Economy of Iceland

Iceland’s Scandinavian-type economy is basically capitalistic and similar to that of the United States and Canada. In addition, an extensive modern welfare system is in place. This covers the medical needs of the Icelandic people, with extensive medical, dental, and eye-care benefits. Free education (from preschool to the university level), guaranteed retirement pay, and high standards of living are also a part of this welfare system. Such cradle-to-grave public assistance does, however, come with a heavy price tag.

Icelanders pay an income tax amounting to roughly half of their annual income, but at the same time illiteracy, poverty, prostitution, and violent crime are virtually unknown in modern Iceland. On a per capita basis, Iceland is one of the wealthiest nations in the world. By nearly any measure, its people are very well-off. Joblessness is almost unknown, with more than 97.5 percent of the working-age population employed. This is due in part to the work ethic of the population and the progressive nature of the political system. Unlike the United States, there is a remarkably even distribution of income in Iceland. The Gross Domestic Product (GDP) purchasing power per capita was $28,710 (estimated) in the year 2000, and a typical family of four enjoys purchasing power of more than $100,000 (US). By comparison, the GDP purchasing power per capita for the United States in 1999 was $34,100. However, in the United States, incomes are less evenly distributed; some families are very poor while others are extremely wealthy.


The country’s ancestors were seafaring people and brought with them many ways of the sea, including fishing. Fishing and fish processing have been an important way of life throughout all of Iceland’s history and continue to have an important position in the country’s economy today. In the absence of other natural resources (except for abundant hydroelectric and geothermal power), Iceland’s economy depends heavily on the fishing industry.

Icelanders operate the fishing industry with a high degree of technology and skill, and are recognized worldwide as leaders in the industry. This industry, however, is very sensitive to declining fish stocks as well as to drops in world prices of fish.

Marine products make up more than 70 percent of the value of Iceland’s exports. The rich marine life in Icelandic waters is the result of several conditions in the area’s physical geography. One is the nature of the continental shelf, which is the generally flat, gently sloping surface of land beneath the sea which transitions from the coast to the deeper waters of the ocean. On this shallow continental shelf, the warm water of the Gulf Stream from the southwest meets the cold currents from the Arctic Ocean. These powerful oceanic currents, plus the relatively shallow water, create nutrients and temperatures that are ideal for marine life. Very few locations in the Northern Hemisphere have as favorable and rich fishing grounds.

About 12 percent of Iceland’s work force is employed in the fishing industry. This includes not only the actual catching of the fish, but also processing the catch. To protect this industry, Iceland has imposed strict conservation measures, and fish catches are tightly controlled.Among the better known species of fish caught in Icelandic waters are cod, haddock, redfish, and herring.

Originally, fish were preserved by open-air drying. This was accomplished by erecting huge fish-drying racks constructed of vertical poles set in the ground, extending some 10 or more feet above the surface. These were then set in a gridlike fashion, much like the grid of a chessboard, about 15 feet apart.

Horizontal poles were then attached near the tops of the vertical poles. The fish were split lengthwise, leaving the halves attached at the tail, and hung over the horizontal poles,much like hanging a towel over a clothesline. The horizontal poles were placed far enough above the land surface to prevent foxes and other creatures from reaching the fish. The fish would then be left on the racks to dehydrate for several months. Once they were dehydrated, the fish could be kept and stored for a long time, even in warmer climates. The consumer of dehydrated fish would reconstitute them by soaking them in water. The meat then could be cooked with vegetables.

Some dried fish is still produced in Iceland, but on a very limited basis. Once a common element of the cultural landscape, few fish-drying racks can be seen today. (Occasionally, a traveler may see a few fish hanging on a couple of poles.) Today, most of the fish are processed fresh and shipped to many parts of the world. Icelandic fish-processing plants have the most modern equipment, much of which is manufactured in Iceland. Most of the catch is filleted, packaged, and quickfrozen. Some fish is packed on ice and moved quickly, even by air, to markets in lands far from the seas of Iceland.


Agriculture in Iceland has historically been very limited. Less than 1 percent of the land is arable (land that is fit for plowing or tilling) and used for the growing of crops. Perhaps no country in the world has proportionally less of its land suited for agriculture. Slightly less than one-fourth of the country is grass and meadowland suitable for grazing. The growing season—the period of time between killing frosts—is only three to four months. During this frost-free time, however, weather is generally cool and skies are often cloudy—neither condition ideal for raising crops. Most of the grazing land is used for growing grass for grazing and the cutting of hay.

Haying (making and putting up hay) is a very laborintensive task in Iceland. Because of the humid climate and frequent precipitation, the hay must be turned several times to allow it to dry. It is then baled and wrapped completely in plastic to protect it from the weather. Much of the hay is used to feed sheep, dairy cattle, and horses during the long winter season. Some, however, is exported, primarily to Norway.

About 5 percent of Iceland’s labor force is engaged in agriculture. In comparison, about 2.5 percent of the United States’ labor force is in agriculture, fishing, and forestry. Thus, even though the total land area in Iceland used for agriculture is small, a larger proportion of the labor force is in agriculture than in many other countries. The farms are small and tend to be more labor-intensive than those in the United States, where large machines perform much of the work.

There are about 4,250 farms in Iceland, many of which have been in the same family for many generations. Even though they are small is size, the farms are usually located far apart. Iceland is self-sufficient in the production of meat and dairy products. Sheep are the most important livestock and hay is the most important cultivated crop. The land is fertile enough to provide grass and other forage upon which farm livestock can graze. Other crops grown outdoors are potatoes, turnips, cabbage, and rhubarb, all on a very limited scale. In a few small valleys that are well protected from the weather elements, radishes, beets, and onions are also grown.

Because of the short growing season, the majority of Iceland’s vegetables and some fruit are raised in commercial greenhouses. Tomatoes and cucumbers are the most common greenhouse vegetables. Geothermal water is tapped to heat the greenhouses and hydroelectric power provides the light. Most of these commercial greenhouses are located along the south coast in Hveragerdi, which means Garden of Hot Springs. Some Icelanders have private thermally heated greenhouses. In these, they raise vegetables, flowers, and other houseplants.Most of the island’s people love flowers and this is one way they can have them year-round.

Sheep have been important to Iceland’s economy since the days of the first settlement, and continue to be today. Because of the relatively cold climate, the sheep grow especially thick fleece, with longer outer hair covering much softer wool. The sheep, hence their wool, also come in many colors, including white, black, gray, brown, mixed, or patched. Because of these natural colors and the softness of the wool, Icelandic woolen goods are highly sought-after and quite expensive. Wool and woolen products have provided Iceland with a much-needed export commodity. Icelandic sweaters, with their wide variety of woven designs and natural colors, are world-famous.

Cattle are raised primarily as cows for milk. The major centers of milk production are located near the greatest concentrations of people, since milk is a perishable commodity. One of these production centers is south of Reykjavik. Another is near the city of Akureyri on the northern part of the island. In addition to fluid milk, other dairy products are produced, including cheese, butter, skyr, cream, and ice cream.

Some pigs, chickens, ducks, turkeys, and pigeons also are raised on farms, but much of the grain fed to poultry must be imported. Because of the high cost associated with feed, poultry numbers are very limited.

Horses were brought to Iceland in the ninth and tenth centuries by the Vikings and Celts. These early horses were the ancestors of the present-day stock. Throughout the many centuries since the horse’s first introduction, selective breeding and life in a harsh climate has resulted in a dramatic change in its make-up. Icelandic horses have evolved into a much smaller animal than their distant ancestors, with a much heavier coat. Its hair generally changes color in winter and becomes even more shaggy.


Iceland’s topography and climate have combined to make it one of Europe’s richest nations in hydroelectric potential. The development of hydroelectric-generating stations providing cheap power has attracted foreign money and industry. Energy-intensive industries, such as aluminum smelting and ferrosilicon plants, have been attracted by this cheap power.

Bauxite, the ore that is ultimately turned into aluminum, is imported from Australia. This ore is processed in reduction plants, the largest located near Reykjavik. Even though the raw material must be imported, the country’s cheap electrical energy makes it possible for Iceland to be a profitable producer of aluminum.

A ferrosilicon plant located on the west coast is owned jointly by the Icelandic government, Elkem A/S of Norway, and Sumitomo Corporation of Japan. This attests to the attraction that cheap power has for foreign investors. This plant also uses imported iron and silicon to produce the ferro-alloys used in the manufacture of steel.

Iceland has five medium-sized manufacturing enterprises whose plants produce fertilizer, cement, rock wool, algin products (for herbal health care), and salt. These plants make use of locally available raw materials and domestic sources of energy in their production processes.All require a high amount of heat and/or energy in their processing.

Seaweed is also a force in Iceland’s economy; it is dried and used for fertilizing the soils on the farms. This requires a great amount of heat, but heat is cheap thanks to the geothermal resources of Iceland. Algin is produced from seaweed and used primarily as an herbal dietary supplement. Because the waters surrounding Iceland are virtually pollution free, this product is widely sought by health-conscious people around the world.

Salt is produced from brine by evaporating the water, leaving the salt residue. This requires an enormous amount of heat energy, which is cheaply and readily available in Iceland. The salt is used to preserve fish, remove ice from the highways, as a seasoning on food, and as an export commodity.

Cement, the bonding agent in concrete, is also produced in great quantities. Iceland is self-sufficient in this commodity, as it is in the manufacture of rock wool. Rock wool insulation is made by first heating basaltic rock to the melting point. The molten rock is then spun into long fibers, similar to our fiber-glass insulation, and used to insulate the buildings of Iceland.

Pumice is a very low-density rock created by volcanic activity. A pumice rock will actually float on water because it is less dense than water. Iceland exports pumice primarily to the Scandinavian countries for the manufacture of aggregate blocks and chimneys. Pumice is also used in the blue-denim jeans industry to stone-wash jeans and other denim clothing to make them look old.


During the 1990s and early 2000s, the number of tourists visiting Iceland has increased dramatically. Iceland is only four to five hours by air from the eastern United States and even less from the European continent.

The chilliest thing about Iceland is its name. In January, the average temperature in Reykjavik, Iceland’s capital, is higher that that in New York City. Almost everyone speaks English, and Icelanders are not really given to formalities.

After all, a country that lists people by their first names in the telephone book cannot be overly formal and “stuffy”! In today’s modern world, there are few opportunities to experience places that have remained little changed through the centuries and yet still be able to experience and enjoy a totally modern environment with all its amenities. This is possible in Iceland, however, where one can visit a world far removed from daily life, bond with nature, and feel a deep affinity with the past. At the same time, urban Iceland is modern in every respect.