Friday, October 14, 2011

Iceland Post Crisis

Naked capitalism takes a look at Iceland's fate following the national bankruptcy that sent the economy into reset mode. - a move that the rest of Eure and Nprth America has resolutely refused to consider. I was also moved by Yves Smith's reference to the Corsican Constituion, a similarity I noticed six years ago when I was visiting the island. Not that anyone in the US would want to credit Pasquale de Paoli with inspiring the US document:

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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