I’ve always wondered myself how The Swiss, being positioned in almost the centre of Europe, managed to stay relatively neutral during all World Wars, and retain their wealth as a Nation – it’s really quite impressive.
The process of economic development is generally very complex. First, it would be useful, perhaps to use the classification by Joe Studwell where he separates economic development (upgradation of individuals through improvements in education, healthcare, access to safe drinking water and other basic necessities) and economic efficiency (output of goods and services per capita, advancement of technique in Industry, sophistication of technology in production, development of markets etc). On both these counts, Switzerland does come out very well.
So, what are the causes for it?
Development of Agriculture
For any successful country, the key to kickstarting the Industrial Revolution and becoming rich lies in the development of agriculture. The reason for this is, increase in productivity in farms allows for increase in income for farmers which allows them to save some of it and deposit in a bank or any financial institution which can be then loaned to Entrepreneurs in Industry.
It was especially necessary in today’s developed countries which Industrialized in the 19th century, since unlike developing countries in the 20th century they couldn’t rely on foreign loans or investment. All developed countries today have a very successful agricultural sector with the probable exception of Singapore and Hong Kong SAR. The economic boom in East Asian Tigers like South Korea, Japan and China started with reform in agriculture.
Development of Industries
The general scheme for development of a particular branch in an Industry is importation of advanced machinery and technical know how from an advanced country, learning how to produce it domestically and then using exports to subject the producers to foreign competition after establishing itself in the home market.
The Swiss industry had the further advantage of low wages because of low price of imported foreign goods. Lack of natural resources were of no real disadvantage to Switzerland any more it was to China in 2000’s.
They were imported from abroad and the Swiss factories produced goods that were very quality and competitively priced which allowed them to pay for imports. Just like China, Switzerland quickly advanced in manufacturing goods and started exporting it. Swiss industries had to export earlier than most because of small size of domestic market. More and more of goods and services has turned into a luxury, aiming at products of highest quality
Their ‘Secretive’ Banking Regime
The Swiss have become world leaders in private banking and asset management for individuals. Switzerland has been known for its sophisticated and discreet banking services, but opening a bank account in Switzerland may prove more difficult for non-residents and recent laws have changed the foundation of Swiss banking secrecy.
Banks and financial institutions play an important role in the Swiss economy. The Swiss franc is among the world’s most stable currencies, and the two largest Swiss banks – UBS and Credit Suisse – are among the world’s leading banks. Switzerland is also home to branches of numerous international banks and hundreds of private banks and investment groups, alongside 24 cantonal banks owned by the individual cantons either entirely or with a majority stake.
Most Swiss banks are investment banks, focusing entirely on wealth management. They typically cater to wealthy investors, but there are some opportunities for individuals with more modest portfolios, too.
Despite a proliferation of institutions, very few Swiss banks handle day-to-day banking transactions.
Why bank in Switzerland?
Switzerland is a popular investment destination for a number of reasons.
Historically, Swiss banking has offered:
- privacy for investors;
- an often advantageous tax situation;
- very low corruption;
- a stable and strong economy.
However, recent legislation designed to limit tax evasion and prevent international money laundering has undermined the famous Swiss bankers’ secrecy, making the country less of a tax hideout but still a financial haven.
Peaceful relations between workers and employers.
The condition of labour (in terms of wages) were generally better off than most parts of the world because of rapid Industrialization. However, it was still extremely low and the conditions in modern factories were very poor and workers were forced to work for a very long periods. The Swiss government passed a law in 1864 that targeted adult males and fixed the length of working day between 11-15 hours. In addition, six weeks were allowed for maternity leave, child labour was limited and factory inspections were established.
This was further complimented in 1877 which abolished the labour of children who were under 14. The law prevented children and women from working at night. The work week was reduced to 65 hours. In 1901, the International Labour Office was established since peaceful relations between employers and employees was necessary for progress.The most significant was the agreement reached in 1937 which created the Tripartite structure i.e consensus based Industrial policy. This was to be done through a dialogue between Labour (through a National Association of Employees), Capital (through a National Association of Employers) and the State.
Participation in Colonialism without being a Colonial power
Under Capitalism, all nation states are separated from each other on the basis of their competitive advantages just like firms/companies are separated from each other in a market. This necessarily implies that while they have a joint interest in the expansion of markets and hence the co-operation during the boom times, their other interests (like maximization of Capital) are squarely opposed to each other. Corporations must either expand or contract but cannot indefinitely stay in stagnation and the taking away of reward (profits) because of competition means they are forced to resort to continuously develop better technologies to stay ahead of their competitors without resorting to a price war and cartel formation.
Switzerland turn towards exports made it reliant on world trade and external markets. However, this was the condition of almost every Capitalist country. Colonialism was therefore borne out of economic necessity. Major Capitalist powers like Britain had already established such a system. Switzerland was not strong enough to be a Colonial power so it tended to rely upon bigger powers like Germany and Britain. Switzerland could get the “benefits” of colonialism without having to borne out the costs of maintaining the empire.
Many of the coloured fabrics woven in Toggenburg, the printed fabrics made in Glarus, the straw goods made in Aargau, as well as the watch manufactured in Neuchatel and Geneva were exported to US, Europe, Eastern countries and South America. The decline in prices of raw materials further improved Industry in Switzerland. John Bowring in Britain even prepared a report in 1836 citing Switzerland as a role model for free trade.
Development of Financial Sector
Switzerland has a three tired banking sector. The first tier consists of high finance (Big banks like UBS and Credit Suisse, Hedge Funds along Bonds, Stock and Derivative Markets), the second tier consists of regional finance (Cantonal banks owned by Cantonal Governments which perform the role of policy banks and commercial banks.
Sometimes, the profits from certain sectors are used to reduce mortgage rates), the third tier consists of local finance (Savings banks, Cooperative banks and self help groups in financial sector that were formed by farmers in mid 19th century). This makes it diverse and (comparatively) sustainable.
The financial sector became only what it is today through the legislation passed in 1935 which established Banking secrecy.
The Banking Law of 1934 made it a criminal act for a Swiss bank to reveal the name of an account holder. Swiss bank secrecy protects the privacy of bank clients; the protections afforded under Swiss law are similar to confidentiality protections between doctors and patients or lawyers and their clients. – Wikipedia
It is only recently and still to a limited extent that Switzerland provides legal assistance in the case of tax evasion, its financial center attracts flight capital- also from poorer countries of the South and East. There is also a flat tax that is placed on income earned from foreign capital deposits though it is staring to be debated.
Switzerland as a emerging economy : How Switzerland became rich by Richard Gerster
“When Did the Swiss Get so Rich?” Comparing Living Standards in Switzerland and Europe, 1800-1913 by Roman Studer;London School of Economics
An Outline History of Switzerland: From the Origins to the Present Day by Dieter Fahrn