I would like to preface this post by saying that I am not an economist and nor do I specialize in economic history. I am, however, somewhat acquainted with the economic development of Iceland as well as the historiography of this phenemenon due to being an Icelandic historian.

It is true that Iceland endured some economic hardships during the 1980s. This includes both catch failures for cod and capelin as well as massive inflation. Indeed, inflation rose to heights of more than 100% during 1983 and consistently stayed above 50% from 1980 to 1983. Government responded by devaluing the currency multiple times in a bid to boost the exports of the main economic sector - the fishing industry. Obviously, such measures were incredibly unpopular with the average worker whose purchasing power simultaneously decreased. This period of economic development can best be described as a time of monetary policy failures. Price levels fluctuated wildly and inflation was a chronic ill. The króna declined by almost 600% against the US dollar from 1980 to 1986.

This was followed by a short time of economic expansion from 1985 to 1988. This was mostly due to an increase in fishing catches as well as a boost in exports. However, this economic prosperity proved to be shortlived as fishing catches (mainly cod) failed again in 1988. During the late 1980s the Icelandic economy can best be described as stagnant. Although inflation fell, unemployment rose at the same time and Iceland's competitive position in the global economy detoriorated. In 1990, however, the cornerstone towards economic stability is sometimes said to have been laid when government managed to strike a tripartite deal with employers as well as labour unions. This deal is generally referred to as 'The National Agreement' (Þjóðarsáttin) and is considered a notable economic achievement for a few reasons. Firstly, the vicious cycle of wage increases followed by price level increases (and inflation) was ended. The labour unions agreed to relatively modest wage increases over the next few years in exchange for more stable price levels - which was made possible thanks to a fixed exchange rate of the króna. Secondly, this is one of the few instances in Icelandic history where collective bargaining of the government and labour movement was possible. Historically speaking, this inability to strike collective bargains has mainly been explained in terms of a very left-wing labour movement in conjunction with mainly right-wing goverments. In 1988, however, a left-wing government had been formed which facilitated this deal. Lastly, the National Accord of 1990 is generally seen as a prerequisite to the economic changes that Iceland underwent during the 1990s. These changes include economic liberalization, privatization of state-owned banks and utility companies as well as Iceland's membership of the EEA which was approved in 1992. Taxes were lowered and a period of economic prosperity began. However, these changes are also seen by many as a major cause of the 2008 Icelandic financial crisis wherein the entire financial system of Iceland collapsed spectacularly.

I would also like to add that although Iceland struggled economically during the 1980s it can hardly be classified as a poor country. Indeed, if we look at indicators such as GDP per capita we can see that Iceland was on par, if not ahead, of most Western European states during this time. For instance, Iceland's GDP per capita was $12,057 in 1984, compared with West Germany's $9,277 and France's $9,432. It is important to state that Iceland's economy is extremely volatile and most recessions are deeper and more frequent than in other European states. This is due to a number of factors. Firstly, because of the small size of the Icelandic economy as well as its unvaried nature and heavy emphasis on fish exports. Secondly, there are natural factors to consider, such as the weather and natural disasters (like volcanic eruptions and perhaps even avalanches). Thirdly and lastly, we can name the very pro-cylical economic and monetary policies of successive Icelandic governments which generally excerbated these crises with massive devaluations of the currency. Iceland can thus truly be called an economy of instability.

Sources:

Árni H. Kristjánsson. Þjóðarsáttin 1990: Forsagan og goðsögnin. BA-thesis. University of Iceland, 2008.

Guðmundur Jónsson and Magnús S. Magnússon, ed. Icelandic historical statistics. Reykjavík: Statistics Iceland, 1997.

Palle S. Andersen and and Már Guðmundsson. Inflation and Disinflation in Iceland. Reykjavík: Central Bank of Iceland, 1998.

Sigurður Snævarr. Haglýsing Íslands. Reykjavík: Heimskringla, 1993.