IS THE FREE-EXCHANGE A SOLUTION TO GET OUT OF POVERTY ? THE ICELANDIC CASE No Experiments, monumental disasters : Why it took a thousand years to develop.

IS THE FREE-EXCHANGE A SOLUTION TO GET OUT OF

POVERTY ?THE ICELANDIC CASE

No Experiments, monumental disasters : Why it took a thousand years to develop a

specialized fishing industry in Iceland ? By Thráinn EGGERTSSON (1996)

Gaultier FRANCQJérémy HERVELIN

What are we going to talk about ?

2

The path of Iceland’s development through centuries

The role of economic, political and social institutions

« The economic history of Iceland from the late Middle Ages until the 19th century is a story of stagnation and of virtually no experiments with the country’s industrial organization. It is a story of a stationary population of some 50 000 individuals who, undeterred by its marginal conditions, gave priority to farming and only attended part-time to one of the world’s most

valuable fisheries that surrounded their country. » p.2

Le petit Poisson et le Pêcheur3

http://poesie.webnet.fr/lesgrandsclassiques/poemes/jean_de_la_fontaine/le_petit_poisson_et_le_pecheur.html

Institutional choice of poverty trap4

5

Lack of knowledge Inappropriate preferences

Rejected b

y

auth

or

- Substantial exports of fish began early on• Dried fish- main export since

13th century• Stock fish known as a quality

commodity throughout Europe since the 14th century

- Technological spillovers from English and Germanic influence

Rejected b

y

auth

or

- Desire of accumulation evident from Viking Sagas

- Basic needs were not meet (frequent Malthusian cycles)

- Icelanders never shy of commerce exchanges

- Fast take off in 19th century

Why mostly institutional ?

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Initial situation of relative prosperity but then path of economic stagnation

Rural society : farmers raising livestock and growing hay

Fishing was a secondary activity of some farmers, which was performed during the winter season

Access to a beach in the southwestern region (fishing region) was a precondition for enrolling the winter fisheries

Use of primitive open boats

Industrial background

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1262 : the Norwegian kingdom acquired property rights to all trade with Iceland, and later these rights were passed to the Danish crown.1262-1380Norwegian Kingdom

1380-1904Danish Kingdom

1874-1904 Icelanders gain

power

Taxes

Added value of farming and fishing

Weak presence

Periphical status in the kingdomHigh Transaction costs

Political situation

8

Turning point situation

Fisheries required extensive foreign contacts, which provided access to export markets and to vital imports (wood, fishing gear, vessels, and technology)

Limited engagement and no organized defenses : island vulnerable to incursions by outsiders attracted on the country’s rich marine resources

Crown loss of control over IcelandThe English Age (1415-1475)

Motives : Strong demand for dried fish in EuropeCoastal fishing stations in IcelandEnglish connection opened new and valuable market for Icelanders

German Influence (1475-1520)

Motives : Iceland fisheriesHamburger offered more lucrative trade than English

Political situation

9Danish Monarch finally regained control over Iceland but need to solve the dilemma :

Protect property rights

In peripheral Iceland

Maximize tax revenue

Poverty trap

o Protective belt of ocean forbidden to all non-Icelandic vessels

o Crown’s trade monopoly with Iceland

o Prevention of coastal townships development

o Only farmers in coastal fisheries

Uncertain property rights of the crown

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Landlords

Solution for limited engagement policy of the Crown : autonomy of local elite (powerful landlords)

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Landlords

Labor market constraints12

Tensions between farming and fisheries Labor shortage (or upward pressure on labor cost) Adverse selection and moral hazard (insurance system)

Design of institutions that would allow the farmers to exploit the inshore fisheries but also shelter the agricultural sector

Labor market constraints13

Institutional system to prevent independance labor force : Compel all Icelanders to live on a farm Specific social insurance system (farmers care for their

servants) Technology limitations Market and credit barriers

Monopoly trade with Danish kingdom Sales of monopoly licenses Price distortion : low relative price of fish to price of agriculture

But one may wonder…14

Did the Icelanders really have a relative advantage in fishing ?

Could they have found foreign markets for their products ?

History says yes for both questions

Then standard theory of trade (Ricardo’s comparative advantages) is enough to predict economic boom in Iceland !

Institutional collapsing : when a society chooses success15

Why the situtation finally changed ?16

Average annual growth rate of population between 1786 and 1850 : + 0.6% per annum

TURNING POINT

Iceland lost around 20% of its total population between 1700 and 1785 !

A first set of non-concluding reforms

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Unsuccessful reforms : 1701 : Danish merchants of the trade monopoly can

winter in Iceland 1706 : Icelandic leaders protested and yield of 1701’s

law 1762 : inland farmers had to produce their own fish 1763 : withdraw of 1762 law

Copenhagen was sensitive to the wishes of Icelandic elites

The second one is always the best

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Around 1770 : much firmer position of the crown 1770-1776 : subsidize and introduction of new

technologies 1776-1787 : the Danish « modern » fishing fleet 1787 : abolishment of trade monopoly + merchants

were allowed to employ Icelanders in fishing Around 1800 : tax exemptions to promote townships 1855 : free trade with all nations

Conclusion19

From inland to the sea : the take-off of Icelandic economy thanks to free exchange !

What now ?

14th GDP/capita (PPP) 2nd best quality life in the

world 4% of workforce in farming

for 5% contribution to GDP 27% of GDP due to fishing 40% of exports due to

fishing

Vulnerability to world prices, especially for fish and aluminum

Close to bankrupt in 2008 (see the Inside Job Ferguson’s 2010 document)

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Current economic situation

Openness : a bad friend ?

Thank You !21