Switzerland maintains enviable economic conditions and consistently tops global competitiveness rankings. How much of this is down to its system of government?
Swiss economic success is easy to quantify but difficult to explain. How is it that a country with such a small domestic market and some of the highest average incomes in the world can sustain such steady GDP figures, maintain almost full employment, and (most perplexing) consistently grab top spot in global competitiveness rankings?
For a single, secret ingredient, you might as well ask about the meaning of life. But this doesn’t stop people looking. And one possible link, recently explored at a conferenceexternal link on the Montreux lakeshore, is between the Swiss federal system and its economy: does the decentralised, multi-tiered political system affect economic conditions?
Yes, was the simple answer. “If Switzerland has an economy in fighting form right now, that is largely due to federalism,” argued Tiber Adler of the Avenir Suisse think tank.
No one contradicted him. But why, or how, does federalism concretely spur economic competitiveness? One thing is sure, it is not the slow speed at which it operates, which can sometimes block rather than incentivise entrepreneurship. Switzerland is an “elephant” rather than a “cheetah”, remarked another participant – stable and plodding.
Efficiency and equalisation
But the pachyderm is an efficient one. Christoph Schaltegger, a University of Lucerne professor who recently co-authored a bookexternal link on the topic, tells swissinfo.ch that efficiency is the first of three ways federalism boosts economic activity: when local government can fulfil tasks “closer to the action”, it makes for a more streamlined and accountable system overall, stimulating competitiveness.
Secondly, the federalist system works “to enhance income distribution and act as an insurance mechanism”. This can be systemic - for example, labour market mobility that allows skills to flow from underperforming to thriving parts of the country - or state-driven, such as with the all-important practice of fiscal equalisationexternal link, a transfer system whereby richer regions pay a certain amount each year to subsidise those less well-off.
Under this system – which depends largely on political and economic solidarity across the country – economic collapses in one area can be mitigated by nationwide funds and transfers. According to Schaltegger, about 20% of any “shock” that hits a region is absorbed by Switzerland’s federal system as a whole. This allows the economy to take more risks, as well as maintain a high level of diversification (think watches in Neuchâtel, pharma in Basel, banking in Zurich).
‘Innovation labs’ and competing regions
But the most important federalist success factor is even more intangible. Swiss cantons (or regions) are like small, jostling “innovation labs” that develop singular solutions, often in competition with each other, which (if successful) are then taken up as best practice across the country, explains Schaltegger.
“Cantons can learn from each other,” he says. The education system is one example: while each region retains large control over schooling policy, cantons are constantly on the lookout for what works well and what doesn’t. This “laboratory effect” is crucial, to overall success, he said – if difficult to quantify.
The same applies to more traditional areas of taxation and internal competitiveness. Rivalries between cantons regarding factors like corporate tax and attracting foreign direct investment lead to constant repositioning and re-evaluation of tax rates versus public services. Swiss cantonal tax rates on businesses vary widely, from 12.3% in Canton Lucerne to 24.16% in Geneva – though in practice many big firms negotiate specific deals with the authorities.
“Nobody really knows where the most efficient level of taxes and public services is,” says Schaltegger. But the internal competition makes for balanced overall gains. The constant “calling ourselves into question”, in the words of another conference participant, is an important factor in keeping the economy evolving, and on its toes.
Pulled to the centre
But the question remains: is federalism an active driver of competitiveness, or just a passive shell that simply doesn’t hinder it? As Geneva politician Pierre Maudet wondered in Montreux, would the system prove itself if a real crisis came along?
Nobody was willing to hedge their bets by answering this question outright. But most participants admitted that federalism is not a pristine system without problems. Its slow pace and multiple levels of bureaucracy can be turnoffs for business, even if the political stability they bring is welcome.
“Companies sometimes complain about Swiss perfectionism,” said canton Aargau councillor Urs Hoffmann. When a regulation is passed down from the federal level, Switzerland’s cantons and municipalities tend to meticulously dot every i and cross every t. This can cause headaches, not only in setting up a business, but also in processing payments and administration (though the government is currently trying to remedy this with the rollout of EasyGov.swiss, an online portal for business procedures).
And, the efficiency gains of local government can be offset by overlapping competencies. When it is unclear who is solely responsible for a policy area, business or citizens can be forced to repeat several processes at several different levels, wasting time and money. That may sound familiar to followers of the European Union system.
Schaltegger thinks such design flaws – possibly a sign of a larger “tendency towards centralisation in Switzerland” – need to be tackled.
As he puts it, when it comes to federalism, political stability, and economic competitiveness, “good games depend on good rules more than good players”.