Forget Scandinavia. Switzerland is richer and yet has a surprisingly equal wealth distribution.
By Ruchir Sharma [November 2, 2019]
Like many progressive intellectuals, Bernie Sanders traces his vision of economic paradise not to socialist dictatorships like Venezuela but to their distant cousins in Scandinavia, which are just as wealthy and democratic as the United States but have more equitable distributions of wealth, as well as affordable health care and free college for all.
There is, however, a country far richer and just as fair as any in the Scandinavian trio of Sweden, Denmark and Norway. But no one talks about it.
This $700 billion European economy is among the world’s 20 largest, significantly bigger than any in Scandinavia. It delivers welfare benefits as comprehensive as Scandinavia’s but with lighter taxes, smaller government, and a more open and stable economy. Steady growth recently made it the second richest nation in the world, after Luxembourg, with an average income of $84,000, or $20,000 more than the Scandinavian average. Money is not the final measure of success, but surveys also rank this nation as one of the world’s 10 happiest.
This less socialist but more successful utopia is Switzerland.
While widening its income lead over Scandinavia in recent decades, Switzerland has been catching up on measures of equality. Wealth and income are distributed across the populace almost as equally as in Scandinavia, with the middle class holding about 70 percent of the nation’s assets. The big difference: The typical Swiss family has a net worth around $540,000, twice its Scandinavian peer.
Switzerland did draw 15 minutes of media attention around 2010, when Obamacare was still new — but only for its health care system, which requires all residents to buy insurance from private providers and subsidizes those who can least afford it. Admirers said Swiss health care had something for everyone: universal coverage for liberals, private providers and consumer choice for conservatives.
But for the most part, intellectuals ignore Switzerland as a model, perhaps put off by its exaggerated reputation as a shady little tax haven, where Nazi gold and other illicit fortunes hide behind strict bank secrecy laws. In 2015, Switzerland agreed under pressure to share bank records with foreign tax authorities, but that has not slowed the economy at all. Switzerland always was more than secretive banks.
Capitalist to its core, Switzerland imposes lighter taxes on individuals, consumers and corporations than the Scandinavian countries do. In 2018 its top income tax rate was the lowest in Western Europe at 36 percent, well below the Scandinavian average of 52 percent. Government spending amounts to a third of gross domestic product, compared with half in Scandinavia. And Switzerland is more open to trade, with a share of global exports around double that of any Scandinavian economy.
Streamlined government and open borders have helped make this landlocked, mountainous country an unlikely incubator of globally competitive companies. To build wealth, a country needs to make rich things, and an M.I.T. ranking of nations by the complexity of the products they export places Switzerland second behind Japan, well ahead of the Scandinavian countries, whose average rank is 15.
The Swiss excel in just about every major industry other than oil, often by targeting specialized niches, such as biotech and engineering. The country is home to 13 of the top 100 European companies, more than twice as many as in the three Scandinavian nations combined. And most top Swiss firms dwarf Scandinavian peers. Nestlé, with a stock market value of $320 billion, is 15 times larger than its closest Scandinavian rival.
Though major multinationals are concentrated in big cities, the Swiss economy is as decentralized as its political system. Traveling southwest from Zurich to Geneva recently, I was struck by how many iconic Swiss exports also originate in its provinces — Swiss Army knives from Schwyz, watches from Bern, St. Bernard puppies from a mountain pass in Valais, cheese and chocolates from Fribourg. Small companies anchor the economy, accounting for two of every three jobs. Only one in seven Swiss work for the government, about half the Scandinavian average.
No other nation’s currency has been rising faster against its trading partners, and normally a rising franc should erode Swiss exports by making them more expensive. Instead, while most rich countries (including Scandinavia’s) saw their share of global exports fall over the past decade, Switzerland’s continued to rise. Such is the reputation of its engineers and chocolatiers that customers readily pay more for Swiss goods.
The premium the world is willing to pay for Swiss goods and services helps deter capital flight and stabilize the economy. Switzerland has not been hit by a domestic financial crisis since the 1970s; the Scandinavian countries were wracked by crises in the 1990s and suffered sharper downturns than Switzerland did following the global crisis of 2008.
If there is any fault line, it is that in trying to slow the rise of the franc, Switzerland cut interest rates to record lows ahead of its European peers, triggering a lending boom that has driven private corporate and household debt up to 250 percent of G.D.P., a risky height. No paradise is perfect.
For all its local charms, Switzerland is worldly in the extreme. The Swiss are a polyglot mix of German, French and Italian speakers, many intimidatingly fluent in multiple languages. The foreign-born population has been increasing for more than a century and accounts for a quarter of the whole, 40 percent non-European Union.
True, the rise of anti-immigrant parties across Europe has an offshoot in Switzerland. The country has always been choosy, accepting new arrivals based on their professional résumé more than family ties or humanitarian need. But Australia and Canada also filter immigrants to fill jobs and are widely studied models of how rich economies can survive the aging of their domestic work forces.
Switzerland has been welcoming more immigrants than any Scandinavian country since the 1950s. It is on track to accept more than 250,000 immigrants between 2015 and 2020, expanding its population by 3 percent. That immigration rate is nearly double the Scandinavian average, and one of the highest among large, developed countries. Immigrants are also significantly more likely to hold jobs in Switzerland, in part because most are required to land one before they arrive.
The Swiss labor force gets an added boost from a meritocratic public school system that starts steering students as young as 12 toward their academic strengths. The world-class universities charge average annual tuition of only $1,000 and leave graduates thousands of dollars less in debt than many Scandinavian schools.
Die-hard admirers of Scandinavian socialism overlook the change of heart in countries such as Sweden, where heavy government spending led to the financial crises of the 1990s. Sweden responded by cutting the top income tax rate from nearly 90 percent to as low as 50 percent. Public spending fell from near 70 percent of G.D.P. to 50 percent. Growth revived, as the largest Scandinavian economy started to look more like Switzerland, streamlining government and leaving business more room to grow.
The real lesson of Swiss success is that the stark choice offered by many politicians — between private enterprise and social welfare — is a false one. A pragmatic country can have a business-friendly environment alongside social equality, if it gets the balance right. The Swiss have become the world’s richest nation by getting it right, and their model is hiding in plain sight.
Ruchir Sharma, author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World,” is the chief global strategist at Morgan Stanley Investment Management and a contributing opinion writer. This essay reflects his opinions alone.