Iceland's inflation is 60%, and the people just smile
| Reykjavik, Iceland
Americans and most other people around the world grumble and tremble at the sound of the word inflation. In Iceland, the people shrug their shoulders, smile, and go on buying.And inflation here is running close to 60 percent a year.
"We have learned to adapt to inflation," Jon Sigurdsson, the director of the National Economic Institute, told this reporter. "We don't have to like it, but we have learned to cope with it."
Richard A. Ericson Jr., the American ambassador, observed that "the resolution is in the spiral. When prices go up, wages go up to meet them."
One can't call many places unique and get away with it. Nonetheless, in truth this nation island is unique. Perhaps that is why inflation makes so few waves here.
For one thing, there is not much difference between the people who earn the top income and those close to the bottom. For another, there is the size. In a country just a little smaller in area than Kentucky (39,000 square miles) reside a mere 225,000 people -- fewer persons than in the city of Louisville alone.
From that population must come all the bankers and fishermen, the teachers and brick masons, the civil servants and doctors. Iceland has them all, in a country whose northern tip touches the polar circle and whose temperature, at least in the capital city of Reykjavik, rivals that of San Francisco.
Mr. Sigurdsson, a handsome young man with a wry smile and a perfect command of English, was appointed in 1976 to head a national commission to come up with answers to the inflation problem. At that time, the cost- of-living index had just jumped 32 percent over the previous year.
In 1978 his commission proposed a number of sweeping changes. By then, the inflation rate was up to 44 percent. No one paid any attention to the recommendations, and the annual rate at which inflation was running in the first month of 1980 was a whopping 61 percent!
In fact, so unconcerned was the public that the political party that based its campaign on beating inflation, the Independence Party, lost ground in the recent election. The country was thrown into a three-month crisis resolved only in February with the selection of a coalition government including the extremes of both left and right.
Mr. Sigurdsson does not expect major changes. "A coalition is a mechanism for compromise," he observed in one of his many quotable lines, "not a mechanism of con
Inflation is nothing new for Iceland. As far back as 1950, the cost of living was going up 9 percent a year, compared with 2 percent in the United States. The main point here is that Iceland's economy is heavily based on a single industry, fishing. Both the annual catch and the purchasing power of other countries tend to produce inflationary trends.
In the 1960s and '70s the rate of increase began going up even faster than the sharp inflationary trend in the United States and Western Europe.
It wasn't entirely unplanned. "As with all economic movements, it was a matter of trade-offs," Mr. Sigurdsson said. Rather than just stability, Iceland -- with what Mr.Sigurdsson called its "frontier mentality" -- chose rapid growth , full employment, social- welfare advances, and a favorable balance of payments. Today, it has them all.
While the rest of the world's economy has been sluggish, the rise in Iceland's gross national product has been running at 4 percent or more a year. Unemployment is nonexistent, and the social-welfare budget continues to rise. Iceland's export income matches its imports despite the monstrous rise in oil prices; gasoline costs $4 a gallon.
The balance-of-payments picture is a direct result of the absence of a foreign-exchange policy, an absence counter to the practice in many nations. The Icelandic krona is simply allowed to float, so that it reduces in value every year. It now takes 400 kronur to buy a dollar; just two years ago you could buy a dollar for 270 kronur -- and, remember, the value of the dollar has been falling, too!
Iceland's solution may not be permanent. But the public doesn't seem concerned. "We just don't bother to save money," observed Bryndis Schram, who produces children's programs for Iceland TV. "We spend it."
Mostly, she added, Icelanders spend their money on tangibles, items whose value is certain to increase. The construction busines is booming. "Everybody wants to buy a house," she said. "Or a car."
The Volvo company took judical notice of Icelandic public opinion recently by launching a campaign whose advertising slogan was: "Don't buy a car, buy an investment."
It makes sense, too. As Ambassador Ericson pointed out, "You can get 31 percent interest in savings at your local bank, but you'd be losing money."
Wages stay up under a national indexing system. Salaries are adjusted every three months to the new cost-of-living index.
"We catch up," Mr. Sigurdsson remarked, "but the danger factor is that we never quite catch up altogether. We always lose a little bit, and what we lose most is time. Inflation is the thief of planning."
No one knows what the future will bring, but it is in the present that the hardworking, spendthrift Icelanders live.
"Yes," Mr. Sigurdsson said, with a wry grimace. "We don't like it, but we have learned to live with inflation. We have learned that inflation does not have to dislocate society, as it did in Weimar Germany."
The new coalition government has announced formation of a committee to tackle inflation. "We will lose some sleep over inflation," Mr. Sigurdsson said, "but not much."