It's beautiful, but the climate is vile. Resources are few and history books tell of dismal poverty. Yet tourism booms, the capital swarms with the international clubbing crowd, housing prices are soaring and economists talk of a new "tiger" of Europe. Ireland? Nope. Iceland. Just last week, the Swiss International Institute for Management Development rated Iceland the most competitive economy in Europe. Despite its diminutive population—293,000—Iceland has been busily shedding its cod-and-Viking image for more than a decade. Since the mid-' 90s, the country's center-right government has pushed free-market reforms. Companies now pay just 18 percent on profits, down from 50 percent. The country has focused on such sectors as high technology, where the brainpower of a highly educated work force compensates for distance. (How better to spend those long winter nights than surfing the Web?) Along the way, the capital of Reykjavik has become home to a slew of niche companies selling their expertise to the wider world in arenas from software and pharmaceuticals to prosthetic limbs. And if Iceland is short on conventional resources, it's rich in geothermal energy—think volcanoes—and untapped hydropower, a big draw for energy-hungry industries.