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How Is Switzerland Doing?

Switzerland is a prosperous country, and relative to most countries its wealth is quite evenly distributed. This is due not least to a political system designed to promote cooperation and equity. However, this system will face serious challenges in the future. 

Of our three large neighbors, two – France and Italy – are in the midst of an economic crisis. The Swiss economy, however, is still booming. While the global financial crisis of 2008 affected our country as well, its gross domestic product has been growing since 2010 at an annual rate of about 2 percent, after adjustment for inflation. 

The phenomenon referred to as a super cycle makes Switzerland seem to be even more of an "economic miracle". At least since the financial crisis, we have experienced extraordinary growth, generated by a combination of low interest rates (which dropped to zero after the Swiss National Bank responded to the revaluation of the Swiss franc), a large number of relatively high-income immigrants and growing demand for real estate.

While there is cause for concern about the consequences of this super cycle, a number of measures show that Switzerland is, indeed, doing well:

  • With a per capita income of nearly 75,000 francs (2013), Switzerland is near the top of the rankings. Only Luxembourg, a special case because of its strong focus on the financial sector, and some small oil-exporting countries (including Norway) score higher on this measure.
  • Even after adjustment for the high cost of living, Switzerland remains a leader in per capita income; aside from the countries mentioned above, only the United States and Hong Kong rank higher.
  • Compared with these two countries, however, Switzerland has a "flatter" income distribution, which means that it is wealthier from a social perspective. An OECD comparison shows that Switzerland ranks near the top, behind South Korea, in the distribution of primary income (i.e., not including government transfers), as measured by the Gini coefficient.

A number of other, more specific, indicators also show that Switzerland is doing well:

  • The Swiss population is healthy, as reflected in the high life expectancy. The life expectancy of women in Switzerland was 84.9 years in 2012 (compared with an OECD average of 82.8) and for men it was 80.6 (77.5 for the OECD countries).
  • The level of criminal activity continues to be low. In 2012, the murder rate in Switzerland was only 0.6 per 100,000 people; the OECD average was 2.1 per 100,000. Note, however, that Mexico's murder rate, at 22.8 per 100,000, distorts that statistic.
  • In terms of fine particles per cubic meter, Switzerland has cleaner air and a lower level of water pollution than almost any other country in Europe.
  • In 2012, the purchasing power of the franc allowed the average person in Switzerland to take 1.8 trips abroad, including overnight stays, and in 2010 the Swiss traveled an average of 5,200 kilometers by airplane.
  • Although there is poverty in Switzerland, of course, there is no doubt that the country is a global leader in terms of material well-being, in both a narrower and a broader sense.

Why Switzerland Is Doing Well

There are a number of reasons for Switzerland's prosperity, and some of them are rooted in its history. Clearly all of these factors play a significant role, although it is difficult to determine their relative importance or impact.

They include the following:

  • an extraordinary level of political stability, lasting for over 150 years;
  • a liberal legal order that promotes security and leaves room for entrepreneurial activity;
  • a society (in which small farms play a major role) that has sought for hundreds of years to reconcile competing interests, which limits the potential for conflict, such as that between capital and labor;
  • a unique tradition of combining the scientific and the practical – as reflected in Switzerland's dual educational system – that lays the groundwork for technical progress, thus contributing to the diversity and strength of the economy;
  • extensive periods of open borders, making it easier for foreign companies, and then foreign workers, to come to Switzerland;
  • a tradition of monetary stability, encouraged in part by the interests of the banking industry;
  • efficient public authorities and a heightened sense of financial responsibility;
  • high-quality infrastructure;
  • and finally, the fact that our geography and lack of natural resources have forced us to focus on international trade.

Today Switzerland has both large, successful global corporations and countless small and medium-sized enterprises that are also active throughout the world.

However, the growth in Switzerland's prosperity has not been a linear process. Cyclical fluctuations and the need to make structural adjustments, whether in specific sectors or in the overall economy, have led to repeated setbacks, or have at least temporarily halted that growth. For the most part, however, such difficulties have been quickly overcome, and have even strengthened our economy – whether it was the crisis of the 1970s, which led to a shift away from labor- and energy-intensive production; the crisis and comeback of the watch industry in the 1980s; or the transformation of the chemical industry into a global leader in pharmaceuticals in the 1990s.

The excellent condition of the Swiss economy today clearly owes much to the lessons learned from the real estate – and to some extent banking – crisis of the early 1990s. The financial sector is currently at a pivotal moment – in part because of the financial crisis, which triggered a need for recapitalization and re-regulation of the banking system, and in part because of international pressure for tax compliance. Here, too, the future success of the Swiss economy will depend on moving quickly and decisively to make the necessary changes.

How to Ensure Our Future Well-being

It is impossible to predict the challenges Switzerland will face in the coming years, as circumstances can change dramatically.

But some of those challenges are already apparent:

  • Changes in the economic super cycle may cause problems in the years to come. Hopefully the super cycle will end quietly, with the supply of real estate expanding enough to keep prices from rising and with demand gradually decreasing, in part because of credit restrictions imposed by the banks.
  • It would be more worrisome if demand were to drop sharply – for example because of a dramatic decline in immigration – quickly producing an oversupply of housing and commercial real estate. Those most affected would be the developers of large-scale projects and perhaps construction companies; this, in turn, would affect banks' loan portfolios. Experience both in Switzerland and abroad has shown that it is crucial in such situations to address problems as quickly as possible, rather than delaying out of consideration for political special interests.
  • Restructuring political and economic ties to the EU, Switzerland's primary economic partner, will be of critical importance in the coming years. Approval of the initiative opposing mass immigration has made the situation more difficult. Here, too, we must hope for a "soft landing." This would require implementing the initiative in a way that respects the will of the people, but that is also acceptable to the EU – in other words, that is not perceived as violating the principle of the free movement of persons. In that case, our bilateral agreements would not need to be affected. However, even under those circumstances it will not be easy to strengthen our relations with the EU – for example by reaching a general services agreement or a services agreement designed specifically for the financial industry. The results would be much more negative if Switzerland were to introduce very restrictive quotas for immigrants, leading to the termination of our bilateral agreements. This could lead to the stagnation of the Swiss economy.
  • Over the long term, Switzerland, like many industrialized countries, will have to confront the complex problems that come with an aging population. In additional to medical challenges, such as an increase in age-related diseases like dementia, the most pressing problems are financial. Financial promises, whether they concern state retirement provisions, private pensions or healthcare, will have to be adjusted to reflect demographic realities. Ultimately, we need to fill the labor market gap resulting from the departure of the baby boom generation or to invest more capital. If the labor and capital markets function properly, however, it should be possible to solve this problem.

Meeting the crucial challenges facing Switzerland will require finding the right mix of market-oriented measures and government action. But that will not be possible without political compromise, something that seems to have become more difficult in recent times. Whether the situation will change after next year's parliamentary elections remains to be seen. And let us hope that it will prove possible to maintain political stability in Europe as well as globally. Switzerland's well-being depends in large part on how the countries that surround us are doing. Despite Switzerland's strengths, developed over time, its future could be much less rosy – depending on circumstances in those countries.  

Bulletin 5/14 – 25 Questions about Switzerland >