and financial services are taking place. The tourism sector is also expanding, with recent trends in eco-tourism such as whale watching, hiking, and nature tours growing steadily.
Iceland's economic performance has been characterized as "impressive," and is seen to be the direct result of the government "refocusing policies on financial stabilisation and market liberalisation." (Suppanz and Laubach 2005: 1) Although Iceland suffered the same fate as other modern, industrialized countries in the global recession of 2002, its most recent recovery "has been much more vigorous than expected, as buoyant household demand has reinforced the stimulatory effect of the large-scale aluminum-related investment projects underway." (Suppanz 2005: 1) In fact, the annual growth of GDP was a vigorous 4% in 2003 and 5.2% in 2004. (World Bank 2005: 1)
Thus, it can be fairly stated that the overall economy of Iceland is very strong; perhaps too strong. A major concern among policy makers now is inflation. The robust financial and property markets are driving a wage/price spiral that is exceeding the initial policy moves of the Central Bank. As discussed in further detail within the assessment portion of this paper, the Icelandic position toward stabelisation and liberalisation has improved the economic environment and the resulting productivity growth has given rise to a per capita income that is increasing at a faster rate than other European countries. (Suppanz 2005: 2) Predictably, as the result of this growth in consumer income, equity and property prices have increased significantly. If policy does not get this under control, then a correction is sure to follow. With only modest budget surpluses and a high external debt by international standards (Suppanz 2005: 2), the effects of such an adjustment in prices would present a fiscal crisis. Economic policy needs to focus on maintaining controlled, sustainable growth without over-heating the markets.
A study of the available statistics will provide a more accurate understanding of the macroeconomic issues present, and guide the discussion of policy options to address the problems.
The first area of study is that of domestic production. As noted previously, Iceland mainly exports fish and fish products, as it ramps up its manufacturing, service, and tourism industries. Although Gross Domestic Production (GDP) is not as high as it has been in times past, the data demonstrates a solid