The Role of Government in Economic Growth and Development: A Comparative Study of Malta and Iceland 1960-1980

Abstract

This is a comparative study of the two small island states of Iceland and Malta in 1960-2000. It focuses on the role of the two governments as they enacted public policies, intervened in the functioning of their economies and foreign trade, invested in infrastructure, enhanced human capital and developed welfare states. The governments aspired to boost economic growth, improve quality of life, raise living standards, increase exports, combat recessions, create jobs, reduce trade and economic volatility, reap political gains and advance foreign relations. The thesis compares economic and political developments and their interplay, advancing international relations and different routes to European cooperation. With their emerging public sectors, political systems, and political customs and conflicts, both island states tried to secure their rights, livelihoods and positions amongst other European nations. Around 1960, Iceland´s economy was relatively advanced compared to Malta. Iceland was a financially self-standing republic, financing growth through exports, foreign loans, Marshall Aid and locally accumulated capital; and gifted with prolific fishing grounds and rich renewable energy resources. The national economy was vulnerable due to dependency on the volatile fishery and its export markets. However, Iceland could not yet control and manage the fishing grounds, as they were open for foreign deep-sea trawlers until the mid-1970s. Iceland maintained its focus on developing the fishery further during the last quarter of the twentieth century but with parallel government-driven developments in the power sector, while foreign investors built the associated power-intensive industries. A transferable quota system was introduced and shaped in the fisheries from 1984 to the 1990s. The new system increased efficiencies and labour productivity and reduced the over-capacity of fleet and plants. The 1970s and 1980s were marked by slack macroeconomic policies - hyperinflation, frequent devaluations of the ISK, rampant over-investments, subsidies in farming and uneconomical redistributive systems in fisheries. The economy became more liberal, diversified, and productive in the 1990s, helped by the European Economic Area Agreement, which became effective in 1994. In contrast to Iceland, Malta pursued rather stable macroeconomic policies throughout the period considered. In the 1960s, Malta was at first preoccupied with the politics and administrative issues of independence, which was achieved in 1964, and then during the remainder of the decade with preparations for diversifying and strengthening the economy in iv reaction to a massive down-scaling of the workforce in the dockyards and the British services. The 1960s saw a large-scale emigration. Based on local development plans and in line with advice from foreign consultants, manufacturing for exports was targeted, and foreign technology and investments were attracted to Malta. Industrial estates were built, and incentives offered to foreign investors. Manufacturing firms, e.g. in textiles, electronics and pharmaceuticals, set up plants in Malta. New hotels were built in the 1960s, initiating a growing tourism industry. Air Malta was founded, and Malta became a popular tourist destination. In the 1990s and the 2000s, financial services emerged as another successful economic initiative. While Iceland restricted foreign investments and the shareholding of foreign firms in its strategic sectors, i.e., the fishery and renewable power production, Malta used foreign investments to its advantage. Iceland and Malta took steps in easing foreign trade restrictions. Iceland made its first move in liberalising domestic trade in 1960 and took a further step when it joined EFTA in 1970, involving a customs union with the EFTA countries. That same year, Malta signed an Association Agreement with the European Economic Community (EEC), creating a customs union based on free trade between Malta and the EEC. Malta developed a rather centralised political system, while Iceland evolved a more decentralised system. Malta inherited its political system from Britain, and Iceland its system from Denmark. Both had self-government, preceding the republic in Iceland (1944) and independence in Malta (1964). The political system in Malta paved the way for two-party politics, with one party in power and the other in opposition. Meanwhile, the Icelandic system favoured multi-party politics, which needed coalitions of 2-4 parties at any time for a majority in the parliament. Two government levels made the political processes in Iceland more complicated than in Malta, as many policies and programs had to be negotiated between the state, the local authorities, the trade unions and business federations. One of the foremost differences between the two island states was the size of the landmass, topography, climate and location. It resulted in dissimilar political systems with a strong geographical dimension in Iceland. Their dissimilar location in the North Atlantic and the Mediterranean swayed their choices of foreign trading partners and political allies towards adjacent neighbourly countries.