The Economy and Infrastructure of Iceland (Research Paper Sample)

The Economic and Infrastructure of Iceland
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Introduction
Iceland current position
With the dawn of the covid -19 pandemic in late 2019, the global economic platform is left in extreme shock with literally all Nations going on lockdown and restricting movement in and out of their respective borders, with the entire global economy on its knees, the question that remains is how will we get back to the standard economic point as before or even better? In the recent past, we have seen the spread of the virus fall and a semblance of normalcy settling in, with each country trying to stabilize its economy. This paper intends to examine the pre and post covid economic conditions in Iceland and the current economic status.
Before the pandemic, Iceland's economy was stable with a steady gross domestic product of 26.22 B USD, and a growth rate of 2.7%, as of 2018. the high GDP is attributed to the high level of tourism in the country. Iceland has been extremely dependent on tourism since the 2007 -2010 financial crisis. As of 2018- 2019, tourism held over 33% of the total GDP (Walters, 2016). The service sector took the lion's share in the GDP, with 74.6% of the entire GDP, agriculture took the least percentage of share with 5.8%, the industrial sector had 19.7%. As per the 2018 Economic outlook (Walters, 2018)
After the fall of the pandemic, several businesses in Iceland came to a quick end, with the government installing lockdown as a precaution to the spread of the virus. In addition, several external trade links were severed, causing closer international trade; this also meant a serious disruption on tourism which holds a key position in national income (P & Howden, D. 2011) The government is trying to diversify the economy to improve the rate of income from alternative sources. In addition to this, the government is trying to bring structural reforms to boost productivity to improve the economy as it strives to recover. (Iceland, 2021)
According to Alvaro Pereira, director of country studies, Iceland was hit hard by the pandemic, and the economic impact was very adverse. Regardless of this, Alvaro argues that the economy is well on its way to a full recovery; this he says is due to the economic policy actions put in place to catapult the economy to better heights of production (Iceland, 2021) In addition, the minister of finance and economic affairs, Mr. Bjarni Benediktsson, says that moving forward from the pandemic, the economy will receive reforms that intend to unlock the full economic potential regarding innovation and creativity facilitate production (Iceland, 2021)
The economic outlook report indicated that the GDP growth rate dropped from 5.6% to 2.8% in 2020-21 (Iceland, 2021) This fall was due to the pandemic, the hotel sector, and the tourism service was hit the most since flights were canceled indefinitely and domestic trips stopped. with the coming months, the government intends to cushion the tourism sector and also fund areas such as research and Development, this helps enhance the creativity and innovation for growth. The government also intends to aid local businesses by offering subsidies; removing any barriers to capital formation will also boost the recovery process (Iceland, 2021)
Previous economic and infrastructure development.
Before the pandemic, Iceland economic growth rate was low, and growth was projected to fall from 2.8% growth rate to a 2.6% growth rate; the low rate was attributed to the weak foreign exchange where Iceland was importing more than it was exporting, there was also a weak businesses investment both from international investors and local one, furthermore, there was low household consumption (Boulhol et al. 2008) The government in 2018 was more focused on long-term growth and prioritized infrastructure development as opposed to consumer goods production; this meant that riads, hospitals, schools were the main government object. According to the OECD economic outlook, this decision will offset business investment growth as much government funding will be concentrated on long-term projects.
The OECD reported that the Iceland economy could suffer a great deal of imbalance should there be an external shock; this is so given that Iceland is a small country with a relatively small economy that is volatile and vulnerable to any slight shock. Furthermore, the eminent volcanic eruption would also cause severe infrastructural damage should the mountain erupt, Leading to trade disruption in and beyond Iceland (Boulhol et al. 2008) The OECD reported the high and increasing inflation rate resulting from the unfavorable balance of trade, which implies that the price of local goods will also rise.
The Central Bank also raised interest rates to curb inflation. The government has also reduced current expenditure to try and anchor down the inflation rate and concentrate on fund only long-term projects. According to the outlook report, value-added taxes will also increase; the fiscal policy allows for extensive government expenditure on infrastructure, boosting economic growth (Boulhol et al, 2008) Income tax will be reduced for low-income individuals; this government move reduces income inequality. By reducing the income tax, low-income earners will get more income, consequently increasing their purchasing power (P, & Howden, D. 2011)
The 2007 – 2008 financial crisis was one of the greatest ever experienced globally. According to a report done by the IMF, Iceland's banking system was highly dependent on external borrowing. Consequently, the banking system had become huge compared to the small economy. In addition, the bank sector owned several assets that were nearly ten times the size of the Iceland economy. The crisis came up due to the foreign market collapsing; the effect was heavy foreign debt on both the household and firms in the economy. Inflation rates were Soo high, which only exacerbated the bad economic conditions (International Monetary Fund, 2008)
With the Iceland economy in shambles and quickly falling external aid was urgently required, IMF was called in and, in a few days, they came up with a policy that would see the Iceland economy rise again, the help that came with the international monetary fund, was one of the largest in regards to the size of the economy (International Monetary Fund, 2008) The featured policy was meant to gain back confidence in the Icelandic economy. A key policy used to restore the economy was the capital control policy to prevent a rise in the interest rate that would otherwise prevent economic growth (International Monetary Fund, 2008)
Factors that adopted to the current economy.
As of 2018, Iceland was well ahead in economic Development and realizing a self-sufficient – economy. So far, the enormous public debt has been reduced to a sustainable level from a 92% of the total GDP to only 35% (International Monetary Fund, 2008) The extreme measure of capital control imposed to control inflation and regulate interest rates was slowly uplifted as the financial crisis ended. In addition to these positive growths, the total Iceland assets to liability ratio were now favorable, with more assets than a liability in the foreign National. The reserve was also stable in regards to foreign exchange (International Monetary Fund, 2008)
The key factor that led to the Icelandic economy adapting to new changes was the banking system. The system was too large for such an economy to handle. To add to this, banks had several debts owed to external debtors (Boulhol et al, 2008) another factor that led to adopting a new economy was the fall in the currency value. Consequently, this led to a severe imbalance in the trade market, forcing the country to virtually stop currency transactions (Boulhol et al., 2008) The closer of the trade market led to a fall in the market capitalization, which meant market shares value fell. The Gross Domestic Product also fell by10%. Sending the entire economy into an economic depression.
The recovery process for Iceland was a combination of several policies and financial aid from the IMF. Capital formation restrictions were put in place to facilitate the process, and the use of the Gini coefficient was also put in place to reduce income inequality (International Monetary Fund, 2008) The government divided the main three banks into foreign and domestic operations to bring in the investors. The government also privatized some banks, enabling investors to access cheap capital loans (International Monetary Fund, 2008) Among the key participant who was involved in the recovery process was the European Economic Area; this is an agreement that allows members to participate in the European single market; the economic area allows members to move freely and to engage in goods and services trade and capital trade in the single market (Gudmundsson, 2016)
External financers also played a key role in bringing stability to the Icelandic economy by purchasing several foreign businesses. For example, British retailers such as the Debenhams and the Woolworths bought either fully or partly Iceland retail businesses. Organizations such as the Novator Partners and Royal Unibrew acquired telecoms, among other huge economic assets. The main player in the economic recovery was the IMF. Through the international monetary fund, Iceland received a two-year loan of 2.1Billion USD, the main purpose of IMF was to bring stability to both Iceland krona and the economy (Gudmundsson, 2016)
Among other factors that facilitate the recovery process Wes the string basic foundation Iceland has in terms of a well-educated labor force...