Efling Trade Union’s priorities for Iceland’s industrial policy
The government is currently working on shaping an industrial policy “to promote sustainable growth of industries, increased productivity, and a healthy labour market.” The main objective of the policy is “to increase the number of well-paid jobs across the country and support economic growth in balance with society, the environment, and infrastructure.”
These are fine goals, but what truly matters is how they are put into practice.
The toolbox of industrial policy
The main tools of public industrial policy are generally considered to be the following:
- Financial support (grants, equity, guarantees)
- Tax incentives for companies
- Protective tariffs
- Deregulation and reduced government intervention
- Infrastructure development
Direct financial support from the state to companies or industries has been out of fashion in recent decades, except mainly in the form of innovation grants. In Iceland, there is generally little need for such support these days. There is strong and rapid growth in land-based aquaculture, with pension funds investing heavily. Pharmaceutical manufacturing is also expanding quickly without needing public subsidies. The software sector benefits from a favourable innovation environment, though efficiency could be improved. Innovation grants in Iceland are relatively high, and the OECD has pointed out that closer monitoring is needed of how those funds are used. In general, companies in Iceland, as well as those from abroad, have broad access to capital, so there is little need for increased public subsidies, loans, or guarantees.
Tax incentives have been widely used in Iceland, with generally low taxation of corporate profits and capital income compared to neighbouring countries. Tourism has benefited from extensive special tax incentives, which undoubtedly accelerated its growth in recent decades. The fisheries sector has faced minimal resource fees, with fishing charges barely covering the state’s direct expenditure on supporting the industry. Energy-intensive industry owned by foreign companies has also enjoyed tax concessions. Many more examples could be given. In this field, there is more reason to reduce rather than expand incentives.
Protective tariffs are generally not a viable option for a small economy highly dependent on international trade, such as Iceland. The country’s participation in free trade agreements and the European Economic Area has created favourable conditions for business development.
Deregulation and reduced government intervention have been tried extensively in Iceland. It is important that such efforts focus on simplifying licensing processes and removing barriers to innovation and investment through better planning and efficiency. However, regulation of consumer and labour markets is essential to protect the public and workers from harmful corporate practices. Iceland has significant shortcomings in this area, so there is reason for increased supervision and oversight. Efling Trade Union has extensive knowledge in this regard and is ready to act as an advisor to the government.
Here, arguments will be made that infrastructure development is an especially urgent challenge for Iceland today and in the coming years. It should therefore be the core of the new government’s industrial policy. Everything indicates that strong infrastructure investment could contribute the most to “promoting sustainable industry growth, increased productivity, and a healthy labour market.”
Lessons from the growth of tourism
Tourism in Iceland has grown exceptionally fast over the past fifteen years. It went from being a medium-sized sector, even a sideline, to becoming the country’s largest export industry. This was a major achievement of industrial policy, which included significant tax incentives for companies in the sector and other public support (for example, international advertising campaigns).
However, this rapid growth has completely failed to deliver on the main goal of the current government’s industrial policy: “to increase the number of well-paid jobs across the country and support balanced growth in society, environment, and infrastructure.” Tourism appears to fall short of all the good objectives of industrial policy, except for achieving rapid growth.
Tourism is primarily associated with low-wage jobs and low productivity. Its rapid expansion has created serious imbalances in society due to a large influx of foreign labour, which has destabilised the housing market, health services, and schools, with severe consequences in many areas. Tourism grew far beyond society’s ability to provide the necessary workforce, housing, and services of all kinds to integrate migrants.
This has also put significant pressure on the environment across the country. Last but not least, infrastructure development has fallen far short of the increased needs created by the growth of tourism. As a result, an infrastructure debt has accumulated in society, amounting to hundreds of billions of ISK. This applies across many areas: transportation, healthcare, education, and social security. The quality and functionality of society have thus been undermined.
In the labour market, the growth of tourism has not only brought a sharp increase in low-wage jobs but also a rise in labour rights violations. Tourism has therefore weakened the health of the labour market and the status of low-paid workers, undermining stability.
The sector’s seemingly successful growth has therefore generated numerous social problems and failed on nearly all quality criteria of sound industrial policy. These lessons must inform the government’s further design of industrial policy.
The importance of infrastructure
From the above, it is clear that the greatest need for development in Icelandic business, and where government involvement is most urgent, lies in strengthening all forms of infrastructure, both economic and social. Regardless of the considerable infrastructure debt accumulated in recent years, strong infrastructure is always essential, both to foster a dynamic business environment and to improve citizens’ living standards and the functioning of society.
The Federation of Icelandic Industries (SI) expressed the importance of infrastructure in its opinion on the government’s policy plans:
“Strong and reliable infrastructure is the backbone of a modern society and an absolute prerequisite for a competitive business environment. For the Icelandic industry, infrastructure quality is not secondary but a fundamental element of the entire value chain, from raw material procurement to delivery of finished goods or services. The Federation believes that infrastructure investment is one of the most important investments the government can make to ensure growth, innovation, and improved living standards for the future.”
Efling Trade Union fully agrees with this.
Strong infrastructure investment has both economic and social benefits. It enhances competitiveness, productivity, and value creation in general. It creates conditions for further growth and better living standards. At the same time, it is crucial to safeguard rights and health in the labour market, with special emphasis on improving wages and opportunities for the lowest paid – creating better-paid jobs.
Due to years of austerity and cutbacks in public services, understaffing has become widespread, for example, in healthcare, preschools, and all forms of care. This has reduced service quality and increased pressure on staff, who are often low-paid. Social infrastructure has thus weakened, impairing the functioning of society. Living standards have declined both for those who provide services and for those who rely on them. This development has also been evident in the private sector with similar effects. Strengthening social infrastructure is therefore no less important than strengthening economic infrastructure.
Improving the transport system, housing market, healthcare, schools, and other social infrastructure will reinforce the foundations for sustainable business development, increased economic growth, and a well-functioning society.
The draft of Iceland’s industrial policy for 2035 is expected to be published in the government’s consultation portal in October. Efling Trade Union will then submit its opinion on the matter. The union also expects that the government and the newly appointed Industrial Policy Council will invite consultation with the union in shaping the policy.
References:
- Werner Raza (2025): Industrial Policy Must Include Workers and Citizens, in Social Europe, August issue.
- Mariana Mazzucato and Dani Rodrik (2024): Industrial Policy with Conditionalities. Institute for Innovation and Public Policy, London.
- Federation of Icelandic Industries (SI), Opinion on the government’s industrial policy plans 2025.