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On Switzerland: An alpine song of ice and fire

Sometimes ridiculed, often admired and regularly envied – yet very few understand the Swiss business model. It rests on five essential pillars that make it a pragmatic triumph over chaos and disorder. The result is a very open, ‘antifragile’ economy that has made – and will likely keep making – private wealth prosper.





There may seem to be bigger issues in the world that are currently worth thinking about than Switzerland. After all, it is a tiny country, home to only 0.11% of the world’s population. However, it produces 0.4% of global economic output and owns 1.1% of global private wealth (factors of 4 and 10 times the global average, respectively). Its achievements are reflected in other global rankings too: Switzerland is #6 in the World Happiness Report (United Nations 2019), #2 in output per capita (International Monetary Fund 2017) and #1 in the Global Competitiveness Report (World Economic Forum 2017–2018). While these rankings may vary depending on the source, the methodology and the year in which they are produced, it is still quite striking to see the persistence with which the Swiss keep popping up in the top league. It is, therefore, worthwhile taking a look at the ‘secret sauce’ behind this tiny country’s success story.

Different and defying conventional wisdom

As a Swiss and an economist by training, I started early on to compare the Swiss business model to other ones. What struck me from the very beginning was the fact that many characteristics of the Swiss business model are not only different from those of other models, but also, in many cases, they are the exact opposite of what ‘conventional wisdom’ would suggest. In terms of currency, politics, administration, foreign relations and education, the Swiss example holds some hidden treasures that are worth exploring. This analysis should prove interesting not only for non-Swiss global citizens, who can come to appreciate the benefits of leaving the trodden path of common sense, but also for Swiss readers, most of whom do not even realise how special their system is, since they are so used to it. Let us have a look, then, at the five pillars on which the success of the Swiss business model rests.

Pillar #1: The Swiss franc, the strongest paper currency in the world, as the unique selling proposition

There is a widespread consensus that in times of economic woe, the best a central bank can do is to weaken its home currency. Exports soar, growth picks up and wages eventually follow. While this may be quite intuitive, it is not borne out by empirical evidence. A notable counterexample is the recent experience of the eurozone, which highlights the limits of the ‘cheap-currency-driven export model’. Despite five years of an undervalued euro currency, the European economy does not seem to have sustainably profited from the European Central Bank’s (ECB) stimulus. The same holds true for Japan, where the same remedy has been tried almost constantly over the past 25 years. Some economists claimed early on that there were limits to this ‘beggar thy neighbour’ approach, as it cannot work for the world economy overall. If everyone does the same thing, relative competitive advantages evaporate and a competitive devaluation race ensues. Yet the examples of the eurozone and Japan are particularly noteworthy in this respect, since the world at large did not simultaneously depreciate its currencies. And still the positive effects of doing so in the eurozone and Japan were only temporary at best.

This brings us to Switzerland, which is an example of what happens when a country takes the opposite approach. The history of the Swiss franc shows that it is the most stable currency in the world. The purchasing power of CHF 100 Swiss francs in 1974 has declined to the equivalent of CHF 40 today. In other words, the price appreciation of goods and services in Switzerland has eaten up 60% of its purchasing power. That is quite a material decline. Yet when you compare it to the decline seen in other currencies, it still proves to be extremely solid. The US dollar lost more than 80% of its purchasing power over the same period, and some currencies lost 95% or more. The currencies of all of the countries in the Organisation for Economic Cooperation and Development (OECD) combined saw a decline of about 90%.

It seems that, despite the short-term stimulus to the export sector and the subsequent growth in the economy, it is not possible to compensate for the loss in purchasing power. This is why a strong currency – again contrary to conventional wisdom – is the strongest asset for an economy in the long run. In the case of Switzerland, it has proven to be the unique selling proposition overall, whatever timeline (for which we have data) we care to consider. A strong currency is what is needed to preserve wealth against the chaos in the world around us.

Pillar #2: Swiss politics in constant gridlock

As an economics student, I attended lectures on comparative political sciences for the minor component of my degree. I remember very well the day when our professor told us that the Swiss political system qualified as a one-party system in comparative terms. What? Like Cuba and North Korea? We were completely puzzled. When I asked him why that was, the answer was short and intriguing: “Because you cannot vote off your incumbent government as a Swiss citizen”. And there is indeed something to this. Just to clarify for those not familiar with the Swiss political system, we do have more than one party, of course. However, because Switzerland has a system of proportional representation, the majority cannot be overturned as simply as, say, in the UK or the US. In addition, Switzerland has a referendum system, which allows citizens to vote on everything from immigration to whether cows should keep their horns (no kidding: the latter was the subject of a referendum in 2018). This means that voters have a final say – always. This, in turn, forces parties to compromise on every motion they put forward or else face defeat. If that is not gridlock, then what is? The importance for the overall system is the following: the gridlocked system is ultra-slow and entirely oriented towards compromise, and it does not encourage sharp U-turns. A situation like that in the US, where Donald Trump was able to undo substantial measures taken by the Obama administration in his first six months in office, would be unthinkable in Switzerland. Put more constructively: the Swiss political system is extremely reliable, stable and foreseeable for all economic actors. At least, when compared to other countries in the world.

Pillar #3: A grass-roots approach to administration

In his eye-opening book ‘Antifragile’ Nassim Nicholas Taleb calls Switzerland the happiest nation in the world because it lacks a central government. This would probably not go down well with our central government – as we do have one. (The existence of a sizeable central government, however, is historically a rather recent development. It was introduced after World War II as an extension of the ‘war tax’ and was designed to empower a central body to defend the population against the war machines raging abroad.) But there is some truth to Taleb’s observation, in the form of a century-old motto that the Swiss use for administering their society: resolve everything at the lowest executive level possible and only delegate what cannot be resolved on the spot. You could call this a ‘grass-roots approach to administration’ or the ‘subsidiarity principle’. By either name, it has turned into a rather efficient form of public administration, one that can be measured by government spending. With 33% government spending to gross domestic product, Switzerland ranks far below, for example, the eurozone, whose ratio stands at 46%.

Pillar #4: Submissive foreign relations

This is where we get into a minefield for many Swiss politicians. The Swiss would like to come across as strong and self-dependent in a global context. This is no wonder, given that Switzerland held superpower status before the year 1515. After that, new military technologies, such as the rise of cannons, ended the dominance of the Swiss hordes on medieval battlefields. Unfortunately, everybody outside of Switzerland has understandably forgotten about the country’s once superpower status. And this is why the Swiss approach to foreign relations is rather submissive these days (ssshhh... please don’t tell any of my fellow citizens citizens). It is still pragmatic, though, as the Swiss make a virtue of necessity. I recently took part in a high-profile roundtable at a think tank in Zurich, where everybody patted themselves on the shoulders given that ‘we Swiss do not wage trade wars’. My contribution to the discussion was the following observation: we Swiss do not wage trade wars for the simple reason that we just cannot – we are too small to impose our terms on our large neighbours, let alone after they have joined forces. And yet, the agility of Switzerland’s foreign relations approach has kept the country from committing major mistakes vis-à-vis foreign partners.

Pillar #5: On-the-job training

In 2018, one bottleneck to growth was felt in many Western economies: finding qualified workers. In Switzerland, two prominent Swiss companies warned of profits falling short, citing labour shortages abroad.Sanitary equipment maker Geberit could not find enough plumbers to install their products in Germany. Car supplier Autoneum ‘copy-pasted’ their highly automated European factories for the US market, only to realise that there were no American workers able to operate the machines. In Switzerland, a key feature of the home market is the ‘dual education system’, which combines on-the-job training in a company with classroom instruction at a public vocational school. With only 20% or less of Swiss adolescents choosing the purely academic path, thanks to the dual education system, the Swiss labour force also consists of a highly skilled and well-trained pool of workers that boast apprenticeship skills in addition to higher-education qualifications. Even Ivanka Trump briefly came to Switzerland after her father’s inauguration in 2017 to study the Swiss approach. We have not heard anything back from her, which is funny, considering that Donald Trump’s claim to television fame is his participation in a TV programme called ‘The Apprentice’. For some reason, he has not developed this useful idea beyond TV. What a pity.

Challenges and threats

Now, before you think that I watched too much of the last US election campaign and want to start my own ‘Switzerland first’ movement, please consider the following. Of course, the Swiss system was not designed on a drawing board a few decades back. Instead, it is the result of lessons learned from many years of crises and the pressure these put on the economic and political systems of a small and open economy like ours. The pressure points still exist today and will likely keep Swiss business leaders and politicians awake at night long into the future.

Now, at the end of the 2010s, one of the major challenges for Switzerland is the immense pressure it is under to confirm its support for the European Union project. On the economic front, it also faces structural issues such as the extremely high indebtedness of private households. Granted, this smells of conventional wisdom; usually, high indebtedness is seen as negative. I could continue to list other challenges as well, such as the highly inflated central-bank balance sheet that eventually ballooned as a result of the Swiss National Bank’s fight against the extreme strength of the Swiss franc. No one knows whether this will backfire at some stage.

Growing on resistance

Arguably, Switzerland has faced these challenges and threats in one way or another throughout its history. And it is these challenges and threats that have made the system stronger, more resilient and, in Taleb’s words, more ‘antifragile’, meaning that they have created a system that thrives on chaos, disorder and volatility. Such pressure points may shift and change in the future, but they are unlikely to go away and are more likely than not to produce more of the same.

The proof of the pudding is investing in it

Growth through resistance is mirrored on the investment side of things as well. Given that Swiss investors hold the strongest paper currency in the world, they must calculate their performance abroad in Swiss francs. Astonishingly, Swiss financial assets have outperformed their counterparts abroad on a currency-adjusted basis despite the fact that the franc has appreciated on average 2% per annum versus other paper currencies for the past 40 years. The reason for this may be quite simple: Swiss companies have had to constantly adapt, and not just on rainy days, to remain competitive. The result speaks for itself and shows capital discipline at its best, or at least on a relative basis versus competition in softer currency regimes. Before trying this at home, which might take decades, global investors might want to take a shortcut. Given Switzerland’s track record, they could consider investing a much higher share of their wealth in Swiss-franc-based assets. Conversely, for Swiss-based investors, this means they can rely on their home-listed corporates to give them access to global growth. Nominally, this may not seem so appealing, but benefiting from the strongest currency in the world makes all the difference. It could be time to add some ‘antifragile’ assets to your portfolio.

Further reading

Baltensperger, Ernst (2012). ‘Der Schweizer Franken – eine Erfolgsgeschichte’, NZZ Libro.

Baltensperger, Ernst and Kugler, Peter (2017). ‘Swiss Monetary History since the Early 19th Century’, Cambridge University Press.

Taleb, Nassim Nicholas (2012). ‘Antifragile: Things that Gain from Disorder’, Random House.

Tanner, Jakob (2015). ‘Geschichte der Schweiz im 20. Jahrhundert’, C.H. Beck.