No experiments, monumental disasters: Why it took a thousand

years to develop a specialized fishing industry in Iceland

Thráinn Eggertsson (1995)

Georgette Fernández LarisMyriam A. Gómez

Cárdenas

Introduction The equilibrium trap The game unravels Conclusion

Agenda

The main focus of the paper is on the equilibrium trap that held the Icelandic economy at low income and technology for a thousand years.

From a long-run perspective, economic stagnation has political and social roots and reveals failures of cooperation, coordination and organization.

Icelanders gave priority to farming and only attended part-time to one of the world’s most valuable fisheries that surrounded their country.

Introduction

Iceland enjoyed an initial period of considerable prosperity, but then the country entered a path of economic stagnation.

Paradox: Icelanders failed to develop a specialized fishing industry, due to institutional arrangements (laws and regulations) that blocked its development: Constraints on labor mobility Restrictions on cooperation with foreigners Price regulation (price of fish was kept low)

The equilibrium trapBackground

Industrial organization: Iceland was a rural society made of farmers

raising livestock and growing hay. Fishing was a secondary activity of some farmers, which was performed during the winter season.

Most fishermen used primitive open boats. Access to a beach in the southwestern region

(fishing region) was a precondition for enrolling the winter fisheries.

Coastal properties were owned by the church, the Danish crown, and by wealthy individuals.

The equilibrium trapBackground

Main economic and political actors: The crown, agents of the crown, the church,

landowners, tenant farmers, farm servants, foreign merchants, and foreign governments.

However, it was the crown that controlled the fate of the country’s fisheries.

Political authority in Iceland 930 – 1904:

The equilibrium trapThe uncertain property rights of the crown

1262-1380Norwegian Kingdom

1380-1904Danish

Kingdom

1415-1475 English Age

1475-1520 German influence

1874-1904 Icelanders gain power

In 1262, the Norwegian kingdom acquired property rights to all trade with Iceland, and later these rights were passed to the Danish crown.

The size of the crown’s tax base in Iceland depended primarily on the value added in farming and fishing. Primitive fisheries provided both more tax

revenue and greater potential for long-term growth.

The equilibrium trapThe uncertain property rights of the crown

Fisheries required extensive foreign contacts, which provided access to export markets and to vital imports (wood, fishing gear, vessels, and technology).

Potentially, the Scandinavian connection provided such a contact, but the crown’s failure to develop a strong specialized fishing industry in Iceland is a central puzzle of this story.

Peripheral status of Iceland in the kingdom

The crown’s challenge to restrict cooperation between Icelanders and outsiders.

The equilibrium trapThe uncertain property rights of the crown

The Danish monarch regained tolerable control over Iceland. The crown’s new dilemma: Find cost-effective ways to

protect its property rights in peripheral Iceland and provide conditions for a strong economy that would maximize its tax revenues.

The compromise solution, which put Iceland on a path of decline until the end of the 18th century, had four elements:

The country and a protective belt of ocean around it were put off limits to all non-Icelandic vessels.

The crown monopolized trade with Iceland. Prevention of coastal townships development. Only farmers could enter the coastal fisheries.

The equilibrium trapThe uncertain property rights of the crown

The English Age (1415-1475): Motivation: Strong demand for dried fish in Europe. The English operated coastal fishing stations in Iceland. For the Icelanders, the English connection opened a new

and valuable market. The fishing sector expanded and the Icelandic economy

blossomed. The German Influence (1475-1520):

Motivation: Iceland fisheries. Hamburgers offered more lucrative trade than the English. Germans were confiscated their property in Iceland,

including 45 fishing boats (Danish crown’s new fishing fleet).

The equilibrium trapThe uncertain property rights of the crown

The Danish crown was unwilling to invest in Iceland due to high transaction costs of developing a strong presence in the country.

This was reflected in its low profile in the island and the relative autonomy given to the local elite.

Limited engagement and no organized defenses, made the remote island vulnerable to incursions by outsiders attracted on the country’s rich marine resources.

The Danish crown temporarily lost control in Iceland, which leaded to the decision of isolating the island.

The equilibrium trapThe uncertain property rights of the crown

The policy of limited engagement required the Danish crown to rely on cooperation from powerful Icelanders (landlords).

The equilibrium trapLandlords and the labor market constraints

Nearly all farmers were tenants paying rents Labor was cheap and farmland scarce Social insurance: farmers care for their servants Landlords realized that the development of a

specialized fishing industry would draw farm workers away thus increasing labor wages

The opportunity cost of concentrating exclusively on farming and of ignoring the fisheries was high.

The equilibrium trapLandlords and the labor market constraints

Two issues related to the tension between the two sectors of the economy, the farm sector and the fisheries:

Adverse selection and moral hazard might undermine the insurance system of the communities and drain the taxpayers’ wealth

Labor shortages (or upward pressure on labor costs) due to fisheries marginal productivity being much higher than in farming and the potential for growth far greater

To solve the dilemma, the elite in Iceland attempted to design institutions that would allow the farmers to exploit the inshore fisheries but also shelter the agricultural sector.

The equilibrium trapLandlords and the labor market constraints

Developmental Paradox: Poverty amidst Plenty

Inappropriate Preferences

(opposed to commercial exchange principles)

Lack of KnowledgePoor institutions: Self-Interested Rent-seeking

- Desire to accumulate wealth evident from Viking Sagas and uneven distribution of private wealth

- Icelanders never shy to commercial exchange

- Malthusian Cycles: scale forced not enough to meet basic needs

- Value system proved to be flexible in times of foreign interventions and take off

- Substantial exports of fish began early on

- Stokkafixxa: • Dried fish- main

export since 13th century

• Stock fish known as a quality commodity throughout Europe since the 14th century

- English and Germanic invasions created technological spillovers and appropriations

- No experimentation and failed experimentation

- Reinforcing Internal and External components

Refuted by author because

Main explanation

Danish Crown

Unwillingness to invest

Forgone potential

Crown “blindness” had to be met with

Icelandic Elite’s autonomy

- Power tied to landownership

- Elites depended on unproductive

farming - High labor costs undermine rents

- Endemic famine increased

opportunity cost of agriculture

- Bondage and part-time fishing

Policy of isolation

& Monopoly trade

Near Collapse

Wealth

Maximization goal

Maximize Revenue

Strong Fish industry

*Best achieved through Free

Trade

Maximize tax base

Maintain Property Rights

* Endangered through free

trade

OpportunityRelative advantage in fishing due to proximity to fishing grounds

Allows for better processing of fish and organization of fisheries (think of gravity, possibility of agglomeration, etc)

Constraints Labor tied to land – main fishing areas were not self-sufficient in labor, depended

of labor migration at the mercy of farming Barter economy and no credit available for entrepreneurs Expected cost of entry varied greatly among landlords and crucially

depended on geography Lower opportunity cost of entry (relative advantage) linked to prior experience

in fishing industry and existing foreign contacts Small scale of Icelandic economy reduced benefits from defecting from coalition

of landowners

External barriers to trade (Danish Monopoly Trade) Forgone trade opportunities with more profitable trading partners Icelanders faced many potential collaborators but isolation and monopsony trade

prevented cooperation Under ideal conditions the Danish were unattractive trading partners ( highly

substitutable products also not as technologically advanced nor powerful as the British)

Internal Opportunities &Barriers

Icelanders could only trade with Crown and Crown sold and leased licenses to merchants in Copenhagen and other cities

Value of license an increasing function of the volume of fish products involved in the trade

Before 1662: Low license price but high taxes on traded products

After 1662: Abolition of taxes and duties was matched with higher license prices (potentially improving rents to Crown)

Terms of trade were fixed according to a royal price list that corresponded closely to old price lists in Iceland’s internal trade

External Barrier:Danish Monopoly Trade

Price distortion: price of fish relative to price of agriculture (farm-based) goods was kept artificially low

Incentive Distortion: discouraged local investment in fisheries- Icelanders with little incentive to invest in better equipment and

increase the supply

- Danish merchants with even less incentive to invest because o Returns were appropriated by Crown (investment -- larger fish volume – higher

license price)o Renewal of licenses was uncertaino Regulations forbade Danish participation on fisheries

Higher returns for the Crown: gap between internal price of fish and its price abroad ensured cheap imports from Iceland and large profits both from licensing and being able to export to rest of world at higher price (export subsidy captured by the Crown)

Danish Monopoly Trade

A little trade theory…

- Export specialization in good with comparative advantage

- Comparative advantage in good using intensively abundant factor, this would be the high productivity sector

- Hecksher-Ohlin would predict booming fish industry

But issues with insufficient scale…

- Fish industry has high entry fixed costs (technological and marketing costs)

- Need joint ventures to achieve increasing returns thus undermining Crown sovereignty

Trap Revisited

Internal Trade

Barriers fueled by farming elites

External Trade

Barriers fueled by Crown’s need to

secure tax base

Rent-Seeking

PovertyTrap

Near Collapse

leading to Institutional Reforms

Jared Diamond’s recipe for collapse

1. Unsustainable extraction: Iceland farming economy dependent on low productive land

- Low productivity of land coupled with population growth with lead to more marginal land extraction and Malthusian Cycles

2. Iceland literally an island: no friends gained, no allies lost3. Environmental change: little ice ages?

- Population lacked resilience to cope with cold spells and natural disasters (volcanic eruptions, epidemics)

4. Cultural and Institutional failures- Met through the interaction of the external and internal components of the Icelandic

Institutional framework

Adapt or Collapse (Reform vs. lost tax revenue) Dynamics of Institutional change lasted roughly 100 years

(beginning 1700’s until late 19th century with emergence of modern fishing sector)

Reforms, while undermining it, took place within the old institutional framework of the labor market

Near Collapse…

Early attempts at permitting Danish merchants of trade monopoly to winter in Iceland yet Copenhagen still sensitive to the wishes of the Icelandic elites

1770 Crown became much firmer in its reforms (mostly due to the virtual collapse of the Icelandic society: population went through 3 main crises)

1770: office of governor moved to Iceland

Efforts to introduce new technologies 1771-72: Crown subsidized the monopoly trade company to bring Norwegian boat builders and

vessels 1776: Crown took over and developed fleet

Correct pricing and thus incentives 1776: New royal price list doubling export price of fish

Allow geography and agglomeration to work 1785: Crown attempted to establish townships (subsidies and tax exemptions for

traders and artisans choosing to live in coastal townships)

Free-Trade within kingdom 1787: Abolition of Trade Monopoly, trade with Iceland open to all subjects of

kingdom Free-trade with rest of world not achieved until 1855 Merchants now allowed to employ Icelanders in fishing

Reforms

Reforms &Population Dynamics

Labor bondage formally

abolishedEmergence of Modern

Fishing Industry

Call to action, reforms outside

traditional framework

Period of Danish Reforms on Trade

Initial Reforms

Until last decades of 19th century bondage slowed down the development of urban communities in coastal areas, despite natural limits to agricultural land

Population growth softened traditional labor market constraints long before they were formally removed

Rapid population growth led to: subdivision of existing farms farms in increasingly marginal plots Increased ratio of servants to farm households

Additionally cold spells devastated farms in late 19th century

Collapse: Agricultural Reforms

Risk of Malthusian Trap avoided through

massive emigration to North America

(20% of population)

Trade Reforms

(Reforms in Fisheries)

SpecializationProductivity

increasesImproved living

standards

Population Growth

Agricultural Reform

Pressure on traditional

system

Paper focuses on role of institutions- Role of self-interest and high transaction costs in perpetuation

status quo until its unsustainability forces institutional change

Modern industry would have appeared earlier without colonial rule because the external and internal components of bad institutions in Iceland were in fact reinforcing. Elites would have had to give in earlier weren’t it for the Crown’s indirect protection of farming through monopoly trade and isolation policies.

Method of analysis: reliance on counterfactuals- If main thesis is that colonial rule was primer deterrent of

development one must ask what growth would have been in the absence of trade monopoly and related colonial policieso Author only marginally addresses this by suggesting that Iceland

had plenty of eager foreign collaborators

Conclusion