Annual Meeting of the Chamber of Commerce

Prime Minister Halldór Ásgrímsson:

Speech given to the
Annual Meeting of the
Chamber of Commerce of Iceland,
February 8th 2005

Ladies and gentlemen.
It gives me great pleasure to be able to address this splendid group of business leaders in the Icelandic economy that represent the power and drive that some have called the Icelandic economic miracle. I had the opportunity the other day to invite the directors of the Icelandic Chamber of Commerce to lunch where we were able to discuss the present state and future prospects of the economy and exchange useful opinions. To me, it is very important to work closely with business leaders and establish avenues of communications that are based on fairness, candour and mutual understanding.

The Icelandic economy has undergone profound changes in the past decade, and I think it is not an exaggeration that these changes are the most extensive ever in this country. To some, this may sound like an old story, but the fact of the matter is that since the present Government coalition came to power, we have liberalised the financial market, including capital movements to and from abroad, the tax system has been overhauled and firm foundations have been laid for Icelandic business and industry. Most important of all, we have succeeded in establishing economic as well as political stability. The economic vicissitudes that were so common in earlier years are now a thing of the past. We may, of course, expect that we will meet with difficulties in the future, but our economy is now far better prepared to meet them than before due to the reforms we have brought about. We can therefore look with some pride and satisfaction over the past decade due to the fact that we participated in implementing these reforms.

Our main task over the past decade has been to forge a strong, modern society that can take on the future with a powerful market economy, a strong business environment, an ambitious cultural and educational milieu along with a resilient social and welfare system in the spirit of a liberal democratic social policy that preserves our national heritage.

I believe there is good reason to emphasise this point here, since it is not evident in our domestic political discussion, that Iceland and we Icelanders are sometimes viewed with awe and curiosity abroad when the discussion turns to our business and economy. We enjoy continuous economic growth, low unemployment, rapidly increasing household purchasing power and a strong welfare system open to all, irrespective of means. We posses enterprising businessmen who are not afraid to venture abroad and invest in foreign countries for the benefit of their own nation. We can assert with assurance that we are enjoying a prosperous economy with a bright future.

Contrary to facts, the public discussion in Iceland tends to revolve around problems rather than achievements. We can of course always do better. But would it not be wiser that we tackle our tasks with sincerity and treat them as issues to be dealt with rather than wallow in darkness and pessimism over our nation’s future. There are undoubtedly those who yearn for the good old days of state-owned banks and investment funds, black-and-white television with no TV on Thursdays. The rest of us prefer to bathe ourselves in the sunrays of the future and in the opportunities that it portends.

I wonder if Icelandic business is doing enough to pass on the message that we have created opportunities for growth and expansion. I don’t think so. Let us not forget that there exists another ideology that preaches the message that the public authorities should increase their interference in economic activity through a host of prohibitions and regulations in all areas. Would Icelanders really wish to revert back to the era when devaluations, strikes, inflation and unemployment were the main subjects of television news? I don’t think so.

Ladies and gentlemen:

We Icelanders have reaped well, as we have sown. We took difficult decisions that were politically controversial, such as building up power-related industry, restructuring the fisheries sector with transferable quotas and privatising the banks. Today, the facts speak for themselves.

The impact of these reforms can be seen in the improved international competitiveness of the Icelandic economy. According to a survey of the IMD Business School in Switzerland, Iceland is now in fifth place in the world in terms of competitiveness. By comparison, in 1995 we were in 25th place. It is no less interesting that we now rank on top of the list of European nations but were in 13th place in 1995. This survey takes a number of factors into account that relate to the competitiveness of the economy, such as the economic track record, the efficacy of the public sector, the flexibility of companies and the social infrastructure. In terms of investment abroad and the degree of liberalisation of capital movements, we are in first place. Our “brain drain” – i.e. the emigration of skilled professionals - is lowest, and technical co-operation between companies is the highest.
In a relatively short period, the Icelandic economy has been transformed from a primary producer economy with fisheries as its mainstay into a versatile high-tech producer and service economy where new industries are of increasing importance. This does not only refer to the new power-based producers of aluminium and ferro-silicon that have established themselves but also those companies that have been established in various high-tech sectors, such as software, pharmaceuticals, medical equipment, biotechnology and telecommunications. At the same time, a number of companies have established ventures abroad which further strengthens our economy.

It is interesting to view some figures to illustrate these profound changes. Icelandic direct investment abroad has increased since 1998 from 24 billion to 120 billion in 2003. The bulk of the increase comes from financial concerns, holding companies and software companies. These investment were negligible in 1998, whereas by 2003 they had increased to 18 billion for financial concerns and to 40 billion for holding companies and software companies. Investment assets abroad of production companies also rose sharply, quadrupling between 1998 and 2003 to 40 billion krónur.

I see it as one of the main tasks of government policy over the next several years to ensure that this trend will continue by paving the way for Icelandic investments abroad as well as encouraging foreign investment in Iceland. I therefore fully endorse the main ideas set forth in the report of the Chamber of Commerce now before us to the effect that public policy should be directed towards further reforms of the business environment that we now have. This does not only apply to the tax environment but also to the public regulatory aspect. We must find the acceptable compromise that ensures a sound and progressive economic milieu where general rules of fair play apply at the same time as public regulatory interference does not hamper business enterprise.

This is not an easy task, as experience shows in many of our neighbouring countries.

Ladies and gentlemen:

As you know, the Government has taken a number of important steps in cutting taxes during its present term of office. These tax cuts represent a certain order of priorities, since the room for tax cuts is not unlimited. It is nonetheless evident that further changes are needed that simply must wait for another opportunity. I can therefore agree with the view that the stamp tax is obsolete and should be reviewed. The same applies to excise taxes, although these have been considerably revised in recent years. These taxes are certainly not efficient as is pointed out in the report of the Chamber of Commerce. I am certain that these issues will come up for revision when further room for tax cuts is created.

I also endorse the view of the Chamber of Commerce that domestic investors should keep their investments in domestic rather than foreign holding companies. We can not afford to lose powerful companies abroad for tax reasons. It is important that we create a level playing field for domestic as well as foreign companies and seek to improve our competitive position and attract foreign companies to an increasing extent, thus creating exciting and well-paid jobs. With this in mind, I think it appropriate that we carefully consider the taxation of dividends and profits of foreign companies that establish subsidiaries in Iceland.

I think this is a very important point, not only for us in the political arena with a mandate from the nation to create a legal environment and conditions for sound business. I think it is also important for you, the leaders of business in this country, to establish greater transparency in the market and eliminate suspicion when foreign holding companies proliferate, and the shareholding in the average, every-day company reminds one of an overgrown genealogy tree in the Book of Icelanders compiled by Kári Stefánsson.

The reforms of recent years have led to a very sound economy. Economic growth is higher, unemployment lower, household purchasing power has increased more than can be seen elsewhere, by 40 per cent since 1995, and is forecast to increase by 55 per cent by the end of this term of office. Treasury finances have also been sounder than in many other countries which has resulted in a sharp decline in Treasury debt. Although inflation has been increasing recently, this is mainly the result of rising real property and oil prices. The strong exchange rate reduces inflation pressures, and there is every prospect that the inflation assumptions underlying the wage agreements will hold. The main task of economic policy in the medium term is to ensure that the power-related investments currently underway will not upset the present stability of the economy.

The passage of the 2005 fiscal budget with a 10 billion surplus reflects the determination of the Government to pursue a tight economic policy. At present, there are signs that economic growth will exceed the rate that was assumed in the budget which will render a higher fiscal surplus than projected in the budget. In this connection it should be noted that the prospective fiscal measures that already have been announced, along with a tighter monetary policy, should be adequate to ensure continued economic stability over the next several years.

A responsible and sound economic management along with a strong fiscal stance are key elements which make it possible to cut taxes without endangering the economic balance. The emphasis of the Government, as reflected in the fiscal budget and its medium-term fiscal projection, is on restraint in public investment. This policy is well in concert with recommendations of domestic as well as foreign economic experts, such as from the IMF and the OECD, both of which have recommended such measures in order to mitigate the expansive impact of power-related construction. We will, on the other hand, continue to allocate funds for extensive social services in the area of health, welfare and education.

There are those who have maintained that the timing of the tax cuts could increase demand pressures and inflation at the same time as power-related investment is peaking. They point out that the current account deficit is sizeable and that the tax cuts will exacerbate it further. This is a fundamental misunderstanding of the state of the economy and the impact of power-related investments. Most forecasts predict that the current account deficit will shrink sharply when these investments are completed. It is not a coincidence that the bulk of the tax cuts will take place in 2007 when the power-related investments will mostly be completed. This will prevent a contraction in the economy at that time and ensure that household purchasing power can continue to increase. It should also be pointed out in this connection that these measures have been announced well in advance, thus creating greater certainty regarding economic developments and stability. All economists are in agreement on this point.

I think it is important to point out that we are facing an unusual period in Icelandic economic history. We have embarked upon the largest investment project in our history at the same time as there is rapid progress in other areas of the economy. As we all know, the Icelandic economy is very small and these circumstances do therefore pose certain problems of economic management. This notwithstanding, the body of domestic and foreign economic experts are in broad agreement that there is no danger that the economy will be badly upset. To be sure, the resilience of the economy as well as the inflation limits of the Central Bank will be put to the test. I believe however that the economy will pass this test and reap the results when production commences and revenue begins to come in.

The strengthening of the exchange rate has been an inevitable corollary of these investments. The stronger currency has had a favourable impact on price developments in the short run since import prices have declined, whereas difficulties have been created for the export and import-competing sectors, in addition to the adverse impact upon the current account. It is however difficult to prevent this from happening due to the large inflow of capital. This is in part offset by the reforms of the economy which have strengthened business competitiveness and made it possible for companies to live with a stronger exchange rate than before. The increased efficiency and rising productivity in recent years have had a similar effect.

Ladies and gentlemen:

Privatisation and the sale of shares in government-owned enterprises that operate in a competitive environment have been one of the main issues of economic policy. By my count, fourteen sales of shares in government enterprises have taken place in the period 1999-2004. The proceeds from these sales total close to 55 billion krónur which have been used to reduce government debt and for other useful projects.

I believe that privatisation has proceeded smoothly in recent years and contributed to increased competition and efficiency in the economy, for the benefit of consumers. The commercial banks are a good example. Would anyone believe that the banks would have flourished under government auspices, bringing declining interest rates and service charges and going for a strong expansion abroad? I don’t think so, even if I have strong confidence in myself as well as in other politicians! The proof in the pudding is that this kind of business is better off in the hands of the private sector.

Preparations are underway for the privatisation of Iceland Telecom. Market conditions are favourable at present and interest amongst investors is considerable, since Iceland Telecom is a well-run company, one of the best in its sector. The sale of Iceland Telecom is going to be the largest privatisation in Icelandic history. It is therefore very important that this will be a success.

There are those, however, who wish to cloud this transaction with suspicion. The content of that debate is already well-known and perhaps understandable. Old acquaintances have reappeared. Those on the extreme left wish to keep the company in government hands and make it compete with private companies that have ventured into the telecom market. The majority recognises that the government has no business any more in running such a competitive enterprise but demand that the basic telephone grid be separated from the rest of Telecom’s operations.

The debate on the separation of the basic grid from the rest is not new. We had that debate more than three years ago when the sale of the company was last attempted. At that time, the Althingi authorised the sale of the undivided company. This is the political mandate, unchanged, and the matter is going forward on that basis. There are important reasons for the decision to sell Iceland Telecom in one piece.

Let us consider several points.

First, we are not inventing the wheel. Most governments in Europe have privatised their telecom companies. Nowhere has the basic grid been separated from the rest.

Second, the separation of the basic grid would create uncertainty regarding the sale of the company and reduce the value of Iceland Telecom.

Third, the operators of the basic grid must constantly react to ongoing developments and the demands of the consumer. Who would be most likely to fulfil such demands, a basic grid in public ownership or a grid owned by a service company that must rely on providing the consumer with the service that it demands? The answer is very clear in my mind.

Fourth, our law environment here, as well as elsewhere in Europe, assumes that basic grids are operated on a competitive basis. Those who are comparing the new environment in the electricity sector, which according to EU legislation expects a monopoly in distribution, to the operation of the basic grid in the telecom business completely overlook this important point. The basic grid of Iceland Telecom is already in competition with the communications grid of other telecom companies. It suffices to name Reykjavík Energy, Og Vodafone and the Fjarska Company. Should the state continue operating a telecom grid? Hardly.

Fifth and last – and this is a particularly important point - the legal framework should ensure that competitors of Iceland Telecom will have access to the basic grid at the same price as paid by Iceland Telecom. Icelandic legislation is in concert with EU legislation in this respect. The law places stringent demands upon market-dominant companies in the telecom market and gives strict instructions as to the access of other telecom companies to the basic grid of such a company. The law is enforced through the supervision of the Competition Authority and the Post and Telecommunications Agency, both of which have enforcement powers if needed.

The purpose of the Government in selling its share in Iceland Telecom is clear: to increase competition in the telecom market still further and thereby improve the lot of the consumer. An effective supervision is an absolute prerequisite for success in this area. If further enforcement powers are needed in order to eliminate suspicion towards a market-dominant company that operates a basic grid, I would think that this matter should be reviewed in particular.

I wish to emphasise that although the Government intends to privatise Iceland Telecom, it will still be the obligation of the public authorities to do their utmost to ensure the necessary telecom service in areas where private companies feel unable to operate. It would be reasonable to use a part of the privatisation proceeds of Iceland Telecom for this purpose. This is a second important point and I assert that the possibilities of the public authorities to ensure a powerful distribution system will not be diminished by the sale of Iceland Telecom but it will strengthen the system significantly.

Ladies and gentlemen.

The annual meeting of the Chamber of Commerce has on its agenda a discussion of the turning point at which the Icelandic economy now stands. Iceland joined the European Economic Area ten years ago, a greater turning point than now. It may truly be said that this was the cornerstone for the modernisation of the Icelandic economy.

There has been a general consensus with respect to the EEA Agreement, although there were many that criticised it at the time of its inception. This discussion was reawakened due to the recent remarks of Professor Ragnar Árnason that Iceland could perhaps have been better off outside the EEA.

Such an assertion has not been heard for a long time and deserves just scrutiny, since all discussion is for the good and opinions may be divided on such an important matter. The main point is to focus on how we can ensure our future interests in Europe and other key markets and how we are going to do that. I need not elaborate to those attending this gathering what interests are at stake. We must think about how we are going to face the radical changes ahead in the European Union and assess what we should do if the EEA Agreement withers, particularly if Norway decides that it is in its best interest to join the European Union. We should also review the possibilities that may be hidden outside Europe.

I have several times mentioned that the EEA co-operation could change. It is therefore important that we assess our options in a timely manner. Professor Árnason mentioned one of these options, that of completely staying out of the EEA and taking up bilateral negotiations with the European Union. He pointed out that Switzerland had chosen this option and done well outside the EEA. It is true that the Swiss have fared well as usual, but that does not tell the whole story. I have pointed out earlier that Iceland’s position is quite different from that of Switzerland. The European Union is quite different today than when the Swiss entered into negotiations with it, following their rejection of the EEA Agreement in a referendum.

It has also been maintained that the rules imposed by the World Trade Organisation upon member states are sufficient to render agreements such as the EEA Agreement unnecessary. We are of course active participants in the WTO, and I am certain that it is apparent to everyone present here how important increased freedom in international trade is for Iceland. In spite of the WTO, there are still many states in the world that are forming free trade areas of various sorts. The WTO framework is not yet adequate for its member states.

It is apparent that most states, large and small, have seen an advantage in agreements with those states with which they do most business. Iceland is no exception. Those agreements differ in extent. Some only cover trade, whereas an increasing number covers other aspects, although I know of no agreements as far-reaching as the EEA Agreement.

No one knows what they have got until they lose it. In my opinion, we would not be where we are today without membership in the European Economic Area. We should not have chosen to reject the EEA Agreement like the Swiss. Whether the EEA Agreement will survive the test of time remains to be seen. The situation may arise where we must proceed without the benefit of the EEA Agreement which we have had for more than a decade. The option of joining the European Union must also be reviewed and should not be excluded. A committee with representatives and parliamentarians from all parties has tackled this important and timely task. The conclusion will undoubtedly not be unanimous for a number of reasons that can not be detailed here. I have discussed all those issues before. My conclusion is that a strong economy and extensive international trade make Iceland an interesting choice and will strengthen our position in the international arena, regardless of the fate of the EEA Agreement. It is therefore important that we continue along the trail that people like the next speaker after me has blazed in such a splendid manner.

Ladies and gentlemen.

I wish to conclude my remarks by referring to the beginning and the end of the issue under discussion here, that is the spectacular success achieved by our small and energetic nation that does not let its small size discourage it and charges full steam ahead, even in times of adversity. In the same manner as I permit myself to credit us politicians with some of the results achieved, particularly by creating favourable and encouraging conditions, it still is our role to shape the future that provides still further opportunities.

I have a dream that Iceland will become an international financial centre in the future. That this little and precious island will become the home for large and vigorous international companies that choose to have their headquarters here due to the favourable conditions created by the public authorities, due to the human resources of this country and due to the prevailing economic and political stability.

I believe that with a concerted effort we can turn this dream into reality. We should not be sorry to see vigorous companies establish themselves in this country and that more people will be amply paid for their work. It is not a desirable goal that all will in the end suffer the fate of some law of averages. It should much rather be our goal to show that we can create a country where companies enjoy a competitive environment for doing business and grow along with the best in the world, while at the same time placing emphasis on a strong welfare system, based on time-honoured principles of mutual support and good will towards all, where there are funds to provide for better schools, good healthcare and means to provide senior citizens with care without worry in their old age.

All of this is possible and need not be complicated. We must focus on our goals and cotinue on the same path with the same courage as we have displayed up to now. We slashed our company taxes and there are those who were opposed to it. We also cut the tax on individuals and there were certainly those who opposed that. There will undoubtedly be many who will criticise this vision of the future. So let them.

It is also eminently clear that we can undo the successes already achieved in a short period, if we do not play our cards right.

We have come a long way but can go still further. The opportunity is there. It can be seized in order to reach the common goal . Such a goal for the future demands broad vision and courage, both from the business community and the public authorities. I am truly confident that those present here as well as other important representatives of Icelandic business and industry are up to the task. On my part, I shall support all changes necessary on behalf of the Government to make full use of the opportunities for progress that lie ahead for the Icelandic economy.