Iceland: From Crisis to Constitution

Yves here. I’m intrigued by the way Iceland’s post crisis experience does not get the coverage it warrants. This is a country whose banking system collapsed and its citizens suffered months of real privation (I dimly recall that it was difficult to import medicine, for instance, because no finance more or less means no trade). Yet after a period of serious dislocation, things somehow got sorted out, and with a cleaned up financial system and a much cheaper currency, the Icelandic economy has rebounded nicely.

One aspect of this housecleaning was writing a new constitution. Its preamble calls for a just society, an idea which seems to be at the core of OccupyWallStreet’s demands: “We, the people of Iceland, wish to create a just society with equal opportunities for everyone.” I think readers will find both the process of developing and ratifying this document as well as its major provisions to be eye-opening. The model for the US Constitution was the Corsican constitution of 1755. Could this Icelandic document also have a disproportionate impact?

By Thorvaldur Gylfason, Professor of Economics, University of Iceland. Cross posted from VoxEU

As economic protests continue throughout Europe, many wonder whether such efforts will be in vain. This column explores what happened in Iceland, where a “pots-and-pans” revolution in response to the devastating financial crisis gave rise to a new constitution.

Political upheaval is the most common precursor of constitutional change. The collapse of communism in 1989 produced a large number of new constitutions in East and Central Europe and Asia (Elster 1995). Economic crises are less common triggers of constitutional change. The Great Depression did not prompt the Americans to change their constitution – changes of the law, such as the Glass-Steagall Act of 1933, were thought sufficient.

Pots and pans

Iceland’s spectacular financial collapse in October 2008 was, in effect, political as well as economic. One of the most vocal demands of the “pots-and-pans” revolution that led to a change of government in early 2009 was for a new constitutional order, a new republic even, to replace the provisional constitution from 1944 when Iceland unilaterally separated from occupied Denmark.

The new parliament promised at once to quickly revise the provisional document, essentially a translation of the Danish constitution with a nationally elected president with potentially significant powers substituted for a monarch. This promise was not kept, however, except for a few minor revisions to adjust the article on parliamentary elections to demographic changes, to transit from a bicameral parliament to a unicameral one, and to append, in 1995, some new articles on human rights.

The demand of the pots and pans for an overhaul of the constitution was a demand that the political class – discredited by the collapse of the banks to which it had been so close and so generous[1] – eventually honour the promise it had for so long failed to keep. In its own interest, the political class wanted the constitution to continue to preserve the significant bias of the electoral system in favour of the provinces to safeguard their overrepresentation in parliament (Gylfason et al. 2010, 7,140). The parties behaved as pressure groups of political insiders.

Breaking the mould

The collapse of 2008 seemed to open a way to break this mould. The pots-and-pans revolution sent into opposition the two political parties that between them had always been able to count on a majority of the vote and thus had held power nearly without interruption from 1927, either one at a time with junior partners or jointly in a grand coalition. It took a deep crisis to produce this sea change, a crisis inflicting on creditors, shareholders, and depositors abroad as well as at home financial damage equivalent to about 7 times Iceland’s GDP, a world record. The local equity market was virtually wiped out. Iceland’s crash was probably the costliest financial crash on record relative to the size of the country (Gylfason 2011). It is therefore not surprising that public confidence in politicians is at an all-time low. According to a recent poll, 11% of the electorate say they have great confidence in the parliament compared with 6% for the banks, 37% for the courts, and 80% for the police.[2]

As demanded by the pots-and-pans revolution, the post-crash government decided to revise the constitution. A constitutional committee appointed by parliament convened a national assembly consisting of a thousand citizens drawn at random from the national registry. The national assembly discussed constitutional matters for a day or two, concluding that a new constitution needed, among other things, to respect the principle of ‘one person, one vote’ and to substantiate, or rather reclaim, the people’s ownership rights to their natural resources. The committee then organised a nation-wide single-transferable-vote election in November 2010 where 522 candidates stood for 25 seats in a constitutional assembly. Despite open antagonism from the opposition parties, 84,000 voters showed up, or 37% of the electorate (full disclosure: I was among the 25 elected). With the process at this point seemingly unstoppable, the Supreme Court declared the election null and void based on esoteric technical complaints from an unsuccessful candidate and two others.[3] The parliament then appointed the 25 elected candidates to a constitutional assembly/council (henceforth CAC), giving it 4 months to do the work. Meanwhile, the constitutional committee had produced a 700-page background report for the CAC. On time, on 29 July 2011, the CAC delivered its constitutional bill to parliament.

Constitutional reform proposal: Some highlights

The CAC reached a consensus, approving the bill 25–0, a remarkable feat, not least in view of the fact that the reforms proposed are quite radical in a number of ways. The bill stresses checks and balances between the three branches of government as well as between power and accountability. It stresses transparency, fairness, protection of the environment, and efficient and fair exploitation plus national ownership of the nation’s natural resources. It is intended to stamp out corruption and secrecy, yet leaves both words unspoken. It declares in a preamble that: “We, the people of Iceland, wish to create a just society with equal opportunities for everyone.” Here are some of the highlights.

One person, one vote

“The votes of voters everywhere in the country shall have equal weight.” This is important because MPs from rural areas currently have much fewer votes behind them than their fellow MPs from the Reykjavík area, with far-reaching political and economic consequences. The same article states: “A voter selects individual candidates from slates in his electoral district or from nationwide slates or both. A voter is also permitted instead to mark a single district slate or a single nationwide slate, in which case the voter will be understood to have selected all the candidates on the slate equally.” Voters will thus be free to cast their votes for parties as now or for individual candidates on different slates. This matters because, among other things,corruption is more prevalent in countries with small electoral districts and party slates than in countries with large electoral districts where voters have an opportunity to elect individual candidates (Persson and Tabellini 2005, Ch. 7).

Natural resources

“Iceland’s natural resources which are not in private ownership are the common and perpetual property of the nation. No one may acquire the natural resources or their attached rights for ownership or permanent use, and they may never be sold or mortgaged. Resources under national ownership include resources such as harvestable fish stocks, other resources of the sea and sea bed within Icelandic jurisdiction and sources of water rights and power development rights, geothermal energy and mining rights. National ownership of resources below a certain depth from the surface of the earth may be provided for by law. The utilisation of the resources shall be guided by sustainable development and the public interest. Government authorities, together with those who utilise the resources, are responsible for their protection. On the basis of law, government authorities may grant permits for the use or utilisation of resources or other limited public goods against full consideration and for a reasonable period of time. Such permits shall be granted on a non-discriminatory basis and shall never entail ownership or irrevocable control of the resources.” By “full consideration” it means full market price for the right to exploit the resource in question, a clear departure from current practice where vessel owners have been granted access to valuable common-property fishing quotas, first gratis and then against nominal fees. To clarify the meaning of the nation‘s, as opposed to the state‘s, ownership rights to its natural resources, the natural resource article is preceded by a corresponding article on cultural assets: “Valuable national possessions pertaining to the Icelandic cultural heritage, such as national relics and ancient manuscripts, may neither be destroyed nor surrendered for permanent possession or use, sold, or pledged.”

Iceland’s nature and environment

“Iceland’s nature is the foundation of life in the country. Everyone is under obligation to respect it and protect it. Everyone shall by law be ensured the right to a healthy environment, fresh water, clean air and unspoiled nature. This means maintenance of life and land and protection of sites of natural interest, unpopulated wilderness, vegetation and soil. Previous damage shall be repaired to the extent possible. The use of natural resources shall be managed so as to minimise their depletion in the long term with respect for the rights of nature and future generations.” This means that ordinary people can seek legal recourse in matters relating to environmental damage.

Right to information

“Information and documents in the possession of the government shall be available without evasion and the law shall ensure public access to all documents collected or procured by public entities.” This article is intended to help uproot a pervasive official culture of secrecy.

Appointment of public officials

“Qualifications and objective viewpoints shall decide appointments to offices. When a Cabinet Minister makes an appointment to the posts of judge and Director of Public Prosecutions, the appointment shall be submitted to the President of Iceland for confirmation. If the President withholds his or her confirmation, the Althing must approve the appointment by a two-thirds majority vote for the appointment to take effect. Ministers shall make appointments to other posts as defined by law following recommendation by an independent committee. If a Minister does not appoint to such an office one of the persons regarded as most qualified, the appointment shall be subject to the approval of the Althing by a two-thirds majority vote. The President of Iceland shall appoint the chairman of the committee.” The civil service committee is intended to put an end to ministerial appointments of incompetent people to high office.

Independent state agencies

“Certain agencies of the State which carry out important regulatory functions or gather information which is necessary in a democratic society may be granted special independence by law. The activities of such agencies cannot be discontinued, significantly changed or entrusted to other agencies except by an act of law passed by a two-thirds majority in the Althing.” The source of this article is the government’s decision in 2002 to summarily abolish the National Economic Institute on the grounds, among other things, that the economic analysis on offer from the commercial banks was enough.

The author is one of the elected contributors to Iceland’s new constitution.

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  1. riemann sum

    I’ve been wanting to visit Iceland since the pots-and-pans revolution. I think I’ll make it a priority.

    Thanks for reporting on this.

  2. F. Beard

    “We, the people of Iceland, wish to create a just society with equal opportunities for everyone.” Preamble to new Icelandic Constitution via Yves [bold added]

    Then government backed usury and counterfeiting, commonly known as “banking” must be disallowed. Otherwise some, the so-called “creditworthy”, will be allowed to steal purchasing power from everyone else.

    And it is not like there is no alternative to banking. Common stock is a means to democratically consolidate capital without usury. Yes, more shares equals more votes, but a general bailout of the entire population, including savers, from all private debt should be a part of abolishing government backed banking. That would greatly reduce initial wealth disparity.

  3. Marley

    Huzzah! Of course no one wants to report it – an example of a country that defaulted and managed to rebound without the help of “The Markets” or private/foreign-currency financing?! Surely such a thing could not exist! From Iceland to Greece… with LOVE.

    1. Marley

      Oooh… some juicy details here:

      Combination IMF $2B and Nordics $3B = $5B

      Key excerpt – “First, no attempt was made to secure payback to foreign creditors. This was impossible given the huge scope of the shortfall. Those who view the IMF as a collection agency for commercial banks will certainly not be able to find support for this view in Iceland. On the contrary, through bankruptcy proceedings and with tacit support from the IMF, the Icelandic banks were walked away from a variety of claims, resident and nonresident, loans and bonds, and claims by banks and nonbanks.”

      Frightfully nice of the IMF…

      1. F. Beard

        The IMF is a bank. Why should it care if its competitors get stiffed?

        But Iceland should know this: As a monetarily sovereign country, any debt it can service is a debt it need not incur in the first place.

        Iceland should have said to the IMF, “Oh, you think we can service this debt? Fine, we don’t want it. We will self-finance. Thanks for the free financial advice. Have a fish.”

  4. Daniel de Paris

    It is not like there is no alternative to banking. Common stock is a means to democratically consolidate capital without usury. Yes, more shares equals more votes, but a general bailout of the entire population, including savers, from all private debt should be a part of abolishing government backed banking. That would greatly reduce initial wealth disparity.

    From an oversea supporter of BOTH tea-parties and OWS movements. Yes I can see the limits of those two movements.

    The banks MUST be stopped, reigned-in and controlled. OWS have the strongest point here. But that has some implication on the Fed. Of course that’s were the tea-party have some solid ground as well!

  5. psychohistorian

    Why, the next thing you know, Iceland will choose E pluribus unum for its new motto……./snark

    Before I get all supportive of this I would want to know how much of Icelandic natural resources are currently in private hands….what is left for the 99%?
    I want to be a Rentier of the Cosmos, not some other human, nor a religion.

  6. Middle Seaman

    A new constitution might be a construction plan for the US. After endless talk about the greatness, above every other system, of our constitution, reevaluation may be in order. Companies have political rights, I am free to have 200 guns, millions of inmates in the prison system, the shortest vacation of any developed country, no health care for all, a highly political justice system, a Senate that requires a super majority for any meaningful vote, etc.

    May be it’s an idea its time has come.

    1. doom

      We could do worse than copy Uganda’s. It’s a good example of a modern constitution. Kind of long because it doesn’t incorporate much treaty law by reference, but it covers the main requirements.

  7. Kevin de Bruxelles

    I recently spent a week in Iceland travelling around and speaking to locals about the crisis. Most were anything but optimistic about the future. While the new revisions to the constitution are nice, they do not address the main problems Icelanders face.

    What I was told was that due to their weak currency, Icelandic home mortgages are adjustable not only in the sense of the interest rate (4.5 over the central banks rate) but also the total outstanding amount due is adjustable to a cost of living index. So if say you own 3,000,000 Krona (200,000 Euros) on your home, at the end of the year, if the currency has not done well, after paying all year, you may well own for example 3,200,000 Krona! So as the Krona gets weaker and weaker, imports become more expensive, and the amount due on home mortgages goes up. No wonder Icelanders cannot pay back the UK and the Netherlands! And remember, almost no fruit grows in Iceland and most vegetables require greenhouses. The soil and climate are so poor that a skinny little tree is considered a great accomplishment. Iceland only has 300,000 people so they must import most of the goods they consume. So the people there have very few options.

    1. James Cole

      Yes but they literally have all of the energy they need for the foreseeable future–the water comes up from the ground steaming hot & can power everything.

      1. aet

        And ALL natural resources are EXPLICITLY and INALIENABLY owned by the State!

        THIS is the truly revolutionary section of that Constitution.

        What do American mining companies pay for the materials they extract from the earth? And who owns it that material? And how are the profits from its production taxed?

        Who benefits from America’s natural bounty?

      2. doom

        Yeah, chalk up another for CESCR Articles 1(2) and 25. Most new constitutions directly incorporate a lot of the International Bill of Human Rights, the real revolutionary movement of the 20th century. It’s been a hundred years since any new constitution has been based on the US model.

  8. Goupil

    Just read an English translation of the new proposed Icelandic constitution. Since I’m not Icelandic I should abstain of any comment, however nothing is said of the potential imbalance that could arise if media (papers, radio etc.)were to be concentrated in too few powerful hands.
    In the same manner nothing is said of the financing of political campaigns. In USA financing of political campaigns by private interests seems to be the source of huge distortions in the democratic process.
    Ad contrario set financing of elections by the state limits the undue influence of a minority of people to the detriment of the majority.

    1. aet

      Iceland is a small-population island: stated simply, money doesn’t there have the importance, politically, that it has in a vast, heavily populated, continental nation, with its attending higher costs of communication.

      Thus, your concern is overblown, imho; Constitutions ought to differ in their detailed provisions, where the Nations they are to serve differ.

      One size does NOT fit all.

  9. Pat

    This new constitution is a pointless attempt to whitewash a deeply-corrupt society.
    During the boom years (late 90s to 2007), the Icelandic right parties privatised the banks and the fish quotas (the main natural resource) and put them into the hands of a crony right-wing class. The banks engaged in a massive Ponzi scheme that cheated foreigners out of a huge amount of money (at least $100 billion) and the banks went broke. The fish quotas were pledged as collateral for “loans” that were never paid back. Much of the money ended up in the hands of a few hundred individuals who hid it in secret accounts in the Caymans and elsewhere, where it sits today.
    This was not a secretive right-wing or Wall St type of takeover. Most of the people — some 70% — voted for the two corrupt parties who allowed all this to happen, and generally the population enjoyed a lot of wealth that trickled down.
    During the boom years very few Icelanders objected to the Ponzi banks and fish quota leveraging — most Icelanders were concerned with a piece of the wealth for themselves.
    The Icelandic response to the bank collapse has been to try to screw the foreign creditors, through a complicated Emergency Law and bank bankruptcy scheme.
    I don’t blame the Icelanders for refusing to pay off the foreign creditors, because ultimately any country will act in its own self-interest, but they are hypocrites for claiming they have no responsibility for what happened to their country.
    To this day no real reforms of the corrupt crony society have occurred. The banks are still run by the same crooks, and the two political parties that created the mess enjoy 40% support of the population. There has been virtually no prosecutions, and the money stolen in the bank Ponzi scheme sits uncollected in the Caymans. The country has continued its grossly unfair systems of indexing debt to inflation and of allowing no writedowns of home mortgages. The banks write down only debts of companies, which happen to be mostly owned by the crony class. The corrupt judiciary remains in place, appointments are made to political friends, and the unfair system of voting by party slates (rather than direct voting) remains intact.
    So the demand for public ownership of natural resources (fish and energy development) should be seen in the proper light. The fish quotas have ALREADY been pledged to foreign creditors, as have some streams of income for energy. Now they are trying to undo those deals.
    The natural resources should never have been privatised in the first place and allowed to be pledged to creditors. Where were the Icelanders when that happened? That’s right — 70% of them were voting for the parties who allowed this.
    And a 37% voter turnout for the constitution election is pathetic. This poor turnout is really a sign of the deep hopelessness and futility for meaningful change in the country.
    (By the way, Prof. Thorvaldur Gylfason was one of the few honest citizens who warned the country about the bank Ponzi scheme and the ruinous economic policies — during the boom years nobody paid any attention to him.)

    1. aet

      “I don’t blame the Icelanders for refusing to pay off the foreign creditors, because ultimately any country will act in its own self-interest….”

      But you are doing PRECISELY that, with and in your posted message!

      Blaming the victim, for being such a sheep, that the wolves have now had their way?

      How gallant of you, how sympathetic, how honourable and useful, to condescend to tell us, as to precisely how the things in Iceland are All and entirely the Icelanders’ own fault.

      I do note that you clearly state that “deeply corrupt” Iceland “screwed” foreigners.

      But you “”don’t blame them”?

      Consistency in assertion is not your strong point, is it?

      PS If you do really wish “to help”, perhaps you could post the evidence which you possess of those secret Cayman Island – or is it Guernsey or Jersey? – accounts which you claim exist. I’m pretty sure that there are some money-tracers and forensic accountants who would find such info useful in their efforts, and who would know what to do with any such specific and detailed information which you could provide – and as it has served to convince you, I trust that you could name names and which particular accounts they hold.

  10. michael hudson

    This is AWFUL, Yves. It misses the whole point.
    I’ve been asked to work with reformers there in countering the present disaster. Here’s what happened: Vulture funds bought the 3 banks’ “good bank” parts for 10 cents on the dollar. They are now wrecking Iceland’s economy by demanding payment of loans INDEXED TO THE CPI — while real estate prices have plunged. Homeowners are in negative equity — and PERSONALLY LIABLE. 300,000 Icelanders have had to flee their indebteness by emigrating to Norway.
    The government is a dictatorship. Its approval rating has fallen to only 10% — even worse than the US Congress! It refuses to respond to popular demands. The Social-Democratic/Green coalition is ultra-right-wing, in the hands fully of the bankers against the economy at large. The Icelanders seem powerless to prosecute the fraudsters, because members of Parliament or their famiilies are so tightly implicated.
    So the economy is being stifled by the worst debt burden in the EU. It’s a story not told here at all. I’ve done some in my FT and Global Research articles, and within a week will try and spell out just what the problem is. The time pressure is that the IMF has invited Martin Wolf, Paul Krugman and Simon Johnson for a meeting in a week or so, that my friends are trying to prepare background information for.

      1. Foppe

        (I’d be interested in the update; though your mentioning of Johnson as being on the panel does not give me much hope as to the usefulness of said panel. But perhaps he can manage a more critical stance when he’s talking about foreign countries.)

    1. Carla

      “300,000 Icelanders have had to flee their indebteness by emigrating to Norway.”

      Since there are only 318,000 Icelanders, this seems highly unlikely.

      1. Frank Powers

        The correct number seemes to be 3.000, as the article linked to in the next comment by Benedict@Large indicates.

      2. Frank Powers

        The correct number seems to be 3.000, as the article linked to in the next comment by Benedict@Large indicates.

  11. Philip Pilkington

    Nope, you’re not allowed mention Iceland. Because theirs was a success story. Instead focus is kept on Latvia and Estonia. ‘Success’ stories that impoverished the people and lost about a decade of economic growth.

    The joke used to be: “What’s the difference between Iceland and Ireland? One letter and six months.”

    Last laugh is on the Irish.

    1. Philip Pilkington

      *Pulls at collar*

      Looking at the two posts above mine I think I might have got this one wrong. Might be worth reconsidering this one, Yves…

  12. kjr63

    Does “Iceland’s natural resources” include real estate land? Or will Iceland see the same mortgage rally again soon?

  13. barrisj

    What Iceland’s constitution did permit was referendum voting, i.e., “direct democracy”, which resulted in two failed bailoout votes, where Iceland taxpayers were asked to make whole UK and Netherlands banks and investors who got fried when the “Big Three” Icelandic banks went to the wall. The referenda were called when the Icelandic president refused to sign bills authorising taxpayer underwriting of the bailouts.
    Far more effective than opinion polls or public demos.

  14. Conchscooter

    This is the first mention I have ever seen connecting the. Corsican Constituion to the US. I saw copy of it at Pasquale de Paoli’s house in Morosaglie six years ago and I was struck by the obvious similarities, not least because the US Founders must have read that revolutionary document.
    No one I have mentioned this to since has evinced any knowledge of,or interest in “my” discovery. Which I found astounding in light of the reverence that is awarded to the US authors, who it turns put had some help!

    1. Jack Parsons

      I did not know of the Corsican connection.

      Ben Franklin lived with the Iriquoise Nations for a few months and much of the tri-partite structure and legal “workflow” comes from the Iriqouise model.

      1. decora

        well if you take it that far, you might as well mention The Politics by Aristotle, 300 BC. clearly the founding fathers were highly educated, widely read people…. unlike our modern school system which seems to have eradicated basic civics from the curriculum for some damn reason

  15. Eugene

    Sure, let’s hype the Iceland miracle! Until folks realize it’s a racially homogeneous country with 300K people, a $12 B economy (half the size of Vermont’s ‘GDP’) and growth is expected to reach a whopping 3% by 2013 (maybe, but so far they are well behind schedule). And don’t forget the IMF’s stand by arrangement and outright loans along with a shiny new friendship with Russia. We’ll definitely want to copy their model. At least the grocery stores are 2/3 full instead of 1/2 empty like they were last year.

  16. ScottS

    This constitution doesn’t solve the agency problem. If it depends on checks and balances, what happens when everyone in national government agrees with each other and conspires together against their constituents?

    It seems structurally the same as the US constitution with some nice happy talk about keeping public resources public.

    If we went to publicly funded campaigning and closed the revolving door, we’d be 90% of the way there.

    1. Canute

      “If we went to publicly funded campaigning and closed the revolving door, we’d be 90% of the way there.”

      DingDingDingDing! ScottS, you win the prize.

      The way we choose people determines what kind of people get chosen. Right now they get filtered for opinions that benefit those who can make large campaign donations. When the maximum amount an individual can pump into the campaign system is capped at over $100k, then only those who can approach that limit have significant political power.

      Any country can write all the feel-good stuff into their constitution they want. Until their representatives are dependent upon numbers of people rather than numbers of (insert currency), then those with more currency rule.

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