I have long had a interest in the Icelandic economy and my views on the Icelandic boom-bust are well know.
Iceland has come quite well through the crisis – and there is a moderate recovery underway in the economy and the debt situation has clearly been stabilised. However, there is one area where I continue to see a serious problem and that this capital controls. In the wake of the crisis the IMF more or less forced the Icelandic government to introduce draconian capital controls.
Now two Icelandic economists Ragnar Arnason and Jon Danielson have written a excellent comment on the website Voxeu.org about the capital control. You should read the comment for yourself, but here is a bit of the conclusion:
“Thus, in our view, the imposition of capital controls was both unnecessary and unjustified. Without them, the exchange rate might have temporarily fallen even further in a worst case scenario, in which case a surgical intervention in the form of a temporary tax on short capital outflows would have been a sufficient policy response.
Instead, the IMF forced the Icelandic government to impose draconian capital controls of a type last seen in developed economies in the 1950s, causing significant short-term and long-term economic damage. The capital controls were initially touted as a temporary measure, but now three years after the event it looks like they are there to stay, and as the domestic economy adapts to their presence, they will be increasingly costly to abolish. After all, the last time Iceland imposed capital controls in the 1930s, they lasted until 1993.
The capital controls have resulted in an intrusive licensing regime, with government permission required for foreign travel and those emigrating prevented from taking their assets with them. Both are direct violations of the civil rights of Icelandic citizens and Iceland’s international commitments as a democratic European country.
Our hope is that other countries facing a similar situation will have the good fortune of receiving better advice from the IMF.”
Lets just say it as it is – I agree with every single word.