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SWITZERLAND V SWEDEN: SHOOTOUT

Come on. Confess. You’ve all been involved, at one time or another, in what P.J. O’Rourke eloquently described as an ‘Anarchist dorm-room bull session’. Some of us have even made a career out of it… You’ll have also noticed how frequently, political debates, either in ADBSs, social media, mainstream press or academia, gravitate towards some Scandinavian economy, usually Sweden, as the exemplification of how good, functioning economies work. 

Switzerland barely gets a mention. It's a known unknown in Mr. Rumsfeld terms. It’s also something of an anomaly, being one of the few modern, rich economies that isn’t simultaneously dysfunctional. 

 

A cursory glance at the stats for the Sweden and Switzerland reveal an uncanny number of similarities: populations 8.4m and 10m respectively, virtually identical GDP ($500b) and, logically analogous GDP per capita ($51k compared to $59k); Switzerland has a (heavily managed) free-floating Franc, while Sweden’s currency is technically a managed float. Likewise, the two share diversified economies with many similar principal industries and exports: machinery, metals, pharmaceuticals, etc.  

 

There are, however, huge divergences. The first major difference is just how shockingly low taxes are in the Helvetic state. Business start-ups pay a mere 8%, for example, whereas federal income taxes range from either free, for single people below 13,000 CHF ($13,000) or 27,000 CHF per couple, to a high-end of 11%. This is all the more impressive when you consider the top-notch quality of public services. The critics might cite labour market flexibility and expensive health insurance as two standard anti-Swiss gripes; free marketeers tend to see them as a virtue.   

On the first of these two points, it should be stated that virtually everyone in Switzerland is employed. Over the first few years of the 2008 crisis, the unemployment rate in Ticino, one of the country’s least wealthy cantons, ‘soared from 3.4% to 3.5%’. Shock horror! It has remained in the exact 3%-4% band ever since. The world economic crisis barely affected the country. Sweden too, almost managed to avoid the southern European-style economic catastrophe - Swedish unemployment fluctuating about 8% while the rest of the EU zone moved between 9% -12%. Meanwhile youth unemployment in the Mediterranean hit 50%. 

The net result is: high employment and low taxes mean the Swiss earn extremely well but this is offset by a slightly high cost of living. For Swedes it’s high gain and high prices. 

 

In a recent polemic article published in the Guardian entitled ‘Myths about money that voters should reject’ the much underated economist Ha- Joon Chang argued, 

If tax really were a pure burden, all rich individuals and companies would move to Paraguay or Bulgaria, where the top rate of income tax is 10%. Of course, this does not happen because, in those countries, in return for low tax you get poor public services. Conversely, most rich Swedes don’t go into tax exile because of their 60% top income tax rate, because they get a good welfare state and excellent education in return. Japanese and German companies don’t move out of their countries in droves despite some of the highest corporate income tax rates in the world (31% and 30% respectively) because they get good infrastructure, well-educated workers, strong public support for research and development, and well-functioning administrative and legal systems.

Chang obviously doesn’t live where I live - near the Swiss-Italian border - where many hundreds of Scandinavian workers, such as international pilots, have relocated to, for purely fiscal reasons. International transport hubs like Milan and Frankfurt make ideal bases for Scandinavians whose standard income tax rate is often as high as 65%. 

 

So just how have the Swiss maintained this model of prosperity for such a long, sustained period? The trolls will have been howling about money laundering, fiscal paradises and numbered Swiss bank accounts. Keep watching the trashy thrillers in your trailer! The modern Swiss banking system is hugely changed. A domestic Swiss bank account holder, will have to endure the same strict procedures and produce the same documentation that one would in any European country. Plus there are additional cross-border controls, trans-national fiscal agreements and a heap of restrictions. To highlight some of these changes let’s look at the example regarding Italian capital. In the last five years Italian authorities have initiated two Fiscal Shields and two Voluntary Disclosure programmes in a bid to bring back home some of the huge amounts of covert capital. In a nutshell, you pay your 5% fine and transfer the cash back to Europe. Likewise, more than eighty Swiss banks have paid fines to the US and have agreed to help in criminal, anti-tax evasion proceedings. Switzerland is making huge efforts to shake off the money-laundering haven tag. Everyone knows the European capital of financial crime and money-laudering malfeasance is the City of London.  

 

The Swiss prosperity model has come about for a very clear reason and it doesn’t sit comfortably with either the neo-liberal, socialist or the free market arguments. 

A look at the Swiss-Italian border any working day will explain why. There is the Italian-Out checkpoint, the Swiss-In and, on the other side of the road, the Swiss-Out and the Italian-In. Two of these points are usually unmanned: the Italian-Out and the Swiss-Out. There are very few checks on the Italian-In. All the border action takes place at the same point: at the entry check into Switzerland. There is a huge truck and merchant facility on one side of the road, plus the domestic entry point where customs officials almost constantly monitor vehicles. ‘Any goods onboard?’ is the standard question as you get waved through. 

 

The reason is that Switzerland is hugely protectionist. Some 70% of agricultural produce consumed internally, for instance, is home-produced. Everything else coming in is either strictly controlled, banned or has high tariffs. Fines are exorbitant. A local lady was jailed for bringing an undeclared gold sovereign through customs! 

 

Nevertheless, the country is, ironically, one of the most accepting of human capital. The cross-border commuters or frontalieri coming into Ticino from Italy alone number in access of 60,000. Thousands enter on a daily basis from France and Germany too. 

How come they are so accepting of foreign workers? The answer goes hand-in-hand with the reason they are so accepting of foreign capital: you can’t have one without the other. When local right-wing Swiss populists forced a referendum to limit the number of foreign workers, the population voted in favour of an immigrant cap… at least until the E.U. intervened and threatened to put controls on capital flows. Can you imagine the U.S. doing the same with Mexico? This makes for an interesting contrast. One of the world’s most aggressively protectionist countries also has quite possibly the world’s most accommodating and tolerant approaches to immigrant workers (albeit the type that go back home at the end of the day).