Switzerland’s Wealth: An Economic Anomaly
Throughout history, the world’s richest countries have typically been blessed with abundant natural resources. The British Empire developed a sophisticated trade system to extract resources such as iron, coal, and diamonds from its colonies in India and Africa. The United States exported cash crops such as cotton, wheat, and indigo while relying on slave labor in its southern States. Most recently, Middle Eastern countries such as Saudi Arabia, Qatar, and the U.A.E. have capitalized on vast oil reserves. Fellow non-European Union country Norway has also capitalized on its oil resources. However, Switzerland has scarce valuable resources within its small, mountainous territory and is yet notoriously affluent, with a GDP per capita of $85,157 USD, third highest in the world, behind only small nation-states Luxembourg and Macao respectively. The Swiss have been able to succeed economically because of business-friendly politics that has created economic stability and resulted in the world’s most prominent banking industry.
Since the 17th century, Switzerland has been committed to political neutrality, to both avoid conflict with more powerful countries in the traditionally war-torn Eurozone and to reap the economic benefits of minimal military spending. This has created economic stability and made Switzerland a very attractive market for business operations. During both World Wars, Switzerland’s economy was unscathed by threat of currency hyperinflation or immense war debt. Exchange rates on the Swiss franc remained constant and easily convertible to other currencies due to high demand. This resulted in many corporations and high net worth individuals parking their money in Swiss rather than English, French, or German banks. Furthermore, the Swiss National Bank, which housed money for the Nazi-controlled German Central Bank, was able to make the current day equivalent of approximately $260 million USD in transaction costs alone during World War II. The immense demand for Swiss banks and business dealings with all countries during the tumultuous World Wars led to the rapid development of the Swiss banking sector and its international credibility.
Arguably the most important reason that Switzerland is synonymous with the banking industry today is the 1934 Banking Act. This piece of legislation provided account holders with unparalleled levels of privacy that included allowing accounts to be held under aliases or even numbers and forbid bankers from sharing the identity or any financial details of clients with foreign governments. Many individuals and corporations around the world took advantage of these laws to hide taxable income from their governments and Switzerland became a tax haven for the global elite. As a result, the Swiss economy, in particular the banking sector, grew enormously through increases in banking fee revenue. However, in 2018 Switzerland submitted to international pressure and the Swiss Federal Tax Administration revised this law to begin sharing information with select foreign governments. Although Swiss banks such as Credit Suisse and UBS have been able to generate sterling reputations and dominate the international banking sphere, this change in legislation threatens the long term growth of the sector. As a result, financial institutions in tax-havens such as the Cayman Islands and Monaco will certainly cut into the market share of Switzerland’s banking industry.
In addition to its banking sector, with its relatively small population of highly-educated individuals, Switzerland has been at the forefront of economic globalization since the beginning of the 20th century. Swiss companies are industry leaders in various high-income, luxury sectors such as pharmaceutical, food, and jewelry and is home to companies such as Netslé, Rolex, Patek Philippe, and Novartis. As a result, Switzerland exports these expensive services to virtually every country around the world, causing vast sums of money and assets to be transferred from foreign economies to Switzerland. According to Nationmaster.com, Switzerland has the world’s 6th highest exports per capita at $41,527.28 USD. Accordingly, a 2018 study by economic research organization Bertelsmann Stiftung concluded that Switzerland’s economy profited the most in the world during the period of hyper-globalization between 1990 and 2016.
The recent global far-right political wave focused on nationalism and decreased globalization could hurt the Swiss economy by cutting into its biggest economic strength: exporting services and goods at low transaction costs. Higher tariffs on exports will both reduce the demand for the luxury goods Switzerland specializes in producing and increase the transaction cost on sales. In addition to threatening the high profit yields these companies rely on, it reduces the competitive advantage of companies being headquartered in Switzerland. Furthermore, the recent revision in banking privacy will undoubtedly cut into the global monopoly that Swiss banks had on individuals trying to legally hide their wealth. With the impending Brexit, Swiss banks that have European Union offices in London will have to spend time and resources relocating to countries such as Ireland and Germany. However, history suggests that Swiss legislation will adapt to support the economic prosperity of its largest companies and the country will continue to sustain one of the richest economies in the world despite its lack of natural resources to exploit.
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