When the 2008 financial crisis first unfolded, few countries were hit harder than Iceland. Its stock market collapsed. All of its major banks failed. And unemployment rates surged. By the peak of the crisis, Iceland had become a global icon of economic mismanagement.
But fast-forward four years and Iceland represents a very different story. Unemployment has been cut in half. The country’s GDP grew by about 2.5 percent in 2012, better than most developed economies. And Iceland has paid back IMF [International Monetary Fund] rescue loans ahead of schedule.
So what explains Iceland’s success? How has this small Nordic country managed to bounce back from the economic crisis?
Quite simply, by doing everything that Western economic theorists told it not to. It began by letting its three largest banks fail. It defaulted on its debt, devalued its currency, and indicted the bankers and politicians responsible for Iceland’s financial ruin. And it put the needs of average taxpayers before those of international markets. Instead of bailing out banks, Iceland wiped out large portions of homeowners’ debt and offered loans to low-income families. In the process, Iceland successfully flouted the conventional wisdom on economic recovery.
Still, despite this impressive record, many question whether the Icelandic model can be replicated. For one thing, Iceland has a tiny population, with a narrow economy that has little in common with countries like the U.S. or Germany. What’s more, for all of Iceland’s recent success, it still hasn’t fully recovered. The country’s debt remains almost 100 percent of GDP. High interest rates threaten economic growth. And many of its professionals have emigrated. This may make the Icelandic model unsustainable.
As economists debate the right path for economic recovery, what do you think? Did Iceland’s decision to flout Western economic orthodoxy pay off? Should other countries do the same?
For more information see
"Fighting Recession the Icelandic Way," Bloombergy, September 26, 2012
"Iceland: The economic model to follow?," Mindful of Money, June 21, 2012
Stephen Cole "Olafur Ragnar Grimsson Iceland president 'Let banks go bankrupt'," Al Jazeera, January 25, 2013
Photo Credits in order of Appearance:
World Economic Forum
Kjell Joran Hansen