When he was in London in late February for a meeting with UK prime minister Tony Blair, Iceland prime minister Halldór Ásgrímsson also dropped in on the British offices of some of the many internationally minded Icelandic companies. Although Mr Ásgrímsson says he learned on his trip that most of the fish sold to the UK comes from Iceland – and the country is world famous for its salmon – its most important export is its business community.
“There are 70,000-80,000 people employed by Icelandic companies here in the UK, which is a lot,” he says, speaking to fDi in the lobby bar of his Knightsbridge hotel. “These companies have been growing very fast. I have been surprised by how big they have become and how fast they are growing. We are a small economy, but working in a globalised world.”
Apart from raising the profile of Iceland and attracting interest in its stock market, the outward orientation of Icelandic companies has also helped progression on economic diversification. Despite fishing still dominating the economy, the services sector is growing, especially in financial services. Aluminium production has also increased thanks to a significant investment by Alcoa.
“Those Icelandic companies that have gone out into the international market have helped in diversifying the economy,” Mr Ásgrímsson confirms.
Privatisation, pursued vigorously in banking and telecoms, has been another driver. “It has been important that we privatised the banks, which as a result have been able to finance the companies” as they expand around the world, he says.
The assertiveness and dynamism of Icelandic companies is one reason why a thinly populated volcanic island in the northern Atlantic Ocean that is known mainly for its hot springs has been able to carry disproportionate weight in the international financial system. Its ability to move markets, albeit in a negative direction, was underlined when a plunge in its currency in February hit currency markets hard and sparked a sell-off of previously strong emerging market currencies from Brazil to Indonesia.
Mr Ásgrímsson’s visit to the UK coincided with this event and the onset of market jitters over the country’s previously high-flying economy. Rising inflation and a ballooning current account deficit have sparked fears of overheating. A sudden drop in the value of the krona and a Fitch Ratings announcement that it was downgrading its outlook on Iceland’s AA- rating from stable to negative added fuel to these fears.
Mr Ásgrímsson does not seem rattled though. “We have a strong economy, fiscal policy is very sound, we have been privatising banks and telecoms and using that money to pay down debt so it is now very low. We have a large surplus. Banks and the public have been taking out huge loans, but behind them is property,” he says.
Iceland is, if anything, a victim of its own economic success. “The economy has been growing fast – 4%-5% for the past four or five years – and of course that creates some problems,” Mr Ásgrímsson says.
“Many people underestimate the flexibility of the Icelandic economy. We proved this in 2001 when there were a lot of worries about the economy but in the end everything went well.”
At that time, Mr Ásgrímsson was serving as minister of foreign affairs and external trade, a post he assumed in 1995 and held for nine years. A certified public accountant by training, he was an economics and business professor before moving into politics in the mid-1970s. In addition to foreign affairs, his ministerial portfolios have included justice and ecclesiastical affairs, fisheries and ‘Nordic co-operation’.
He became prime minister in September 2004, taking over from Independence Party leader Davíd Oddsson after a 13-year stint. Mr Ásgrímsson’s liberal Progressive Party, which has its roots in agriculture and still commands great support from farmers and fishermen, governs in coalition with the centre-right Independence Party.
The rapid rise in GDP has allowed the Icelandic government to achieve the always politically popular double act of lowering taxes while boosting spending. Areas such as health services and education have been given particular attention. The government has also invested in infrastructure improvements, such as more and better roads, which are crucial for a large land mass populated by only 300,000 people. In the past, the prime minister says, there has been a reluctance to spend government money on infrastructure projects. Has this changed thanks to the economic boom years? “Not yet,” he says. “We have to be cautious because private investment has still been very high.”
Foreign investment into Iceland, however, has been relatively low. “A lot of companies have not yet discovered Iceland,” Mr Ásgrímsson acknowledges. But he points out that the foreign companies that do go to Iceland quickly discover its advantages: “We have cheap electricity and that is a big advantage as oil prices continue to rise. We have a strong infrastructure and political stability – Iceland is a safe place in which to operate and that is very important in these days of terror and criminality.”
Iceland is also an easy, as well as safe, place to do business: it ranks fifth in the 2006 Index of Economic Freedom, published by The Wall Street Journal and the World Heritage Foundation, and ranks an impressive fourth in competitiveness worldwide according to the IMD World Competitiveness Yearbook 2005, following the US, Hong Kong and Singapore.
Despite the steady stream of local businesspeople venturing out into the world, Iceland remains a net gainer of brain power and skills, the prime minister insists. “Icelanders study and work overseas but for one reason or another all of these people want to come home.”
Maybe, he suggests, they have the spirit of Leif Ericsson, an Icelander believed to be one of the first Europeans to visit what is now North America with his expedition in 1000. They might also be inspired by the Icelandic woman who gave birth to the first European baby in what is now North America and returned to Iceland in 1003, with child in tow. She later went to Rome to visit the pope. “At the time she was probably the most travelled woman in the world,” Mr Ásgrímsson says.