Iceland, a small island nation, situated in the Northern Atlantic went from being the 4th richest nation during its economic rise to occupying the center stage role in the financial controversy of 2008. And now, it has become infamous among the economists as an example of “what countries shouldn’t do”.
The most astonishing part of its journey is that until the 1990’s, the country had very little economic growth, with fishing being its primary source of employment. In 1991, there was a significant shift in the power tectonics of the country and David Oddsson was elected as the new Prime Minister. His ascent to the country’s Prime Ministership changed the fate of the country forever. His Government had inherited an economy built on huge debts, lacking the means of paying them back. This was a result of immense accumulation of unproductive investments made by the earlier governments and to worsen the situation further, the nation’s inflation rate was as high as 20% (which was unbelievably high when compared to other western countries). The stocks of fish, then a major source of income for the economy, began to deplete at an increasing rate. Thus, it called for a change and people voted for it. And oh, what a change did their votes bring!
The new Government rolled out extensive liberalisation policies: the state-owned enterprises were privatised, taxes were slashed and that paved the way for the rise of the private sector in the country. Fortunately, the economy started to revive gradually, and inflation was brought under control. Thus, began an era of growth and it exploded in the 2000’s. Most significant of all was the deregulation of the finance industry which helped the banks to expand and grow at an unbridled speed. They started holding and managing billions of dollars. An exponential progression from the past. Shockingly, the banks dealt with an enormous amount of money, which was almost ten times the country’s GDP. By early 2007, the country had successfully emerged as the 4th richest nation in the world, and Reykjavik, the nation’s capital, had become a financial power hub.
Thus, the rise curve was steep and the short term growth misled people to think that they were invincible. However, as swift the rise to power is, the harder is the fall from grace.
When everything was going well for the country, the financial crisis of 2008, which affected almost every west-world country, took a massive toll on Iceland’s economy. As the global recession started, the value of krona, the currency of Iceland, began to plummet and their banks failed the country. Because the banks dealt in enormous volume of money, it proved hard for the government to bail out the big players of the market. Amidst the chaos and tragedy, the country managed to find its way out of the recession far earlier than many of its partners-in-crime.
As we know, some countries grow off manufacturing and the others off services. Likewise, Iceland decided to grow off the latter. They captured a part of the already gigantic worldwide tourism industry and built up a feasible strategy for much-needed economic development. The country leveraged tourism effectively to bounce back from the worst financial crisis that the world has witnessed since the Great Depression of 1929.
Iceland has a serene and pure natural beauty with plentiful waterfalls, lakes, glaciers, geysers: pretty much everything that could attract tourists from all over the world. It has one of the most spectacular natural environments in the world, the country is only a few flight hours away from the richest countries like the UK, the US and others. Accessibility and affordability are two major aspects that tourists look for when travelling. Iceland has been very focused on addressing these two primary concerns to boost its tourism sector. The issue of affordability needed no attention as the fall in the value of krona made it cheaper for tourists to travel and avail various services in the country. To resolve the issue of accessibility, Iceland had Iceland Air, the national carrier, which by providing attractive fares to the flyers had grown in the trans-Atlantic area, and acted as a boon to the country. This well-reputed airline started more service routes and expanded to different parts of the world. A second airline based in Iceland, Wow Air, was soon launched. The two airlines carried more than half the visitors every year.
During the Crisis, word about Iceland spread across the world and grabbed the interest and attention of tourists. This has helped the Nordic nation tremendously in attracting foreign tourists. In one way, the event that crashed the economy had paved the path for its revival. By 2010, the tourism industry was growing by an enormous 20% per annum. As the industry grew, so did the hospitality sector. New hotels began to spring up. Car rentals expanded to carry people all across the pristine country.
Eventually, Iceland’s real GDP started to grow at almost 7.5% by 2016. Tourism contributed about 10% to the GDP and 30% of the total export revenue of the country. Another central reason for the sudden boom in the tourism sector was immigration. The number of immigrants steadily rose into the country because of the labour shortage and economic boom in the country. They now make up for 32% of the total workforce employed in the tourism industry.
However, this is one side of the coin, let’s now look at the other side. The tourism industry is highly seasonal and therefore, can’t be expected to generate revenue and employment throughout the year. This largely curtails the period of growth making it difficult for those employed in the sector to find stable employment. Tourism is an industry where most of the people are low-wage workers with limited scope of growth. Tourism also hasn’t exactly been the go-to industry for those white-collared employees who were out of jobs after the crisis. Then there are the negative effects on the environment due to the excessive usage. As heavy infrastructure is needed to accommodate the exponential growth in tourist visits, they come at the expense of damaging the environment. It has reached a level that excess tourism has become a serious concern for the country. The tourism industry has its dark sides, such as illegal employment, paying workers below the minimum wage and human trafficking.
However, this boom did not last for long. The tourism sector began to experience downfall since the third quarter of 2018. Since last December there has been a substantial fall in the number of tourists in the country. Since December 2018, Iceland started reporting negatives in the growth rate of incoming tourists. In April 2019, this had reached a level of negative 26%. There are many reasons for this sharp and sudden downfall. One of the first reasons is the collapse of Wow Air. Albeit being the second-largest airline of the nation, it had collapsed as it never saw profits and ran out of financials. Consequently, the growth estimates for 2019 were revised to -0.4% from the earlier 1.8%. Unemployment was predicted to reach 3.9% as against the earlier 3.1%. The collapse also meant that the thousands of tourists that were supposed to come were suddenly non-existent. Apart from Wow Air’s collapse, the fall of tourism can also be attributed to Iceland becoming expensive as a result of the appreciating krona owing to increased GDP growth. If one were to make an intelligent guess, it can also be is simply that Iceland isn’t appealing to people anymore.
As it was noted earlier, the tourism boon had devastating effects on the environment. On the other hand, the country did not have the structural capacity to support the huge influx of tourists. Optimistically speaking, Iceland can utilise this period to rebuild itself to expand infrastructure and to restore the lost natural beauty. It can also utilise this time to make plans for revitalising the sector and transforming it into one that can sustain a huge number of tourists and think of a solution to provide year-long stable income stream to the workers involved in this business.
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