Annual meeting of the Icelandic Chamber of Commerce

Address of Prime Minister Halldór Ásgrímsson
at the annual meeting of the
Icelandic Chamber of Commerce,
February 8th 2006

Ladies and gentlemen.

Let me begin by thanking the Chamber of Commerce for convening this annual meeting. This meeting has become a significant annual event in our society in recent years, particularly because the topics of discussion have been challenging on each occasion. This time, the question is: What kind of Iceland will we be expecting in 2015? We have a saying in Iceland, when the question is challenging, the answers are generally scant. In this instance, this is not the case.

Policymaking has become easier

The annual report of the Chamber of Commerce that we have at hand today presents a fairly clear picture of the Icelandic business environment as seen by the business community and ideas as to how Icelandic society may be expected to evolve until 2015. Allow me to congratulate the Chamber of Commerce for their contribution to a constructive discourse on the future of our country. In broad terms, I am able to agree with the main points set forth in the report.

However, I cannot agree to the introductory remarks in the report, where it is asserted that ten years is a long time for policymaking. This may have applied to Iceland 15 to 20 years ago when the economy was unstable and all rational decisions had to apply to the short term. Policy planning for a period of a few years was out of the question. All planning was from one day to the next, and this applied to businessmen, households as well as to us politicians.

All of this has changed by now. The economic environment has become stable and the same applies to the political environment. The fundamental political differences are not the same as before. Twenty years ago, there was no consensus on the role of fiscal finances in the economy. There was no agreement whether it mattered at all that the Treasury was run at a surplus or a deficit. These views have changed very much since then, and today there are not many parliamentarians who think that fiscal finances are unimportant in overall economic policy.

Twenty years ago, there was also much disagreement on the fundamental changes in the fishing industry which were key elements in the development of the economy. This has also changed. Ten years ago there were disagreements on the privatisation of the banks and today there are doubts regarding the recent changes in the communications and electricity sectors, to name an example. On the other hand, all timing of plans for the future is subject to uncertainty, and the longer the time frame, the greater the uncertainty. Fortunately, economic developments often turn out better than projections indicated.

Who would for instance have believed in 1995 that household purchasing power would increase by 60 per cent until 2005? Or that GDP would increase by more than 50 per cent? Not even we who were in government at that time would have dared to present such an optimistic forecast. We for example in my party were accused of unrealistic optimism when we presented a far more cautious projection.

Iceland has changed radically

Through a concerted effort, it has been made possible to radically modernise the Icelandic economy and eliminate the obstacles that previously hampered its progress. The privatisation of the state’s stake in enterprises engaged in competitive businesses was a big step in the direction of increased liberalisation and diversification of the economy. Over the past 14 years, 44 such privatisation transactions have been completed for a total of 141 billion krónur at current prices. Funds that previously were tied up in government enterprises have been used to repay debt and for various other social purposes. The latest sale was of Iceland Telecom for close to 67 billion. It is quite clear that the sale of the banks and their subsequent growth have been at the forefront of Iceland’s expansion in foreign markets.

We have taken a number of other important steps. Iceland’s accession to the European Economic Area has turned out to be quite beneficial for Icelandic society. The same applies to the tax cuts, both for individuals as well as for companies. Although tax rates have been sharply cut, government tax revenue has increased significantly due to the stimulus that the tax cuts have imparted upon the economy as a whole.

The tremendous growth of Icelandic companies abroad must be viewed in this light. Icelandic companies in the food sector, pharmaceuticals, aviation and tourism, fish production, communications, design and retailing have expanded abroad and now employ thousands of staff around the world. A recent survey by the local business newspaper shows that about 104 thousand persons in fourteen countries go to work everyday in companies owned by Icelanders. This is about as many as those employed in the capital area here at home. The earnings of Icelandic companies abroad and their investments abroad are about the same as the sum total of the government’s fiscal budget. This goes to show you that the world has changed. This is Iceland today.

And what is my vision of Iceland in the year 2015?

Production and services are not opposites

I think it is important that we continue on the path of development that we have been on in the past decade. First and foremost, we must ensure a continued economic stability, since it is necessary for further progress. We must continue to develop the service economy and the diversity of high-tech sectors. I believe that these sectors will be the growth sectors of the future and must therefore be encouraged.

This does not mean that the build-up of traditional industries will stagnate, although their relative importance will diminish. We are bound to increase the production of foods and manufactured products that can be efficiently produced in this country. The resources of the ocean will continue to play an important role in our economy. There are many that currently are viewing the possibility of increasing production of certain species such and cod and halibut.

The world is facing an energy shortage and the value of our energy resources is therefore high. These open up a number of possibilities, not only the production of aluminium. The large ongoing power-intensive investments under way at Reyðarfjörður and Grundartangi are the largest in the history of the country. Other projects are presently being contemplated but it is too early to assert whether they will be realised. These are opportunities that must be used to ensure continued economic growth. If agreement can be reached on the price of energy and other related issues, these projects must be distributed so as to have as positive an effect on other sectors of the economy as well as the economy as a whole.

As to the profitability of power projects, it should be kept in mind that the Búrfell hydro-station is almost fully amortised today after 40 years of operation and is in better shape now than at the beginning. The owners of Landsvirkjun have invested more than 1 billion krónur at current prices, whereas the company’s equity exceeds 50 billion. This in itself tells its own story of the profitability of power project investment in this country.

The production and the service sectors must not be viewed as being mutually exclusive. Many of the strongest high-tech companies in the country started by servicing production companies such as in fisheries. We must ensure that the operating conditions of all of these sectors will be kept stable and as favourable as possible in each instance. In this connection, it must be borne in mind that the present strong exchange rate is only to a little extent attributable to power-related investments. The sharp increase in bank credit and the high rate of bond issues by foreigners in Icelandic currency have a substantial influence on the exchange rate.

Globalisation presents the best opportunity

Icelandic companies will undoubtedly continue their penetration into international markets. These represent their opportunities for growth. The world is gradually turning into one marketplace, and the international community is working on the dismantling of trade impediments. I expect that Icelandic companies will increasingly turn their attention to the growing markets of Eastern Europe and Asia, particularly China and India. Economic growth in these countries has been phenomenal. The Indian middle class has by now acquired a considerable purchasing power, grown rapidly to some 300 million persons, about as many as the entire US population. The establishment of an Icelandic embassy in India is a part of the government’s efforts to support Icelandic companies and individuals that intend to forge business and investment links in this area.

I have also been looking for ways to attract foreign investment to Iceland. For this purpose, I appointed a committee to look into the necessary prerequisites for attracting international banking and finance to Iceland and explore Iceland’s competitive stand in this respect. The committee is chaired by Sigurður Einarsson, the chairman of the board of KB Bank. The committee is charged with the task of recommending amendments in rules and regulations regarding financial enterprises and markets, taxation and company operations in order to attract international finance to Iceland without relaxing the rules of normal supervision.

I am of the opinion that specialised services to Icelandic so-called multinational companies and financial services to international companies that would wish to lodge their operations here could become amongst the main growth industries of the future, if we provide the appropriate environment. Such a development would tend to reduce the brain drain out of the country, create new, well-paid jobs and at the same time create an attractive community of talented people in Iceland. I see it as the task of the government in cooperation with business to work on this challenging project of bringing financial services in this country up to the same level as prevails in Britain, the Netherlands, Ireland, Luxembourg and Switzerland.

I envisage that by 2015 Iceland could have become an international financial centre. In my opinion, all the basic conditions are at hand. The geographical situation of the country is suitable, linking important markets in east and west. The level of education is high, and regulations on banking and finance are in line with European regulations and generally in good shape. The same applies to all the basic social infrastructure of the country.

In order for this vision of the future to become reality, a number of improvements in selected sectors must be made. Although the tax environment is rather favourable for business, there are still a number of adjustments to be made for domestic companies, such as abolishing the stamp tax and excise taxes that distort the competitive position of Icelandic companies vis-à-vis their foreign competitors. Tax incentives must also be developed to attract foreign investors in line with what is being done in many neighbouring countries. Telecommunications with other countries must also be improved. Finally, the views of politicians and civil servants must change. Ministries and their agencies must receive clear orders that the business community should be promptly serviced at the same time as efficient supervision is being improved.

I think it is also time to review earlier decisions on limits to foreign investment in certain sectors, such as fisheries. Whereas there were good reasons earlier for imposing such limits, today we are in an international commerce environment where capital, labour and investment flow freely across borders. Such restrictions could impede our efforts to attract foreign investment to Iceland.

Iceland and Europe

We can not look ahead to the year 2015 without contemplating the best way for ensuring Iceland’s position in the continuing process of globalisation. International trade will be freer and so will investment flows. The report of the Chamber of Commerce places strong emphasis on globalisation and the possibilities it creates. However, it does not discuss whether the European Economic Agreement is sufficient in this environment.

The principal question is whether we will continue with our independent currency or whether we will join the European Union as full members. We must recognise that fluctuations in the króna exchange rate represent a disturbance, and the possibilities for small currencies in a free financial market are questionable.

I predict that we will be full members of the European Union by 2015. The main determinant in the debate on this topic in the near future is the size and the future of the European Monetary Union. Decisions by Denmark, Sweden and the United Kingdom will be quite influential. At present, there are no political prerequisites at hand for a decision in this respect. The debate has not matured to that point. One of the conditions is that the business community involves itself in this issue to a greater extent. I have always been concerned about the lack of discussion in the business community on European issues. It has fallen to the labour unions to carry the discussion on. Why, I know not.

It seems clear to me, however, that this debate can not be postponed much longer, neither in the business community nor in political circles. In this case, as in many other major issues, we know what is coming even if it is not going to be popular. The fear of rocking the boat is too great. When there is no urgency for a quick decision and things are going well, it is generally easier to postpone the matter.

Education and innovation

I want to emphasise the need for education for the continued development of the economy and the welfare of the people. The education system must develop in concert with the demands of society and the economy. Icelandic universities must be flexible and attract good scientists and gifted students from all over the world. Our aim must be that education at all levels will be one of the best in the world. Schools and scientific research must increasingly operate in a competitive environment where emphasis is placed on creative thinking, language skills, physical sciences and ethics. The education system must foster innovation and personal initiative and encourage gifted students. I want to see a vastly increased number of students coming into technical and physical studies.

My vision is that the increased emphasis that the government, under the auspices of the Science Council, has placed on education and scientific research will by the year 2015 yield a sharply increased proportion of high-tech sectors in Iceland’s export earnings.

The Government decided to allocate 2.5 billion krónur for industrial innovation over the next several years. Of this amount, 1.5 billion will go to a fund where pension funds, financial enterprises and others would also contribute substantial amounts.

I wish to encourage business leaders to respond quickly and generously so that the fund’s capital could reach 6-10 billion krónur of which the state would hold, say, 20-25 per cent of the equity. The business community could thereby emphasise its own innovation opportunities and direct necessary innovation projects while at the same time it could encourage start-up companies with the required risk capital.

An enquiry has revealed that it may be necessary to amend certain legislation in order for such a fund to be established and operate in this country. The Government is prepared to support such an effort.

The role of the state

Let me now come to the role of the government as well as the extent of the state and its administration. How do we envision these issues in 2015?

I have certain quite determined opinions on many of the issues discussed in the report of the Chamber of Commerce. In actual fact, considerable work is under way in preparing for a reorganisation in this area.

The Government has launched a project under the name “A simpler Iceland”. The project is placing the entire public regulatory regime under review as well as the treatment that business and the general public receive when dealing with public agencies. This measure should improve the competitive position of Icelandic business and the quality of life of the public.

Although the Icelandic nation is small and the public administration is simple in many respects, work methods in processing and passing legislation must be improved. The cost to business of satisfying the regulatory regime has not been assessed, but to judge by foreign experience, it is considerable. We therefore have considerable room for improvement in order to increase productivity.

My vision is that by 2015 no new legislation or regulation will come into force without first assessing the cost of business from their passage.

Work is now under way, on the basis of the Government’s information society project, to establish an Internet service that will play a key role in the transmission of information and provide public administration by electronic means. The aim is to make it easier for individuals and businesses to have access to public services, improve services and lower their cost.

By 2015, I expect that the entire country will be able to communicate with the public services over the Internet where all public services will be made available. At the same time, care must be taken that the state will not become a remote and inhuman technical entity. At the same time as services to the public can be taken care of over the Internet, the role of civil servants will increasingly become similar to service personnel in banks that assist customers in solving their problems.

An older Iceland

So far, I have confined my remarks to my future vision of the development of the economy and business on one hand and the reform of state operations and public services on the other. Let me now say a few words in closing on the demographic changes that will take place over the next several years and decades and their impact on our national way of life.

The age structure of Icelandic society has changed rapidly in recent decades. Births have declined at the same time as the average age has increased. There is every indication that this trend is continuing, both here and elsewhere. It is therefore to be expected that the proportion of persons at a pension-qualifying age will double over the next several decades.

In contrast to most European countries, Icelanders were prudent enough to make it obligatory three decades ago to belong to a pension fund based on financial asset accumulation. At the present time, the first Icelanders that have contributed to a pension fund all their lives are now qualifying for a pension. This will mean that the payment of old-age pensions by the social security sector will gradually recede in line with the increasing role of the pension funds. The social security system will thus no longer play the role of providing pensions for all Icelanders but instead concentrate on the role of being a safety net for those that can no longer work throughout their working age. This will create more room for the social security service to better meet the needs of such persons.

At the same time as persons of pension-qualifying age will double in number, the number of persons in the over-eighty age group will also double. A major effort will therefore be needed to provide care for these people, particularly by enabling them to live at home as long as possible. This will call for an increasing coordination of home-based nursing and other such services which in turn will require substantial funds and organisation where I think that private enterprise can play a role.

But it goes without saying that not all persons at this age are able to care for themselves. The capacity of nursing homes must therefore be increased. The Government has already done much in this important area but there is much more that needs to be done and further measures are under preparation.

There is one more issue in this respect that I wish to mention. In contemporary developed societies such as ours there is a need for flexibility in the labour market where people can shorten their working hours or take an early or part-time pension. Older people possess valuable experience that gets lost upon retirement. Most older people enjoy their work, and their standard of life diminishes upon retirement. We must find new ways to provide a more flexible retirement and increase the choice of the people.

There are great opportunities ahead

I have participated in all the major changes in Icelandic society in recent decades. They have most often met with bitter criticism, and public polls have reflected stiff opposition. Change is still necessary, and I look forward to participate with you and others in dealing with it. The recent successes should provide encouragement, but it is always more difficult to change in times of prosperity. Prosperity dulls and it is easy to fall behind other nations. That should not happen.

I look forward to the future with optimism. We have challenging possibilities ahead in strengthening our society to everyone’s satisfaction. This calls for courage, both from us politicians as well as from businesses and the general public. The opportunities are unlimited, and I think that we Icelanders have shown and proven in recent years that we possess a spirit of enterprise and the ability to innovate. I am certain that these qualities will bring us a bright future and continued prosperity, not only until 2015 but for the indefinite future.