The I's Have It

Last year, when my wife and I traveled to Iceland, we wondered what was the secret to the apparent success of the Icelandic economy. An article in the Economist about Icelandic firms investing in Europe sheds some light:

All this from an island of only 300,000 people. Not all the money is Icelandic: SIF, for instance, paid for Labeyrie partly via a syndicated loan in London. Yet it raised $300m, mainly from local sources, in a later share issue; and this soon after a Kaupthing issue had raised $550m. What is the source of Iceland's financial muscle?

A broad answer is almost 14 years of deregulating and privatising government. Specifically, Iceland, like Luxembourg or Ireland, has become a friendly place for financiers and, like Switzerland, is not subject to EU tax-prying: Burdaras's biggest shareholder is Landsbanki's Luxembourg private bank. And corporate profits, taxed at 50% in 1991, and, after cuts, still at 30% in 2001, now pay 18%, the lowest tax-rate in the OECD after Ireland and Hungary.

Few as they are, Icelanders are also feeling richer. After a slide in 2001-02, the economy is back to 4-6% growth. And, with inflation and interest rates mostly low, house prices, bonds and equities have soared in recent years, encouraging a sharp rise in household borrowing. Some of this has gone, indirectly, into investment overseas.

Deregulation, privatization, and lower taxes? Imagine that.

The same issue of the Economist also describes in an interesting twist on outsourcing in India. It's no longer just the jobs that are moving over there:

It is a scene replicated in hundreds of huge offices across India: row upon row of young people behind flat-screen computer terminals talking to the other side of the world via their keyboards or telephone headsets. In the office of Tecnovate eSolutions in Delhi, the Swiss, Swedish, French, German and other flags give the d cor an original touch. Even more unusual are the blond heads and Swiss, Swedish, French, German and other faces. Instead of simply moving jobs to India, Tecnovate has taken the next step: it imports some of the workers, paying them Indian wages.

Surely the whole point of outsourcing is that labour in places such as India costs a fraction of the wages paid in rich countries? Tecnovate has spotted that, for many young Europeans, a year or so in India seems attractive and even exciting. One-tenth of its 950 workers are Europeans.