Individual Behavior and Collective Action: The Path to Iceland’s Financial Collapse

See Aliber (2016) and introduction in Aliber and Zoega (2011).

The IMF’s initial estimate of seven times GDP can be reduced to six times GDP in view of better-than-expected asset recovery. See Gylfason (2015, 2019) and Benediktsdóttir et al. (2017). These estimates are incomplete, however, as they include, e.g., the decline in the value of stock-market and pension-fund assets from an artificially inflated value before the crash. On the other hand, they do not include the loss of net worth of the 10,000 households, one household in 12, that lost their homes. Homes lost to banks should count as losses rather than as cost-neutral transfers of wealth from households to banks. Several such complications arise in a comprehensive accounting of the total cost of financial crashes, which is beyond the scope of this study.

The U.S. government unilaterally withdrew its forces from Iceland in 2006 against the protests of the Icelandic government, protests best understood in the light of the reduction in rent accruing to the local economy.

More than a hundred years later, import restrictions against farm products remain largely intact as high tariffs replaced an outright ban against importation of dairy products and meat.

The contribution of the NATO base to the Icelandic economy was particularly large in the early years, amounting to 15%-20% of total foreign exchange earnings during 1953–1955, for example (Ingimundarson 1996, p. 282).

For comparison, the Norwegian Pension Fund, earlier Oil Fund, the world’s largest sovereign wealth fund, amounts to about USD 800,000 for each family of four in Norway.

Statistical endogeneity bias is hardly an issue here because corruption 2012–2018 cannot have exerted but a minor effect on resource rents 1970–2017.

The Special Investigation Commission (2010, vol. 8, pp. 164–169) reports that during 2004–2008 the banks granted financial support to political parties and politicians in the amount, in today’s money, of almost 20 euro per vote cast in the 2007 parliamentary election.

The tourism boom in Iceland may not last, however. Ghalia and Fidrmuc (2015) study the relationship between tourism and growth in 133 countries during 1995–2007 and find that a dependence on both trade and tourism tends to reduce economic growth, an effect they attribute to the Dutch disease.

The Finger-Kreinin index (FKI) of export diversification, a relative index that compares the structure of exports across countries by showing the extent to which the structure of exports by product of a given country differs from the world average, tells the same story (not shown here). Both indices, the HHI and the FKI, vary inversely with country size as measured by output or population, because small size encourages specialization. When the HHI is adjusted for country size by taking as a measure of concentration the difference between the actual average HHI during 1994–2014 and the HHI predicted by a linear cross-country regression of HHI on the log of the average population during the same period, similar results obtain. But size does matter: Iceland moves from 76th place down to 98th place in a sample of 202 countries ranked by export concentration, where Iraq, Nigeria, and Chad head both lists. With the adjustment for population, Italy moves up the list from 202nd place to 187th. The adjustment method is taken from Gylfason (1999), where it was used to extract an index of openness to trade from exports-to-GDP ratios that, like the HHI and the FKI, vary inversely with country size as measured by population.

For surveys of corruption and the corruption literature, see Ades and di Tella (1997), Tanzi (1998), Treisman (2000), Jain (2001), Aidt (2003), Rose-Ackerman (2006), and Rose-Ackerman and Søreide (2011).

In fact, to accommodate the banks’ wishes, the Central Bank reduced the reserve requirement before the crash.

See Dooley (2019) and Ghosh et al. (2017), among others, on the use of selective capital flows.

The outsiders include Icelandic and foreign university professors, some of whose pre-crash writings appear in Aliber and Zoega (2011). Many other academics and journalists stayed silent, however, or cluelessly towed the line of the banks, the business community, and the government. Some still do. For more, see Gylfason (2015, 2019).

See https://​www.​vb.​is/​frettir/​lindsor-var-stjornad-af-stjornendum-kaupthings/​62474/​