Knowledge on the Nordics

Iceland: Uncovering the Nordic Welfare State with Stefán Ólafsson

February 03, 2021 Season 3 Episode 1
Knowledge on the Nordics
Iceland: Uncovering the Nordic Welfare State with Stefán Ólafsson
Show Notes Transcript Chapter Markers

Interested in the Nordic universal welfare systems and how effective welfare can be in times of crisis? How has Iceland fared compared to the other Nordic countries, before and after the Great Recession of 2008? Can this teach us anything about how to tackle Covid?

Join the editor of, Nicola Witcombe, on her virtual visit around the Nordic countries, this time to Stefán Ólafsson, Professor of Sociology at the University of Iceland. Stefán has had a long career looking at social policy in Iceland and elsewhere, and is one of the editors of the well-known book ’Welfare and the Great Recession: A Comparative Study'.

In this podcast, you will hear an historical overview of Iceland’s welfare policy since the middle of the last century. You will also hear about a range of related issues, like whether Iceland was a failed neoliberal experiment and 'business vikings'.

This podcast was recorded in January 2021 and is the first in the series: The Nordics Uncovered: Critical Voices from the Region. The second in the series is an interview with Janne Holmén, Associate Professor in the Department for Education at Uppsala University in Sweden  who will be talking about key geopolitical events and trends and how these influence education policy in the Nordics, as well as what it means to be a 'small state' on the world stage.

Sound credits from including "Noir" Reel by Hainbach by makenoisemusic.

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Stefán Ólafsson  0:09 
Normally when we talk about the welfare state we talk about how the equalizes, how it reduces poverty. We should also be really aware of the importance of the welfare state for securing us in a deep crisis.

Nicola Witcombe  0:26 
That was the voice of Professor of Sociology at the University of Iceland Stefán Ólafsson, my first guest in this new podcast series 'The Nordics Uncovered: Critical Voices from the Region'. Stefán is a good starting point, having spent many years focusing on one of the key things that people think of when they think of the Nordics, namely welfare. And as he is from Iceland, today, we will be looking at welfare through an Icelandic lens, covering issues like how does Iceland fare on welfare compared to the other Nordic states? What were some of the reasons that Iceland suffered a crash in 2007-8 and how is it faring now? And how can we talk of economic hardship when Iceland has much less poverty than most other countries in the world?

I am Nicola Witcombe, editor of And a normal part of my job is to travel to universities and conferences, to meet researchers and to encourage them to spread the word about their research to a wider audience. In these COVID times, I am virtually visiting 12 researchers based in six different countries to try to find the answer to big questions like what is the state of the Nordics today? How do researchers investigate Nordic society and concepts? And smaller questions like what leads people to research such a range of weird and wonderful subjects? And how is it done in practice? This interview was recorded in January 2021. And I caught up with Stefán over Zoom.

So Stefán Ólafsson, professor in sociology at the University of Iceland, thank you very much for agreeing to talk to me!

Stefán Ólafsson  2:25 
Thank you for having me. It's a great pleasure. It's always a pleasure to talk to colleagues in the other Nordic countries.

Nicola Witcombe  2:33 
And the Nordic model is usually characterized by Universal welfare and collective bargaining between labor market partners and a host of other aspects. And primarily Sweden and Denmark Norway and mentioned in this regard, Finland and Iceland less so. And why do you think that is? And how does the Icelandic model differ, if at all?

Stefán Ólafsson  3:02 
When the Nordics, the Scandinavian nations were expanding their welfare systems, like in the period between 1950 and 1980, or thereabout, Iceland lagged behind, we sort of followed, but we lagged behind. So we were, our welfare state was less generous during the 1980s. And 1980s, we, the Nordic nations were generally seen as in many ways, elite  in welfare, they had the most equal societies, less level of poverty and, and so on, than most other modern nations, Western nations, at least. So it was, for us as a Nordic nations to lag behind the best was painful and it was also quite powerful in, in all public debates to say, look at this, look at the how our neighbors are doing better than we in this, that and that - we might be doing better than some other factors. But we were never as much a social democratic country as the Scandinavian countries. Our left was split between social democrats and socialists but on the other hand, we had strong labor unions. And it was often the labor unions who actually pulled through improvements in the Social Security system in the welfare provision system, and often by referring to to how things are in in Sweden, Denmark and Norway.

Nicola Witcombe  5:00 
And you say Iceland was lagging behind at that time? Are you able to say when it's caught up? And if it has caught up in your view?

Stefán Ólafsson  5:12 
Yes, it sort of gradually caught from the 1970s up towards the early 2000s. That is, before the financial collapse of 2008, we were was not much difference in welfare expenditures in Iceland, counting everything, and also the acute patient or pension expenditures. Not much difference between Iceland and Norway, for example, expenditures were slightly higher in Denmark and Sweden, and even Finland. But we have almost caught up, we're still in the lower end of welfare expenditures. But we, in many ways, have probably more generous minimum pension guarantee than Sweden and Norway, I'm not so sure about Denmark. So there are some features where we're doing quite well. But we still like mainly behind the in terms of the income testing. And that's also the reason if we didn't have, you could take child benefit, for example. That's a standard sum for everybody and Norway, Sweden and Finland, you have some income testing of the child benefit in Denmark. But it starts being cut at, maybe average earnings or higher. And it's modestly cut, from our perspective, at least. But we start cutting the child benefit much slower, at low wage, and it's cut out Quite so. So if you have average earnings, you're not going to get any significant child benefit at all. So that's in many ways, extreme deviation, and that's the main, Iceland's pass on Nordic welfare system, more or less with universal coverage of the Social Security system, and universal access to health care and education and housing support. But the excessive use of income testing is the main deviation. And that's, as I see it, where we still lag behind.

Nicola Witcombe  7:58 
Could you perhaps give us an example of the means testing that you're referring to?

Stefán Ólafsson  8:03 
We're currently doing a project on the Icelandic pension system. We basically have a fairly similar structure of our pension system as Denmark has. We have the Public Social Security system, and then we have occupational pension funds, which are sort of run by the labor unions and Employers' Federation jointly. So they're social but not public sector. The occupational pension funds are probably the third largest in the world after Netherlands and Switzerland. And we've had tremendous problems in our pension system. I mean, part of it works quite well and all of that, but there have been continuous problems with the interactions between the occupational pensions and Social Security pensions, and this is reflected then in the high degree of income testing, which is used in the Public Social Security system.

Nicola Witcombe  9:32 
Is it too early to ask whether there are particular occupations or particular vulnerable groups that you're concerned about?

Stefán Ólafsson  9:42 
So this is the people who really suffer from this is disability pensioners who've been long term disability pensioners. It's also women who are accumulate less pension rights in the occupational pension funds if they have a broken employment participation due to child caring periods and so on. And it's also the low or medium low earners in the labor markets. So basically what we need, we have a fairly generous minimum pension allowance or minimum pension guarantee. But we need slightly more generosity in the public pension system to sort of slide the towards average.

Nicola Witcombe  10:55 
Well, obviously, the risks the recession has had an enormous impact. And in a recent book that you edited, I believe called Welfare and the Great Recession, you and your colleagues looked at 30 different countries, nine of the countries in detail, and how they responded to that recession. Could you tell us briefly whether there were any characteristics particular to the Nordic countries, perhaps, compared to other European countries that made them fare better or worse than counterparts elsewhere?

Stefán Ólafsson  11:38 
We've sort of sank into quite excessive neoliberal politics in Iceland, from the mid 1990s, until the financial collapse of 2008. I mean, we were a sort of an extreme neoliberal experiment in this country, which produced the bubble economy and the financial collapse and the financial crisis, which was excessive here. We found that level of living declines or increasing financial hardship were less significant in the more advanced welfare states than in the less advanced welfare state, like in the case of Greece which  did not at that time have any social assistance system for the very lowest. People only had their families to rely on in that case. Their unemployment benefits system didn't cover all the unemployed population, and it covered that population only for a relatively short period of time, then they were thrown off their unemployment benefit on to nothing else, basically. This was a completely different situation from what we found in the Nordic countries where you had universal coverage of the unemployed people, and more generous benefits as well. Even though the generosity of unemployment benefits in the Nordic countries has actually come down somewhat and later years, but still, we stood well compared to the south and eastern European nations. And so, even though like Iceland, had this tremendous fall, big decline of gross national product, the collapse of the banking system, tremendous debt problems, and so on, and still, the increase in financial hardship of homes was less than in Ireland, which did not have an impressive welfare state. And obviously, significantly less than in the southern Mediterranean countries, Spain, Portugal, Italy, Greece, and also in the Baltic countries where they have weaker welfare state. And even if we look at Sweden and Finland, let's take those two, they had a significant increase of unemployment during the financial crisis, but they had hardly any increase in financial hardship of households. So that was basically an effect of the protection that the welfare system provided. But also of importance was how government policies either supported the welfare state or supported the labour market, in addition. So the Nordic welfare systems, they really proved their importance in a time of a deep crisis. Normally, when we talk about the welfare state, we talk about how the equalizes, how it reduces poverty, we should also be really aware of the importance of the welfare state for securing us in a deep crisis. And in the globalized financial world, we're gonna have more financial crises. And maybe we're gonna have more epidemic crises.

Nicola Witcombe  15:41 
I think I assumed that ordinary people were affected. But in actual fact, what you're saying there was still this protective network or protective blanket for for ordinary people, have I understood that correctly?

Stefán Ólafsson  15:58 
Oh yes, there were definitely consequences, living standards decline, real earnings came down, and so on. But my point is that the welfare system still soften the blow. The consequences did not become a serious as it would have been in a weaker welfare state. But still, the consequences were quite serious. And particularly depth problems of households, who saw their real earnings come down, and saw their payments of their mortgages go up. But government implemented policies in relieving that burden and so on. Then, when we had reached the bottom of the crisis by mid year 2010, the crisis hit in October 2008 and it was dramatic, almost the whole of the banking system went bankrupt, and so on, but from 2010, particularly 2011, we were on a course, the Union started increased wage levels. And government implemented the debt relief to households. And then we went on a on a quite forceful growth particularly based in addition to our previous sort of economic foundations, in the fishing sector, and in the energy intensive sector, which quite prosperous, we got tourism as a new sort of industry, which really, it had been there, of course, before and expanding, but it's expanded really, really fast in these years from 2011-12.

Nicola Witcombe  18:20 
Thanks to the Game of Thrones, I believe.

Stefán Ólafsson  18:22 
Well one of the issues was volcanic eruption in 2010, with through tension close to air traffic in Europe for a few days, and Iceland also became cheaper, it was always unexpensive country for tourists. But one of the consequences of the financial crisis, our currency came down so that made Iceland cheaper for tourists. So we had a really strong comeback in the period from 2012, up to 2018. And we had by 2016, fully regained what we had lost in the crisis, both in terms of household purchasing power, and also in terms of national product and so on, and, in fact, gone beyond that. So we have a strong recovery. And in many ways, people wanted to deal with a failed neoliberal experiment and build a new Iceland with a new constitution, a new politics and all of that. Much of that failed. We haven't gotten we designed the new constitution. It hasn't been implemented yet. We are still operating on more or less the same political economy, globalized open economy principles. But there are more regulations in the financial sector, more demands on the banks and more restraints. But there is always this push from business. From politics on the right to liberalize again, liberalize again, privatize banks again. So we're still dealing with a situation that we were dealing with around the year 2000, the near or liberal interest and business interests sort of pressing on, but the rest of society trying to hold back and we now we have the lesson of the bubble economy and the collapse. So I can't see the neoliberal tendencies going as far as they did before. And then the experience of the pandemic now is everywhere, showing the importance of both of government and also of welfare states in in dealing with situations like that. So I think neoliberalism has been discredited quite a lot.

Nicola Witcombe  21:31 
Just taking one step back a bit, when you talk about the hardships to households in the recession. Are we able to put a comparative blinker on it? And I guess my personal example would be, you know, how many people were made homeless? And did you have to have food banks, because those were, those have been persistent things that have happened in the UK, over the last 10 years that were stark images of, you know, increasing poverty and lower income, and so on and so forth.

Stefán Ólafsson  22:10 
Yeah, even though we one of the lowest poverty levels in OECD, we have caused these increase. We've still had food banks here much used by immigrants, unemployed people, unemployed immigrants, particularly also by disability pensioners, single parents, and these increased, of course, the use of these increased in two years following the financial collapse. But nothing on the scale that you see in the UK or in the USA. Nothing compared to that. And there is a difference, of course, mainly due to the welfare state, after all. I mean, that is always a good lesson for us in the Nordic countries. We, even though we're in a bad year, we complain and we  feel the pain, I guess, but nothing compared to what the majority of humanity faces, I guess, so.

Nicola Witcombe  23:35 
I believe there is this phenomenon whereby ice Icelandic people who sort of went abroad and used their  money of their business or their own money to go out and conquer other businesses abroad, not least Denmark epitomise the economic boom of the early 2000s. This go-getting attitude. I mean, given what has happened since how have Icelandic policymakers or others come to terms with this rather brash image? I mean, do you agree with that original image?

Stefán Ólafsson  24:17 
Oh, yeah. Yeah, I mean, business Vikings were basically what they were, I mean, they were aggressive business speculators, who were accumulating properties and ownership and, and mainly by using borrowed money, it wasn't so much their own money, even though they had assets to take the loans out on but they were basically operating with borrowed money. And the Icelandic banks from that rarly period in early 2000s were benefiting from the new liberties in borrowing from abroad, the effects of globalization, and a lot of access to finance at low interest rates. And the Icelandic banks overused this excessively and channeled the money to these business Vikings who were really dangerous speculators and those were, of course, totally discredited in this country, when the financial collapse came. They had more or less to go into hiding. And some of them survived. Most of them actually maintained some properties, I think, even wrongly important tax havens. Some of them have sort of made some sort of a comeback, but not nearly to the scale where they were at before. And but we are really, very much aware of the danger that we see in this society of this sort of behavior. And so, but we're still in a globalized economy, open economy, with fairly liberal finance, even though more restrictions have been put on. And we still have to deal with this. And I still see a threat from these forces.

Nicola Witcombe  26:53 
So when you say it's discredited in in I can't read Icelandic, so in the sort of popular press, is it assumed that they did a bad job? Or?

Stefán Ólafsson  27:06 
Yeah, some of them. I mean, they cheated on tax by using tax havens, and they escaped. I mean, they let companies go bankrupt, and channelled their money into other channels to hold on to it and so on a lot of unlawful and immoral activities-

Nicola Witcombe  27:33 
- gave Iceland a bad name, presumably?

Stefán Ólafsson  27:36 
Yeah, yeah. And that was a part of the sort of the sort of softer, neoliberal politics that there wasn't enough restraint on the financial sector and on business in general, too much leniency on behalf of government.

Nicola Witcombe  27:59 
And what are some of the key research questions that you'd like to see explored in the next five years or so?

Stefán Ólafsson  28:06 
Globalization is a big change of modern times. And it's a bigger change than we realized, I think. We're seeing some of the consequences of that going to curious extremes in the US nowadays. We are seeing increasing problems in national politics, and most of all, growing inequality, which is a threat to not just sort of, to welfare oriented people or Nordic people in general. It's also a threat to just to honest or functional capitalism. It produces, it lets the worst characteristics of capitalism go loose. And I think we need to focus much more seriously on the relationship between inequality and globalization. I think we should also need to develop poverty studies. Not just for the rich world, but also for all over the world. I mean, poverty is a worthy goal to reduce, and we need better understanding better multi dimensional measures of poverty. But also, I would like to see more focus on evaluating the effectiveness of social policies without the tools of the welfare state. When we fix the sort of problems of extreme poverty, we will be fixing a lot of other problems in society like health standard. I mean, poverty is associated with lower health, lower education, crime, and  all sorts of risks. So when often when we fix the extreme promet poverty by lifting the bottom closer towards the middle. We are solving a lot of social problems on the way, often some of the most pressing problems and increasing the overall level of wellbeing. By doing that it's a sort of a win win strategy.

Nicola Witcombe  30:46 
Yep, so we've talked about the past quite a lot. And what about the prognosis for Iceland in the future?

Stefán Ólafsson  30:53 
I could foresee that Iceland will climb the Welfare league, if we look at that as a, as a as a ranking order. We will climb that in the coming years to be more Nordic than Scandinavians. Maybe along with Norway, I mean, Norway is in such a good position with an Oil fund. We have been improving. And I'm, I'm optimistic that we're going to be improving our welfare state, particularly the pension and the public pension system. And the child benefit system in the near future, which will put us on on the highest rank amongst the Nordic countries. So we profile ourselves very much as a Nordic country, Nordic welfare state. That's where we want to be. We sometimes worry that Sweden is losing ground. Our previous leading role model.

Nicola Witcombe  32:15 
Well, when I when I speak to the Swedish participants of this podcast, I will let them know that you are concerned. But my final question is, please, could you put a question to the next person I'm going to be interviewing, Elizabeth Staksrud, who is professor in the Department of media at the University of Oslo?

Stefán Ólafsson  32:45 
Yes, I would like to ask her about this sort of research shows this sort of decline is not that serious, maybe. But Sweden has in many ways sort of come down from the status that it had as a, as a welfare role model with the most equal distribution, lowest level of poverty, it's now somewhere in the region of six to nine positions amongst the ranking amongst the OECD countries on these issues, benefits have become less generous, and so on minimum pension guarantees, and so on. So I would like to ask her whether she sees that as a significant change in the Swedish society and is that much being reflected in the media in sort of contemporary debates?

Nicola Witcombe  33:54 
Well, thank you very much, Stefán, it's been great to talk to you today. And we've been through all sorts of topics both in and outside the Nordic countries. And what's been particularly nice has been looking at your window, which was dark an hour ago. And now it's a beautiful sky. Where is that pointing to over over there?

Stefán Ólafsson  34:19 
The view over here is towards the Reykjavik City Airport.

Nicola Witcombe  34:25 
Well, thank you very much for for being with us today.

Stefán Ólafsson  34:28 
Well, thank you very much for the good questions. It's been an interesting discussion with you, very much so.

Nicola Witcombe  34:42 
Stefán gave a broad historical overview of what has happened to Iceland compared with other states, in and outside the Nordics since the middle of the last century to today. Unsurprisingly, perhaps, we find that the strength of the welfare system means that everyday financial hardship during times of crises, like the current COVID one, are softened by welfare measures. And the more money spent on welfare roughly means less hardship. He perhaps put it in more sophisticated terms, but that appeared to be the tall and the short of it to me. But as any researcher worthy of his title, he is, of course still able to criticize the system in his homeland of Iceland, for example, in relation to means testing being too harsh, leading to those who have around average earnings, or those who are vulnerable due to disability or being out of the workforce for certain periods of time being penalized. What I found most interesting though, is this image and terminology he used when talking of forces, both outside and inside the country, epitomized by the now famous Icelandic business Vikings of the 2000s, pushing for less regulation, even getting into social democrat policy, and other forces like trade unions and public opinion, particularly in the aftermath of the Great Recession in 2007, pushing back. While not spilling blood and guts, like the Vikings war-like terminology is perhaps fitting. The dynamics of regulating and even democratic decision making, deciding on more or less or what should be done is a bit like a battleground with losses and wins. More importantly, however, is the point that inequality and welfare and not on opposite ends of the spectrum to free market capitalism, but they underpin it.

Stefán Ólafsson  36:40 
Growing inequality, which is a threat to welfare oriented people or a gala. terian oriented people like Nordic people are in general. It's also a threat to honest or functional capitalism. It produces it lets the worst characteristics of capitalism go loose.

Nicola Witcombe  37:19  
You've been listening to podcast. Thanks go to Stefán Ólafsson and to our very own research hub, Reimagining Norden in an Evolving World (ReNEW) and our funders NordForsk. If you would like to find out more, please visit

Iceland lagged behind the Nordic social democratic model in mid-20th century
Overview of key welfare benefits in Iceland compared to the other Nordic countries today
Universal benefits & government policy in the Nordics cushioned the effects of the Great Recession of 2008
Iceland bouncing back from the Great Recession post-2010
Saying goodbye to a failed neoliberal experiment?
Icelandic business Vikings
Inequality a threat to functioning capitalism: if you sort out poverty, then you sort out lots of other problems
Optimism for Iceland's future: More Nordic than the other Nordic countries?