50 years ago, Iceland was an afterthought—a small, barren, insignificant island in the North Atlantic.
It had little money, little power, and a tiny population. Its economy was primarily dependent on fishing. The country sits in an area with plentiful supplies of desirable species of fish and the capture and processing of this resource proved a stable source of employment for the country’s small population, but it was not a sector that could push the country onto the world stage.
Iceland’s economy had little blips of growth throughout the 80s and 90s, but none permanent or significant but then, in the 90s, economic reform occurred. Taxes were slashed, state owned enterprises were privatized, and slow but constant growth began. It continued, briefly faltered, and then just exploded. Private industry took hold of the economy, the financial industry was deregulated, and Iceland’s banks came to hold hundreds of billions of dollars in assets. By 2008, Iceland was the fourth richest country in the world.
It was on top of the world. Reykjavik became a small but significant financial capital. It had everything a small country could want—money, power, attention—but then it all just came crashing down. The economy imploded. As the global recession began, trust in Iceland’s small banks started to fall and so did the value of the Icelandic Krona. Customers came to withdraw their savings and the banks just didn’t have the money to give them.
Iceland’s banks dealt with ten times more money than the entire GDP of Iceland so the country just couldn’t bail them out. The banks collapsed and with them the country’s economy did too. But Iceland had other assets. One of tourism’s biggest barriers in accessibility.
If you can’t get to a place, no matter how much you want to go, you won’t go. As an extreme example, almost anyone would probably like to visit the South Pole and you can visit the South Pole, it just costs tens of thousands of dollars. If you took a few zeros off that number, the number of zeroes on the visitor count would certainly go up. In Iceland’s case, it already had accessibility.
Despite its population of only around 340,000, Iceland has long had a fairly large airline—Icelandair. You see, in the 1950’s international airline travel was all heavily regulated with most prices fixed by IATA so airlines had little ability to compete on price. While a route like New York to London nonstop would be IATA regulated, a connecting itinerary from New York to Reykjavik to Luxembourg, on the other hand, would not be IATA regulated as it was a connecting itinerary so this is what Icelandair flew. With this, they could undercut other airlines’ fares by hundreds of dollars.
Thus, Icelandair became one of the first ever budget airlines and it grew into the transatlantic airline of choice for students, backpackers, and other travelers on a budget. Its numbers of planes and destinations grew and grew and all of these people were flying through Iceland but they weren’t actually going to Iceland. By 2005, more than two million passengers were flying through Keflavik airport, Icelandair’s hub, annually despite only 370,000 of those actually visiting Iceland. Of course the other asset Iceland has are things people want to see—unspoiled, unbridled natural beauty. It is one of the most spectacular and unique natural environments in the world and its only a two hour flight away from the UK.
Now, there was just one more thing Iceland needed in its tourism recipe—affordability. With the 2008 financial crisis and banking industry collapse, the Icelandic Krona too collapsed. From the beginning to end of 2008, its value against the US dollar halved with a similar story against the Euro. Of course, that meant that those using the Dollar and Euro, Americans and Europeans, could buy more for less in Iceland. So, Iceland had accessibility, it had affordability, it had sites people wanted to see, it had all the fuel for a tourism explosion—it just needed ignition.
In a way, the very event that crashed the Icelandic economy initiated the start of its revitalization. The Icelandic banking collapse made world headlines and placed Iceland on the map. Then, in 2010, two years after the economic crash, Iceland made even bigger headlines with the volcanic eruption of Eyjafjallajökull. The ash cloud that ensued drifted over Europe preventing almost all flights from operating for a period of six and a half days. All in all, over 100,000 flights were cancelled because of Iceland’s ash cloud but because of that, reporters from all around the world descended on Iceland broadcasting images of the nation’s volcanoes into the homes of millions. It was free, worldwide advertisement for Iceland’s natural beauty.
A few years after that, Iceland became the smallest nation ever to quality for a major tournament as its national football team competed in the Euro 2016 tournament. The team lost, but received significant attention for its qualification and then it ultimately qualified and competed in the 2018 World Cup. With these three events, Iceland was now known, its tourism industry had ignition, and word spread fast. It became the tourism destination of the 2010’s especially for Europeans and Americans. Iceland hit double digit tourism growth year over year, year after year. They had their first year with a million visitors and then only two years after that they had their first year with two million.
Tourists just would not stop coming. New hotels opened every month, new rentals opened every day, online casinos are legal like in Ireland. Iceland’s roads carried a non-stop procession of camper vans. New routes were opening to Keflavik Airport faster than they could build gates. Icelandair was adding new destinations left and right.
Soon enough, you could get to Iceland nonstop from more than 50 cities worldwide. A second Icelandic airline, Wow Air, opened up and was soon too flying thousands of people into Iceland each day. Iceland had real, considerable GDP growth topping out at over 7% annually—almost unheard of for a wealthy nation. Now, taking a step back, worldwide, the tourism industry is absolutely enormous. $1.6 trillion was spent on international tourism alone in 2017. Capturing a part of this industry is a viable strategy for economic development.
Some countries grow off manufacturing, some off mining, and some off tourism. Now, in the past century, there are so many stories of countries that went from nothing to something in an instant thanks to oil. All of these countries, though, know that oil is finite and that they need to use the wealth that oil generates to develop new industries if they want to survive as wealthy nations in a post-oil economy. The UAE, for example, is one of the better diversified oil-economies.
Oil revenues have gone from accounting for 90% of the country’s GDP in the 70’s to around 25% today. A lot of this growth in non-oil industries came from an aggressive pursuit of foreign direct investment to become the definitive business hub for the Middle East, but an industry that played no small part is that of tourism. 21 million people visited the UAE in 2018—quite impressive for a country physically smaller than Iceland and even more impressive considering that number was only 12 million in 2012.
As a country with fewer natural tourism assets than Iceland, the UAE government has put a lot of focus into crafting Dubai into the entertainment capital of the Middle East to draw these tourists in. As a result of all these efforts, economically, the UAE has gone from nothing; to an unstable, oil-based something; to a diversified something that will likely survive a future without oil. Other nearby oil-dependent economies are paying attention to the UAE’s path. Saudi Arabia, Bahrain, Qatar, and Oman have all each also indicated their intention to grow tourism to be a sizable element of their post-oil economies. This is part of the reason, mimicking Emirates and the UAE, that these neighbors have devoted vast sums of money into developing and improving their state-owned airlines—Saudia, Gulf Air, Qatar Airways, and Oman Air. Mimicking the story of Iceland even further, Qatar has already established itself as a major connecting airline hub thanks to its advantageous geographic position and is using this to introduce more and more people to the country itself in the lead up to the 2022 Qatar World Cup.
But tourism has its limitations. It can do a great job of pushing up those indicators, but not all economic growth is created equal. For one, tourism is a service industry and these jobs are low wage. Clearly, most people who were working as banking executives in Iceland’s collapsed finance industry are not going to start working in hotels. As such a high-wage country, Icelanders are just a bit too expensive for many of the jobs in the tourism industry.
As a result, Iceland opened its borders slightly and 32% of those now working in its tourism industry are foreigners—many from lower wage countries. Tellingly, 37% of staff in Icelandic hotels are Polish while only 24% are Icelandic. Of course, Iceland has absolutely no problem with unemployment right now, which is mostly a good thing, but the labor that’s in demand is low-paid with limited upward potential. Nobody’s making their millions manning front desks. In addition, the tourism industry is highly seasonal. In Iceland in 2017, just 13.6% of total visits happened in the entire season of Spring.
It’s hard to offer stable employment when one month could have triple the demand of another so the tourism industry provides a great source of casual, seasonal, low-paid employment but its much tougher to make a true career in the industry. In all, employment is good, but higher quality employment is better. Of course, in addition, what most people go to Iceland to see is its natural beauty.
That is its strategic asset, but the big conundrum with nature tourism is that use of nature deteriorates nature. Of course, you want to allow people to experience nature but you can only let so many people see nature before it becomes not all that natural. More people require more roads, more parking lots, more paths, soon enough it starts to look like an amusement park and conversations about nature conservation start to arise. Then there are problems with an impact on national culture, a housing crunch due to the rise of rentals, implications on the currency due to heavy conversion demand from abroad, and just the simple effect of having so many people visit what was previously such a quiet country. Overtourism has become a serious concern for Iceland.
Regulations and infrastructure simply have not been able to keep up with the increased demand. Of course, one final issue with the tourism industry is that it is fickle. Today’s trends will be tomorrow’s memory and just as soon as the tourism industry can explode, it can implode. If the recipe for success changes, so does the result. In 2017, 1/3 of all passengers flying to, from, or through Keflavik airport, Iceland’s largest, flew on Wow Air—Iceland’s #2 airline. Unfortunately, though, Wow never reached profitability, ran out of financial runway, and collapsed.
Overnight, the airline funneling hoards of paying tourists into the Icelandic economy ceased to exist. Now, Wow Air was not a large airline, in its final days it only had ten planes, but to a country as small as Iceland, those ten planes made a difference. The Icelandic economy was estimated, by the Icelandic Central Bank, to grow 1.8% in 2019 but since Wow Air’s collapse, that figure has been revised to estimate a shrinkage of 0.4%. The year was also supposed to end with unemployment of 3.1% but now that figure is estimated to be 3.9%.
Perhaps more worryingly, though, 2018 ended with something Iceland had not seen in quite a while on its visitors statistics—a negative. The number of visitors to Icelandic airports in December 2018 shrunk by a percent relative to December 2017—and that was before Wow Air’s collapse. And then January came—down 6.6%; February—down 6%; March—down 13.1%; and April—down 26.4% compared to the April before. The Icelandic economy is once again changing as its unstoppable tourist invasion is coming to a stop. Now, nobody’s entirely sure what’s causing this drop. Just like with the initial uptick, one can only make an educated guess on why thousands or millions of people are changing their travel preferences.
Maybe its that Iceland is getting too expensive, maybe its that Iceland fell out of fashion, or maybe there’s somewhere else taking Iceland’s tourism dollars. What’s sure is that it’s not all because of Wow Air’s collapse—that certainly didn’t help, but this is a bigger trend—but this slow-down is not all entirely bad news. This gives the country time to catch up.
It had a bit of a wild-west period of tourism during the explosion but it can now collect itself and figure out how to turn this trend into an industry that can translate to long-term, stable economic success. Thanks to Iceland’s small size, its economy is small and nimble—they’ve proven in the past that they can completely reinvent themselves even within a decade—and perhaps this is just the start of revolution number three. Now, in the 2000’s, when Iceland’s finance industry was so strong, one of the things that a lot of Icelanders would have learned is quantitative finance. This is the sort of math used to model how the financial markets work and its quite useful to know if you want to get into stock trading or other fields of finance. Brilliant has a fantastic math for quantitative finance course which teaches the complex topics in an approachable way that anyone can understand.
This, in fact, is Brilliant’s specialty—making the complex approachable by teaching the intuitive principles behind a concept. If quantitative finance isn’t your thing, Brilliant has dozens of high-quality courses on everything from logic to computational biology. One new feature is that, with the mobile apps, you can now download Brilliant courses to take on the go, whenever you have time. Best of all, by being one of the first 200 to sign up at brilliant.org/Wendover, you will get 20% off their annual premium subscription.