ECONOMIC SURVEYS BY THE OECD c ICELAND NOVEMBER 1961 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT PARIS ICELAND BASIC STATISTICS THE LAND AND POPULATION Area (1,000 sq.km.) (cid:9) 103 Urban population Reykjavik, Dec. 1959 . 70,850 of which: Other, Dec. 1957 . (cid:9) 43,000 Cultivated area, Jan. 1961 ....... 0.8 Population by occupation 1950: Rough grazings, average 1953-57 ..... 19.8 Agriculture (cid:9) 20% Glaciers (cid:9) 14.0 Fishing (cid:9) . (cid:9) 11 % Population, mid-1960 (cid:9) 176,000 Fish processing (cid:9) 5% No. of inhabitants per sq.km. (cid:9) 1.7 Manufacturing (cid:9) 16% Population increase, average 1954-59 . . 2.3% PRODUCT/ON Total fish catch, overage 1953-60 (1,000 metric Sheep population, Jan, 1961 (1,000 heads) ions) . . . GOVERNMENT AND PARLIAMENT Government: (number of ministers) Parliament: (No. of seats) Independent Party (Conservatives) (cid:9) 4 Independent Party (conservatives) ...... 24 Social Democrats ............. 3 Progressive Party (Liberals) (cid:9) 17 Communists (cid:9) 10 Social Democrats ............. 9 Last general election 1959 ......... 60 Next general election 1963 LIVING STANDARDS Calories per head, per day 1958 (cid:9) 3,240 Number of passenger cars in use per 1,000 Energyconsumption perhead, 1957(O.E.E.C, inhabitants, 1958 (cid:9) 71 average = 100) (cid:9) 163 No. of radio sets per 1,000 inhabitants 1958 278 Paper consumption per head, 1957 (O.E.E.C. Average hourly wages of unskilled labour average = 100) (cid:9) 80 in Reykjavik, July 1961 (Kronur) 2-1.10 FOREIGN TRADE Exports: Imports: Main exports, I960(percentageoftotal exports) Main imports, I960 (percentage of total im¬ Fish and sea products (cid:9) 92 ports); Agricultural products (cid:9) 6 Equipment (cid:9) . 33 Other manufactures (cid:9) 31 Fuels (cid:9) 13 THE CURRENCY Monetary unit: Krona Currency unit per U.S. dollar 43.Û0 ECONOMIC SURVEYS BY THE OECD ICELAND 1961 PUBLISHED BY THE ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT 2, RUE ANDRÉ-PASCAL, PAR1S-XVI« The Organisationfor Economic Co-operation and Development was set up under a Convention signed in Paris on 14th December 1960 by the Member countries of the Organisation for European Economic Co-operation and by Canada and the United States. This Convention provides that the O.E.C.D. shallpromote policies designed: to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; to contribute to sound economic expansion in Member as well as non member countries in the process of economic development; to contribute to the expansion ofworldtrade on amultilateral, non-discrimina¬ tory basis in accordance with international obligations. The legal personality possessed by the Organisationfor European Economic Co¬ operation continues in the O.E.C.D., which came into being on 30th September 1961. The Members of O.E.C.D. are: Austria, Belgium, Canada, Denmark, France, the Federal Republic of Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. This document was approved by the Economic Committee of the O.E.C.D. in November 1961. It has been circulated within the Organisation under the symbol EDR(61)2. Published in December 1961 CONTENTS Introduction (cid:9) 5 The results of the stabilization programme (February 1960- June 1961) (cid:9) 6 Developments in the field of demand(cid:9) 6 Bank credits (cid:9) 9 Government finances (cid:9) 13 Output and employment (cid:9) 14 External development (cid:9) 16 The wage increases in the spring 1961 and the new devaluation (cid:9) 23 Prospects and conclusions (cid:9) 25 * Statistical annex (cid:9) 29 CD CQ ICELAND Introduction 1. Throughout the 1950's, economic developments in Iceland had been dominated by strong inflationary pressures, originating mostly in a heavy investment demand. For a long time, the authorities attempted to counteract the consequences of excess internal demand the continuous price increases and the large external deficits through a complicated system of consumer's subsidies, differential exchange rates and quantitative controls on external trade. These measures made it possible to maintain and increase exports in the face of sharply increasing costs, but they did not combat inflation at its sources, and distorted the price and production picture, as well as the geographical pattern of external trade. 2. A radical change took place in the beginning of 1960, when the Icelandic Government introduced a stabilization programme designed to eliminate excess demand, restore normal economic mecha¬ nisms and balance external payments. The main elements of this Programme1 were: the establishment of a uniform exchange rate for the Icelandic Krona, implying a substantial devaluation; strict limita¬ tion on the expansion of bank credits; a balanced budget; a re-ar¬ rangement of taxes and subsidies to moderate the impact of the deva¬ luation on living standards; and a gradual liberalisation of imports. The Programme received the support of the International Monetary Fund and the O.E.E.C, which made available to Iceland credit faci¬ lities of about $ 20 millions. 3. The Programme was implemented satisfactorily in 1960 and, with some minor adjustments, its implementation has been continued in 1961. The results of the first fifteen months pointed to a substan¬ tial measure of success: excess demand was eliminated, prices had become more stable after the inevitable re-adjustment which followed the devaluation, domestic savings were increasing rapidly and the net foreign exchange reserves had improved substantially. 1. For a detailed description of the Programme, see Economic Conditions in Member and Associated Countries of the O.E.E.C.-Iceland, 1960, O.E.E.C, Paris, 1960, pp. 5 to 9. 4. But much of the progress thus achieved has been wiped out by repeated strikes in the first half of 1961, the final result of which has been a general wage increase ofthe order, approximately, of 16 per cent. The massive increase in internal demand inevitably resulting from this development, not matched by any corresponding increase in output, could only lead to a huge growth in imports, impossible to finance out of current export proceeds of the still small external reserves. At the same time the export industries, unable to raise their selling prices which are regulated by world market conditions, found themselves in a position in which operating costs were so increased as to render their continued operation impossible. The Government was thus forced to proceed, on August 4th 1961, to a new devaluation, bringing the exchange rate from 38 to 43 Kronur to the U.S. dollar. Additional measures will, no doubt, have to be taken in other fields. The results of the stabilization programme, February 1960- June 1961 Developments in the field of demand 5. The elimination of inflation, aimed at by the Stabilization Pro¬ gramme, implied a significant reduction in internal demand. Consu¬ mer's demand was to be reduced, or at least stabilized, through the combined effect of increasing prices and stable wages. Investment demand was to be reduced by means of control of the expansion of bank credits, the raising of interest rates and a halt to the financing of the extra-budgetary investment funds by the banking system. The government finances were to have a slightly disinflationary effect, by means of a small budgetary surplus. On the whole, these object¬ ives were being achieved by the end of 1960 and the first months of 1961. 6. Nominal wage rates remained stable on the whole from 1959 to 1960 and did not change much in the first months of 1961, before the new wage agreements of year 1961. There has been, however, some wage drift, at least up to the autumn of 1960, due to continued conditions of excess labour demand. According to a sample survey of tax returns prepared by the Statistical Bureau, the average increase in earnings from 1959 to 1960 was of the order of 6 per cent. But in the last months of 1960 and in the first half of 1961, there was pro¬ bably a considerable reduction in overtime work, with a parallel fall in worker's total earnings. A non negligible improvement in the in¬ comes of the farmers probably occurred in 1960, as a result of an increase of the value of agricultural output by about 5 per cent. In¬ comes offishermen, on the other hand, were probably lower as a result of unfavourable catches. 7. The effects of the devaluation of February 1960 on internal prices have been important but their impact on the cost of living and purchasing power was greatly moderated through a re-arrangement of indirect taxes, a considerable reduction in direct taxes, and sub¬ stantial increases in family allowances and consumer subsidies. Con¬ sumer prices for goods and services (excluding rent) rose by 12 per cent in the first half of 1960, and by an additional 4 per cent in the second half of that year. Their further rise in the first half of 1961 was almost negligible, but from June to October prices on goods and services went up by 9 per cent as a consequence of the wage in¬ creases and the devaluation [Cf. para 34-36]. The cost of living index (including rent and a component of «net direct transfers to Govern¬ ment», i.e. direct taxes minus family allowances) rose by 5 per cent from the first to the second quarter 1960, and remained practically stable until the wage increases and the devaluation in the summer of 1961. At the beginning ofOctober, the cost ofliving index exceeded its June level by 10 per cent. 8. It would seem, thus, from the comparison of the developments in the cost of living, on the one hand, and earnings, on the other, that no or little reduction in total real purchasing power took place. This conclusion, however, should be qualified on two grounds. First, as mentioned above, the increase in earnings probably stopped and might even have been followed by a decline after the autumn of 1960. Second, the cost of living index represents families with 2-3 children, which are in a better position than families with fewer children or none, because of the increase in family allowances. It is thus probable that the average decline of purchase power has been significantly stronger than that implied by the movements of the cost of living, and this must have been increasingly felt after the autumn of 1960. This conclusion is supported by the fall in the imports of some typical consumer goods; for the categories of such goods listed in Table 1 below, the fall was of 13 per cent from 1959 to 1960, and of 19 per centfrom the first halfof 1960 to the first halfof 1961. Themostimpor¬ tant reductions were recorded for automobiles, clothing and foot¬ wear, and textile yarn and fabrics. It must be borne in mind, however, that imports in 1959 and the first three months of 1960 were inflated by the anticipation of the impending devaluation. 9. According to preliminary estimates, total fixed investment in¬ creased considerably between 1959 and 1960, from I. Kr. 1,875 to 2,410 million; even after allowing for the important price increases in 1960, the growth in real terms must have been not less than 15 per cent. However, the increase in investment took place almost exclu¬ sively in the fisheries sector (and, to a lesser extent, in the transporta¬ tion industry), in the form of increased imports of fishing boats and ships, corresponding to orders passed abroad in 1958 and 1959. If the exceptional imports ofboats and ships in 1960 are excluded, invest¬ ment expenditures show an increase of approximately 7 per cent, whereas from 1959 to 1960 the index of building costs increased by 6 per cent, the goods and services component in the cost of living Diagram 1. COST OF LIVING Index: March 1959 = 100 S ' m * , T * te * m $ (cid:9)(cid:9) A Goodsandservices H 115 u ft i . . MR $ Food no £ r*J andservices) IÏI n £ III * 105 % *i * Costoflivingindex, Tf ;fe ti 1. total « ** 5 J" I Rent 01 100 . i, MB M n a \ M 100 . 90L Nettransferpayments gJ fromhouseholdsto Government tfl (included inHietotal * 70 costofliving index) If 60 50 ; i. ti 40 30 20 10 0Ll(cid:9)i_i(cid:9)i_j(cid:9)i(cid:9)i(cid:9) i (cid:9)i(cid:9)i i i i(cid:9)(cid:9)i(cid:9)(cid:9)i i i i(cid:9)i(cid:9)(cid:9)i(cid:9)i(cid:9)i mamjjasond|jfmamjjasond|jfmamjjasond 1959 1960 1961 Source: Icelandic submission to the O.E.C.D. 8