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
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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