How Iceland survived a financial crisis: Lessons for Malaysia

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The Blue Lagoon, Iceland

Malaysia can learn from how a small nation like Iceland survived a financial crisis by relying on its inherent strengths, writes Benedict Lopez.

Our heavy dependence on petroleum and palm oil as major revenue earners has hit the Malaysian economy when prices, especially of oil, plunged.

So we need to broaden our economic base, tackle critical issues within our economic structure, and tenaciously promote other sectors that could be important revenue earners.

Malaysia also needs to work towards a cleaner and greener environment.

Learning from the experiences of a small nation

Developing nations like Malaysia often look towards major developed economies for trade, investments, business and other ties. But we often ignore the fact that small countries can paradoxically offer models we can emulate.

Malaysia can learn a lot from the excruciating and positive experiences of a small country such as Iceland.

Situated in the North Atlantic Ocean, Iceland lies between Norway and Greenland and is Europe’s western-most country and the second largest island, just about three hours by air from Stockholm or Copenhagen. Iceland is not a member of the European Union, but together with Switzerland, Norway and Liechtenstein, it is part of the European Free Trade Association.

With no army, air force and navy of its own, Iceland is a member of the North Atlantic Treaty Organisation (Nato), which ensures it is protected from external aggression. Iceland’s only internal defence consists of the Icelandic Coast Guard, which patrols Icelandic waters and airspace, and other services such as the National Commissioner’s National Security and Special Forces Units.

Though it has a small population of just over 300,000 on a land mass of 103,000 square kilometres, Iceland has made great strides. It is globally renowned not only for its fishing industry but also for its geo-thermal energy and tourism.

But it has not always been wine and roses for Iceland. The country has had to face its fair share of setbacks too, although the worst is now behind. Iceland is moving forward despite an agonising past decade, and it still faces occasional challenges.

Recently, the country hit the headlines once again, when the Icelandic Prime Minister, Sigmundur David Gunnlaugsson, was forced to resign after protests over the revelations in the Panama Papers. Protesters pelted parliament with eggs. It was People Power, Icelandic-style.

I suppose the Icelanders are hyper-sensitive to any issue related to money matters, even the slightest transgressions. Who can blame them after the country’s mammoth problems ensuing from the 2008 banking crisis.

I know Iceland quite well, as I do Denmark, Norway, Sweden and Finland. I had visited this tiny island nation a few times meeting people of all walks of life – politicians, public sector and corporate officials, industry associations and ordinary Icelanders.

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Friendly people, I should say, willing to share experiences and exchange ideas, which is why I believe Malaysia can benefit from Iceland’s knowhow, skills and capability to develop targeted sectors of our own economy.

Even our women entrepreneurs can look into areas of cooperation with their Icelandic counterparts. I was once invited to address the Icelandic Association of Women Entrepreneurs and was surprised to note the strides made by Icelandic women in various fields.

In one of my meetings with an industry association, they informed me that Malaysia was now on their radar.

From boom to bust

Prior to the 2008 financial crisis, Iceland’s economy was booming at an unprecedented rate.
Iceland’s stock market prices skyrocketed 900% from 2003 onwards, and by 2006, the average Icelander was 300% wealthier than in 2003.

The banking sector grew rapidly, driven by borrowed money, and Icelanders could access credit easily.
Housing prices spiralled and spending soared. To lure worldwide currency investments, Iceland raised its interest rates up to 15%.

As a measure towards enticing global depositors and investors, Iceland opened high-interest online bank accounts.

It looked like the good times would never end.

Suddenly, darkness descended on Reykjavik, and like a bolt of lightning, a financial meltdown traumatised Icelanders, who did not know what hit them. Ironically, Reykjavik in Icelandic means ‘Bay of Smokes’.

Iceland found itself at the epicentre of the 2008 global financial crisis. For a country that has experienced natural earthquakes, this crisis struck like a financial tremor on the nation’s economy equivalent to, as some observers remarked, 7.0 on the Richter scale.

The financial crisis triggered a collapse in banks, wiping out 50,000 people’s savings, and plummeted Icelanders into debt, forcing 25% of homeowners to default on their mortgages.

Icelanders were compelled to re-evaluate the country’s economic system and the abuses of a totally unregulated free market economy.

Save for a few, like economist Joseph Stiglitz, who had warned of the vulnerability Iceland was exposed to, many ordinary depositors and investors had viewed Iceland as a safe haven for their money.

Iceland’s government was forced to resign and its citizenry had to re-evaluate the merits of inconceivable opulence, excessive borrowing, indiscriminate consumption and incessant speculation.

The country was bankrupt.

Battered and severely bruised, Iceland was forced to institute painful reforms to resuscitate the country’s economy in the aftermath of the crisis. And these reforms have borne fruit.

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Since 2011, Iceland has been on the road to recovery, albeit slowly, but the journey is not yet complete.

As is a norm in any country, it is the people who ultimately pay the price for any political or economic misfortune. It was a bitter medicine for the Icelanders and an invaluable lesson for countries all over the world.

Surprisingly, even during one of the darkest chapters in the country’s history, Iceland still had its strengths.

Capitalising on its forte

Infamous for its banking sector, Iceland is nevertheless globally renowned for its fishing industry. Although at one time overshadowed by the growth in the financial services sector, fishing has once again regained its premier position as a pillar of the nation’s economy. As such, it is unlikely that Iceland will join the EU, unless it can keep its sovereignty in fishing.

If it joins the EU, Iceland would be subject to the quota system for the fishing industry, something the nation can ill afford. Nevertheless, Iceland subscribes to and adheres to the principles of responsible, sustainable and ethical fishing practices.

But climate change is looming as a challenge to Iceland’s fishing industry. Variations in the ocean’s salinity and temperature are partly responsible for the disparities in the annual catches of fish like cod.

In spite of its small size, Iceland accounts for more than two per cent of the world’s catches, making it a global player in the fishing industry. Its fishing grounds yield salmon, cod, redfish, haddock and arctic char. Iceland is the world’s largest producer of farmed char.

The fishing industry today employs nearly 10,000 people, directly and indirectly.

On all my visits to Iceland, I never once ate meat, as I was completely captivated by the taste of the various fish dishes at my favorite joint in the heart of Reykjavik, known simply as the “The Fish Shop”, adjacent to the hotel where I always used to stay. If you are a connoisseur of fish dishes, then this place will definitely satisfy your appetite and delight your taste buds.

Like Norway, Iceland has built an ecosystem and developed the fishing industry completely along the value chain through research and development, advanced fishing techniques, downstream processing, logistics and marketing and distribution.

All this is very conspicuous, on the shores of Reykjavik, where many downstream-processing fish factories are located. I had the opportunity to visit a few of these factories, observing their operations.

Relevant Malaysian agencies should visit Iceland to get a first-hand view of the holistic approach of Iceland’s extremely successful fishing industry. A lot can be learned from the Icelanders to improve our fishing industry.

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Powering the country through geothermal energy

Iceland is a pioneer in the field of geothermal energy for space heating. Generating electricity with geothermal energy has increased significantly in recent years, and it currently accounts for 25% of the country’s total electricity production.

In 2014, about 85% of primary energy use in Iceland was derived from renewable resources.

Despite being fortunate enough to have had the opportunity to visit Iceland’s geothermal plant, about an hour’s drive on the outskirts of Reykjavik, I knew very little about geothermal power, prior to visiting this facility.

I was briefed on the modus operandi of the plant and how all of Reykjavik is heated and supplied with energy without polluting the atmosphere. It is a clean power station and an unquestionably worthwhile experience for visitors.

I am not an expert in this area, but the relevant Malaysian authorities can contact the National Energy Authority of Iceland to at least find out if there is any possibility of cooperation.

Natural beauty draws tourists

One of Iceland’s most popular tourist attractions is the Blue Lagoon, which attracts thousands of tourists from all over the world every year.

The Lagoon is a geothermal spa fed by water from a nearby geothermal plant, which originates near lava flow from 6,000 feet at its deepest level. On each visit to Iceland, after my official assignments, I always headed for the Blue Lagoon and spent nearly two hours at this geo-thermal spa. So soothing, refreshing and relaxing, it is one of the places etched in my memory.

Malaysia, too, has hot springs but seldom is publicity given to tourists. Perhaps we can explore ways to develop our hot springs to attract domestic and foreign tourists.

Nature has bestowed on Iceland intrinsic beauty, especially the breathtaking countryside whether during summer or winter. A coach ride all over this island will enchant any tourist.

Iceland also benefits from drawing tourists closer to Nature: think of its geysers, whale-watching, horse farms and the famous Northern Lights or Aurora. Tourism is one area where we can work in partnership with Iceland. Surely, Malaysia, which is much bigger in size, with numerous tourist attractions and exotic food, can learn something from Iceland?

Perhaps, it is time for Malaysia to look towards small countries like Iceland to expand and fortify our political, economic and tourism ties and engage in meaningful collaboration. In this age, geographical distance should not be an obstacle in nurturing mutually beneficial partnerships with Iceland.

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Benedict Lopez
Benedict Lopez was director of the Malaysian Investment Development Authority in Stockholm and economics counsellor at the Malaysian embassy there in 2010-2014. During the course of his work, he covered all five Nordic countries. An eternal optimist and now an Aliran member, he believes Malaysia can provide its citizens with the same benefits and privileges found in the Nordic countries - not a far-fetched dream but one that he hopes will be realised in his lifetime.

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Cheow-Lay Wee
Cheow-Lay Wee

Iceland sent their bankers to court; they were convicted and sent to jail. They also got rid of their government at the next election.

Yong Jin
Yong Jin

Agreed, it is totally corrupt. It is a public secret! Every body knows about, just ask the primary kids.

Cheng Eak Chew
Cheng Eak Chew

Get rid of UMNO .. Then we’ll be one step ahead ..