Social Enterprise in Iceland: The Long Journey Towards a Hybrid Welfare Model

Steinunn Hrafnsdottir and Omar H. Kristmundsson


Although the terms “social innovation”, “social entrepreneur” and “social enterprise” were relatively unknown in public discourse in Iceland until the start of the 21st century, the country has a long history of collective initiatives directed towards social objectives which correspond to the EMES Network’s approach to the concept of social enterprise.1 As elsewhere in Europe, the freedom of association, which was recognised in Iceland in the 19th century, urbanisation and a growing middle class formed the background against which new associations, social movements and cooperatives appeared and developed in the late 19th and early 20th centuries.

In the first part of this chapter, the historical roots of social enterprise (SE) in Iceland will be analysed. Then, concepts and definitions that describe social enterprise will be addressed, and a tentative categorisation of social enterprise will be put forward. Finally, the SE-related policy, legal environment within which social enterprises operate and support for these initiatives will be discussed.

Historical Roots of Icelandic Social Enterprise

It is generally agreed that Iceland belongs to the Nordic welfare model (as do Denmark, Finland, Norway and Sweden). The Nordic welfare states are known for their universal welfare services and equal opportunities for their citizens. However, Iceland has always deviated from the Scandinavian countries in some respects, and it has been suggested that the Icelandic system is a hybrid of the Nordic welfare model and the liberal model (Olafsson 2012). This has been explained by the country’s late modernisation and industrialisation and different political landscape, in comparison to the other Nordic countries, which gave social enterprises a larger role in welfare services (Olafsson 1999; Hrafnsdottir and Kristmundsson 2012a).

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Industrialisation and Mass Movements at the Turn of the 20th Century

The urbanisation and economic upswing that followed industrialisation at the turn of the 20th century created several mass movements focusing on human rights and public-welfare objectives (Hrafnsdottir 2006, 2008; Hrafnsdottir and Kristmundsson 2012b). Women’s associations were established which, in addition to pressing for women’s fundamental rights, performed charity and humanitarian work. A powerful temperance movement also became, in a short time, one of the largest mass movements in the country. In the late 19th and early 20th centuries, these new movements established and began to run hospitals and other social and health institutions, which were for the most part financed by the associations and the patients themselves. The role of the government, be it as financer or provider of these welfare services, remained limited.

Continued Importance of Associations in the Developing Icelandic Welfare System in the First Half of the 20th Century

In the second and third decades of the 20th century, the direct involvement of the government in welfare programmes increased, finally leading to the foundation of the present Icelandic welfare system. There were several reasons for these changes. First, the national income increased considerably as a result of the industrialisation of fishing, and this resulted, in turn, in growing urbanisation. Secondly, a new political system, which focused more on domestic problems, was established. Finally, labour unions became influential in public policy-making and, together with other associations, led the public debate on the need for improvement in health and social security (Hrafnsdottir and Kristmundsson 2012a, 2012b).

All these factors paved the way for increasing public intervention and contributions to the welfare sector in the form of sickness, injury and support insurance. This development led to a substantial increase in welfare expenditure and created the first stable foundation on which private entities operating in the welfare sector could establish themselves. The Icelandic government passed legislation on public insurance in 1936 and a Social Security Act in 1947. These two acts formed the backbone of the state’s welfare legislation (Olafsson 1999, 2012; Jonsson 2001). Despite this ground-breaking legislation, however, non-profit institutions continued to take the initiative in terms of setting up of new welfare institutions (Hrafnsdottir and Kristmundsson 2012b). The construction of hospitals was primarily in the hands of private organisations, such as the Catholic Church and women’s associations, and affluent individuals. The number of associations operating in the welfare sector did not increase substantially during this period, but patients’ associations were established for the first time; these campaigned for their clients’ interests,

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but also took the initiative in establishing and running treatment facilities. Other types of collective movements also emerged, including powerful unions and political parties, which formed strong alliances as in the other Nordic countries. Cooperative societies became prominent and were instrumental in increasing the number of commercial and industrial jobs in the country.

Despite the establishment of the social security system, associations continued to fund and operate various welfare institutions (Hrafnsdôttir and Kristmundsson 2012b). The official system, however, provided an important regular income in the form of day rates, that is, an amount of money paid by the government based on the number of patients and care days. In some cases, governmental subsidies also covered construction expenses. Yet official funding levels remained low, so that an examination of the history of various associations from this period reveals constant financial problems and requests for increased governmental support.

From Informal Relations between the State and NPOs to New Public Management in the Late 20th Century

In the 1970s and 1980s, various patients’ organisations and member-oriented associations formed an umbrella group, the Icelandic Disability Alliance (Oryrkjabandalagid), which became a powerful means of putting pressure on the welfare state, urging it to take responsibility for dealing with various problems. The group also insisted on being given a role in the policy-making process.

It was not until the latter half of the 20th century that fundamental changes occurred in relations between non-profits and the government, following the establishment of the Icelandic welfare state, economic growth and social changes. The government gradually took over general hospitals and some other activities in the health sector. As a consequence, some non-profits became quasi-governmental agencies. However, increasing public responsibility did not crowd out as many non-profits as might have been expected. Indeed, several welfare services—notably, those offered by nursing homes, rehabilitation centres, residential services for the disabled and treatment facilities for alcohol and drug abusers—remained the responsibility of the non-profit sector, though with government funding. In these areas, non-profit organisations are still large or even dominant today in terms of both their level of activity and staff numbers (Sigurdardottir et al. 2016; Hrafnsdôttir and Kristmundsson 2019).

Historical research (Hrafnsdôttir and Kristmundsson 2012b) shows that civil society has been a great contributor to social innovation and entrepreneurship in Iceland. Furthermore, there was a close relationship between the state and interest organisations in implementing public policies. Non-contractual informal relations were the norm until the 1990s,

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but with the establishment of new public management (NPM), in 1991, a development was initiated towards more detailed unit-cost contracts. For the first time, a government’s white paper included privatisation objectives and goals linked to the outsourcing of programmes to private organisations in order to assure efficient and effective public services. This development led to an increase in different types of formal service contracts at various administrative levels (Kristmundsson 2009). A legislative framework for contracting and tendering was created. However, most of the contracts made in this period were so-called “soft” and less specific contracts, focusing on cooperation rather than competition, and on trust rather than distrust. State/non-profit communication in general was largely based on trust, although monitoring and surveillance were also part of the agreement. For the most part, the government contracted with parties that were considered trustworthy and had a good reputation. Emphasis was put on market mechanisms to regulate third-sector organisations in welfare services, with specific emphasis on business and privatisation. The development towards more formal relations between government and non-profit organisations seems to have occurred at a slower pace in Iceland than in the other Nordic countries, even though the period has been characterised, as elsewhere, by formal contracts and NPM. Iceland also witnessed an increase in membership of all kinds of advocacy groups, fighting for various causes and even establishing new initiatives (Hrafnsdottir and Kristmundsson 2019).

Increasingly Formalised Relations between Third-Sector Organisations and the State in the Aftermath of the 2008 Crisis

Like many other countries worldwide, Iceland experienced a financial collapse in 2008, with serious consequences. The gross domestic product contracted by some 10% in two years (2009 and 2010), and unemployment rose from l%-2% in 2007-2008 to about 9% in 2009. Real earnings were drastically reduced, private consumption contracted by some 24% between 2007 and 2009, and household, corporate and government debt escalated. Iceland had to apply to the IMF and neighbouring countries for emergency assistance, loans and guidance (Hrafnsdottir and Kristmundsson 2011; Ôlafsson 2013).

The role of third-sector organisations after the crisis has not been studied systematically with regard to their innovative or entrepreneurial role. However, analysis of official documents from the Ministry of Welfare and of the annual reports of relevant third-sector organisations indicates that they played some innovative and entrepreneurial role during the crisis. Third-sector organisations joined forces with the government in establishing all kinds of labour-market incentives, voluntary work for unemployed people and food distribution, and they participated at government level in policy-making and consultation on

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reactions to the crisis (Hrafnsdottir and Kristmundsson 2011; FriSleifsdottir et al. 2017). The number of third-sector organisations in work-integration activities grew considerably after the crisis; they focused on work-related activities with vulnerable groups, sometimes providing them with a way of entering the mainstream labour market. A time-series study of the effects of the crisis on the third sector also revealed new and extensive challenges: since the turn of the century, the sector has been facing problems related to funding and capacity. The environment is becoming more competitive, resulting in greater marketisation of the non-profit sector and increased formalisation of the relations between the state and the sector (Hrafnsdottir and Kristmundsson 2016).

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