I agree with Megan McArdle’s general point that the winners and losers from this financial crisis have not yet been sorted out. Here is Jon Danielsson, with some negative notes on Iceland’s economic performance:
Based on the current state of the Icelandic economy, the Fund’s claim of success [for Iceland] does not stand up to scrutiny.
- Public finances are not on a sustainable path,
- Exchange rates are not fully stable even with capital controls,
- Investment has collapsed, and
- The financial sector is dysfunctional.
At the same time, the Fund forced Iceland to impose a high interest-rate policy at the time when every other developed economy was doing the opposite…
GDP has declined by about 11% since the crisis of October 2008, but modest and volatile growth has returned, sustained primarily by an increase in private consumption catching up after two years of austerity. Worryingly, export growth is low, even with a sharp fall in the exchange rate, while investment is at a record low.
Business investment rates in Iceland equalled the EU average from 1995 to 2008, according to Eurostat.
- Over the past two years the investment rate in Iceland collapsed to 10% whilst the EU only suffered a small decline to 17%.
…Initially, the capital controls were touted as a temporary measure to prevent a sharp depreciation of the currency, but by now the domestic economy has adapted to their presence, and become increasingly inward looking. The signs point to the controls remaining.
…Unfortunately, the government has also been using the capital controls as means to implement industrial policy, politically selecting those allowed to use cheap offshore kronas to buy Icelandic assets. Such direct political selection of investors can only breed corruption, mistrust, and inefficiency.