Whenever we think of rich countries, Switzerland is the first one to come to mind. The Central European country is famous for its stability and high standard of living. Let us analyze the top 10 reasons why Switzerland is so rich.
Content
Introduction
Switzerland was a poor country only 150 years ago. It was an agrarian society, and its economic development was like that of Italy, Spain or Portugal.
Although Switzerland has virtually no natural resources and is surrounded by mountains, nowadays it is one of the richest countries in the world. Switzerland proves that, under the right conditions, any country has the capacity to prosper. And prosper big.
GDP per capita in Euros. Data from the World Bank.
There is a lot of ignorance about the Swiss economy. It is often said that Switzerland is rich only because it is involved in money laundering activities, and it kept the gold of many people after World War II. This is obviously absurd. Many countries throughout history have plundered others and are not prosperous today. Not that Switzerland plundered any countries in the 20th century.
Switzerland has one of the most advanced and value-added economies in the world. Although its taxation is attractive, it is not a tax haven. Switzerland proves that you can have elements of a welfare state and world-class infrastructure without taking as much money from its citizens and companies as is usually the case in most Western countries.
Hence there is no doubt that Switzerland does a lot of things right. By learning what those are, we can help many countries prosper. Let’s look at the top 10 reasons why Switzerland is so rich.
10 Reasons why Switzerland is rich
1) Rule of Law
Switzerland is one of the countries with the best rule of law in the world. Citizens and businesses around the world trust Switzerland and its institutions. Laws are clear, stable and properly enforced.
Thanks to that, Switzerland attracts a lot of capital. This capital fulfils two very important functions. In the first place, business capital serves to develop the productive fabric of the country. Companies are not afraid to invest in Switzerland. And this creates jobs.
Secondly, a high degree of certainty makes it possible to attract many wealthy individuals from around the world. While bank secrecy no longer exists, Switzerland is still a phenomenal place to park your money. Why? Well, because you know that the Swiss government would never dare to expropriate it. And this boosts the country’s financial sector, creating numerous high-paying jobs.
2) Transparent and competitive taxation
Although Switzerland is not a tax haven, it does have much more attractive taxation than most Western economies. In fact, calling Switzerland a tax haven is mere propaganda, typical of any Western politician who feels entitled to take half of what workers and entrepreneurs produce.
Switzerland enjoys both a welfare state and first-class infrastructure. And it manages to do so with much lower tax rates than its neighbors.
The main VAT rate in Switzerland is 7.7% (this compares to Germany’s 19% or Spain’s 21%). Swiss personal income tax rates, which depend on the canton one lives, are significantly lower, with most of their taxpayers, who tend to earn relatively high salaries, paying between 15 and 25% in taxes.
The average corporation pays between 12 and 22% of its profits in taxes, depending on the canton in which they are domiciled. And the property transfer tax, equivalent to the United Kingdom’s stamp duty, for the purchase of a home is between 1 and 3%.
Inheritance taxes are highly complex and depend on the canton and the relationship between the deceased and the heir. However, the average effective rate in 2019 stood at 1.4% of the capital inherited. Despite having much lower tax rates, Switzerland has a tax burden of 27.8% of GDP. That compares with Spain’s 37.3%. Why is the difference so small? Well, we can look at the differences in unemployment rate (4% vs. 16%), the percentage of adults working (81% vs. 64%) and wage levels, which are all a direct result of a much more developed economy.
3) Political system: stable and well defined
Another reason why Switzerland is so rich is its political system. Two things are fundamental here: the rigidity of the system and the internal competition between cantons.
Firstly, Switzerland has a very rigid legal system. It is very difficult for a government to implement radical reforms without having massive political support or asking the people to approve those reforms in a series of referenda. Consequently, the educational system does not change every 4 years. And the country’s taxation is not amended whenever politicians feel like it, which always pushes taxes higher in the long run.
To put this in perspective, let us remember that Switzerland has a general VAT rate of 7.7%. That may seem low within the European context, but only if we compare the Swiss VAT rate with that of other European countries today. Until 1968, VAT in Germany was 10%. It is 19% today. And until 1992, the general VAT rate in Spain was 12% (21% today). The same thing can be said about income taxes. While other countries have been continuously increasing their tax burden, Switzerland has not.
Secondly, Switzerland is a federation of 26 cantons. And each canton has significant fiscal powers, as we have seen so far. As a result of that, cantons compete to be more attractive to citizens and businesses. This competition, as in the free market, favours the consumer (in this case citizens and businesses).
If we compare the fiscal competition between cantons in Switzerland with the mindset of politicians in charge of the European Union, we will understand the reason why those regions are so different. Brussels wants all governments to cooperate, just so that taxes are high everywhere.
In short, the Swiss tax system more closely resembles a free market, and the European Union model is an oligopoly that wants to become a monopoly.
4) Sound public finances
Sound public finances are another important feature of Switzerland. I have always believed that running deficits or surpluses is, in the long run, a choice, not a result of fate. And Switzerland has always rejected high public deficits.
On the one hand, because of the rigidity of the political system, politicians have a much harder time promising free stuff to citizens to get elected. On the other hand, Swiss society tends to consider the consequences of government’s actions on the future of the country.
Thanks to this, Switzerland is in an enviable position. Robust public finances go hand in hand with economic stability. The little public debt it has (46% of GDP as of 2019) can be financed with internal savings, as Switzerland also enjoys large trade surpluses (it exports much more than it imports).
Another advantage of having such a good macroeconomic position is that its currency, the Swiss Franc, is the strongest in the world. Its overvaluation on a purchasing power basis is precisely because it is seen as a haven.
Despite Keynesian arguments, a strong currency, if there is a strong economy behind it, is a great asset. It means that Switzerland can export its products at higher prices, import products more cheaply, and allows its citizens and companies to invest more easily outside the country.
5) World-class infrastructure
World-class infrastructure allows the Swiss economy to boost trade, tourism and mobility. Switzerland is known for its efficient trains which almost always run on time. And at comparatively competitive prices. Those who have had the pleasure to travel on them will know what I am talking about.
Despite being a country full of and surrounded by mountains, it also enjoys an enviable road network, which allows it to benefit from its geographical position at the center of Europe. And, if this were not enough, Switzerland is also a leader in air travel, with one of the highest ratios between passengers and number of inhabitants in the world.
All this makes it easier for both companies and individuals to choose Switzerland as a place to do business. And that has many positive externalities for society.
6) High value-added industries
While Switzerland is known for its financial industry, it only accounts for 12% of GDP and 6% of employment. And that includes the banking sector, the asset management industry, and the insurance sector. As you can see, Switzerland is much more than finance.
Switzerland dominates in many high value-added sectors, such as machinery, pharmaceuticals, watches, jewellery, precious metals, chocolate, cheese, and luxury tourism.
This means that, both in services and goods, Switzerland produces and exports quality and luxury.
Switzerland is home to some of the largest corporations in the world, such as Nestlé, Novartis, Roche, UBS, Credit Suisse, Swiss Re, Zurich Insurance or ABB. In fact, if we look at the MSCI World Index, a stock market index composed of companies from developed market economies, Switzerland enjoys the second largest weight of all European economies and the fourth largest globally, only after the Unites States, Japan and the United Kingdom.
And even though Switzerland is home to many large corporations, including many foreign multinationals, more than 99% of its companies are small and medium-sized.
For those who love gold, Switzerland also refines about 70% of all global production.
7) High quality immigration
As a result of all the positive facts seen so far, Switzerland is able attract high quality immigration. Germany and Italy are the most common nationalities among foreign citizens living in Switzerland, each accounting for approximately 15% of the total.
Thanks to the high demand for skilled labor, on a relative basis, Switzerland attracts many more doctors, engineers, and economists than other developed countries. In 2018, the median salary of expats, according to a HSBC survey, was $202,865, more than any other country in the world.
This has very positive consequences for the country’s economic development and public finances.
8) Geopolitical neutrality
This is probably the only aspect that we cannot fully replicate since it is partly in the past. As we all know, Switzerland has long been a neutral country. Which means it has not participated in major wars. And that is a very positive thing.
While we can mention how the country benefited from trading with both sides during the two world wars of the 20th century, that was only temporary.
The most positive consequence of not having participated in those major wars is not having suffered the destruction of human lives and capital that comes with that: homes, factories, infrastructure, etc. This means that, while many European countries had to spend many years rebuilding basic infrastructure after World War II, Switzerland was able to move forward much faster.
Although many Keynesian economists would argue that rebuilding a country can be useful in reactivating the economy, that is a gigantic misconception. Resources are finite. Hence it is better not to have to rebuild anything and develop new sectors of the economy.
9) High level of savings
Switzerland is the country with the highest average and medium wealth levels in the world. The average net worth per adult in 2019 stood at $564,653. To put that in perspective, it was $432,465 in the United States and $216,654 in Germany.
And while average wealth numbers can be skewed by a small number of very rich people, especially in the United States, we can also look at median wealth. When it comes to median net worth, half of the adult population in Switzerland has a net worth greater than $227,891. By comparison, the median net worth is $65,904 in the United States, $94,070 in Austria and $35,313 in Germany. The data of all the countries can be found here.
A high level of savings allows the country to have plenty of capital to invest. In addition, a richer society requires less welfare spending. This is the result of high income levels and a high savings rate.
10) Educational system and technological development
The last reason why Switzerland is such a rich country is its focus on the long term. Switzerland knows that prosperity in the future will depend on having a highly qualified workforce and an advanced level of technological development.
Thus, the Swiss economy spends 3% of GDP on research and development. More than 75% of that money comes from the private sector. Not surprisingly, Swiss companies are the ones with the highest levels of investment in R&D, at 6.6% of their net income.
This allows Switzerland to maintain its leadership in the pharmaceutical, chemical, engineering, and agricultural industries. In the field of education, Switzerland is the second country in the world with the highest percentage of adults with a PhD.
Conclusion
As you can see, there are plenty of things that other countries can learn from Switzerland. Clearly not all countries can be like Switzerland. But many of its policies could be replicated in other places if politicians really wanted their countries to prosper.
Personally, I believe Switzerland has some historical advantages that place it in a privileged position. However, I also think that the main reasons why Switzerland remains such a prosperous country today have little to do with those advantages.
Switzerland seems to be a country that knows in which direction it wants to go. Further, thanks to its political system, which is so different to that of most Western countries, the level of political intervention in the economy and taxation are much lower.
Switzerland has not followed the trend of most Western countries in continuously increasing taxes. This has allowed its citizens and businesses to prosper much more. It proves that prosperity increases when resources are in the hands of the people and not controlled by government. In addition to that, a very strong rule of law makes it possible to attract investments from all over the world.
Indeed, there are many things that other countries can learn about Switzerland.
If you liked the post, I encourage you to subscribe to my newsletter:
Clear Finances
Comments are closed.