The Icelandic economy is relatively small but growth and input have been sufficient to provide Icelanders with living standards that are among the highest in the world. Use of renewable natural resources such as the country's rich fishing grounds and its abundant hydro-electric and geothermal power capacity are the most important sources of export income. Diversification is increasing with fast growing sectors including software and biotechnology industries, tourism and the export of fisheries know-how.
After settlement in the 9th century, the economy of Iceland soon assumed a form which would remain much the same for centuries, determined by natural resources and the constraints of culture and technology. The main livelihood was animal husbandry of an extensive nature, wide areas used for grazing and scattered meadows for haymaking. At the beginning of the 20th century, two-thirds of families still lived from agriculture.
The industrial revolution started in Iceland at the beginning of the 20th century. Milestones in industrialisation were the motorisation of the fishing fleet and the import of trawlers, the first being bought in 1904. In 1905 the Fisheries Investment Fund was established to promote fisheries. In the decades that followed, the economy diversified into the exports of manufactured goods, process industries and a range of services for export and domestic use. At the same time the marine sector diversified significantly.
Rapid developments in the areas of fisheries, manufacturing and services transformed the somewhat stagnant agricultural economy in place since the Settlement into a modern industrial state.
The rich power resources of Iceland lie in the rivers and geothermal fields. All other indigenous power resources are considered insignificant with regard to possible utilisation. At present only a fraction of the potential of the power resources has been harnessed. Hydro power is the main source of electricity, while geothermal energy is mainly used for space heating.
Electricity was first introduced in Iceland in 1904 when the small town of Hafnarfjörður, near Reykjavík was harnessed with the building of an initial plant of 9 kw. Today, around 99.9 % of the Icelandic nation have access to electricity from public supply utilities. Iceland is highly ranked in consumption of electricity per capita, largely a result of its abundant hydro power resources. Power plants were originally built by the Reykjavík municipality, but the law under which they were set up stipulated that the government would provide the neccesary funds when the time came to enlarge them to more than half their initial size, and thereby become a part-owner. Since then, various large rivers have gradually been harnessed in more densely populated areas of the country. Today electric power potential from hydro and geothermal resources is estimated to be 50,000 GWh per annum.
In 1999 Landsvirkjun (The National Power Company), the prime supplier of electricity in Iceland completed work on the Sultartangi power plant, a new 120 MW hydropower station. The Sultartangi project will boost production capacity in Iceland's electricity system by 880 Gwh p.a. Economically harnessable electricity from hydro sources in Iceland, taking environmental factors into account, is estimated at around 30 TWh per year. An additional 20 TWh of electricity can be produced using geothermal power. At the moment, only about 10 % of this potential is being used.
The building of power-intensive industries allows Iceland to export its energy. There are now two aluminum smelters in Iceland, and a third is under consideration. Aluminium production using hydroelectric power sources reduces CO atmosphere emissions by 90 % compared with aluminium production based on coal-fired electricity generation.
Iceland is one of the leading fishing and fish exporting nations in the world. In 1999 the export value was USD 1.33 bn, placing Iceland amongst the top five nations worldwide. The total catch in 1999 was 1.74 million tons, again placing Iceland in 2nd place in Europe, 15th place worldwide.
The importance of fishing to the Icelandic economy rests first and foremost on the large share of fish products in exports. Some three-quarters of Iceland's merchandise exports are accounted for by fish and fish products and their share in the country's foreign currency earnings is about 50 per cent. However, fishing employs only some 5 per cent of the labour force and fish processing accounts for another 5½ per cent. Its share in the labour market has been on the decrease over the past decades, having peaked in 1930 when about 23 per cent of the population were employed in fishing. This is due to the fact that fishing today is relatively more capital-intensive. The freezing plants have become highly automated, with rapid throughput and state-of-the-art technology, and many of the trawlers have on-board processing capacity and are very well equipped with fishing gear.
Manufacturing gained ground in the early 20th century. Diverse changes in the beginning of the century paved the way for the industrial revolution. One factor that had a bearing on the manufacturing was electricity and today the largest manufacturing industries are based on extensive usage of electric power.
The development of manufacturing industry in Iceland in the 20th century is closely tied to customs duties and exchange rate policy. In the first stage of the development of manufacturing it did not enjoy any protection through customs duties, and foreign currency was freely available.
The largest manufacturing sectors are the power intensive industries, primarily aluminium. Today the Government encourages investments from foreign enterprises to develop power intensive industries. In 1999 manufactured products accounted for around 26 percent of total merchandise export and small scale manufacturing units are increasingly producing goods for export.