In Iceland, as well as in the other Nordic countries, the third sector have from the latter half of the 19th century had an important role in establishing and preserving the nation’s welfare system (Matthies and Nordiska ministerrådet 2006). This role has evolved through three periods in Iceland. The first period, in Iceland ranging from the 1880s to the late 1960s, was characterized by a proliferation of voluntary organizations which initiated, supplied, operated, and partially financed welfare services. At the same time responsibilities of local and central government were limited to core activities like public administration, establishment of essential infrastructure and public utilities (Kristmundsson 2004). The governmental spending as a percentage of GDP was low. Important welfare legislation was passed. The relationship between the government and the third sector was informal and distinction between the sectors blurry.

In the second period, ranging from the 1960s to 1990s, the present welfare state was formed with an active governmental role in opening and operating new schools, hospitals, health centers, service for the handicapped and elderly, social security etc. This led to a large increase in the number of public organizations and employment of civil servants as well as in governmental spending (Kristmundsson 1999). In this period the role of non-profit organizations became auxiliary and advisory instead of the previous leading and operating role. Still, the relationship between NGOs and the government was informal and not on a contractual basis. During this period the number of social and civil rights movements increased.

In the third period, from the 1990s to the present, the Icelandic governmental system went through a period of transformation under the influence of the international “New public management” movement (Kristmundsson 2003). This development was reflected in privatization, deregulation and reorganization of the government structure. As elsewhere, new public management approaches were adopted, the government was to “steer but not row”, thereby giving nonprofit organizations the opportunity to regain their role in welfare services. The relationship between the government and the third sector was essentially different from the first and the second period. An effort was made to establish a formal contractual relationship focusing on separating ‘the buyer’s role’ from ‘the seller’s’ and consequently on performance indicators. In recent years a more complex relationship has emerged that can be identified as network governance.

The paper describes a study on the changing interaction and partnership between government and the third sector in Iceland as summarized above. The study is based on qualitative data, primarily historical documents. The data is analyzed by applying theories of public-nonprofit relationships, including the taxonomy of Anheier (2005) and Najam (1996), Weisbrod work on the public choice theory of the nonprofit sector (1977) and Salamon’s interdependency theory (1996). Recent academic discussion on public-nongovernmental complexity reflected in concepts like new/network/ collaborative governance/government (Salamon and Elliott 2002; Agranoff 2006; Rhodes 2007) is discussed.

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