Switzerland trapped in economic “slow lane”

Silvio Borner says direct democracy carries a heavy price. University of Basel

Speaking shortly before Swiss voters went to the polls on Sunday, a leading economics professor told swissinfo that direct democracy may be crippling economic growth.

Professor Silvio Borner, head of Basel University’s department of applied economics, says too many voters are isolated from market realities.

Borner hit the headlines this year when he calculated that the Swiss spend as much annually on subsidising three cows as they do on primary schooling for one child.

But he says high agricultural subsidies are only one symptom of more far-reaching economic and political problems.

swissinfo: Switzerland is the only OECD country that saw no increase in real economic growth per head right through the 1990s. How much of a problem is this?

Silvio Borner: It depends very much whether you look at the level or at the rate of change. For historical reasons, we are still at a very high level of economic well being, but the rate of change has been slow for more than three decades.

swissinfo: Why is it so important for a rich country like Switzerland to carry on growing – can’t we just coast along a bit longer and enjoy the ride?

S.B.: Economically, it is easier for countries to catch up than to stay ahead. But that doesn’t mean you should be overtaken. In Switzerland’s case, several nations have now overtaken us in terms of GDP per capita, the most spectacular case being formerly very poor Ireland.

Also, [even rich countries] need growth to finance, for instance, social programmes. Name virtually any big social or political problem today, and it will always be easier to solve it with growth than without.

swissinfo: So how much growth does a country like Switzerland need?

S.B.: It’s quite clear that we will never go back to the spectacular rates of, let’s say, the 1950s or ‘60s. But I think we should be able to reach one or two per cent per year, per capita and in real terms.

swissinfo: Why is growth slower in Switzerland?

S.B.: Using traditional economic analysis, one partial explanation is the rate at which the ratio of government spending [to the overall size of the economy] has grown. But, in the end, the models cannot explain even half the discrepancy, so we have to look elsewhere.

There are two main candidates outside the traditional models – technology and politics. Despite some possible exceptions – for instance, modern IT and communications technologies – it is hard to conclude that Switzerland has fallen behind technologically.

swissinfo: Is money being spent in the wrong places, or is it just that too much money is being spent?

S.B.: I think it is spent in the wrong places. In agriculture, the level of support is about twice as high as in the EU.

Some public transport investment is also politically driven by the regions – so we build too many tunnels through the Alps and too many parallel lines.

Much social expenditure also tends to be wasteful – redistribution less from rich to poor than around the middle. This may be one result of Switzerland’s political “status quo bias”.

swissinfo: What do you mean?

S.B.: This has to do with the fact that we have popular votes on major issues. One key factor is that, because Switzerland is still a rich country, many people can live from their savings and are therefore effectively isolated from market realities.

There is thus a sort of institutional resistance to reform, for instance of the pension scheme.

swissinfo: What will happen if there is no change soon?

S.B.: I think we will see more political polarisation and a “reform logjam”. Things are only likely to change when the situation starts to hurt people more than it does now.

However, people may find they are less immune than they thought. For instance, even the value of savings depends on market factors. If economic development continues to stagnate, incomes will do likewise – and that will affect the value of houses.

swissinfo: What would it need to precipitate change?

S.B.: If reforms can’t be made within the current system, one possibility is joining the European Union. Then we would simply have to implement many reforms, be in the energy sector, cartel law or whatever. But this would not be my preferred scenario.

swissinfo: What would be?

S.B.: Ideally, like Norway, we would have joined the European Economic Area while defending our political independence. The Swiss franc is an asset to our economy and we do have certain political institutions worth preserving.

[Looking ahead], it is strange that the government says EU membership is not currently an issue. Maybe they mean the majority of people wouldn’t vote for it – but the issue doesn’t just go away.

swissinfo, interview: Chris Lewis

Key facts

Switzerland, previously a relatively poor country, shot up to become one of the richest earlier this century.
However, following a deep recession in the 1970s, it has lost ground ever since compared to other OECD members.
While experts disagree over how best to measure growth, the choice of method makes little difference to the overall result.

In brief

Borner says there is a “Swiss illusion” that acquired wealth is a sufficient cushion against economic stagnation.

He also thinks Switzerland’s direct democratic system has a tendency to block introduction of badly needed reforms.

Borner sees only two ways out – internal reform or reform from the outside, i.e. through EU membership.