Iceland, a tiny European island country of just 3 lakh people seldom appears on the map of the world economy. Back in 2008, the country was embroiled in a deep financial crisis along with the rest of the world. But it did something very radical then. The outcome is that nearly four years after the crisis, the economy is in a much better shape. Compared to the rest of the developed world, its unemployment level is sound at just 6.1%. Moreover, its economy grew at a steady rate of 2.4% last year.
What did it do so differently? What lessons does Iceland have for the rest of the world? We thought the best person to answer these questions would be none other than Mr Olafur Ragnar Grimsson, President of Iceland since 1996. This is what he has to say. As per him, most other developed countries viewed the collapse of banks as just a financial and economic crisis. Iceland looked more broadly and deeply into the matter. It saw that the crisis would have political, social and judicial consequences.
Iceland found itself facing a crucial dilemma. On one side were the interests of the financial market. On the other side was the democratic will of the people. It is obvious now that it chose the latter. It did not pump money into the failed banks with taxpayers' money, the way the US and other European economies did. It treated banks like any private manufacturing or commercial companies that had gone bust. At the same time, it initiated measures on the judicial and economic front to address several aspects of the crisis. Some measures pertained to protecting the lowest income sectors such as elementary social and health services.
As we all know, the US and most economies of Europe have done mostly the opposite of what Iceland did. They salvaged the same big banks and institutions that were the culprits of the crisis. In the process, they have made their debt problem even worse. These economies are now witnessing sluggish economic activity, high unemployment levels and widening income gaps. All this means that even more severe crises are in the offing.
Iceland's model is not very complex and difficult to replicate. It decided to face some short term pain in the larger long term interests of the economy. Why, you may ask, the other countries did not take inspiration from Iceland's model? Were they fools or were they crooks? Unfortunately, our hunch is slanting more towards the latter.