2009 Index of Economic Freedom

Quick Facts

Population:

• 0.3 million

GDP (PPP):

• $11.1 billion
• 4.4% growth
• 4.4% 5-year compound annual growth
• $36923 per capita

Unemployment:

• 1.0%

Inflation (CPI):

• 5.0%

FDI Inflow:

• $3.7 billion

Iceland's economic freedom score is 75.9, making its economy the 14th freest in the 2009 Index. Its overall score is essentially the same as last year, increasing by 0.1 point. Iceland is ranked 7th out of 43 countries in the Europe region, and its overall score is much higher than the world average.

Iceland is very open to global trade and investment. The economy has high scores for business freedom, investment freedom, trade freedom, financial freedom, and property rights. Business regulation is efficient. Virtually all commercial operations are simple and transparent. The financial sector is modern and competitive but perhaps overexposed in foreign lending, given the island economy's modest domestic market. The judiciary, independent of politics and free of corruption, demonstrates an exemplary ability to protect property rights. Iceland's tax system is efficient and simple, boasting a competitive corporate tax rate of 15 percent. Iceland also enjoys the world's sixth-highest level of freedom from corruption.

Iceland is relatively weaker in terms of fiscal freedom, monetary freedom, and especially government size. Total government spending is more than 40 percent of GDP. Increases in social spending threaten to undermine the government's commitment to fiscal prudence. Although investment freedom is otherwise strong, foreigners may not own real estate.

Background Back to the top

Iceland is a wealthy, centuries-old democracy with very low unemployment and a dynamic and diversified economy that has been growing steadily. It also has high levels of literacy, longevity, and income by world standards. Iceland is not a member of the European Union, largely because of its huge fishing industry, which would be subsumed by the Common Fisheries Policy in the event of EU membership. It is, however, a member of the European Free Trade Association and the European Economic Area, which allows for free cross-border movement of capital, labor, goods, and services with the EU.

Business Freedom 93.6 Back to the top

The overall freedom to conduct a business is strongly protected under Iceland's efficient regulatory environment. Starting a business takes an average of five days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures and 225 days. Bankruptcy proceedings are straightforward.

Trade Freedom 88.0 Back to the top

Iceland's weighted average tariff rate was 1 percent in 2006. Some high agriculture tariffs, import bans and restrictions, import taxes, strict sanitary and phytosanitary regulations, and an agricultural policy that includes export subsidies and a price equalization mechanism to support agricultural exports add to the cost of trade. Ten points were deducted from Iceland's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 76.2 Back to the top

Iceland has a competitive flat-tax system. The main income tax rate is 22.75 percent (which, combined with the local government rate, can rise to 35.72 percent). Investment income is subject to a flat 10 percent rate. The corporate tax rate was reduced to a flat 15 percent as of 2008. Other taxes include a value-added tax (VAT) and an estate tax. In the most recent year, overall tax revenue as a percentage of GDP was 40.4 percent.

Government Size 44.0 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 43.2 percent of GDP. Privatization of state-owned enterprises has progressed over the past 10 years.

Monetary Freedom75.3 Back to the top

Inflation is moderately high, averaging 5.4 percent between 2005 and 2007. The government subsidizes agricultural production; milk is subject to production-linked direct payments, production quotas, and administered prices; and sheep farmers receive direct payments based on support targets and quality-dependent payments. Ten points were deducted from Iceland's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom70.0 Back to the top

Foreign capital receives domestic legal treatment. Iceland generally welcomes foreign investment, although the government maintains restrictions in some key areas. Foreign ownership in the fishing industry, a major portion of the economy, is limited to 25 percent. Airlines and real estate are likewise restricted; individuals must live in Iceland to purchase real estate. Investment regulations are transparent, although bureaucratic delays can occur. Residents and non-residents may own declared foreign exchange accounts. There are no controls on payments or current transfers, access to foreign exchange, or repatriation of profits.

Financial Freedom70.0 Back to the top

Iceland's modern financial sector is competitive, and the banking sector has undergone restructuring and transformation in recent years. Since joining the European Economic Area (EEA), Iceland has liberalized and deregulated its financial markets, allowing Icelandic financial institutions to operate on a cross-border basis in the EEA and vice versa. Liberalization of the financial markets has facilitated access to credit and reduced its cost. The government sold its stakes in two partially state-owned banks in 2003 and no longer has a presence in the commercial banking sector. Iceland's financial health has been questionable in recent years because of several factors, including macroeconomic imbalances, rapid expansion of the banking sector, and private-sector borrowers' high indebtedness. Efforts to shore up stability and confidence have been made, but vulnerabilities still linger. The stock market has expanded rapidly and is part of a regional integrated network of exchanges in Nordic and some Baltic countries.

Property Rights90.0 Back to the top

Private property is well protected. The constitution provides for an independent judiciary, and the government respects this in practice. Trials are generally public and conducted fairly, with no official intimidation. Iceland is one of the few countries with efficient, property rights–based fisheries management.

Freedom From Corruption92.0 Back to the top

Corruption is perceived as minimal. Iceland ranks 6th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Its thousand-year history of parliamentary government has encouraged the institutionalization of such principles as accountability and transparency.

Labor Freedom59.9 Back to the top

Iceland has relatively rigid labor regulations that hurt overall productivity growth. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee can be difficult and costly. Regulations on the number of work hours are rigid.