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

This is a comparative study of the two small island states of Iceland and Malta in 1960-2000. It
\nfocuses on the role of the two governments as they enacted public policies, intervened in the
\nfunctioning of their economies and foreign trade, invested in infrastructure, enhanced human
\ncapital and developed welfare states. The governments aspired to boost economic growth,
\nimprove quality of life, raise living standards, increase exports, combat recessions, create jobs,
\nreduce trade and economic volatility, reap political gains and advance foreign relations.
\nThe thesis compares economic and political developments and their interplay, advancing
\ninternational relations and different routes to European cooperation. With their emerging public
\nsectors, political systems, and political customs and conflicts, both island states tried to secure
\ntheir rights, livelihoods and positions amongst other European nations.
\nAround 1960, Iceland´s economy was relatively advanced compared to Malta. Iceland
\nwas a financially self-standing republic, financing growth through exports, foreign loans,
\nMarshall Aid and locally accumulated capital; and gifted with prolific fishing grounds and rich
\nrenewable energy resources. The national economy was vulnerable due to dependency on the
\nvolatile fishery and its export markets. However, Iceland could not yet control and manage the
\nfishing grounds, as they were open for foreign deep-sea trawlers until the mid-1970s. Iceland
\nmaintained its focus on developing the fishery further during the last quarter of the twentieth
\ncentury but with parallel government-driven developments in the power sector, while foreign
\ninvestors built the associated power-intensive industries. A transferable quota system was
\nintroduced and shaped in the fisheries from 1984 to the 1990s. The new system increased
\nefficiencies and labour productivity and reduced the over-capacity of fleet and plants. The 1970s
\nand 1980s were marked by slack macroeconomic policies - hyperinflation, frequent devaluations
\nof the ISK, rampant over-investments, subsidies in farming and uneconomical redistributive
\nsystems in fisheries. The economy became more liberal, diversified, and productive in the
\n1990s, helped by the European Economic Area Agreement, which became effective in 1994.
\nIn contrast to Iceland, Malta pursued rather stable macroeconomic policies throughout
\nthe period considered. In the 1960s, Malta was at first preoccupied with the politics and
\nadministrative issues of independence, which was achieved in 1964, and then during the
\nremainder of the decade with preparations for diversifying and strengthening the economy in
\niv
\nreaction to a massive down-scaling of the workforce in the dockyards and the British services.
\nThe 1960s saw a large-scale emigration. Based on local development plans and in line with
\nadvice from foreign consultants, manufacturing for exports was targeted, and foreign technology
\nand investments were attracted to Malta. Industrial estates were built, and incentives offered to
\nforeign investors. Manufacturing firms, e.g. in textiles, electronics and pharmaceuticals, set up
\nplants in Malta. New hotels were built in the 1960s, initiating a growing tourism industry. Air
\nMalta was founded, and Malta became a popular tourist destination. In the 1990s and the 2000s,
\nfinancial services emerged as another successful economic initiative.
\nWhile Iceland restricted foreign investments and the shareholding of foreign firms in its
\nstrategic sectors, i.e., the fishery and renewable power production, Malta used foreign
\ninvestments to its advantage. Iceland and Malta took steps in easing foreign trade restrictions.
\nIceland made its first move in liberalising domestic trade in 1960 and took a further step when it
\njoined EFTA in 1970, involving a customs union with the EFTA countries. That same year,
\nMalta signed an Association Agreement with the European Economic Community (EEC),
\ncreating a customs union based on free trade between Malta and the EEC.
\nMalta developed a rather centralised political system, while Iceland evolved a more
\ndecentralised system. Malta inherited its political system from Britain, and Iceland its system
\nfrom Denmark. Both had self-government, preceding the republic in Iceland (1944) and
\nindependence in Malta (1964). The political system in Malta paved the way for two-party
\npolitics, with one party in power and the other in opposition. Meanwhile, the Icelandic system
\nfavoured multi-party politics, which needed coalitions of 2-4 parties at any time for a majority in
\nthe parliament. Two government levels made the political processes in Iceland more
\ncomplicated than in Malta, as many policies and programs had to be negotiated between the
\nstate, the local authorities, the trade unions and business federations. One of the foremost
\ndifferences between the two island states was the size of the landmass, topography, climate and
\nlocation. It resulted in dissimilar political systems with a strong geographical dimension in
\nIceland. Their dissimilar location in the North Atlantic and the Mediterranean swayed their
\nchoices of foreign trading partners and political allies towards adjacent neighbourly countries.

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