Icelands neoliberal epitaph

Iceland Serves As Appropriate Epitaph For The Neoliberal Economic Policies Of Milton Friedman

Wednesday, 22. October 2008, 01:03:44
Iceland, once the leading example of securitization and global savings, is now bankrupt and serves as the leading example of the failed economic policies of capitlism's hero.
Toby Sanger writes in Milton And The Meltdown In Iceland that Iceland is now essentially bankrupt after taking over its three major banks to prevent them from failing. These banks owe more than $60 billion overseas, about six times the value of Iceland’s annual economic output. As a professor at London School of Economics said, “No western country in peacetime has crashed so quickly and so badly.

This made me wonder: what on earth happened to get Iceland and its banking sector into such a state?

It turns out that Iceland, despite its coalition governments and Nordic social mores, became a poster child for Friedmanite economic policies from the 1990s on. Friedman himself visited Iceland in 1984 and participated in a lively television debate with leading Socialists. He inspired a generation of young conservative intellectuals in Iceland who came to power in 1991 through the Independence party and have run the government through different coalitions since then.

Under Prime Minister David Oddsson and explicitly inspired by Friedman, they implement a radical (but now familiar) program of privatization, tax cuts, reductions in spending and deficits, inflation control and targeting, central bank independence, free trade and exchange rate flexibility. Corporate taxes were cut from a rate of 50% down to 18%. Privatization and deregulation were driven directly through the Prime Minister’s office and the major banks were privatized early this decade.

At first, the policies seemed to be very successful. The economy grew at a strong pace, rising until Iceland achieved one of the highest per capita GDPs in the world. In 2007 it also topped the score for the UN’s Human Development Index.

Iceland rocketed up to the top ten rank in the indexes of economic freedom designed by the Fraser Instittue and the Heritage Foundation. It was lauded by the conservative Cato Institute for its flat taxes, privtaization and economic freedoms–and Naomi Klein was criticized for not mentioning it (along with Ireland, Estonia and Australia) as an example of the success of Friedmanite economic policies.

Icelandic banks and businesses, with the support of their government, expanded aggressively overseas, particularly into the U.K. and the Netherlands. The banking industry and private businesses flourished and created a number of billionaires on the island.

Then it all came crashing down.

Short-term interest rates and inflation have both hit 14% and the country’s currency has lost half of its value. As a result of its economic and financial meltdown, iceland now has an external debt equivalent to about $200,000 per person with virtually no prospect of repaying it.

This wasn’t caused by the U.S. subprime crisis or by what is happening at the former centre of free market capitalism on Wall Street, but instead by the same Friedmanite free market policies being applied in one of the smallest countries in the world.

What is somewhat incredible is the apparent lack of remorse or self-reflection and doubt being expressed by the ideologues who put these policies in place and caused this economic and financial meltdown. Amazingly, many neo-cons continue to argue that this was caused by regulations that were too strong, or by a confluence of unlikley events, including a rise in “leftist attitudes“.

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There seems to be a belief among many that a financial market bailout will soon relieve the credit crunch caused by the subprime fiasco and then we can go back to business-as-usual. We don’t need to look too far back in time or too far abroad to see how misguided that view is.