Globalisation: Realising the opportunities
FIH Erhvervsbank
Globalisation: Realising the opportunities
Mine damer og herrer.
Det er både en ære og en fornöyelse å være her i dag. Og jeg håper dessuten at vi alle vil ha nytte av den utveksling av informasjon og synspunkter som kommer å finne sted. Jeg mener det er naturlig at vi i Norden og i nordisk sammenheng bruker de nordiske språkene og pleier faktisk å legge særlig vekt på det. Men da jeg i dag har en god del ikke-nordiske tilhörere går jeg nå over til engelsk.
Ladies and Gentlemen.
It is an honour and a great pleasure to be with this distinguished audience today and share with you some of my thoughts on the Icelandic economy. As you all know, the relations between Denmark and Iceland go back a very long time. This applies not only to political and economic issues but also to cultural and educational issues. For centuries, Iceland’s exports to Denmark were mainly fish products and to some minor extent agricultural products.
Danish exports to Iceland have been more diverse, ranging from various food products in the early days to highly diversified manufacturing products and technological know-how today.
It is interesting to note that no country buys more Danish products than Iceland, if measured on a per capita basis. This is reflected in the trade accounts showing imports from Denmark accounting for more than 8% of total imports to Iceland. Icelandic exports to Denmark are, however, more moderate, or only half as large in krónur terms. If you add capital flows and direct investment to this the imbalance is even more pronounced since there is a large inflow of direct investment from Iceland to Denmark while investment flows from Denmark to Iceland are much smaller. We would therefore very much welcome more Danish investment in Iceland. In fact, we would be happy to have more investment from all countries.
Danish firms, however, have played a very important role in the build-up within the energy sector in Iceland for more than half a century. I could also add the very important contribution of Danish architects as witnessed by the many graceful and elegant buildings in Iceland, including the former state prison built in the late 18th century where my office, the Prime Minister’s office, is situated in the very heart of Reykjavík.
Let me also mention that for centuries, Icelanders have been coming to Denmark both for work and to study. In fact, even today Denmark hosts the largest number of Icelanders living abroad, some of whom are temporarily living in Denmark while others have taken up a more permanent residence. Many of us present here today, including myself, have indeed lived and studied in Denmark.
This looking into the rear mirror shows that for centuries there has been a special link between Denmark and Iceland. Why is this important? I feel this is important because, as one of our great poets once said: “In order to meet the challenges of the future you have to understand the past.” You should not, however, take this too literally. It is certainly true that close relations between Denmark and Iceland, and for that matter between all the Nordic countries, throughout the years have placed the Nordic countries more in the spotlight of Icelandic investors than other countries.
But there have been other forces at work, both domestically and abroad. Which brings me to the main issue that I wanted to address today, namely: Why are Icelandic investors so prominent on the international scene of late, be it in Denmark, the UK, Sweden, Finland, Norway and many other countries? And where does the money come from, as many outsiders have asked, including many from the Danish press?
These questions are both appropriate and understandable. However, as is often the case, the explanation is not as complicated as you might think. The main explanations for this incredibly strong investment activity of Icelandic businessmen abroad are, on the one hand, the impact of wide-ranging structural measures that have been implemented in Iceland in the past decade or so, and, on the other hand, the highly positive effect of increased globalisation, liberalisation and economic integration on the business environment in Iceland.
These changes have had a catalytic effect on the business community in Iceland and fostered an entrepreneurial spirit that has, among other things, led to the investment in this bank, the FIH bank, and many other firms in Denmark. Furthermore, this has contributed to a rapid rise of asset prices as witnessed by the fact that the Icelandic Stock Exchange index has more than doubled since mid-year 2003. Another factor is the strong financial position of the pension funds in Iceland but their total assets amounted to about close to 1.000 billion krónur at the end of 2004, or 10% more than Iceland’s national income.
This means that there is a lot of capital available for investment purposes both domestically and abroad. All of these factors explain the strong investment activity of Icelanders abroad.
Before discussing theses factors in more detail let me say a few words about the Icelandic economy before all these changes took place. First of all, you have to remember that the economy was to a great extent isolated. Price setting was centralised, ranging from agricultural products and fish prices to prices of various goods and services. Tariffs on trade were also high. Imports and exports were both highly regulated and subject to governmental intervention. Furthermore, the economy was very much a one-product economy as fish and fish products were almost the only export items of any value. As a result, the economy was subject to large fluctuations. Furthermore, the main economic policy tool of the Government was the exchange rate. This was a tool that was time and again used by the Government in order to mitigate the effects of external shocks.
Also, and often as a result of the government intervention by devaluing the exchange rate, the labour market was unstable with strikes further destabilising the economy. Corporate taxes were also very high. In addition, entrepreneurial activity was limited due to other factors, such as a small domestic market and restraints on expansion to foreign markets. Competition between firms was further limited resulting in low quality output and limited production range. Furthermore, the infrastructure of the country was in many ways unsatisfactory.
Ladies and gentlemen.
Fortunately, this was yesterday’s Iceland. It was clear that drastic changes were needed and so, as is very much the Icelandic way, we simply set out to make the changes. Some changes came gradually while others were quickly implemented. As a result, the Icelandic economy has been fundamentally transformed.
Let me first mention that the financial market has now been fully liberalised. This has contributed to a much stronger capital base than earlier which has had a catalytic impact on the business sector by opening up new channels of financing, both domestically and abroad.
The privatisation of the banking sector, which was completed two years ago, has also made the business environment much stronger than before.
The same applies to the privatisation of other state-owned companies. At present, the only remaining large state-owned company is Iceland Telecom. The preparatory work for the privatisation of Iceland Telecom is well underway. Market conditions are favourable at present and interest amongst investors is considerable, since Iceland Telecom is a well-run company. The Privatisation Commission is working on this issue using the counselling of Morgan Stanley of London. 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. I believe that the privatisation process has proceeded smoothly and contributed to increased competition and efficiency in the economy, for the benefit of both consumers and the business sector.
The third reason for the favourable business climate in Iceland is the complete overhaul of the tax system in Iceland. Thus, tax rates have been cut by a large margin. The personal income tax has been lowered from 49% to 38% today and further cuts will be implemented in 2006 and 2007 bringing the tax rate below 35%. The corporate income tax has been cut even more or from 51% to 18%, which is one of the lowest tax rates in Europe. A third major tax reform is that all forms for capital income are now subject to the same tax rate of 10%. Also, net wealth taxes have now been abolished. I would like to stress the importance of these tax reforms for the Icelandic economy, not least the business sector. And I can add that this has not had a negative impact on the fiscal budget; quite the opposite since this has broadened the tax base and raised the tax revenue.
Finally, let me mention two things. First, that we introduced a quota system in the fishing industry which has helped us manage our very important fish resources in a sustainable way. We have also introduced various important structural reforms in the fishing sector that have contributed to a stronger and a more efficient industry. The second is that Iceland has been a member of the European Economic Area which has no doubt speeded up the globalisation process in Iceland and helped us reap the benefits of increased economic integration in Europe.
All these changes have played a major role in transforming the Iceland economy and contributed to create a sound and stable economic situation after decades of instability.
Furthermore, and no less important, is the fact that we have had a very stable political situation.
What does this mean in economic terms? Let me first look at the business sector. In a relatively short time span, the Icelandic economy has evolved from being a primary goods producer, where fish products constituted the bulk of our exports, to a diversified and high-technology production and services economy where new industries and services play an ever bigger role. I am not simply referring to large scale power-intensive industries utilising our valuable energy resources but also to numerous companies in other sectors such as software development, pharmaceutical production and distribution, medical equipment production, biotechnology research and development, expansion of the telecom industry and other high-tech industries. At the same time Icelandic firms have expanded into foreign markets which has furthermore strengthened the foundations of the economy.
Let me just mention a few examples. Icelandic firms have been investing in the banking sector in the Nordic countries, Switzerland and the UK. This bank, the FIH Erhvervsbank, is a good example of this development.
At the same time the Icelandic banks have been setting up subsidiaries in these countries as well as others such as Luxembourg. They have also been doing the same things when it comes to the pharmaceutical sector and telecommunications where the activity has stretched to Eastern Europe and the Balkans and even to Asia. But there have been interesting developments in other sectors as well, for instance in aviation where Icelandair, the biggest airline company in Iceland, holds 10% of Britain’s low-cost Easy-jet and another Icelandic airline company, Avion Group/Atlanta, has been investing in foreign companies. And just a few days ago, a group of Icelandic investors became the second largest owners of Finnair. Finally, let me mention the flourishing investment activity of Icelandic firms in the food market, especially in the UK but also in France. The same applies to other markets such as real estate, clothing, toys and jewellery stores.
It is interesting to view some figures to illustrate these profound changes. Icelandic direct investment abroad has increased since 1998 from 24 billion Icelandic krónur to 120 billion in 2003, amounting to 15% of the national income. 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.
Needless to say, this development has also contributed to a sound macroeconomic situation in Iceland. Economic growth has been very strong and is at present more than 5%. Unemployment is less than 3% and falling; in fact, we have had to resort to foreign labour to meet the demand for labour. Household purchasing power has also increased sharply, up by 40% since 1995 and forecast to increase by another 10% to the end of 2007. The fiscal situation has also been strong which has resulted in a sharp decline in public debt which is among the lowest among the OECD countries. Inflation has also been moderate between 2-3% most of the period. The recent hike is mainly due to sharply rising housing prices and to some extent also higher oil prices.
The favourable development of the Icelandic economy is recognised by international organisations such as the OECD and the IMF as well as the major rating companies. A recent survey of the IMD Business School in Switzerland places Iceland in fifth place in the world in terms of competitiveness. By comparison, in 1995 we were in 25th place. No less interesting is the fact that we now top 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 efficiency 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.
Ladies and Gentlemen.
It is very important to understand that the changes that have taken place in Iceland during the last decade or so have not only led to fundamental changes in the Icelandic economy but also served to compensate for the small domestic market in Iceland.
The liberalisation of the capital market and the impact of increased globalisation and economic integration has made it possible for Icelandic businessmen to reach out and invest abroad which was simply not possible before.
Our main task over the past decade has been to build a strong, modern society that can take on the future with a powerful market economy, a strong business climate, an ambitious cultural and educational environment along with a resilient social and welfare system in the spirit of a liberal democratic social policy that preserves our national heritage.
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. Let me conclude by saying that I think we have done quite well so far which proves that you don’t have to be big to succeed, you only have to do the right things.