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The Impact of Tourism in Iceland
Dr. Ásgeir Jónsson
Associate Professor, Department of Economics
University of Iceland
Economic impact
A paradigm shift
• In 2012 there was a paradigm shift in Icelandic tourism
– In three years the number of foreign visitors has almost doubled, from 560 thousand in
2011 to about one million in 2014.
– The underlying growth seems to be 20-25% in each year.
• The shift is not caused by any single reason
– Increased name recognition/brand awareness of both Iceland and Reykjavík caused by a
financial collapse, volcanic eruptions, Hollywood movies shot on location, Björk, and etc.
– Word of mouth praise from past visitors, leading to more visits.
– A great increase in flight availability – now Easy Jet flies to Iceland.
• The Tourist sector is becoming a leader in Iceland´s economy
– In the labor market as source of new jobs.
– In the currency market, as the main source of new export revenue
– In the housing market, as a new demand for small, centrally located apartments.
A doubling in three years
The number of foreign visitors, 1949-2014
y = 6173,6e0,0746x
0
200.000
400.000
600.000
800.000
1.000.000
1.200.000
1.400.000
1.600.000
1.800.000
A new growth territory, 20-25%
The growth of foreign visits, from year to year
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
19
81
19
82
19
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19
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19
85
19
86
19
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19
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19
90
19
91
19
92
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94
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95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
- Fjölgun ferðamanna á hverju ári – í þúsundum.
Sívaxandi hagræn örvun frá ferðaþjónustu
-50.000
0
50.000
100.000
150.000
200.000
250.000
300.000
350.000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Foreign trade and currency
market
- Ársfjórðungslegur vöxtur einkaneyslu 1998-2015, þriggja fjórðunga hlaupandi
meðaltal
10% aukning kaupmáttar á einu ári – Íslandsmet í nánd?
-15
-10
-5
0
5
10
15
9
- Launakostnaður og framleiðni 2008 til 2015 og spá Seðlabankans fram til 2018
Bara launahækkanir engin framleiðni?
-6,00
-4,00
-2,00
0,00
2,00
4,00
6,00
8,00
10,00
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Launakostnaður á framleidda einingu Framleiðni
Með hærri launum og stígandi krónu, tapast samkeppnishæfni
10
0,0
20,0
40,0
60,0
80,0
100,0
120,0
140,0
160,0
1. á
rsfj
. 19
86
4. á
rsfj
. 19
86
3. á
rsfj
. 19
87
2. á
rsfj
. 19
88
1. á
rsfj
. 19
89
4. á
rsfj
. 19
89
3. á
rsfj
. 19
90
2. á
rsfj
. 19
91
1. á
rsfj
. 19
92
4. á
rsfj
. 19
92
3. á
rsfj
. 19
93
2. á
rsfj
. 19
94
1. á
rsfj
. 19
95
4. á
rsfj
. 19
95
3. á
rsfj
. 19
96
2. á
rsfj
. 19
97
1. á
rsfj
. 19
98
4. á
rsfj
. 19
98
3. á
rsfj
. 19
99
2. á
rsfj
. 20
00
1. á
rsfj
. 20
01
4. á
rsfj
. 20
01
3. á
rsfj
. 20
02
2. á
rsfj
. 20
03
1. á
rsfj
. 20
04
4. á
rsfj
. 20
04
3. á
rsfj
. 20
05
2. á
rsfj
. 20
06
1. á
rsfj
. 20
07
4. á
rsfj
. 20
07
3. á
rsfj
. 20
08
2. á
rsfj
. 20
09
1. á
rsfj
. 20
10
4. á
rsfj
. 20
10
3. á
rsfj
. 20
11
2. á
rsfj
. 20
12
1. á
rsfj
. 20
13
4. á
rsfj
. 20
13
3. á
rsfj
. 20
14
2. á
rsfj
. 20
15
Miðað við verðlag Miðað við laun
- Raungengi, á mælikvarða launa og verðlags 1986-2015
- Vöru- og þjónustujöfnuður, milljarðar króna á hverjum ársfjórðungi
Ferðaþjónusta er nú leiðandi í gjaldeyrissköpun
-80
-60
-40
-20
0
20
40
60
80
100
Þjónustujöfnuður Vöruskiptajöfnuður
- Viðskiptajöfnuður sem hlutfall af landsframleiðslu
Viðskiptajöfnuður – 5% af landsframleiðslu
-25
-20
-15
-10
-5
0
5
10
- ISK/EUR frá 2009 til 2016
Krónan eru undir þrýstingi – til styrkingar
130,0
140,0
150,0
160,0
170,0
180,0
190,0
2.1
.20
09
2.3
.20
09
2.5
.20
09
2.7
.20
09
2.9
.20
09
2.1
1.2
00
9
2.1
.20
10
2.3
.20
10
2.5
.20
10
2.7
.20
10
2.9
.20
10
2.1
1.2
01
0
2.1
.20
11
2.3
.20
11
2.5
.20
11
2.7
.20
11
2.9
.20
11
2.1
1.2
01
1
2.1
.20
12
2.3
.20
12
2.5
.20
12
2.7
.20
12
2.9
.20
12
2.1
1.2
01
2
2.1
.20
13
2.3
.20
13
2.5
.20
13
2.7
.20
13
2.9
.20
13
2.1
1.2
01
3
2.1
.20
14
2.3
.20
14
2.5
.20
14
2.7
.20
14
2.9
.20
14
2.1
1.2
01
4
2.1
.20
15
2.3
.20
15
2.5
.20
15
2.7
.20
15
2.9
.20
15
2.1
1.2
01
5
2.1
.20
16
2.3
.20
16
100 milljarða svigrúm til erlendra
fjárfestinga
• Greiðslujöfnuður er bókhaldsjafna fjárstrauma inn og út úr hagkerfinu:
Viðskiptajöfnuður + fjármagnsjöfnuður = greiðslujöfnuður
• Sterkir hagrænir hvatar halda greiðslujöfnuði á núlli þannig að útflæði og
innflæði nettast út og fjármagn fossar hvorki inn né út úr hagkerfinu.
• Þess vegna spegla fjármagnsjöfnuður og viðskiptajöfnuður hvorn annan;
afgangur annars þeirra leiðir til halla á hinum og svo öfugt.
• Þrátt fyrir ofurvöxt ferðaþjónustu hefur viðskiptajöfnuður haldist stöðugur – það
er 5%af landsframleiðslu sem er um 100 milljarðar.
• 5% viðskiptaafgangur gefur svigrúm fyrir 100 milljarða útflæði á
fjármagnsjöfnuði vegna erlendra fjárfestinga innlendra aðila.
Regional impact
16
Tourism is essentially a service industry
• Large population centers simply have an advantage in services, with
regard to quality, diversity and even price.
• Therefore, money from tourism is mostly earned in Reykjavik or other
large population centers – where you can actually buy something.
• Indeed, in many parts it is almost impossible for tourists to spend money
on other things than gasoline, hamburgers and perhaps accommodation.
• Foreign visits to the rural areas are confined to the summer months and
can thus not create a stable year long employment.
• Moreover, since tourists most often travel on foot their activities are very
clustered within the cities they dwell.
• The center of the tourist growth is now 101 Reykjavik – the downtown –
which has become a new hub for economic activity and export earnings.
• Thus, the downtown long suffering from suburbanization and re-direction
of commerce into malls, has been re-vitalized
17
Tourists spent their time in the rural areas… but
their money in Reykjavik
Days spent in Reykjavik% of total days spent in Iceland
Earned income from tourism in Reykjavik% of total earned income from toursm in Iceland
18
Only 11% of earned income from tourism is not spent in
close approximity to either Reykjavik or Akureyri – the main
population centers of Iceland
76%
8%
5%
11%
Reykjavik
< 1 hourfrom Reykjavik
Akureyri & Eyjafjörður
other areas
19
Earned income ISK from each night spent on paid
accommodation of a foreign visitor (figures from 2003)
- 10.000 20.000 30.000 40.000 50.000 60.000
Reykjavik
Akureyri
< 1 hour driving dist.
from Reykjavik
< 1 hour driving dist.
from Akureyri
Other areas
20
A new promise for rural areas?
• The population of many rural areas in Iceland has been shrinking very
rapidly for the past few years.
• This is particularly true for townships in the East, West (Vest fjords)
and North, which lie at sea and are surrounded by mountains.
• For townships in these parts of country a 10-30% total population
decline since 1980 is not uncommon.
• In these areas, the local service economy has collapsed.– partly due to better transportation and better connection to large population areas
– partly because population has gone below the threshold needed to sustain commerce
and services.
• Although, Reykjavík is taking the largest slice from the tourist revenue,
there is plenty to go for the other smaller players.– The service sector is re-vitalizing the rural service economy with new demand for
groceries, food, and etc.
– This is particularity observable along the main roads leading south-east and north-west
from Reykjavík, which are the most frequented by tourists.
Future challenges
22
The benefits of scale
• The population of Iceland is almost too small to support the
infrastructure and specialization needed for a developed economy.
• Foreign visits have similar effect as a population increase, without the
welfare costs.
• The main thrust of the taxation is Iceland indirect, both through a very
high value-added tax and levies alcohol and gasoline which one has to
pay to use the road system.
• Iceland would also be unable to maintain an international airport with
the current flight frequency or number of destinations without the
foreign visits.
• So, for the growth of the tourist industry has been almost like a free
lunch for the state – since the foreign visitors are just the infrastructure
that is already in place and pay a lot of taxes.
• That might be changing.
The end of free lunch in tourism
• The tax revenue from tourism is collected centrally – however the costs are
incurred locally. – May local governments are feeling strained by an increase in population that is not really paying
any local taxes. A new cost-sharing is needed between central and local government.
• Iceland´s delicate natural wonders can only sustain a limited number of
tramplers – that limit has been reached in some areas– Many traditional rights in Iceland, like a free and unbridled access to the highland are under
threat for both safety reason and natural preservation.
• With 1 million visitors – Iceland’s infrastructure has reached its limits. – For continued growth, very expensive investments are needed with a larger airport, improved
roads and extended security in the highland and etc.
• Iceland’s own inhabitants are getting increasingly more irritated by the
increased number of visitors. – The foreign tourist are crowding out Icelanders from many areas of their own country.
Conclusion
25
The Pros and Cons
• The surge in tourism in 2012 came at very favorable time – Icelandic economy had shrunk considerably after the banking collapse of 2008 and the
export industry was stagnant despite a much lower currency.
– The tourist sector has been leading the economic recovery in past three years.
• The increased export revenue came at little cost– All the infrastructure was already there.
• Now, it’s the end of free lunch– After the 1 million mark, there is a great need for infrastructure investments and re-
organization of various sorts.
• The tourist sector can not be a future growth leader for Iceland.– Most of the jobs created are low-paying, low skill service employment that is being met by
importing cheap foreign labor.
– Iceland can not welcome an unlimited number of tourists – as it will create burden for
the population as well as the precarious nature.
• In not so distant future, Iceland will probably place limits to the growth of
the tourist sector.