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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Switzerland's Seven Secrets for Success

Switzerland's Seven Secrets for Success

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1Switzerland's Seven Secrets for Success Empty Switzerland's Seven Secrets for Success Sun Mar 24, 2013 6:12 pm


Gerd Habermann, Economic Philosopher

In economic and political terms, Switzerland is doing better than almost any other nation in the world. What does it do better than others? What's behind its competitive edge? And how can it stay on top? German economist and exponent of classical liberalism Gerd Habermann offers his take on a small but extraordinary country.

The verdict is in, and it is unequivocal. Whether we are comparing global business locations and the civil liberties they enjoy, considering the number of Nobel Laureates or the quality of academics, entrepreneurs, artists and authors, Switzerland has long occupied the topmost echelons.

For the fourth time in a row, the World Economic Forum has declared Switzerland the most competitive country in the world – ahead of Singapore, Finland, Sweden and the Netherlands – placing the country first in the categories of innovative capacity and labor market efficiency and lauding its business sector for its close collaboration with its universities. Its national institutions are among the world's most effective and transparent. Though a small nation, Switzerland boasts a midsized economy. Internationally, it ranks 20th in gross domestic product, ninth in export statistics and fifth in export of services. Most importantly, it is one of the world's wealthiest countries.

Even in terms of the biggest economic policy challenges we face today – national debt and unemployment – Switzerland comes out on top. While once-stable countries teeter on the brink of insolvency, Switzerland has managed to reduce its national debt drastically over the past 10 years, from 55 percent to roughly 35 percent, measured against its gross domestic product. What's more, the unemployment rate, at its highest point since the formation of the European Monetary Union in 1999, stagnates in Switzerland around the three percent mark.

What are the reasons for this success? What does Switzerland know that no one else does? I see seven ways in which the country excels.

1 – Small Size
Switzerland does not adhere to the economies of scale that other countries swear by. Quite the contrary: Its smallness makes it more successful relative to the size of its bigger neighbors.

It is no accident that the first thinker after Aristotle to develop a theory about the ideal size for a political economy was Swiss, Jean-Jacques Rousseau (1712 – 1778). "In every body politic there is a maximum strength which it cannot exceed and which it only loses by increasing in size," Rousseau wrote. Every extension of the social tie means its relaxation; and, generally speaking, a small state is stronger in proportion than a large one. He maintained that this is particularly true when the state is especially heterogeneous, such as Switzerland.

Rousseau underpinned his statements with the reasoning that long distances make administration more difficult. Each level of government costs more the higher you go and the highest of all costs the most. Last of all comes the supreme administration, which eclipses all the rest. Not only is the government less vigorous and swift in ensuring the observance of laws, preventing nuisances, correcting abuses, and guarding against seditious undertakings, the same laws cannot suit so many diverse provinces with different customs, situated in the most various climates.

2 – Genuine Democracy
Switzerland's relative smallness and the exceptional granularity of government allow the country to enjoy the comparative advantage of genuine democracy. Switzerland has never experienced an era of absolutism. It has never been a bureaucratic state in the manner of Germany or France, and still is not one today. Nowhere else in the world do citizens have the voice they do in Switzerland – a power that extends all the way to elected judges and referenda about public borrowing. This is the only country in which "democracy" is not simply an empty word, where the rank and file still assume responsibilities left to officials and expensive career politicians in other major powers. Republican equality is considered a good in itself. Stature – whether in politics (the big name) or in business (the major corporation) – is viewed with suspicion.

This concerted participation and joint responsibility for public policy has trained citizens politically in a way that justifies what would otherwise be an exaggeration. The average Swiss citizen is better informed politically than your run-of-the-mill representative in the German Bundestag. "We are the state" is an expression to which the citizenry of Switzerland has a better claim than any of its neighboring representative democracies.

Switzerland is much more of a cooperative society than a sovereign state. While the "militia" political system serves to replace a caste of career politicians, it also prevents the formation of an autonomous class of officers. Switzerland has never been a bureaucratic and partisan state in the mold of Germany. For the most part, government in Switzerland has remained a matter of self-government, or rather, despite the current number of federal officials – 30,000 – of true autonomy.

3 – Decentralization
Switzerland boasts another advantage in its thorough decentralization, which could even be considered "non-centralization". Apart from its Helvetia episode (1798 to 1803), Switzerland has never been centralized. It has neither a principal city nor a head of state in the same way that countries including Germany do. Here in particular there is much to learn about how competition between political entities yields the best possible service for their citizens.

Both cantons and municipalities have clout, i.e. their own tax sovereignty. The federal government only has rights of disposal over a tiny portion of the tax collected, and wields powers of taxation that are precarious at best. Add to this the rights of cantons and municipalities, whose extensive powers ensure that even now, the potential of the Swiss domestic market has not been fully tapped.

Diversity is viewed as an opportunity, not as an unwelcome disparity that must be smoothed over with "harmonization". The vertical division of power brought about by the strength of cantonal and municipal self-organization yields much broader latitudes and options than the horizontal ones in major powers or even empires (which are still being undermined by party dominance and bureaucracy).

4 – Subsidiarity Principle
The extreme degree to which government is subdivided – the consistent application of the principles of pooling the highest powers of authorization at the bottom and favoring the private over the public sector and informal structures over formal ones – means that the principle of subsidiarity is practiced in Switzerland as it is nowhere else in Europe. Nowhere else have the ideals of internationalism and urbanity been synthesized as successfully as in Switzerland. For its size, Switzerland is probably more engaged with the rest of the world in the areas of business, finance, culture, law and sports than any other European country, and is better integrated with Europe and the rest of the world, not least because of its ethnic and cultural diversity, held together by a single, common political will.

Decision-making bodies are small, lending an intensity to political life, a practicality to most – if not all – of their decisions, and a vitality to their communities that are unknown to the major powers with their barren bureaucracies. The tiny nation of Switzerland, along with its even smaller subdivisions, can leverage its localized individual knowledge in the service of what Friedrich August von Hayek – the Austrian free-market economist and Economics Nobel Prize laureate – termed "competition as a discovery procedure" as no other state can.

The granularity of Switzerland's subdivision and its non-centralization also give it a flexibility in crises that larger political and economic entities lack. The scope of bad decisions is relatively limited.

5 – Non-Professional Politicians
In Switzerland, parties, bureaucracies and interest groups serve the citizens' collective political will, rather than the other way around. Brussels' centralized bureaucracy demonstrates – as documented in the reports of the European Court of Auditors – the price we pay in the absence of the independent political checks and balances afforded by a "militia" system of non-professional politicians and by clearly organized structures: the dominance of bureaucratic-technical paraprofessionalism in conjunction with well-disguised influence-peddling. Under such a system, career politicians and officials cannot but display the understandable need to pad out their assortment of pet projects, their tax-financed budgets and their career options.

In spite of this, however, a small nation like Switzerland is more exposed to political blackmail than a large nation, as we have occasion to witness today. This is obviously a disadvantage. In order to secure its independence, Switzerland has relied on some felicitous historical circumstances – geopolitical factors like the power over central mountain passes or the jealous obsession of competing major states with maintaining a balance of power have helped the country.

6 – Safe Haven for Capital and Brainpower
Switzerland has long served as a safe haven for intellectual independence and, as is well known, as an economic Rock of Gibraltar. This allows it to constantly increase its intellectual and monetary capital in every respect by importing from abroad. Particularly during crises, Switzerland has served as a safe haven since the age of Voltaire through the 19th and 20th centuries, welcoming freethinkers, fighters for democracy and socialists. It even protected Lenin – demonstrating the value of a generous policy toward refugees and foreigners that is blind to both party politics and world view.

This ties in with Switzerland's strict neutrality, which also positions the country advantageously when it must play the role of an internationally credible and independent mediator above the wranglings between superpowers. The huge exodus of Germans into Switzerland demonstrates – and continues to augment – the respect the country has gained for its stability and economic attractiveness. Switzerland's relatively liberal labor laws also serve as an object-lesson on how to safeguard employment for all.

7 – Middle-Class Mentality
Switzerland is consciously middle-class – and that is an advantage. It did not go through the devastating catastrophes of the two world wars, or suffer inflation as a result, as Germany did. Even today, it stands as a model of moderation, mainstream thinking and deliberation, for business sense, a no-nonsense attitude and realism. In Switzerland, you have not just attorney-client and doctor-patient privilege, pastoral secrecy, and confidentiality of correspondence and communications – you also have banking confidentiality, an expression of respect for the privacy of its citizens and their property.

Switzerland's validity and identity do not spring from its view of itself as a single linguistic, cultural, or religious entity, but from the commitment of the majority of its population to the political foundations of the state: federalism and democracy based on consensus, autonomy and deregulation of business. This is how Switzerland is able to offer broader guarantees for private property and independence and provide more opportunities for experimentation on the municipal and cantonal level than many major states. It is only thanks to this historical-political tradition and balance of interests that the confederation can even be called a single entity.

Switzerland has no call to forget its beginnings as a loosely connected group of states formed to preserve the autonomy of the cities and free farmers' cooperatives. "They swore an oath to remain different from one another", wrote Denis de Rougemont, Neuchâtel-born philosopher. "The reason for their solidarity was not to attain collective power but rather to maintain the autonomy of each individual." And Basel historian Herbert Lüthy once proposed Switzerland as an antithesis to groupthink, to a concentration of power, to a monoculture and enforced conformity. Switzerland should remain just such an antithesis. It embodies the canon of classical liberalism: skepticism toward power and government, private property, middle-class values and a belief in productivity rooted in diversity. In international competition, that is a huge advantage. The "Swiss model" of self-determination, self-help and individual responsibility – as borne out by its economic and political success – is also a formula for prosperity.

Profile: Gerd Habermann
Gerd Habermann is an economic philosopher, professor at the University of Potsdam and cofounder of the Friedrich A. von Hayek-Gesellschaft.


Director - Equity Analytics
Director - Equity Analytics
Very interesting article.

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