Iceland's economy is 76.5 percent free, according to our 2008 assessment, which makes it the world's 14th freest economy. Its overall score is 0.2 percentage point lower than last year, reflecting moderately better scores in three of the 10 economic freedoms. Iceland is ranked 7th out of 41 countries in the European region, and its overall score is higher than the regional average.Iceland enjoys some of the strongest economic freedoms among all countries and has the second-highest score in terms of freedom from corruption, which is 55 percentage points above the world average. It also has exceptionally high scores for business freedom, investment freedom, trade freedom, financial freedom, property rights, and labor freedom. The average tariff rate is low, and business regulation is efficient. Virtually all commercial operations are simple and transparent. Foreign investment is permitted without government approval, although capital is subject to restrictions in some areas of the economy. Iceland's financial sector is very modern. The judiciary, independent of politics and free of corruption, has an exemplary ability to protect property rights.
Iceland is relatively weaker in terms of fiscal freedom, monetary freedom, and especially government size. Total government spending equals roughly half of GDP.
Background:
The Republic of Iceland is a wealthy, centuries-old democracy with very low unemployment and a dynamic and diversified economy that continues to grow 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 - 94.5%
The overall freedom to start, operate, and close a business is strongly protected by Iceland's regulatory environment. Starting a business takes an average of five days, compared to the world average of 43 days. Obtaining a business license requires less than the world average of 19 procedures and 234 days. Bankruptcy proceedings are straightforward and not costly.
Trade Freedom - 85%
Iceland's weighted average tariff rate was 2.5 percent in 2005. Strict phytosanitary regulations, import taxes, import bans and restrictions on agriculture products, prohibitively high agriculture tariffs, and an agricultural policy that includes export subsidies and a price equalization mechanism to support agricultural exports add to the cost of trade. An additional 10 percentage points is deducted from Iceland's trade freedom score to account for non-tariff barriers.
Fiscal Freedom - 73.6%
Iceland has a competitive flat tax system. The main income tax rate is a flat 22.75 percent (which, combined with the local government rate, can rise to 35.72 percent). The corporate tax rate is a flat 18 percent. Other taxes include a value-added tax (VAT) and a net wealth tax. In the most recent year, overall tax revenue as a percentage of GDP was 42.4 percent.
Freedom from Government - 46.3%
Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 42.3 percent of GDP. Privatization of state-owned enterprises progressed over the past 10 years. The government recently concluded the long-waited privatization of the state-owned telephone company, Iceland Telecom.
Monetary Freedom - 74.8%
Inflation is high, averaging 5.8 percent between 2004 and 2006. Relatively unstable prices explain most of the monetary freedom score. 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. An additional 10 percentage points is deducted from Iceland's monetary freedom score to account for policies that distort domestic prices.
Investment Freedom - 60%
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. The legal system is transparent and modern, and there have been no major investment disputes for many years. Residents and non-residents may own declared foreign exchange accounts. There are no controls or requirements on payments or current transfers, access to foreign exchange, or repatriation of profits.
Financial Freedom - 70%
Iceland's financial sector is modern. Since joining the European Economic Area, 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. There are four commercial banks, three of which offer a full set of banking services. 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 was in question early in 2006 as a result of severe macro imbalances and bank soundness that led to upheaval in the securities markets. There were 13 domestic insurance companies and a number of foreign insurance companies operating in June 2005. The stock market has expanded rapidly and is part of a regional integrated network of exchanges in Nordic and some Baltic countries.
Property Rights - 90%
Private property is well protected. The constitution provides for an independent judiciary, and the government generally 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 Corruption - 96%
Corruption is perceived as almost nonexistent. Iceland ranks 1st out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Its thousand-year history of parliamentary government has encouraged the institutionalization of such principles as accountability and transparency.
Labor Freedom - 75%
Relatively flexible employment regulations could be further improved to enhance employment opportunities and 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.
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