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Direct democracy and the economy Businesses benefit from citizens’ involvement

As a rule voters have a good understanding of potential negative consequences of initiatives for the economy  


The advantages of direct involvement of citizens in politics outweighs potential negative impacts on a country’s economy, according to political economist Alois Stutzer.

In the following interview with, Stutzer says a global comparisonexternal link by the IMD business school shows countries where forms of direct democracy are exercised doing very well both in terms of economic well-being and competitive edge.

Stutzer, a professor of economics at the University of Baselexternal link, says political stability is crucial for businesses to plan investments and contribute to economic prosperity. How do businesses cope with direct democracy in Switzerland?

Alois Stutzer: Companies do not suffer a negative impact from direct democracy Swiss-style, rather the opposite applies.

This statement is based, for example, on the world competitiveness report as reference which assesses the quality of regulations, services, infrastructure and the education of potential workforce as well as access to capital.

Alois Stutzer is an economics professor at the University of Basel. Stutzer graduated from the University of Zurich, where he also worked as an assistant before he took on the position as professor of public finance in Basel. In 2002 he was a fellow researcher at the University of California, Berkeley. His publications cover happiness and economics, citizens participation in politics, and volunteering. 

(Uni Basel)

If we consider public infrastructure and services as a reflection of the good institutional environment of a political system, then I think, in very general terms, companies cannot only cope very well with direct democracy but find conditions that are most beneficial for their profit-seeking and innovative activities.

The example of companies which came to establish their research departments in Switzerland – life science and health technology industries or IT giant Google – are cases in point. How does economic science measure the advantages of direct democracy?

A.S: For instance, by contrasting the efficient use of resources and public funds. In Switzerland voters at the cantonal level and the local level have the final say on the construction, for instance, of new schools or public swimming pools.

In some cases the new infrastructure might even cost a fair bit of taxpayers’ money. But look at Germany or Spain where the costs of building airports spiralled out of control or the projects were delayed or never even completed.

A similar impact of direct democracy can be observed on tax rates, but to a lesser extent. If a taxpayer is confident that he can control the state, he might be willing to allocate more funds and get more services in return: high tax to pay for a nice public pool for instance. But if you don’t trust politicians you might not be prepared to contribute.

A sustainable fiscal policy, low public debt, is crucial to create certainty for the economy, as the examples of Greece, Italy and Spain show.

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Companies which want to plan several years ahead to make investments in new plants may lose confidence in a government which has pledged to pay old age pensions but has to accumulate debts to pay for them. In Switzerland, however, the debt levels are relatively low. What about drawbacks of direct democracy – public ballots, citizens having a direct say on political decisions – for the economy?

A.S.: Of course there also regulatory or legal uncertainties in Switzerland. But they have to be seen in a comparative perspective.

After voters’ approval of the immigration restrictions for European Union citizens in a nationwide vote last year there is a kind of limbo.

Legal uncertainty can in some cases be worse in a purely parliamentary system as politicians can be tempted to make more changes - and more often - than in a direct democracy.

The uncertainty in Switzerland might seem particularly striking at the moment. It is in stark contrast to the key characteristic of Switzerland’s stable economic and political system. How much of a concern is the growing number of initiatives for an economy, notably proposals which are not business-friendly?

A.S.: First of all, let’s see who and what is the economy. Are initiatives against economic interests defined as proposals which are criticised by the Swiss Business Federation, the country’s biggest economic interest group?

Economy and ballot box

Over the past decade Swiss voters have had the final say on numerous issues with a direct or indirect impact on the economy.

Last year, a rightwing initiative to re-introduce immigration quotas for EU citizens was narrowly approved. A proposal to control the salaries of top executives and board members of major companies won a majority in 2013. However, an initiative by ecologists to link immigration curbs and population growth was clearly rejected. Voters also threw out plans by leftwing parties to cap top manager salaries within a company, the introduction of a nationwide minimum salary, the abolition of lump sum taxation for wealthy foreigners. Three years ago a proposal by a trade union group to increase the statutory right to six weeks of holidays per year suffered the same fate.

All the nationwide votes over the past ten years on bilateral treaties between Switzerland and the EU, with one exception, were approved.

end of infobox

But consumers, taxpayers and employees who save money in the second pillar of the social security system are also part of the economy. These people are actually directly involved in these decisions.

Also a factor to be considered is the financial markets. But interestingly, there was no major reaction on the financial markets to the unexpected result of the immigration vote.

The outcome of the immigration vote is probably primarily a problem for small and medium-sized businesses. They have no subsidiaries abroad and cannot switch easily between Switzerland and production facilities abroad.

Alternatively you can argue that the votes brought to the fore underlying tensions in society and they are dealt with in a reasonable and organised manner.

In neighbouring Germany, Austria or France, failed integration policies often lead to public protests and result in rightwing extremism or other problems.

In Switzerland’s direct democratic system, the recent immigration vote has caused political uncertainty with economic costs. But the broad public discussion about the controversial issue has so far prevented the rise of significant rightwing extremist groups. Why would rightwing extremism be a problem for the economy of a country?

A.S: Extremism can be considered an indication that political and social problems are not dealt with in a productive and structured way.

Failure to tackle immigration or integration issues can lead to riots and social unrest which disrupt the economy, slow growth and damage social cohesion.

Some experts might argue parliament and politicians should deal with integration and find ways of defusing tensions in society: how to integrate foreigners, what kind of institutions are necessary to defuse tensions. Switzerland has decided to address these issues in a debate involving citizens. Are the benefits of direct democracy underestimated as some political economists have pointed out?

A.S.: Very probably, simply because the democratic system affects the political process not only when voters decide at the ballot box. Citizens or particular interest groups also have a say in suggesting and drafting a new law or amending it.

So, parties or politicians involved are motivated to find efficient solutions that allow a compromise.

Otherwise, legal reforms face the risk of being put to a referendum and therefore being delayed. As a consequence reforms are more consensus-oriented and might generally find greater support among citizens than if a simple majority in parliament would be sufficient. Do Swiss citizens appreciate the benefits of direct democracy?

A.S.: There is enough evidence to show that people in Switzerland overall have a good understanding of the direct democratic system and the benefits for the economy. For instance, a few years ago an initiative by the Swiss People’s Party which sought to speed up the direct democracy process, thereby bypassing parliament, was clearly rejected. Voters obviously understood that parliament is necessary in a direct democracy.

Parliament debates the policy proposals and explains the reasons for and against. The politicians play the role of experts. To what extent does direct democracy ensure that politicians keep in touch with the daily concerns of society in general and the interest of business?

A.S.: The current trend towards a more professional parliament and more centralisation shows the difficulties. It is getting more difficult for business leaders to take an active role in politics.

It is important to have credible politicians in the federal parliament who can explain issues to people and show why for instance an initiative is costly for business.

There is the case of a prominent business leader, Peter Spuhler, who decided to give up his seat in parliament because he felt it was too demanding.

One reason for the lack of high-level candidates for a political mandate is the fact that an increasing number of chief executives are foreigners in Swiss-based multinationals.

Also a political mandate at the federal level has become almost a full-time job. Many issues, which used to be dealt with at the local or cantonal level have now become a matter of national policy. How can the business community compensate for the loss of direct influence in politics if there are fewer high-profile business leader sitting in parliament?

A.S.: In the medium term we might indeed see a shift towards increasing lobbying efforts in Switzerland if business leaders are no longer directly involved in political decision making. Whether this is a good or bad thing and politicians are more independent remains to be seen.

The fact is that there is a well-developed Swiss system of checks and balances through a referendum. A decision by parliament can be challenged to a nationwide vote. Therefore it is an advantage to have business insiders in parliament.

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