The socialism versus capitalism debate continues in academia, in the mainstream press, on social media and elsewhere. Iceland provides an intriguing case study, as Alan Austin reports.
FORGET VENEZUELA as socialism in action. Grab your ski boots and Das Kapital and let’s visit Iceland. It is impossible to imagine a better example of contemporary socialist principles put into practice. And hard to believe the outcomes.
For most of the 1990s and 2000s, Iceland was capitalist heaven. Unregulated companies were free to do whatever they wanted. And what they wanted was for their executives and shareholders to become rich rich rich! So private banks offered the financial services spruiked by the big corporations in the USA and elsewhere, but promised higher returns.
In the early 2000s, Iceland’s government strongly encouraged corporate gree... er, success. It slashed the company tax rate from 30% to just 18%. That was about half the rate in France, Germany, Italy and Belgium. It reduced the top personal tax rate to 35.7% and scrapped wealth taxes altogether.
By 2006, Heritage Foundation ranked Iceland as fifth in the world as the place where capitalists could operate free of government restraints.
Then came the 2008 global financial crisis. That crashing sound from the Arctic circle was not the collapse of the Falljökull glacier, it was the big three Icelandic banks crumpling under the weight of unpayable liabilities — which totalled nearly 13 times Iceland’s gross national income.
Government bail-outs were out of the question. So the banks went bust and took most of what had seemed a booming economy with them.
The impact on the Íslendingars was catastrophic. Unemployment shot up from below 2.0% to 8.7% in 13 months — the highest since records had been kept. The Icelandic króna plummeted against all major currencies. Inflation then devastated what was left of the króna, soaring above 17% for several months in 2008-09.
Nine of the next 13 quarters recorded negative growth in gross domestic product (GDP), the worst result in Europe, except for Greece’s ten. Median wealth plummeted in 2008 from the highest in the world at US$195,187 down to 9th in the world at $110,698. A year later, this had collapsed to just $95,315, at 12th in global ranking, a loss of 51.2% in two years.
Icelanders queued for handouts for the first time, and thousands just up and left.
With unfettered free enterprise having wreaked so much havoc, the Coalition Government led by prime minister Geir Haarde changed course dramatically. It then implemented arguably the most socialist responses in all Europe.
Enter Karl Marx stage left
It whacked strict controls on capital flows out of the country, it accepted a bail-out from the International Monetary Fund and neighbouring countries, it borrowed heavily and built government-owned banks from the wreckage. It reduced the budget deficit by increasing company taxes by one third, hiking the top personal tax rate up to 46.1% and introducing a new value-added sales tax at a thumping 25.5%.
At all times, the government safeguarded the vulnerable with a generous safety net. It increased social security contributions from businesses but reduced them from employees. While it allowed foreigners to lose their deposits in the failed banks, it guaranteed the savings of all locals.
So far, 36 executives have been convicted of corporate crimes including insider trading and market manipulation and were gaoled. Vladimir Lenin would be ecstatic.
The long-term restructure moved away from finance and banking towards tourism and high-tech manufacturing and back to traditional marine industries. Energy consumption from renewables jumped from 62% to 77%.
World’s best economy
Iceland is finally benefiting from these draconian collectivist responses. It has just generated the world’s best-performed economy for 2018. That’s according to the IAREM — Independent Australia’s ranking on economic management, published last month. The IAREM is a composite index which evaluates all national economies on eight key indicators.
Iceland’s jobless rate is now down to 1.7%. Annual GDP growth is up to 7.2%. Iceland enjoys again the world’s highest median wealth at US$203,847 per adult.
Most impressively, Iceland has reduced its debt dramatically — from 94.7% of GDP in 2011 to 42.3% last year. This is on track to be below 24% by year-end.
In fact, not only is Iceland the world’s best-performed economy in 2018, its overall IAREM score is the highest of all 12 years for which it has been calculated.
Socialism v capitalism
Okay, now a few caveats.
One, yes, Iceland is a small country and hence susceptible to greater economic gyrations than the juggernauts. So we need to see what happens when larger economies – Canada, the UK, Germany, France or Italy – adopt Iceland’s radical policies.
Two, the government which privatised the banks, jailed the bankers and hiked taxes on the rich was not formed by an actual socialist party. Geir Haarde’s cabinet in 2008 comprised his Right-wing Independence Party (IP) and the centre-Left Social Democratic Alliance (SDA). That was replaced in 2009 by a coalition of the SDA and the Left-Green Movement (LGM). Between 2013 and 2016, the coalition comprised the centre-Right Progressive Party (PP) and the IP. For most of 2016, three parties formed the cabinet — the IP, the centrist Reform Party and the small, liberal Bright Future Party.
The current cabinet, led by the LGM’s Katrín Jakobsdóttir, includes also the IP and the PP — Left, Right and centre. So Iceland is not and never was a pure socialist state.
Three, in the last year or so, the government has eased restrictions on capital flows and enterprise. The economy is thus becoming freer and less government-directed.
So, the Icelandic experience does not resolve the Left/Right political argument entirely.
Rather, it suggests that the world’s best-performed economy was generated by the right mix of socialist and capitalist policies, with the primary focus on the wellbeing of the majority of citizens.
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