By Thorvaldur Gylfason

BELIEVE it or not, in 1901, Iceland’s per capita national output was about the same as that of Ghana today! Today, Iceland occupies first place in the United Nations’ ranking of material success according to the Human Development Index that reflects longevity, adult literacy, and schooling as well as the purchasing power of peoples’ incomes.

Can Iceland’s rags-to-riches story be replicated in Africa and elsewhere in the developing world? If so, what would it take?

In 1901, my grandmother was 24 years old. She had six children, as was common in Iceland at the time, even if the average number of births per woman had decreased from almost six in the early 1850s to four around 1900, like in today’s Ghana.

In fact, the number of births per woman in Iceland was four in 1960, so Iceland and Ghana are separated in this respect by a half-century or less. It took Ghana less than 50 years, from 1960 to date, to reduce the number of births per woman by three, from almost seven to four.

True, Ghana has made more rapid progress on the population front than many other African nations. The average number of births per woman in sub-Saharan Africa has decreased from 6.7 in 1960, as in Ghana, to 5.3 in 2005. These averages, however, mask a wide dispersion in fertility across countries.

Mauritius is down to two births per woman compared with almost six in 1960. Botswana is down to three, from seven in 1960. The women of Kenya, Tanzania, and Uganda now have five, six, and seven children each on average compared with eight and seven, in 1960.

The point of this comparison of demographic statistics is that social indicators often provide a clearer view than economic indicators of important aspects of economic development. Moreover, several social indicators of health and education – fertility, life expectancy, literacy, and such – are readily available for most countries and in some cases reach farther back in time than many economic statistics.

Fertility matters because most families with many children cannot afford to send them all to school and empower them to make the most of their lives. Families with fewer children – say, two or three – have a better shot at being able to offer a good education to every child, thus opening doors and windows that otherwise might remain shut.

Reducing family size, therefore, is one of the keys to more and better education and higher standards of life. Around the globe, including in many parts of Africa, there is a clear trend toward smaller families and longer lives. In Ghana, for example, life expectancy at birth has increased by more than three months per year since 1960, from 46 years in 1960 to 58 years in 2005.

In sub-Saharan Africa on average, all 48 countries included, life expectancy increased less rapidly, from 41 years in 1960 to 47 years in 2005. Average life expectancy is now on the rise again in Africa, having reached a peak of 50 years in the late 1980s and then decreased mostly on account of the HIV/AIDS epidemic.

Let us now return to Iceland and briefly trace its economic history since 1901 through African eyes, as it were. In 1901, Iceland’s Gross Domestic Product (GDP) per capita was about the same as that of Ghana today, measured in international dollars at purchasing power parity.

Iceland’s per capita GDP has increased by a factor of 15 since 1901, a mechanical consequence of an average rate of per capita output growth of 2.6 percent per year from 1901 to 2006.

In 2006, at $2,640 at purchasing power parity, Ghana’s per capita GDP was about one-fourteenth of Iceland’s per capita GDP of $36,560.

By 1920, Iceland’s per capita GDP had reached the level of today’s Lesotho. By 1945, Iceland had become Namibia and by 1960, Botswana. By 2006, Botswana’s per capita GDP had climbed to $12,250, one third of Iceland’s. Put differently, Iceland’s per capita GDP in 1960 was one third of what it is today, and its annual growth rate of 2.6 percent per year tripled the level of per capita GDP from 1960 to 2006.

By 1985, leaving Africa behind, Iceland had become South Korea. How did Iceland do it? To make a long story short, upon achieving Home Rule in 1904, Iceland accumulated capital at a fairly rapid pace, all kinds of capital, for this is what capitalism in a mixed market economy is all about, plus hard work: physical capital through saving and investment, human capital through education and training, foreign capital through trade, financial capital through banking, and social capital by means of democracy, institution building, and equality.

Natural capital also played a role, first rich fishing grounds offshore and later hydro power and geothermal energy, but the key to the successful harnessing of the country’s natural capital was its earlier accumulation of human capital. And human capital is probably the single most important key to Iceland´s growth performance, due to smaller families and steadily longer lives.

When Home Rule was achieved in 1904, most of Iceland’s impoverished population was already literate because literacy had been near universal since the end of the 18th century. Thus, Icelanders were well prepared for the modern age into which they were catapulted at the beginning of the 20th century.

Not only is the general level of education made possible by near-universal literacy good for growth, but the social conditions – law abidance, for example – that make near-universal literacy possible are almost surely also good for growth.

Exact measures of literacy in Iceland in 1900 are unavailable, but statistical information on the number of books published is available. In 1906, the number of books in Icelandic published per 1,000 inhabitants was 1.6, which is more than in today’s Norway and Sweden.

By 1966, the number of books published in Icelandic per 1,000 inhabitants had climbed to 2.7, the current level in Denmark and Finland. By 2000, the figure for Iceland had risen to seven books published per 1,000.

At the beginning of the 21st century, African societies face a two-fold challenge. First, they must achieve near-universal literacy because education is the key to the accumulation of human capital as well as other types of capital and the key to growth-friendly management of natural capital.

In 1970, 28 percent of adults in sub-Saharan Africa knew how to read and write. By 1990, Africa’s literacy rate had increased to 51% and by 2006, to 61%. Youth literacy had risen to 73 percent in 2006. The literacy gap must be closed as quickly as possible.

With near-universal literacy, Ghana should be able increase its per capita GDP by a factor of 15 – why not? – in three generations, or less, as Iceland did by practising democracy and piling up capital of all kinds through education, trade, and investment. Some distances are shorter than they might seem.

The writer is Professor of Economics at the University of Iceland and Research Fellow at the Centre for Economic Policy Research in London and Centre for Economic Studies at the University of Munich