Switzerland and Japan: sisters under the skin?

Eating out in Japan is often a pricey business. danciprari.com

Swiss visitors to the 2005 World Exhibition in Aichi will notice at least one striking similarity to their home country – the high prices.

Japan is one of the few places in the world where even affluent Swiss tourists can be caught gawping at the cost of eating out, shopping or other common services.

The experience must give them an insight into why the Swiss tourist industry is not exactly booming – for many visitors, Swiss price levels seem equally unreal.

But why are both countries so expensive, at least when it comes to non-tradable goods and services like meals, taxis or hotel rooms – not to mention electricity?

Inflation is certainly not the answer – Switzerland has one of the most stable currencies in the world, while Japan has undergone a decade of deflation (falling prices).

Economists at the Organisation for Economic Development and Cooperation (OECD) believe a large part of the reason is lack of competition, particularly in areas such as basic infrastructure industries (for example, electricity and postal services), agriculture and professional services.

They also see a more fundamental, although related, problem – the persistent lack of economic growth in both countries.

Close links

OECD Japan specialist Randall Jones told swissinfo that prices were highest in sheltered domestic industries which enjoyed a lot of political influence.

“There tends to be weaker competition and higher prices in areas where there is little or no international trade.

“Part of the problem is that these sectors have a high level of political clout, with close links to the ministries. This makes it very difficult to push through reforms,” Jones said.

A particular problem is the level of government support for agriculture, which is about twice the OECD average.

Unsurprisingly, the other country where this is a major issue is Switzerland, whose subsidies still make those in the neighbouring European Union look modest.

As for electricity prices, plans to liberalise the market were rejected by the Swiss electorate in 2002, with the – unintended – result that major companies are still able to keep their prices comfortably above the European Union average.

In Japan, the problem is different – as an island, it cannot trade electricity internationally – but the end result is the same: lack of competition and high prices.

The OECD also stresses the need to liberalise professional services in both countries.

In Switzerland, this would include removing inter-cantonal trade restrictions – for instance, the rules that often prevent a resident of one canton employing a plumber or doctor from elsewhere in the country.

Standing still

The two countries share another, more fundamental, economic similarity – a phenomenon described by Basel University economics professor Silvio Borner as “affluence without growth”.

While both countries are still near the top in terms of gross domestic product (GDP) per head – a standard measure of productivity – they are right at the bottom when it comes to the rate of economic growth over the past decade.

Switzerland, with an average annual increase in GDP per head of 1.2 per cent, shares last place with Germany, while Japan does just marginally better, with 1.4 per cent.

As Borner and others point out, if this trend continues for the next 20 to 30 years, the majority of developed nations could overtake Switzerland even in absolute terms.

A related problem, as in Japan, is that the combination of increased government spending in the 1990s with near-zero economic growth resulted in both a budget deficit and a steadily increasing ratio of public spending to total output or GDP.

Indeed, one major issue facing the Swiss today is how to push through severe public spending cuts without killing off the prospects of a private sector recovery.

Natural brake

And the two countries share another major economic problem – the rapidly increasing proportion of older people in the population.

In Japan, the share of pensioners has risen exceptionally fast over the past 20 years, and is expected to grow further, from about 20 per cent today to 28 per cent in 2020.

The trend in Switzerland is similar: the authorities estimate that, by 2030, each worker will have to contribute 40 per cent more than today to generate an equivalent basic pension for all retired workers.

In both countries, the combination of traditionally conservative attitudes with slowing birth rates and a rapidly ageing population tends to act as a “natural” brake on reform.

However, two key differences between the two should not go unremarked.

First, while Switzerland has arguably the most decentralised political system in the world, Japan ranks – with France – as possibly the most centralised developed nation.

Second, while Switzerland’s domestic market of just over seven million people forces it to look to the world for a living, Japan’s population of 130 million allows it to at least consider economic independence as an option.

swissinfo, Chris Lewis

Key facts

Japan, with a population of 130 million, has the world’s second largest economy after the United States.
It comes 15th in the OECD ranking of national productivity (GDP per person).
Switzerland, with a population of nearly 7.5 million, just scrapes into the top 20 world economies by sheer size.
However, it takes fifth place for productivity.

In brief

Despite low or negative inflation rates, Switzerland and Japan still have some of the highest price levels worldwide.

They also share two more fundamental similarities: insufficient competition and lack of economic growth.

For both, a major block to reform is the combination of traditionally conservative attitudes with an ageing population.