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The Swiss Model

Putting the Middle Class on Center Stage


Putting the Middle Class on Center Stage


Switzerland is best known for luxury watches, the Alps, and secretive banks. But the landlocked country has carved out a distinctive way of life that makes it one of the world's most livable places.



Putting the Middle Class on Center Stage

By Isabella Wu
From CommonWealth Magazine (vol. 484 )

Fall has come late to Switzerland this year, hot summer temperatures lingering longer than usual, into mid-September. Even before noon, shops along the exclusive Bahnhofstrasse in Zurich put up their patio umbrellas on the sidewalk to block the sun, enticing shoppers who have built up a thirst admiring the street's furs, luxury brand watches and jewelry to take a break and enjoy a beer.

Down the Bahnhofstrasse past Hermes and Cartier stands the headquarters of Swiss financial services giant UBS AG. Passers-by occasionally check the exchange rates posted next to the bank's main entrance to see if the Swiss franc has appreciated again.

Right now, Switzerland is bursting with prosperity.

Over the past year and a half, investors have viewed the Swiss franc as a safe haven as precious as gold, causing the currency to appreciate by as much as 30 percent against the U.S. dollar and euro before retreating in the past month. Swiss wealth has risen in step with its currency.

The question is, how? How has Switzerland, a landlocked country with a population of under 8 million people, sustained growth as the rest of the world economy stagnates and the European debt crisis threatens to bring down the continent? How has it resisted being sucked into the sphere of its huge next-door neighbor Germany – the world's fourth largest economic entity – and how does it continue to attract large amounts of international capital?

"Switzerland is a socially stable country with low tax rates. And the companies here in Switzerland are absolutely creative and very innovative," says UBS Group COO Ulrich Koerner. Working at a bank that moves seamlessly between Swiss customers and international markets, Koerner points to another Swiss strength: "Having the ability to adapt successfully to the changing industrial landscape is very crucial."

These factors may seem rather straightforward, but behind each one lies a unique, non-mainstream Swiss way of thinking developed over a half century that has helped the country navigate its own, distinctive course.

No Industrial Policy? No Problem

Industrial development comes down to a competition of speed and scale. In many countries, the government serves as the main economic driver, setting industrial policies and creating incentives and tax breaks to support targeted sectors.

That's not the case in Switzerland. "There is no industrial policy in Switzerland. Diversity is our major advantage," says Hans Hess, president of Swissmem (the Swiss association for mechanical and electrical engineering industries), in an interview with CommonWealth Magazine. "This might be different than other countries. The Swiss believe that competitiveness and survival is the responsibility of companies," he stresses.

To the Swiss, employment is the foundation of social stability, and good jobs are created by competitive companies rather than conjured up by a labor ministry – the government is no substitute for the private sector in a competitive environment.

Because of the limited size of Switzerland's domestic market, any successful small or medium-sized enterprise (SME) must compete in the global marketplace. At the same time, Swiss SMEs average 11 employees, so even if they go bankrupt, only a small number of people lose their jobs. They can easily be reabsorbed by other companies, minimizing the impact of business failures on social stability.

So what is the government's role in all this?

"The government's responsibility is to establish conditions that give companies competitive muscle, that is creating the environment, including low taxes, talent and good education," says Gerold Buehrer, the president of Swiss business group Economiesuisse, flexing his bicep as he talks.

Economiesuisse, the country's biggest economic association, represents more than 30,000 companies and 1.5 million workers and serves as the main conduit between the Swiss government and the private sector.

Switzerland's Secret in Attracting Wealth

As the rich-poor divide has widened around the world in recent years, governments in many countries have targeted the wealthy as a potential source of higher tax revenues. Britain, France, Italy and the United States have all been caught up in the craze to "hunt down the rich for taxes," hoping to increase the tax rates of higher-income earners.

Switzerland, on the other hand, has long been a "tax paradise." Starting in the 1950s, the country lowered taxes to attract wealthy businessman and companies, and its 26 cantons, with autonomy over their rates of taxation, have generally lowered taxes to draw corporate investment.

Generally speaking, Switzerland caps personal income tax rates at 23 percent and corporate rates at 30 percent, well below the maximum rates of advanced countries, especially the European welfare states that neighbor it.

That is why many prominent wealthy people, including IKEA founder Ingvar Kamprad, American singer Tina Turner, and some Formula 1 drivers, have all moved to Switzerland, and the policy has also proven a draw to foreign companies.

In 1999, the seven cantons around Zurich organized a semi-official organization called Greater Zurich Area AG to recruit multinationals to relocate to the country. Sonjia Wollkopf Walt, the managing director of Greater Zurich Area AG, clearly understands her country's main selling points.

Whenever her team heads out to meet clients to drum up investment, it always includes a tax expert who can tailor tax reduction plans to a company's structure and the country in which it is based.

Today, more than 1,000 global or regional headquarters of multinational companies have established their headquarters in Switzerland. In 2010 alone, the Zurich group drew 104 international companies to the area, and such initiatives have changed the landscape.

The canton of Zug, for example, which is about half an hour south of Zurich by train, was once a small agricultural town. But by lowering taxes and aggressively recruiting corporate investment, it has been transformed into a global commodities trading center.

Some of the best known companies in the world have also flourished in the area. "Google came to Zurich seven years ago (to set up) its European headquarters. Google started with only four people, right upstairs," Watt says proudly.

Today Google has its own park and 700 employees in the city, and "now, it is Google's largest R&D headquarters outside the U.S."

Google's arrival created a cluster effect. IBM, eBay and other big names followed, spawning emerging software development and Internet sectors.

It's no wonder then that people describe Switzerland as the country making the best use of globalization to accumulate wealth. 

Maintaining a Strong Middle Class

Taxes and social justice have always been difficult to balance. Switzerland's low tax strategies to attract international capital have drawn protests from around the world, especially from Germany and Britain. But within the country, the policy has faced little opposition because all individuals and companies – domestic or foreign – benefit from low tax rates, rather than a few specially targeted individuals and companies. The only exceptions are a very small number of extremely wealthy citizens who pay taxes based on secret agreements.

This approach actually allows middle-class people to keep their income in their own pockets, resulting in a sense of security, insists Daniel Mueller-Jentsch, a research specialist at the think tank Avenir Suisse. During the financial crisis of 2008, the Swiss middle class suffered relatively minor losses.

The wealthy have their wealth to stand on, and the disadvantaged have social welfare. But members of the middle class must depend on themselves. Maintaining a broad, growing middle class keeps society stable.

Another reason the Swiss back low tax rates is that they control the purse strings. The government gives Swiss citizens the authority to decide the size of tax revenues and who gets to use them.

Politically, Switzerland has opted for a direct democracy system, where local governments each set their own tax rates. The government explains its tax plan and whether there are revenue shortfalls to its citizens, and the people can decide through direct referendum whether to increase taxes or assess the "extremely wealthy" a special tax rate to raise revenues, and what kind of public infrastructure tax revenues should be spent on.

Once Talent Comes, Technology and Capital Follow

At 7 a.m., Switzerland's train stations are already busy. Salaried workers accustomed to starting work before 8 a.m. get off long trains and quickly make their way to main thoroughfares outside their stations. Others linger inside the station to catch a quick bite for breakfast. An increasingly hot item recently has been German pumpernickel, because of growing numbers of Germans who have moved to Switzerland to work.

In an era of economic stagnation and high unemployment, few countries dare liberalize their labor markets to allow outsiders in. But the Swiss have decided to open their labor market wide open, enabling companies that have taken root in Switzerland to freely use talent from anywhere around the globe.

The country's labor market has always been relatively flexible, placing few restrictions on the corporate use of talent except to require that they employ two Swiss nationals for every foreign employee they hire.

In 2002, however, Switzerland signed a Free Movement of Workers Agreement with the European Union, which meant that companies in Switzerland could freely hire employees from anywhere within the 15 EU countries at the time, and they did not have to employ two Swiss for every new foreign hire as long as they paid the new employees on a par with local workers.

In 2009, Swiss citizens passed a referendum to expand the agreement to include new EU members Bulgaria and Romania.

"The free labor agreement is the best decision the Swiss government has made in recent years," says Jan-Egbert Sturm, the director of the KOF Swiss Economic Institute. "Switzerland is like a talent Silicon Valley. People come to Switzerland for the best talent."

This is another key to attracting foreign investment, because the domestic workforce alone could not support the growing number of multinationals. The infusion of talent has also brought with it technology, capital and innovation.

Sturm himself left his native Netherlands to work in Switzerland. Half of the researchers at his economic institute come from outside countries and, in fact, foreign nationals account for 21 percent of the Swiss population, according to the Swiss Federal Statistical Office.

Though official statistics do not delve into greater detail, an estimated one-third of Switzerland's doctors and university professors are Germans. One Swiss tram company looking for drivers even advertised in Germany.

And even though the cost-of-living in Switzerland is high, its high salaries and low taxes still represent an attractive combination.

The Downside: Astronomical Housing Prices

These many initiatives have helped Switzerland insulate itself from the generally stagnant European economy. The country's economy has continued to grow this year, unemployment is below 4 percent, and youth unemployment is lower than in most OECD countries. There is little evidence to suggest that the open labor market policy has had any adverse impact on Swiss workers.

But the policy has had a downside, reflected in the housing market.

The Swiss jokingly describe themselves as "tent people" – only 30 percent of Swiss citizens actually own their own homes. And the influx of more people from outside the country hasn't helped, pushing the home vacancy rate in cities to nearly zero and sending housing prices through the roof.

Real estate broker Hans Ueli Keller says that even though purchases of residential real estate by foreign nationals are tightly restricted, curbing the rise in housing prices remains a challenge.

In cities that have large influxes of foreign professionals, such as Geneva, Zurich and Zug, housing prices have risen by roughly 10 percent in recent years. In Zurich a new 100-square-meter apartment costs 2.5 million Swiss francs (US$2.82 million, NT$85.1 million). That price is beyond the reach of many Swiss salaried workers, even if their country's per capital income is twice that of Taiwan.

Two-thirds Opt for Vocational Education

As in many other countries, Switzerland sees education as its people's greatest source of security, but unlike other economies, it feels that education must be productive. Most Swiss consider the purpose of learning to be preparation for a job, especially since workplace demand for people with technical capabilities surpasses that for abstract thinkers.

The country has valued vocational education since the 1920s. Under the system, children graduating from the equivalent of junior high school enter a vocational school and choose a job they find interesting. They learn about machines, design, and even secretarial services, among other practical job skills.

To this day, two-thirds of Swiss students choose the vocational education track. And despite repeated efforts by the OECD and European Union to cajole Switzerland into increasing its number of university graduates, the country remains steadfastly committed to vocational training. In 2004, it even expanded the scope of the program to include health care, social care services, and art.

The system equips young people with a marketable skill as they enter the job market, which explains why unemployment among young Swiss adults is so low.

Most importantly, the vocational education system is closely intertwined with the private sector. Under the system, students attend class two days a week and work for companies the other three, which ends up quickly cultivating an elite group of young technicians for Swiss enterprises.

The system's strengths have been particularly evident at a time when the Swiss franc's appreciation has made life difficult for the country's export-oriented machinery industry. A third of the companies in the sector are currently not profitable. But the customers of diagnostic and surgical laser equipment maker Ziemer Group remain willing to use the increasingly expensive Swiss franc to buy the company's products.

"Our quality is the best because all our products are made in Switzerland," Ziemer Group CEO Frank Ziemer says proudly. "Switzerland's apprenticeship education system is very good. With apprenticeship training, any product design and change, our employees can make it."

Ziemer's surgical lasers to treat nearsightedness have already made it into hospitals in 50 cities in China, far more than rival Zeiss of Germany.

The key to its success in China has been the company's ability to rework its designs, cutting its machines' sizes in half to accommodate the limited space and people's physical characteristics in the Asian market. That capability depended on its skilled technicians' vast machinery-related knowledge and experience.

"If we moved out of Switzerland, we could not make it," Ziemer says, pointing to the Made in Switzerland brand as one of the company's biggest advantages.

Affluence has more than one face. But viewed at close range, every form of prosperity is ultimately the collective achievement of an entire society. Copying others' wealth is impossible, but people can still find role models through the efforts others have made.

For small countries, Switzerland may be one of the models from which to learn.

Translated from the Chinese by Luke Sabatier