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Economic Development Analysis of The Republic of Iceland

An Academic Paper

Presented to the Faculty of the College of Business Management and Accountancy

DE LA SALLE ARANETA UNIVERSITY

Victoneta Ave., Malabon City, Metro Manila

In fulfillment of the final output requirements for the course of

Economic Development: ECON 202A

Bachelor of Science in Accountancy

By

Marilag, Albert J.

December 10, 2024

Table of Contents

Page

EXECUTIVE SUMMARY 4

INTRODUCTION 5

The Country and its Relevance

Objectives

Key Issues

ECONOMIC OVERVIEW OF THE COUNTRY 6

Historical Background

Economic Indicators

Development Status

KEY DEVELOPMENT CHALLENGES ANALYSIS 8

Poverty and Inequality

Population of Human Capital

Structural Transformation

Globalization and Trade

Environmental Sustainability

POLICY EVALUATION AND RECOMMENDATION 14

Current Developmental Policies

Policy Successes and Failures

Recommendation for Improvement of Policies

CONCLUSION 19
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Summary

United nation’s Sustainable Development Goals

Main Challenges and Opportunity for Economic Development

Future Prospects for Economic Growth

Economic Policy Recommendation

REFERENCES 22
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EXECUTIVE SUMMARY

TITLE : Economic Development Analysis of The Republic of Iceland

PRESENTER : Marilag, Albert J.

ADVISER : Dalangin, Jerico John

SCHOOL : De La Salle Araneta University

COURSE : Economic Development

This paper examines Iceland's developmental policies in relation to the United Nations

Sustainable Development Goals (SDGs), highlighting both challenges and opportunities for

economic growth. Iceland has made significant strides in renewable energy, generating nearly

100% of its electricity from geothermal and hydropower sources, while maintaining a low

poverty rate of approximately 4.9%.

However, the country faces challenges, including a heavy reliance on tourism, which

exposes the economy to external shocks like the COVID-19 pandemic. Persistent inflation raises

concerns about economic recovery and living costs, while income inequality remains an issue,

with 12.8% of children living in poverty.

Despite these challenges, opportunities for growth exist. Iceland's commitment to green

technology positions it well to capitalize on global sustainability trends. By investing in

emerging sectors such as technology and biotechnology, Iceland can diversify its economy and

reduce dependence on tourism and fisheries.

Future growth will depend on effective policies that prioritize innovation and

sustainability. Recommendations include diversifying the economy beyond tourism, enhancing

education and skills training, and implementing comprehensive carbon-reduction strategies.

While Iceland faces significant challenges related to inflation and sectoral dependence, it

also has substantial opportunities for sustainable development aligned with the SDGs. By

focusing on diversification, innovation, and inclusivity in policymaking, Iceland can build a

resilient economy that meets the needs of its citizens while contributing positively to global

sustainability effort.
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INTRODUCTION TO ICELAND

I. The Country and its Relevance

Iceland, a small island nation in the North Atlantic, presents a fascinating case study for

analyzing economic development due to its distinctive combination of natural resources,

innovative industries, and a rapidly changing economy. After experiencing a significant

downturn during the 2008 financial crisis, Iceland's economy has made a strong recovery, largely

fueled by the tourism sector, which represented over 33% of GDP in 2019 and remains a crucial

driver of economic growth.

The country enjoys one of the highest GDP per capita rates in the world, indicative of its

strong economic performance and high living standards. However, challenges persist, including

ongoing inflation and a tight labor market, which raise concerns about the sustainability and

long-term viability of growth. Furthermore, Iceland's dedication to renewable energy and its goal

of achieving fossil fuel-free status by 2040 underscore its commitment to sustainable

development in the face of rising energy demands. These factors make Iceland an interesting

subject for economic development analysis, as it navigates the complexities of growth while

addressing environmental and social issues. Examining Iceland's economic path offers valuable

insights into how small economies can capitalize on their unique advantages in a globalized

context while managing inherent vulnerabilities.

II. Objectives

The purpose of this study is to better understand the economic implication that the

country, Iceland can adapt, understand the economic growth of the country, and to understand the

economic policies of the country. The following contains the objective of this paper for the

purpose of the analysis of the country Iceland:

● To Analyze the Economic Overview.

● To Identify Key Development Challenges.

● To Evaluate Existing Policies & Provide Recommendations for Economic Improvement.

● To Align Insights with the United Nations Sustainable Development Goals.

III. Key Issues

Iceland's economic development faces several challenges, including persistent inflation

that threatens stability and leads to interest rate hikes by the Central Bank, which may impede

growth. The tight labor market, characterized by low unemployment, results in wage pressures

and labor shortages in key sectors, affecting productivity. Additionally, the country must balance

economic growth with environmental sustainability as it transitions to renewable energy and

addresses climate change. Its heavy reliance on tourism makes Iceland vulnerable to external

shocks, highlighting the need for economic diversification to build resilience. Lastly, tackling

social inequalities and integrating marginalized groups into the workforce is vital for promoting

inclusive economic development and ensuring social cohesion.

KEY DEVELOPMENT CHALLENGES ANALYSIS

Iceland, known for its stunning landscapes and robust social welfare system, presents a

unique case for analyzing poverty and inequality, human capital development, structural

transformation, and the impacts of globalization and trade. Despite its relatively low poverty

rates compared to other OECD countries, challenges remain in addressing income inequality and

ensuring equitable access to resources. This analysis explores these dimensions in Iceland's

economic context, providing insights into the interplay between social policies, economic

structures, and global influences.

I. Poverty and Inequality

Iceland has one of the lowest poverty rates among OECD countries, with a reported rate

of 4.9% for all age groups combined as of 2021 (OECD, 2022). This is significantly lower than

the OECD average of 11.1%, highlighting the effectiveness of Iceland's welfare policies in

alleviating poverty. The at-risk-of-poverty rate was recorded at 9% in 2018, with approximately

31,400 individuals living below the poverty threshold (Statistics Iceland, 2020). Notably, poverty

rates are higher among tenants (20%) compared to homeowners (6%), indicating a correlation

between housing stability and economic security.

Despite these positive indicators, income inequality remains a concern. The GINI

coefficient in Iceland reflects lower levels of income inequality compared to many other

countries, attributed to strong social welfare systems (OECD, 2022). However, disparities persist
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across different sectors. For instance, while the fisheries sector is a significant contributor to

national income, it also creates economic disparities due to varying levels of capital investment

and technological advancement. Similarly, the tourism sector has seen rapid growth but has also

contributed to unequal wealth distribution among different economic strata.

Child poverty is another critical issue; recent reports indicate that approximately 12.8%

of children in Iceland live in poverty (UNICEF, 2021). This increase in child poverty highlights

vulnerabilities within families, particularly those reliant on low-wage jobs or facing housing

instability. Addressing these disparities is essential for fostering an inclusive society where all

citizens can thrive.

II. Population and Human Capital

Human capital development is vital for Iceland’s economic sustainability. The country

boasts a high employment rate of 78% among individuals aged 15 to 64, surpassing the OECD

average of 66% (OECD, 2022). Education plays a crucial role in this success; Iceland invests

significantly in education and training programs that enhance workforce skills. As a result, the

average annual income for Icelanders is approximately USD 67,488, well above the OECD

average (OECD, 2022).

However, challenges remain regarding job quality and security. While unemployment

rates are low at 0.7%, long-term unemployment can have detrimental effects on individuals'

well-being and employability (Statistics Iceland, 2020). Furthermore, despite high employment

rates overall, disparities exist in job security and wages between different demographic groups.
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Women, for example, experience lower participation rates in certain sectors despite Iceland's

strong performance on gender equality indices (World Economic Forum, 2021).

The government has implemented policies aimed at improving access to education and

training for marginalized groups to enhance human capital further. These initiatives are essential

for addressing inequalities and ensuring that all citizens can contribute to and benefit from

economic growth.

III. Structural Transformation

Structural transformation refers to shifts in the economy that lead to changes in

productivity and employment patterns across different sectors. In Iceland, this transformation has

been influenced by globalization and trade dynamics. The country has transitioned from a

predominantly agricultural economy to one characterized by services—particularly tourism—and

renewable energy production.

The tourism sector has experienced explosive growth over the past decade, contributing

significantly to GDP but also creating challenges related to sustainability and resource

management. This rapid expansion has led to increased demand for labor; however, it has also

resulted in rising living costs and pressures on housing markets (Icelandic Tourist Board, 2021).

The government has recognized these challenges and introduced measures aimed at balancing

tourism growth with community needs.

Additionally, the energy sector plays a crucial role in Iceland's economy due to its
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reliance on renewable resources such as geothermal and hydroelectric power. While this sector

provides substantial income and employment opportunities, it also raises concerns about

environmental sustainability and equitable resource distribution among different communities

(Ministry of Industries and Innovation, 2020).

Structural transformation is further complicated by global events such as economic

downturns or pandemics that can disrupt established patterns of trade and employment. For

instance, the COVID-19 pandemic severely impacted tourism-dependent economies worldwide,

including Iceland's. The government responded with fiscal measures aimed at supporting

affected industries while promoting diversification efforts to reduce reliance on tourism

(Icelandic Government Report, 2021).

IV. Globalization and Trade

Globalization has significantly shaped Iceland's economic landscape by opening up new

markets for trade while also exposing local industries to international competition. The country's

strategic location between North America and Europe positions it as a valuable hub for trade

routes; however, this also means that external economic shocks can have pronounced effects on

domestic markets.

Iceland's trade policies have evolved to facilitate greater integration into global markets

while protecting local industries. The country is a member of various international organizations

that promote free trade agreements aimed at enhancing export opportunities for key sectors such

as fisheries and renewable energy (Ministry for Foreign Affairs of Iceland, 2020). However,
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increased competition from abroad poses challenges for local businesses that may struggle to

compete with larger multinational corporations.

Moreover, globalization has implications for income distribution within Iceland. While

some sectors benefit from increased exports and foreign investment, others may experience job

losses or wage stagnation due to competition from cheaper labor markets abroad (OECD

Economic Surveys: Iceland 2022). Addressing these disparities requires targeted policies that

support affected workers through retraining programs and social safety nets.

V. Environmental Sustainability

Environmental sustainability is increasingly becoming a focal point within Iceland's

policy framework as the country seeks to balance economic growth with ecological preservation.

Iceland has committed to reducing its greenhouse gas emissions by at least 55% compared to

1990 levels by 2030, with an ambitious goal of achieving carbon neutrality by 2040 (Sustainable

Europe Network Report [SENR], 2021). The government aims to phase out fossil fuels in

transport while enhancing carbon sequestration through afforestation and wetland restoration

initiatives 1.

Iceland is already recognized as a leader in renewable energy production; it generates

100% of its electricity from renewable sources—primarily geothermal and hydropower—and

meets 90% of its primary energy needs through renewables 2. Innovations such as carbon capture

technology are being explored as part of efforts to achieve zero emissions globally 6.

Additionally, sustainable tourism practices are being promoted as part of an overarching strategy
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to

protect natural resources while supporting economic development 4.

The Wetlands Fund initiative aims to restore drained wetlands responsible for significant

CO2 emissions—approximately 60%—by collaborating with landowners and various

stakeholders 1. Such initiatives not only contribute to climate mitigation efforts but also enhance

biodiversity conservation.

However, challenges remain regarding environmental impacts stemming from rapid

tourism growth prior to the COVID-19 pandemic when visitor numbers surged dramatically 1.

The government continues to address these concerns through policies aimed at managing tourist

activities sustainably while preserving delicate ecosystems.

POLICY EVALUATION AND RECOMMENDATION

Iceland’s developmental policies are shaped by its commitment to sustainable

development, social equity, and economic resilience. As a small island nation with a unique

blend of natural resources, Iceland has positioned itself as a leader in renewable energy and

environmental sustainability. This paper analyzes the current developmental policies in Iceland,

evaluates their successes and failures, and provides recommendations for improvement.

Additionally, it incorporates relevant economic development theories to contextualize these

policies within broader economic frameworks.

I. Current Developmental Policies

Iceland's developmental policies are primarily guided by its Sustainable Development

Strategy, which aims to align with the United Nations Sustainable Development Goals (SDGs)

and the Paris Agreement. The strategy emphasizes a just transition towards a sustainable

economy that benefits all segments of society, particularly marginalized groups. Key components

of this strategy include:

Green Transition and Renewable Energy:

Iceland aims to be an international leader in geothermal energy and carbon capture

utilization and storage (CCUS). The government has set ambitious targets to reduce greenhouse

gas emissions by 55% by 2030 and achieve carbon neutrality by 2040 (Ministry of Industries and

Innovation, 2024).
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Human Rights and Gender Equality:

The policy for international development cooperation (2024-2028) underscores the

importance of human rights, gender equality, and environmental sustainability as cross-cutting

objectives (OECD, 2023). This approach aims to empower marginalized communities and ensure

that development benefits are equitably distributed.

Investment in Human Capital:

Iceland invests heavily in education, healthcare, and social infrastructure to enhance

human capital. The government recognizes that improving living standards is essential for

achieving economic growth and social stability.

International Development Cooperation: Iceland's development cooperation focuses on poverty

eradication, gender equality, and environmental sustainability. The country has committed to

increasing its official development assistance (ODA) to 0.46% of gross national income (GNI)

by 2028 (Government of Iceland, 2023).

II. Policy Successes

Iceland's developmental policies have yielded several notable successes:

Leadership in Renewable Energy:

Iceland is recognized globally for its commitment to renewable energy. Approximately

100% of its electricity comes from renewable sources, primarily geothermal and hydropower.

This achievement not only reduces carbon emissions but also enhances energy security

(Icelandic National Energy Authority, 2023).

Social Welfare System:

Iceland boasts one of the most comprehensive social welfare systems in the world,

contributing to low poverty rates and high living standards. The country has successfully

maintained a low poverty rate of approximately 4.9%, significantly below the OECD average

(OECD, 2022).

Gender Equality:

Iceland consistently ranks as one of the top countries for gender equality globally. The

government has implemented policies aimed at closing the gender pay gap and increasing

women's participation in the workforce (World Economic Forum, 2021).

Community Engagement:

The Sustainable Iceland initiative emphasizes community engagement in

decision-making processes related to sustainable development. This participatory approach

fosters local ownership of development projects and enhances their effectiveness.

III. Policy Failures

Despite these successes, several challenges persist within Iceland's developmental

policies:

Environmental Challenges from Tourism:

Rapid growth in the tourism sector has led to environmental degradation in some areas.

Increased visitor numbers have strained local ecosystems, prompting concerns about

sustainability (Icelandic Tourist Board, 2023). While tourism contributes significantly to GDP, it

also poses risks to natural resources.

Income Inequality:

While overall poverty rates are low, income inequality remains a concern. Certain sectors

benefit disproportionately from economic growth, leading to disparities in wealth distribution

(OECD Economic Surveys: Iceland 2022). Addressing these inequalities is crucial for fostering

social cohesion.

Child Poverty:

Recent reports indicate that approximately 12.8% of children in Iceland live in poverty

(UNICEF, 2021). This statistic highlights vulnerabilities within families and underscores the

need for targeted interventions to support low-income households.

Dependence on Specific Sectors:

Iceland's economy heavily relies on tourism and fisheries, making it vulnerable to

external shocks such as global economic downturns or environmental changes (OECD, 2022).

Diversifying the economy is essential for long-term resilience.

IV. Recommendations for Improvement

To enhance the effectiveness of its developmental policies, Iceland should consider the

following recommendations:

Sustainable Tourism Practices:

Implementing stricter regulations on tourism activities can help mitigate environmental

impacts while promoting sustainable practices. Encouraging eco-friendly tourism initiatives can

enhance visitor experiences while preserving natural resources.

Targeted Social Programs: Developing targeted programs aimed at reducing child poverty is
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crucial for ensuring that all children have access to basic needs such as education and healthcare.

These programs should focus on supporting low-income families through financial assistance

and access to quality services.

Economic Diversification Strategies:

To reduce dependence on tourism and fisheries, Iceland should invest in emerging sectors

such as technology and green industries. Promoting entrepreneurship and innovation can create

new job opportunities while enhancing economic resilience.

Enhanced Community Engagement:

Strengthening community engagement in policy formulation can lead to more effective

outcomes tailored to local needs. Involving citizens in decision-making processes fosters a sense

of ownership and accountability.

CONCLUSION

Iceland's commitment to the United Nations Sustainable Development Goals (SDGs) is a

cornerstone of its developmental policies, aiming to foster economic growth while addressing

social and environmental challenges. The integration of the SDGs into national policy

frameworks reflects Iceland's dedication to building a sustainable and equitable society.

However, the country faces significant challenges, including high inflation, reliance on key

sectors like tourism and fisheries, and the need for economic diversification. These challenges

present both risks and opportunities for Iceland's future economic development.

One of the main challenges Iceland faces is its heavy dependence on tourism, which,

while a significant driver of economic growth, makes the economy vulnerable to external shocks

such as global pandemics or economic downturns. The COVID-19 pandemic severely impacted

tourism, leading to a contraction in GDP and highlighting the need for diversification.

Additionally, persistent high inflation has strained domestic demand and raised concerns about

the sustainability of economic recovery. Addressing these issues requires strategic planning and

investment in emerging sectors such as technology and renewable energy.

Despite these challenges, there are substantial opportunities for economic development in

Iceland. The country’s abundant renewable energy resources position it as a leader in green

technology and sustainable practices. By investing in low-carbon infrastructure and promoting

research and development (R&D) in green technologies, Iceland can enhance its competitiveness

while contributing to global climate goals. Furthermore, increasing exports in non-tourism

sectors, such as seafood and data processing services, can provide new avenues for growth.

Future prospects for economic growth in Iceland hinge on effective policy

implementation that prioritizes innovation, productivity, and sustainability. The OECD has

emphasized the importance of structural reforms to boost productivity growth and enhance

competition across various sectors (OECD, 2021). This includes lowering barriers to entry for

new businesses, improving access to finance for startups, and encouraging collaboration between

firms on innovation initiatives. Additionally, enhancing educational opportunities and skills

training will be crucial in preparing the workforce for the demands of a rapidly changing

economy.

To support these efforts, several economic policy recommendations can be made. First,

Iceland should prioritize diversification by investing in emerging industries beyond tourism and

fisheries. This includes promoting sectors such as technology, biotechnology, and sustainable

agriculture. Second, targeted support for R&D can drive innovation among small firms and

enhance overall productivity. Third, addressing income inequality through progressive taxation

and social welfare programs will ensure that economic growth benefits all citizens.

Moreover, integrating sustainability into economic policies is essential for achieving long-term

resilience. This includes implementing comprehensive carbon-reducing policies across all sectors

to meet ambitious climate targets while fostering green job creation. Finally, enhancing

community engagement in policy formulation will ensure that diverse perspectives are

considered, leading to more inclusive decision-making processes.

In conclusion, while Iceland faces considerable challenges related to inflation and

sectoral dependence, it also possesses significant opportunities for sustainable economic

development aligned with the SDGs. By focusing on diversification, innovation, and inclusivity

in policy-making, Iceland can navigate its path toward a resilient economy that not only meets

the needs of its citizens but also contributes positively to global sustainability efforts. The future

of Iceland’s economy depends on its ability to adapt to changing circumstances while remaining

committed to its core values of equity and environmental stewardship.

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https://chamber.is/reports/the-icelandic-economy-q4-2023

Economic surveys: Iceland 2022. Retrieved from

https://www.oecd.org/economy/surveys/iceland-economic-snapshot/

FocusEconomics. (2023). Iceland Economy: GDP, Inflation, CPI & Interest Rates.

Retrieved from https://www.focus-economics.com/countries/iceland/

Government of Iceland. (2023). International Development Cooperation Policy

2024-2028. Retrieved from

https://www.government.is/topics/foreign-affairs/international-development-coop

eration/

Icelandic Government. (2021). Iceland's climate action plan. Retrieved from

https://www.government.is/publications/reports/

Icelandic Government Report. (2021). Response measures during COVID-19. Retrieved

from https://www.government.is/publications/reports/

Icelandic National Energy Authority. (2023). Renewable energy statistics. Retrieved from

https://www.orkustofnun.is/

Icelandic Tourist Board. (2021). Tourism statistics. Retrieved from

https://www.islandsstofa.is/en/tourism-statistics

Icelandic Tourist Board. (2023). Tourism statistics. Retrieved from

https://www.islandsstofa.is/en/tourism-statistics

Ministry for Foreign Affairs of Iceland. (2020). Trade policy. Retrieved from

https://www.mfa.is/trade-policy/

Ministry of Industries and Innovation. (2020). Renewable energy resources. Retrieved

from https://www.business.is/renewable-energy/

OECD. (2022). Economic surveys: Iceland 2022. Retrieved from

https://www.oecd.org/economy/surveys/iceland-economic-snapshot/

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napshot.html

OECD iLibrary. (2023). Development Co-operation Profiles – Iceland. Retrieved from

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land_5e331623-en

Statistics Iceland. (2020). Poverty statistics. Retrieved from

https://statice.is/statistics/society/poverty/

Sustainable Europe Network Report. (2021). Iceland: Where beauty and sustainability go

hand in hand. Retrieved from

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in-hand-20211002.html

United Nations Framework Convention on Climate Change (UNFCCC). (2021).

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UNICEF. (2021). Child poverty in rich countries. Retrieved from

https://www.unicef.org/reports/child-poverty-rich-countries

World Economic Forum. (2021). Global gender gap report. Retrieved from

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World Resources Institute. (2020). Global renewable energy database. Retrieved from

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