2004 October 15 Friday
Iceland Doing Well Outside The EU

Iceland, like Norway and Liechtenstein a member of the European Economic Area, but not a member of the Euoprean Union, now has a higher standard of living than any European country and the world's highest life expectancy.

Iceland has few natural advantages: it is cold, treeless and, for much of the year, sunless. It has a population of 285,000 — roughly that of Croydon. Yet this sparse, chilly speck of tundra has just overtaken Norway to become the wealthiest place in Europe. Faced with a small home market, Icelandic entrepreneurs have expanded into neighbouring countries. In Britain alone they have bought, among other things, Hamleys, Somerfield, Oasis and Karen Millen. Icelanders now enjoy the highest life expectancy in the world. And — here’s the thing — they have achieved all this while remaining outside the EU.

Iceland has much more leeway with which to create a more business-friendly environment.

Being outside the EU, Iceland has been able to cut taxes and regulation, and to open up its economy. For 70 years the Althing has been dominated by the splendidly named Independence party, which has pursued the kind of Thatcherite agenda that is off limits to EU members because of the Social Chapter, the euro, the 48-hour week and all the rest of it.

With a population of about 294,000 people Iceland does not benefit from high levels of internal economies of scale. However, they do earn 70% of their export income from fishing. So they have some of the characteristics of a state that is wealthy due to natural resources. However, only 12% of the population works in fishing and most of the economy is not the fishing industry.

Switzerland, which is not a member of the EU or the EEA but which has only EFTA (European Free Trade Association) member, has a higher $32,700 (2003 est.) per capita GDP (as measured by purchasing power parity) than Iceland which has a per capita GDP of $30,900 (2003 est.). Switzerland manages this feat without natural resources to make a major contribution to the Swiss economy.

If the British manage to break free of the European Union at some point in the future I predict their economy will then start growing more rapidly.

Share |      By Randall Parker at 2004 October 15 02:36 AM  Europe and America

Invisible Scientist said at October 15, 2004 4:10 AM:

I wonder how the diet that is rich in fish is affecting the mental capacity
of the Icelandic people. Same question with the Norvegians, who are also supposed
to eat a lot of fish. The average national IQ scores of Scandinavian countries, are
not very high, possibly due to deer hunter minorities who live in Lapland and Asia,
and immigrants in Denmark, and so we must see these IQ scores in perspective.
But in any case, I am surprised that Iceland is doing so well despite all the
booze and debauchery over there.

I am listing below the national average IQ of all nations from the
web site http://www.lagriffedulion.f2s.com/sft.htm

Country Avg real GDP Regresion
IQ per cap line
Hong Kong 107 20,763 19,817
South Korea 106 13,478 19,298
Japan 105 23,257 18,779
Taiwan 104 13,000 18,260
Singapore 103 24,210 17,740
Italy 102 20,585 17,221
Austria 102 23,166 17,221
Germany 102 22,169 17,221
Netherlands 102 22,176 17,221
Sweden 101 20,659 16,702
Switzerland 101 25,512 16,702
Belgium 100 23,223 16,183
China 100 3,105 16,183
New Zealand 100 17,288 16,183
U Kingdom 100 20,336 16,183
Hungary 99 10,232 15,664
Poland 99 7,619 15,664
France 98 21,175 15,145
Australia 98 22,452 15,145
Denmark 98 24,218 15,145
Norway 98 26,342 15,145
United States 98 29,605 15,145
Canada 97 23,582 14,626
Czech Republic 97 12,362 14,626
Finland 97 20,847 14,626
Spain 97 16,212 14,626
Uruguay 96 8,623 14,107
Argentina 96 12,013 14,107
Russia 96 6,460 14,107
Slovakia 96 9,699 14,107
Portugal 95 14,701 13,589
Slovenia 95 14,293 13,588
Israel 94 17,301 13,069
Romania 94 5,648 13,069
Bulgaria 93 4,809 12,550
Ireland 93 21,482 12,550
Greece 92 13,943 12,031
Malaysia 92 8,137 12,031
Thailand 91 5,456 11,512
Peru 90 4,282 10,993
Croatia 90 6,749 10,993
Turkey 90 6,422 10,993
Colombia 89 6,006 10,474
Indonesia 89 2,651 10,474
Suriname 89 5,161 10,474
Brazil 87 6,625 9,436
Iraq 87 3,197 9,436
Mexico 87 7,704 9,436
Western Samoa 87 3,832 9,436
Tonga 87 3,000 9,436
Lebanon 86 4,326 8,917
Philippines 86 3,555 8,917
Cuba 85 3,967 8,398
Morocco 85 3,305 8,398
Iran 84 5,121 7,879
Fiji 84 4,231 7,879
Marshall Islands 84 3,000 7,879
Puerto Rico 84 8,000 7,879
Egypt 83 3,041 7,360
India 81 2,077 6,322
Ecuador 80 3,003 5,803
Guatemala 79 3,505 5,284
Barbados 78 12,001 4,765
Nepal 78 1,157 4,765
Qatar 78 20,987 4,765
Zambia 77 719 4,246
Congo 73 995 2,170
Uganda 73 1,074 2,170
Sudan 72 1,394 1,651
Jamaica 72 3,389 1,651
Kenya 72 980 1,651
South Africa 72 8,488 1,651
Tanzania 72 480 1,651
Ghana 71 1,735 1,132
Nigeria 67 795 -944
Zimbabwe 66 2,669 -1,463
Guinea 66 1,782 -1,463
Congo 65 822 -1,982
Sierra Leone 64 458 -2,501
Ethiopia 63 574 -3,020
Equatorial Guinea 59 1,817 -5,096

gcochran said at October 15, 2004 9:40 AM:

That fish diet has also resulted in a tremendous amount of cheap geothermal power. Obviously brains and a reasonable government matter, but let's not forget location.

Invisible Scientist said at October 15, 2004 11:06 AM:

But we must ask the anti-socialist Randall Parker the following question: Given
that the Scandinavian countries are essentially socialist, and they do have high taxes one
way or another, how do we explain their high standard of living?

Brock said at October 15, 2004 11:08 AM:

The natural resources help, but the institutions are what really matters. The regulations coming out of Brussels are absolutely smothering, and I am sure the gains seen in Eastern Europe are only a matter of them catching up to Western European practices. They will taper off and cease to grow.

Iceland has only leveraged its natural resources because the people of Iceland have been free to do so.

It seems amazing to me that so many countries refuse to modernize and free up their economy. All over the world states that do so (intelligently) see amazing returns on their efforts. Just look at Dubai, the Singapore of the Middle East.

Engineer-Poet said at October 15, 2004 11:18 AM:

It takes a higher level of technology to harvest geothermal power than wind, so you would expect areas of high wind-power potential (and lots of fish) to have wealth similar to Iceland's.

So far as I can see from the example of Jamaica (Bermuda, Haiti and the Dominican Republic are not on the list), that's not true.  (To confirm my guess, I checked to see how much wind power Jamaica gets.  My first Google hit on "wind power Jamaica" turned up a reference to a site with 8.1 m/sec average wind, which is 18.1 MPH; I don't know how this relates to average power, but given the cubic relationship between wind speed and power it appears to indicate at least class 4 territory, if not class 5.)

There may be other factors at work too.  Icelandic conditions require good cooperation to make it through the year, whereas Jamaica is a "tropical paradise".  If material progress requires the same cooperative abilities, you would expect harsher environments to have people who produce greater progress... and at first blush it appears that they do.

Perhaps the moral is that humans don't go anywhere if life is too easy.

Invisible Scientist said at October 15, 2004 12:31 PM:

I just remembered that when I was in college in the Boston area, 3 of the top students in math
and physics were from Iceland, and they were very patriotic. One of them was planning to go
to graduate school to study geothermal energy, in order to apply it in Iceland.
And when I was in graduate school in California, two of the good students were from Iceland,
and they were partiotic...

Maybe patriotism also helps prosperity overall. This is something we are lacking in the USA,
we are ready, willing, and able to sell the USA to any foreign power (for the right price.)

Randall Parker said at October 15, 2004 12:45 PM:

Invisible Scientist, The high incomes in Scandinavia are mostly due to high IQs. Also, they had accumulated a fair amount and developed a good work ethic before they went socialist. Their culture has deteriorated somewhat due to socialism. But there is a lingering effect from the pre-welfare state era.

Brock said at October 15, 2004 1:29 PM:

Randall -

Why do you keep linking IQ and wealth? My prime example is North Korea and South Korea. The people are exactly the frickin' same; and yet you could not find a greater juxtopposition of feast and famine.

Or look at China for chrisakes! They're smart AND poor - except in Taiwan and Hong Kong! The mainland is poor because their government and social institutions sucked for a very long time. The people of Haiti and the Domminican Republic are largely the same, but DR is much wealthier than Haiti. Again, it's the institutions. The same goes for Canada and the USA. The differences in wealth between nations is almost 100% about government policies and social institutions.

Switzerland has almost no natural resources, but is wealthy - wealthier than France, Italy or Germany; its three "genetic" neighbors with superior resources.

Singapore and Luxembourg are too small to have "natural resources" the way Germany or the US does, but they are wealthier than the people around them.

Mexicans in the USA make 5 to 10 times what they make in Mexico with the same level of training and work. Did their IQ jump 20 points the second they crossed the border? Would I become suddenly stupider if I moved to India?

Say, what happened in Eastern Europe the last ten years? Did they change their policies, or did they just suddenly put "smart juice" in the water? Why didn't the Soviets put smart-juice in the water? Those Russians should have gotten the secret formula from Dubai, where economic growth has left its Middle Eastern neighbors in the dust. Thank Allah for sudden, less-than-one generation increases in IQ!! Where would be we without them?

Ok, seriously, it's about social institutions. Engineer-Poet should be commended for linking the cold weather with economic development. That has been confirmed in the literature. It's not really about cooperation though - it's about capital investment. You have to plan for the long winter and store food. That requires planning and investment. A lot of investments carry on for longer than one year (think a good hunting rifle or warm boots), and so that means you can collect more food more quickly next year, leaving time for other things. Also, the need for investment encourages specialization of labor, leading to further economic growth. These are what I mean by "social institutions." They can also be called "productive habits held by X% of the population."

Gov't policies are of course much easier to recognize. Mainly their goal should be to coordinate what needs coordinating, and staying out of people's way the rest of the time.

Matra said at October 15, 2004 1:52 PM:

Scandinavia is also helped by the fact that it doesn't have an ingrained culture of corruption. That can't be said for many of the countries that have tried socialism.

A bit off topic but I've heard that Iceland is the western country with the greatest interest in genetics. In this homogenous country there is a genetic database for virtually every Icelander to live over the last few centuries, some going back over a thousand years! (I saw this on (British?) TV a few years back, so I'm going by memory). The country apparently has very high levels of breast cancer and the country's genetic database was being used for research.

Randall Parker said at October 15, 2004 2:16 PM:

Matra, One very probable reason that Scandinavia has a low level of corruption is that they are more shy than many other groups of people (and shyness appears to be linked to genetic variants for blue eyes - not sure if the shyness was selected for or is a side effect). This reduces corruption both because shy people are less likely to propose a corrupt scheme to someone else owing to fear how they might respond and also shy people have greater fear of public disgrace and disapproval. Also, shy people are less likely to get to know enough people to form relationships with potential partners in corruption.

Brock, I bring up IQ because it has a huge impact on economic outcomes. You need to learn more about psychometrics. The Bell Curve is a great place to start. Also see Ten years later, a very big deal forgotten and Too Much Reality: The Bell Curve turns ten and You Have To Tell The Truth”—The Bell Curve After Ten Years.

A lot of people can't handle the truth. The truth is just too ugly and too much of a challenge to their most cherished beliefs. Well, I put the truth ahead of what is comforting.

As for places in the world which economically perform worse than their average IQs would lead one to expect: Yes, of course that can happen. People can be prevented from performing up to their potential. But they can not be made to perform above their potential. Also, those countries which have been held far below their potential are growing much more rapidly than those countries that are at similar per capita GDP levels but closer to their potential. So obviously average national IQ has a great deal of predictive value.

Of course average IQ is only part of the picture when it comes to cognitive potential. Distributions matter too as do other cognitive differences. Part of this can be explained by the Smart Fraction Theory and the Smart Fraction Theory II.

BTW, 5 out of the 6 new chemistry and physics Nobel Prize winners are Ashkenazi Jews. Genetics matters greatly.

Invisible Scientist said at October 15, 2004 3:06 PM:

Randall Parker,

Some of the most aggressive, unscrupulous and ruthless people I have spoken to happen to be people
with blue eyes. Although I have not met Adolf Hitler, he also had blue eyes, but he was not shy at all.

Also, note that in the USA, the Askhenazi Jews are the clear majority, there are very few Sephardi Jews
in the USA.
The only Sephardi Jews you find in the world in important concentrations, would be in Israel and
France, and since the French Sephardi Jews had access to good education instead of Israel,
it turns out that the most recent French Nobel laureate in physics, is a Sephardi Jew by the
name of Claude Cohen-Tannoudji.

Brock said at October 15, 2004 6:37 PM:


I just read all of the links you provided (one of them for the second time). The case is powerful. The SFT links in particular zeroed in on my doubts about the link between IQ and wealth, particularly the high-IQ fraction of a population required to create wealth.

My personal hypothesis (admittedly based on un-rigorous analysis) was that only the "super intelligent" were needed to pull a population upwards; the Einsteins and the Bill Gates of the world. The SFT-II link admits (as I had also surmised) that every population will turn out these individuals on occassion. Based on my assumption I had concluded that every nation would be capable of Western growth rates under the right conditions. SFT suggests that boundry of "wealth creating" IQ is lower, and the "critical mass" required is higher, than I had imagined.

I am still concerned by the IQ advances over time. Our genetics should not be changing so quickly to account for 2-3 points per decade. Something else must be at work. That "something else" may over time bring Africa and the "Other" populations above the average "wealth takeoff threshold" IQ of 90-95. If it can be isolated perhaps we can speed it up. If it's testing error ... that would be unpleasant.

On the matter of the Neocon strategy to remake the Middle East, even considering SFT-II, the Neocons are simply up a greater challenge than imagined - but NOT doomed to fail. Recent Sociology literature suggests that average happiness and contentment within a population does not increase beyond GDP $3500 per capita, adjusted for PPP. Marginal increases in money buys you marginal increases in happiness. As social discontent and religious extremism are the prime motivators of terrorism, this is the barrier we must surpass in the Middle East (excluding Oil exports) in addition to social programs like democracy and social tolerance. Nations above the "immiserating" level of GDP show weak correlation between wealth and happiness, but a very high correlation between happiness and liberty. According to SFT Iraq, with an average IQ of 87, has a theoretical max GDP of $9,436 per capita, far above what is required to maximize social content.

Wall Street Journal, 8/13/04, page B1; Reproduced at http://www.amitai-notes.com/blog/archives/000867.html

As you can see our disagreement was in the data plus some flawed "social science" assumptions, not fundamental questions of statistics or biological science.

On a somewhat related note, I guess my wealth-maximising strategy would be to switch concentrations to Intellectual Property Law, learn Japanese, and patent stuff those clever NE Asians keep inventing. The competition for providing IP Lawyering services will be lower in Japan, meaning higher monopoly profits. Hmmm ...

John S Bolton said at October 16, 2004 12:29 AM:

During the 19th century, a number of countries in the tropics were run on a laissez-faire basis, much more so than any country or colony which exists today. They could not improve per capita income, though, because any increase in production was used for population growth. What are the chances for laissez-faire in Africa today, such as would compare to the regimes of the 19th century? Iceland has the highest number of 'nobel prizes per capita', but this includes the soft categories. Medical science, if it can lose its squeamishness over the chances of damaging the sensitivities of disadvantaged populations, may find the reasons for the differences which correlate with latitude. The NYT yesterday mentioned in a 1st page article, that malaria causes retardation in many cases, where children get it. Populations which need an immune specialization to react to tropical parasites, will not also be naturally resistant to the opposed class of pathogens, such as for TB, but the northern groups can be.

John S Bolton said at October 16, 2004 12:41 AM:

If the sickle-cell trait had not been discovered in the 1940's, before the government's professoriate adopted the policy of conspicous anti-racism first and truth second, would it remain still undetermined? Regarding the EU and Iceland and Switzerland; those countries do well outside the cross-subsidizing EU regime, because it is mainly a mechanism to parasitize the richer countries, in order to subsidize inefficiency in the countryside and especially in the poorer member countries. The organization is a net disadvantage, and should be put down.

Randy McDonald said at October 16, 2004 6:18 PM:

Icelandic wealth, like Norwegian wealth, can be explained by the fact that these Nordic countries can monopolize a single valuable resource, and are governed by competent regimes which have managed these resources well; compare Newfoundland, or Venezuela. The wealth of these two countries relative to western Europe as a whole is no more inexplicable than the wealt of the United Arab Emirates relative to the rest of the Persian Gulf: There's a lot of natural resources, and a small population. Switzerland might be marginally more wealthy than France or Germany, but it's been experiencing relative decline since the Second World War as the rest of Europe grows and the Swiss advantage diminishes.

Mark said at October 16, 2004 6:44 PM:

Brock, sure governments can have a retardation effect of its populations IQ. What's an individual with an IQ of 150 going to do for a living in North Korea? Escape, go to prison, starve to death, or work for the wonderful leader? However I don't know how much do reverse is true, if you sent Paul Martin to Haiti would things change?

Dominican Republic's population is 16% white and 77% mixed and 11% black while Haiti is 95% black and 5% mixed or white. That's a big difference in my eyes, much bigger than any institutional differences between the two nations.

Randall Parker said at October 16, 2004 7:33 PM:


While Switzerland's economy may not be growing as fast as that of Europe as a whole the same is true of Germany. Switzerland and Germany both hit peak GDP growth rates for recent years in 2000 at 3% and both dropped down to almost nothing last year. Well, East Germany is far less developed and so Germany as a whole ought to be able to grow faster. Yet it is not doing so.

It is easier for the less developed Eastern European countries that are no longer under communist rule to grow faster. More generally, it is easier for lower per capita income countries to grow faster than higher per capita income countries with similar IQ distributions. The higher per capita GDP countries have to develop new products and production techniques whereas the less developed countries just have to accumulate capital.

Randy McDonald said at October 17, 2004 6:33 PM:

While Switzerland's economy may not be growing as fast as that of Europe as a whole the same is true of Germany. Switzerland and Germany both hit peak GDP growth rates for recent years in 2000 at 3% and both dropped down to almost nothing last year. Well, East Germany is far less developed and so Germany as a whole ought to be able to grow faster. Yet it is not doing so.

1. West Germany and Swizerland have comparable per-capita GDPs. The various sources I've seen on the per-capita GDP of East Germany suggest that it's around ~20K, and that a period of strong convergence in the early to mid 1990s has now mostly passed, with more inviting targets for investment to the south and east. I've written more about the East German situation here.

2. Over the 1973-2003 period, West Germany narrowed the gap substantially: compare the statistics from 1973 and from now. It's only reunificatino, and the inclusion of a substantially poorer East Germany, which brings down Germany relative to Switzerland. And Germany was the slowest-growing major European economy over the 1990s.

It is easier for the less developed Eastern European countries that are no longer under communist rule to grow faster. More generally, it is easier for lower per capita income countries to grow faster than higher per capita income countries with similar IQ distributions. The higher per capita GDP countries have to develop new products and production techniques whereas the less developed countries just have to accumulate capital.

No disagreement on this point.

Going back to my original point, on the per-capita GDPs of European states inside and outside the European Union, Iceland and Norway are rich not because they're outside the European Union, but rather because they control and manage competently abundant natural resources, pairing these with well-trained populations, while Switzerland's initial advantage has quickly been fading.

Randall Parker said at October 17, 2004 8:17 PM:


But where is the economic advantage for a country to be part of the EU? I do not see it. The Eastern European countries would probably grow just as fast or faster outside of the EU but in EFTA or the EEA instead. Or if they grow faster due to EU aid that comes at a cost. The Eastern European countries that get EU tax aide get that money at the expense of the taxpayers of other EU countries. That money does not increase net wealth in Europe. It probably net destroys wealth.

So I do not see the EU as a source of greater wealth for Europeans. They keep getting closer and their economic growth rates ovreall continue to lag behind that of the US.

Randy McDonald said at October 18, 2004 2:45 PM:

A counterfactual scenario: The various plans proposed in France and West Germany to establish a European economic entity of some kind in the 1950s never come to fruition. No ECSC, no Euratom, no WEU. With exceptions like Benelux and the Scandinavian states, the states of non-Communist Europe conduct their relations bilaterally.

What is the outcome for non-Communist Europe's economy? Without the economies of scale provided for production by European harmonization, or the economies of scale provided for labour by European labour markets, or the economies of scale provided for capital by European regulators and integration, does non-Communist Europe become as wealthy as the group of countries we now know? I'm skeptical. The effects wouldn't be felt as strongly in the relatively wealthy states of northern and western Europe, IMO, as in southern Europe, to say nothing of post-Communist central and eastern Europe.

The European Union provides necessary economies of scale for its constituents, and an integrated domestic market not dominated by a single state. Germany's economic relations with post-Communist central Europe are mutually profitable for both sides; if they were conducted merely bilaterally rather than through the EU's aegis, I'd wonder at how durable things would be.

For wealthy societies like Iceland, Norway, and even Switzerland, it might be acceptable to be on the outside of the European Union, being required to implement European regulations and contribute to European regional-development funds without having any say on how those regulations are being formulated or on how those funds are being disbursed. For poorer countries like those which recently joined, though, the potential costs of exclusion are too severe. Given current protectionist and anti-immigrant sentiments in most of the EU-15, had the central Europeans remained outside it's not out of the question that they might have been substantially excluded from EU-15 markets. Inside, they get to determine the terms of their relationship.

Randall Parker said at October 18, 2004 3:07 PM:


The Euros could have lowered their trade barriers without creating the EU. GATT, NAFTA, EFTA, and other agreements have lowered trade barriers. Trade has increased greatly between non-EU countries.

Also, Switzerland is not part of the EU and it managed to create economies of scale that enabled a high living standard. Singapore managed likewise without joining a federal state.

Randy McDonald said at October 21, 2004 3:28 PM:

The Euros could have lowered their trade barriers without creating the EU. GATT, NAFTA, EFTA, and other agreements have lowered trade barriers.

Trade barriers aren't the only barriers lowered, though. GATT, NAFTA, and EFTA don't cover migration, for instance. Just as importantly, free-trade associations don't establish significant supranational authorities with the capability of enforcing homogeneous standards; customs unions work more effectively.

Finally, neither GATT, NAFTA, nor EFTA corresponded to any kind of supranational ideal. The European Union does.

Also, Switzerland is not part of the EU and it managed to create economies of scale that enabled a high living standard.

Yes. Switzerland did benefit from the establishment of a common market surrounding it on almost all sides and creating a relatively consolidated market of ~180M rather than six considerably smaller and more separate markets of at most ~60M.

Singapore managed likewise without joining a federal state.

manzhivago said at February 25, 2007 3:46 AM:


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