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Economy of Switzerland

Economy of Switzerland
Currency Swiss Franc (CHF)
Fiscal year Calendar year
Trade Organisations OECD, WTO, EFTA, JEC
Statistics
GDP Ranking (2007) 36th
GDP (2007) CHF512.1, $426.75 current, 309.8 PPP billion
GDP growth rate (2007) 5.2% nominal, 3.3% real
GDP per Capita (2007) CHF67,823, $56,519, PPP $41,024
GDP by sector (2007) agriculture (1.1%), industry (22.5%), construction (5.5),services (70.9%)
GDP structure(2007) Private consumption (57.8%), Public consumption (10.8%), Investments (22.2%), Export (55.9%), Import (46.7%)
Inflation rate 2007 0.7%, July 2008 3.1%
Pop below poverty line (2005) 3.3%
Labour force (June 2004) 3.8mio
Labour force by occupation (2002) agriculture (4.6%), industry (26.3%), services (69.1%)
Unemployment rate 2007 2.5%, July 2008 2.3%
Main Industries machinery, chemicals, watches, textiles, precision instruments
Trading Partners
Total exports 2007 $238.5 billion (55.9% of GDP)
Main Partners (2007 est) Germany 20.8%, US 9.3%, Italy 8.9%, France]] 8.4%, UK 4.8%
Total imports 2007 $199.2 billion (46.7% of GDP)
Main Partners (2007 est) Germany 33.9%, Italy 11.2%, France 9,71%, US 5.1%, Netherlands 4.8%, Austria 4.4%, UK 3.9%,
Current account balance $57.0 billion (13.3% of GDP)
Public Finances
Public Debt (2007) 43.7% of GDP

External Debt (2005 est) $NA
Revenues (2007) 37.6% of GDP
Expenses (2007) 35.5% of GDP
Economic Aid (ODA) (1997) $1.1 billion

The economy of Switzerland is one of the world's most stable economies. Its policy of long-term monetary security and bank secrecy has made Switzerland a safe haven for investors, creating an economy that is increasingly dependent on a steady tide of foreign investment. Because of the country's small size and high labour specialisation, industry and trade are the keys to Switzerland's economic livelihood. Switzerland has achieved one of the highest per capita incomes in the world with low unemployment rates and a low budget deficit as a result of its finance industry. The service sector has also come to play a significant economic role.

History

As an effect of the industrial revolution which began in England at the beginning of the 19th century, Switzerland's agrarian sector decreased in size and thus the industrial sector started to increase in size from the mid 19th century on.

In the 1900s and by the beginning of the 20th century Switzerland's industrial sector was the largest and Switzerland was the wealthiest country in Europe by a considerable margin.

In the 1910s, during World War I, Switzerland suffered an economic crisis. It was marked by a decrease in energy consumption. (energy was mostly produced by coal in the 1910s, 1920s, 1930s and 1940s). The war tax was introduced. As Imports were difficult, attempts were made to strengthen the Swiss economy. The cultivation of grain was promoted, and the Swiss railway became the first to use electric instead of coal-burning, steam-driven engines.

In the 1920s Switzerland's energy consumption increased.

Throughout the 1930s Switzerland's energy consumption stagnated.

In the 1940s, particularly during World War II the economy profited from the increased export and delivery of weapons to the German Reich. However, Switzerland's energy consumption decreased rapidly. The conduct of the banks cooperating with the Nazis and the commercial relations with the axis powers during the war became the subject of sharp criticism to such an extent, which even resulted in a short term international isolation of Switzerland from the world. After World War II, Switzerland's production facilities remained to a great extent undamaged which facilitated the country's swift economic resurgence.

In the 1950s, annual GDP growth averaged 5% and Switzerland's energy consumption doubled. Coal lost its rank the Switzerland's primary energy source, as other fossil fuels such as crude and refined oil and natural and refined gas imports increased. This decade also marked the transition from an industrial economy to a service economy. Since then the service sector has been growing faster than the agrarian and industrial sectors.

In the 1960s, annual GDP growth averaged 4% and Switzerland's energy consumption doubled. By the end of the decade oil was Switzerland's primary energy source.

In the 1970s GDP growth rates gradually declined from a peak of 6.5% in 1970 until contracting 7.5% in 1975 and 1976. Switzerland became increasingly dependent on oil imported from its main supplier, the OPEC cartel. The 1973 international oil crisis caused Switzerland's energy consumption to decrease from 1973 to 1977. In 1974 there were three nationwide car free Sundays when private transport was prohibited as a result of the oil supply shock. From 1977 onwards GDP grew, however Switzerland was also affected by the 1979 energy crisis which resulted in a short term decrease of Switzerland's energy consumption.

In the 1980s, Switzerland was affected by the hike in oil prices which resulted in a decrease of energy consumption until 1982 when the economy contracted by 1.3%. From 1983 on both GDP and energy consumption grew.

In the 1990s, Switzerland's economy was marred by slow growth, having the weakest economic growth in Western Europe. The economy was affected by a 3-year-recession from 1991 to 1993 when the economy contracted by 2%, also became apparent in Switzerland's energy consumption and export growth rates. Switzerland's economy averaged no appreciable increase (only 0.6% annually) in gross domestic product (GDP). After having unemployment rates lower than 1% prior to 1990, the 3-year-recession also caused the unemployment rate to rise to its all-time-peak of 5.3% in 1997. And thus, as of 2008, Switzerland is only on the fourth place among European countries with populations above one million in terms of nominal Gross Domestic Product per capita, behind Ireland, Denmark and Norway and to tenth place in GDP per capita at purchasing power parity (see list). On numerous occasions in the 1990s real wages decreased since nominal wages couldn't keep up with inflation. However, beginning in 1997, a global resurgence in currency movement provided the necessary stimulus to the Swiss economy. It slowly gained momentum and peaked in the year 2000 with 3.6% growth in real terms.

In the early 2000s recession, being so closely linked to the economies of Western Europe and the United States, Switzerland was not able to escape the slowdown felt in these countries. After the worldwide stock market crashes in the wake of the 9/11 terrorism attacks there were more announcements of false enterprise statistics and exaggerated managers' wages. In 2001 the rate of growth dropped to 1.2%, to 0.4 % in 2002 and in 2003 the real GDP contracted by 0.2%. That economic slowdown had a noticeable impact on the labour market. Many companies announced mass dismissals and thus the unemployment rate rose from its low of 1.9% in June 2000 to its peak of 3.9% in October 2004, although well below the European Union (EU) unemployment average of 8.9%. The consumer mood worsened and domestic consumption decreased. The exports of goods and services in the EU and the USA decreased as a result of the Swiss Franc's appreciation in value which caused an increase in prices of exported goods and services. On the other hand Switzerland's tourism sector slumped and room occupation rates by foreign guests decreased. Besides that a deficit of market competition in many branches of Switzerland's economy persisted.

On the 10.11.2002 the economics magazine Cash publicized 5 measures, which political and economic actors should implement, so that Switzerland would once again experience an economic revival:

1. Private consumption should be promoted with decent wage increases. In addition to that families with children should get discounts on their health insurances.

2. Switzerland's national bank should revive investments by lowering interest rates. Besides that monetary institutes should increasingly credit consumers and offer cheaper land zones which are to be built on.

3. Switzerland's national bank is asked to devalue the Swiss Franc, especially compared to the Euro.

4. The government should implement the anticyclical measure of increasing budget deficits. Government spending should increase in the infrastructural and educational sectors. Lowering taxes would make sense in order to promote private household consumption.

5. Work should be flexibilised with new working plans. And thus in case of low demand dismissals could be avoided.

These measures were applied with successful results along with the government's policy of the Magical Hexagon which consists of full employment, social equality, economic growth, environmental quality, positive trade balance and price stability. The rebound which started in mid 2003 saw growth rate growth rate averaging 3% (2004 and 2005 saw a GDP growth of 2.5%; for 2006 and 2007, the rates were 3.4% and 3.3% respectively)

This is a chart of trend of gross domestic product of Switzerland at market prices estimated by the International Monetary Fund with figures in millions of Swiss Francs.

Year Gross Domestic Product US Dollar Exchange
1980 184,081 1.67 Francs
1985 244,421 2.43 Francs
1990 330,925 1.38 Francs
1995 373,599 1.18 Francs
2000 422,063 1.68 Francs
2005 463,139 1.24 Francs
2006 487,041 1.25 Francs
2007 512,142 1.20 Francs

Defining characteristics

Trade

Apart from industry, trade has been the key to prosperity in Switzerland. The country is dependent upon exports to generate income and on imports for raw materials and goods. With the notable exception of a strict policy of agricultural protectionism, Switzerland has liberal trade and investment policies. An expansive commercial and bank law system makes Switzerland one of the most secure investment places in the world. The Swiss franc is one of the world's soundest currencies, and the country is known for its high standard of Swiss banking and financial services.

Exports are of great importance to the Swiss economy, since it earns roughly half of its corporate earnings from the export industry. The machinery, electronics, chemical products, precision instruments, insurance and banking services and tourism sectors are essential Swiss exports. Together, they account for well over half of Switzerland's export revenues. About 60% of Swiss exports are destined for the EU market. Germany is the largest importer of Swiss goods and services (20.8%). Germany exports more to Switzerland each year than to all the countries of the former Soviet Union and Eastern Europe combined. The U.S. is the second-largest importer of Swiss goods and services (11.0%). The U.S. is also the largest foreign investor in Switzerland, and conversely, the primary destination of Swiss foreign investment. It is estimated that 200,000 American jobs depend on Swiss foreign investments. One fourth of Switzerland's workforce consists of foreign labour.

Imports of natural resources are important for Switzerland, as these can't be produced domestically in sufficient amounts. Raw materials, chemicals, fossil fuels such as oil, machines, electoric goods, precision instruments and vehicles comprise Swiss imports. About 80% of Swiss imports originate from the EU and 6.3% of Swiss imports originate in the U.S. Switzerland ranks 18th among the main trading partners of the U.S. worldwide. The country is approximately 60% self-sufficient in foodstuffs, taking only 7.5% of foodstuff imports from the U.S.

Agricultural protectionism vs. environmental concerns

Switzerland is extremely protective of its agricultural industry. High tariffs and extensive domestic subsidisations encourage domestic production, which currently produces about 60% of the food consumed in the country.

According to the Organisation for Economic Co-operation and Development (OECD), Switzerland is subsidizing more than 70% of its agriculture compared to 35% in the EU. The 2007 Agricultural Program, recently adopted by the Swiss Federal Assembly, will increase subsidies by SF 63 million to SF 14.092 billion.

Protectionism acts to promote domestic production, but not to reduce prices or the cost of production, and there is no guarantee the increased domestic production is actually consumed internally; it may simply be being exported, to the profit of the producers.
But 90 to 100% of potatoes, pork, veal, cattle and most milk products, are produced in the country. Beyond that, Swiss agriculture meets sixty-five per cent of the domestic food demand.

Prices are not reduced because, in the absence of import tariffs, the price of food would settle to that of the cheapest provider (which would often be external to Switzerland thus more costly in food miles). Import tariffs rise the price of food and Swiss domestic production only has to be cheaper than these artificially raised prices. The consumer pays more than they otherwise would.

The cost of production is not reduced by subsidy; it merely makes the final point-of-sale price lower than it would otherwise be, since some of the cost of production is born by the State. However, the State obtains the money for the subsidy by taxation, which falls ultimately on the consumer. Subsidy merely alters who pays for what (although in this case it now pays for farming practices that are environmentally respectuous). Furthermore, if the food products produced are in fact being exported, the subsidy of their production costs makes them unusually competitive in the world market, which increases the profits of the producers; in other words, the State is in fact taxing the local population with an outcome which is actually merely to increase the profit of food producers.

The stringent policy of agricultural protectionism is generally harmful to the workforce . Domestic agriculture acts as a shield against beneficial import of labour . Consequently, Switzerland has a high cost of living not only in food but also rents, since much land needed for human occupation is retained by farms. About 40% of Switzerland is used for agricultural purposes, alpine pastures included, and the surface of arable and permanent cropland is 10.6 percent of total land area (Europe 13.4%, world 11.3% - 1998 survey). This corresponds with 61 hectares of cropland per 1,000 people (Europe 422 ha/1000 people, world 251 ha/1000 people)

The first reform in agricultural policies was in 1993. Among other changes, since 1998 Switzerland has linked the attribution of farm subsidies with the strict observance of good environmental practice. Before farmers can apply for subsidies, they must obtain certificates of environmental management systems (EMS) proving that they: “make a balanced use of fertilizers; use at least 7% of their farmland as ecological compensation areas; regularly rotate crops; adopt appropriate measures to protect animals and soil; make limited and targeted use of pesticides.” 1,500 farms are driven out of business each year. But the number of organic farms increased by 3.3 percent between 2003 and 2004, and organic sales increased by 7 percent to $979 million. Moreover, Swiss consumers consider less important the drawback of higher prices for organic food compared to locally produced, conventional food.

Tourism

Switzerland has a highly developed tourism infrastructure, especially in the mountainous regions and cities, making it a good market for tourism-related equipment and services. Tourism contributes about SF 1.5 billion to the Swiss economy every year.

Workforce

The Swiss economy is characterised by a skilled and generally 'peaceful' workforce. One quarter of the country's full-time workers are unionised. Labour and management relations are amicable, characterised by a willingness to settle disputes instead of resorting to labour action. About 600 collective bargaining agreements exist today in Switzerland and are regularly renewed without major problems.

With the peak of the number of bankruptcies in 2003, however, the mood was pessimistic. Massive layoffs and dismissals by enterprises resulting from the global economic slowdown, major management scandals and different foreign investment attitudes have strained the traditional Swiss labour peace. Swiss trade unions have encouraged strikes against several companies, including Swiss International Air Lines, Coca-Cola, and Orange. Total days lost to strikes, however, remain among the lowest in the OECD.

Income

Switzerland is among the world's most prosperous countries in terms of private income. In 2005 the median household income in Switzerland was an estimated 95,000 CHF (or US$55,000 at purchasing power parity), which is similar to wealthy American states like California and Vermont

Economic policy

Terrorism

Through the United States-Swiss Joint Economic Commission (JEC), Switzerland has passed strict legislation covering anti-terrorism financing and the prevention of terroristic acts, marked by the implementation of several anti-money laundering procedures and the seizure of al-Qaeda accounts. Continued relationship with the United States through the JEC has brought the Swiss economy into closer proximity with that of the Western world, with mutualistic goals in terrorism prevention providing the impetus.

European Union

Apart from agriculture, economic and trade barriers between the European Union and Switzerland are minimal. In the wake of the Swiss voters' rejection of the European Economic Area Agreement in 1992, the Swiss Government set its sights on negotiating bilateral economic agreements with the EU. Four years of negotiations culminated in Bilaterals, a cross-platform agreement covering seven sectors: research, public procurement, technical barriers to trade, agriculture, civil aviation, land transport, and the free movement of persons. Parliament officially endorsed the Bilaterals in 1999 and it was approved by general referendum in May 2000. The agreements, which were then ratified by the European Parliament and the legislatures of its member states, entered into force on June 1, 2002. The Swiss government has since embarked on a second round of negotiations, called the Bilaterals II, which will further strengthen the two organisations' economic ties.

Switzerland has since brought most of their practices into conformity with European Union policies and norms in order to maximise the country's international competitiveness. While most of the EU policies are not contentious, police and judicial cooperation to international law enforcement and the taxation of savings are controversial, mainly because of possible side effects on bank secrecy.

Swiss and EU finance ministers agreed in June 2003 that Swiss banks would levy a withholding tax on EU citizens' savings income. The tax would increase gradually to 35% by 2011, with 75% of the funds being transferred to the EU. Recent estimates value EU capital inflows to Switzerland to $8.3 billion.

Institutional membership

Switzerland is a member of a number of international economic organizations, including the United Nations, the World Trade Organization, the International Monetary Fund, the World Bank, and the Organisation for Economic Co-operation and Development.

See also

References

External links

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