- Switzerland is a small, landlocked country that is nonetheless one of the most prosperous nations in Europe and the world due to its knowledge-based service economy, ease of doing business, and economic stability facilitated by its independence from the EU. - Switzerland has a highly skilled labor force that produces high-quality goods and services in sectors like mechanical/electrical engineering, pharmaceuticals, watches, banking, tourism, and insurance. This contributes to consistently positive trade balances and current account surpluses. - The Swiss National Bank maintains low and stable inflation through its monetary policy targeting interest rates, and it operates with a high degree of autonomy from the government.

1. Country Study: Switzerland
Marmi Maramot
BUS 515, Fall 2009, Dr. Stephen Pollard
December 10, 2009
Despite being a small, landlocked country, Switzerland is one of the most
prosperous nations not just in Europe, but in the world. This can be attributed not only to
its knowledge-based service economy and ease of doing business, but also to stability in
key economic variables, greatly facilitated by Switzerland’s independent status. Unlike
all the countries bordering it, Switzerland is not a member of the European Union and
does not use the euro as its currency. Therefore, it is able to have a higher degree of
autonomy when it comes to running its economy than do other countries in the
surrounding region. However, as an open economy, Switzerland does rely on trade and
capital flows for its well-being. Thus, there is a high level of integration and cooperation
with other countries; although the recent worldwide economic crisis revealed the
vulnerabilities that come with financial globalization.
A Prosperous Nation
When comparing the prosperity of different nations, it makes the most sense to
use percentages and per capita numbers rather than figures in absolute terms. The most
important economic indicators to look at would be GDP and unemployment. In addition
for GDP, it is also more meaningful to use the PPP-implied exchange rate rather than the
spot rate in converting all countries to a common currency. On the following page are
tables showing how Switzerland ranks against its neighbors and with the U.S. You can
see that while behind the U.S. in GPD per capita on a PPP basis, Switzerland is higher
than its border countries. Also, Switzerland has significantly less unemployment than the
others.
Not only is Switzerland very healthy in economic terms, but also in terms of the
residents themselves. The next page shows that Switzerland ranks similarly or better than
the reference countries in infant mortality and life expectancy.

2. 2
Economy based on skilled labor force producing high quality goods and services
Switzerland’s wealth depends on having an educated labor force capable of
producing high quality goods and services. This contrasts with a developing country
whose economy is more dependent on unskilled labor, such as China. From the table
below, it is clear that the higher importance a country places on education, the higher the
percentage of its workforce that is in services as opposed to the lower-wage agriculture
and manufacturing sectors.

3. 3
So what exactly is being produced by the highly qualified Swiss workers? While
Switzerland is famous for its cheese, chocolate, and watches, mechanical and electrical
engineering and chemicals together make up over half Swiss export revenues.1
Switzerland imports manufactured components and bulky raw materials and turns them
into such items as looms, paper and printing machinery, blanking tools for metalworking,
elevators and escalators, packaging equipment and rack-and-pinion railways.2
One
computer mouse out of every three sold in the world, as well as the microelectric engine
in the Pathfinder robot which explored Mars’ surface, were produced by Swiss
companies.3
Through all these value-adding activities, in 2003 the value of one ton of
exported goods was two and a quarter times more than that of the same amount of
imports.4
Following are details of Switzerland’s notable industries, all taken from
www.swissworld.org.
Research and Development. In Switzerland, a higher percentage of people work in
research and development than in other industrialized countries. Over 2.9 % of the gross
national product was spent on research in 2004. More than two-thirds of this was
privately financed, showing that the Swiss are self-motivated in undertaking R&D
projects that can help spur economic growth, rather than being reliant on government
sponsorship.
Mechanical and electrical engineering. These are known collectively as the MEM
industries and cover four main areas: metallurgy, mechanical engineering and vehicle
construction, electrical engineering and electronics, and precision instruments. In terms
of both labor force and export value, the second of these is by far the largest. The MEM
industry is the biggest industrial employer in Switzerland, with more than 300,000
workers at the beginning of 2005. Almost 80% of their output is exported, accounting for
over 40% of Switzerland's goods exports.
Pharmaceuticals. Switzerland is among the world's leading producers of chemicals and
pharmaceuticals, mainly dyes, fragrances and food flavorings. 85% of this industry’s
output is for export.

4. 4
Watches. From the plastic Swatch to the Patek Philippe containing 1,728 parts, Swiss-
made watches make up about half of all world production. Swiss precision is the gold
standard in timekeeping so accordingly, the average price of an exported Swiss watch
was $410 in 2006. According to OSEC Business Network Switzerland, 95% of the
watch-making industry’s products are for export.
Banking. Having a “secret Swiss bank account” is a status symbol for high net worth
individuals. Switzerland’s private banks manage 35% of all private and institutional
offshore funds. Financial asset management generates a third of the profits for the two
biggest private banks, UBS and Credit Suisse.
Tourism. According to the World Trade Organization, Switzerland was the 14th
top
visited country and 15th
in terms of tourism earnings in 2005. Tourism accounted for 3%
of GDP in 2004 and is the third most important source of export revenue, after the MEM
and chemical industries. Nearly one-twelfth of the Swiss labor force is employed directly
or indirectly in tourism.
Insurance. While the average Swiss family spent more than 22% of its household
budget in 2004 on insurance (some of it compulsory including private health insurance),
insurance companies actually earn half of their revenues from abroad. Switzerland is the
top exporter of insurance in Europe.
Shipping and logistics. This sector comprises 4% of Swiss GDP and employs some
130,000 people in Switzerland alone, although business is conducted all over the world.
The International Federation of Freight Forwarders Associations is based in Zurich, while
Basel is the center for two of the world’s major logistics companies which operate on a
just-in-time delivery basis. Interestingly enough, Switzerland also has about 30 merchant
navy ships for international transport of every kind of good except weapons, in keeping
with the country’s peaceful and neutral character.

5. 5
Net lender
Switzerland’s emphasis on exporting high quality goods and services has
consistently resulted in a positive trade balance, which in turn largely contributes to
positive current account balances. In 2008 the country had exports of 206.3 billion CHF,
exceeding imports of 186.9 billion CHF.5
Below is a chart showing the current account
balance on a quarterly basis, along with the components TB, NFIA, and NUT. You can
see that the magnitude of NUT is negligible compared with the other components and
that apart from CA turning negative in Q3 2008 due to NFIA, there has always been a
current account surplus.
Source: Swiss National Bank, Swiss Balance of Payments Q2 2009
Conducive business environment
Switzerland ranks highly on various indices that compare different countries with
regard to how easy it is to do business there. One such index is the 2010 index of Trade
Freedom Scores, developed by The Heritage Foundation. The scores are calculated using
trade-weighted average tariff rates and non-tariff barriers such as quotas, antidumping

6. 6
duties, regulatory (e.g. sanitation and safety standards) and customs restrictions, and
direct government intervention (e.g. subsidies and government monopolies).6
Switzerland’s score of 90 out of the highest possible score of 100 puts it at a tie for #1
along with Hong Kong, Macau, and Singapore.7
Austria, Germany, and Italy were tied
for #13 along with other countries, and the U.S. was ranked #37. France was tied with
others at #60 with a score of 82.5, showing that even though EU members would all have
the same value for the tariff component of the trade freedom score, non-tariff barriers can
still vary significantly from country to country.
Another major index is the 2010 Ease of Doing Business rankings of 183
economies, developed by the World Bank Group.8
Again Switzerland beats its EU
neighbors, with a rank of #21 (Germany was #25, Austria #28, France #31, and Italy
#78), while the U.S. was #4. As you can see from the table below, the scores for
Switzerland on the ten components of the Ease of Doing Business ranking put it
comfortably in the top quartile of all economies except for Starting a Business and
Protecting Investors.

7. 7
The reasons for Switzerland’s low ranking in Starting a Business are the relatively
higher number of procedures, longer amount of time, and greater minimal capital
requirements. Below are graphs comparing Switzerland to OECD countries in these
indicators.

8. 8
As for Switzerland’s low rank of #165 for Protecting Investors, possible
explanations can be offered once one looks at the components for this indicator in the pie
chart below. Out of a possible 10, Switzerland scored a 3.
Because of the famous Swiss secrecy,
scores would be low on the Extent of
Disclosure subindicator. And because of
accused cronyism, scores would be low on
the Extent of Director Liability
subindicator. There are only about 100
people who sit on the boards of many
different companies.9
Also, while 40% of
board members at large companies were
non-Swiss according to a 2002 survey,
there were few foreign managers at
medium and small businesses, which
comprise 99% of Swiss enterprises.10
The World Economic Forum, headquartered in Geneva, is an international
organization bringing together world leaders from the areas of politics and business to
discuss and shape future economic and social policies, with an aim to improving the state
of the world. However, critics claim that the WEF is a club for the rich where top
businesspeople can gain special favors from politicians.11
Switzerland’s central bank maintains stability of key economic variables
The Swiss National Bank’s monetary policy strategy has three parts.12
First, it
defines what it means by price stability, which is the SNB’s main goal. The SNB has
determined that an inflation rate (using CPI) of less than 2% per year is best. Next, it
makes a medium-term (three years out) inflation forecast upon which to base its
monetary policy decisions. The inflation forecast takes into consideration such factors as
monetary aggregates and loans, economic activity, exchange rates, and oil prices.13
If the

9. 9
forecast indicates that inflation will exceed 2%, then the SNB may decide to tighten its
monetary policy. Of course, the decision is not made in a mechanical fashion; rather it
takes many variables into account in determining if there is a real inflationary danger or if
it is a short-term fluctuation due to extraordinary circumstances.14
The SNB’s last step is
to enact the monetary policy by targeting the interest rate within a certain range.15
The
interest rate that the SNB targets is the three-month Swiss franc LIBOR (London
Interbank Offered Rate). Currently, the target range is 0-0.75%, and the SNB is shooting
for the lower end of this range, around 0.25%. This is a continuation of the expansionary
monetary policy which the SNB initiated in March of this year. According to its latest
quarterly monetary policy assessment, “Despite the recent increase in the number of
encouraging economic signs, uncertainty as to future developments remains considerable.
In these circumstances, the SNB is opting for caution and retaining its monetary policy
unchanged.”16
As you can see from the table below showing the year-on-year inflation
rate,17
with only one exception the SNB has been very successful in keeping inflation
under 2% per year.
CPI CH recent years
period inflation
october 2009 -0.833 %
october 2008 2.598 %
october 2007 1.264 %
october 2006 0.259 %
october 2005 1.334 %
october 2004 1.293 %
october 2003 0.454 %
october 2002 1.237 %
october 2001 0.630 %
october 2000 1.332 %
Swiss National Bank autonomy
Not only is Switzerland independent in the sense that it remains outside the
European Union and neither uses the euro nor pegs the Swiss franc to it, but the country’s
central bank is itself an independent organization separate from (yet fully accountable to)

10. 10
the government. It is actually run like a for-profit corporation with dividend-paying
shares listed on the stock exchange.18
In fact around 45% of shareholders are private
individuals, and no shares are owned by the Swiss state. The Swiss Constitution gives
complete autonomy to the SNB in terms of its budget and even prohibits the SNB from
granting loans to the state19
(this way Switzerland can’t use its bank to print money as
other countries have been known to do). However the SNB is mandated to act for the
benefit of the country as a whole.20
In addition, Switzerland gets one-third and the
cantons (the main geographical divisions of Switzerland) get two-thirds of any profit
remaining after the maximum 6% dividend paid to shareholders.21
This relationship
between the SNB and Switzerland incentivizes the SNB to act to increase shareholder
wealth which in turn also increases the wealth of the country. Below is the year-to-date
change in wealth (both external and internal).22
The next page details the price and
exchange rate valuation effects from the foreign currency positions.

11. 11
High cooperation and integration with world trading partners
We have now seen how wealth accrues to Switzerland via the financial results of
its central bank and by running a current account surplus. Up to now we have focused on
the export side of CA, but now we will discuss the flipside to that, the import side. As a
small country both in terms of land and population, Switzerland is absolutely dependent
on foreign trade for its prosperity. For 2009 year-to-date, Switzerland is the #15 importer
of U.S. goods, with a value of $13.2 billion and making up 1.7% of U.S. exports.23
However, its EU neighbors are Switzerland’s biggest trading partners, with Germany #1
by far, followed by Italy, France, and then Austria. The percentage of imports that come
from EU members exceeds the percentage of exports that went to them (80% vs. 62.3%
in 2005).24
When talking about imports, it is important to remember that this means not just
goods and services, but also the factors of production, of which a big component is
foreign workers, who comprise 25% of wage earners in Switzerland.25
Largely they are

12. 12
manual workers in such industries as construction and hospitality, although highly skilled
labor in the areas of technology, engineering, and computer science are also needed.26
In 2002 and 2004 there were two changes in Swiss law that facilitated the
importation of labor into the country.27
The first was a new law that allowed the free
movement of workers between Switzerland and the old members of the European Union
and European Free Trade Area. The second was the abolition of a law that had given
Swiss nationals priority in hiring over foreigners. One effect of these legislations was
that the number of Germans in Switzerland grew by 45% over the period 2001 to 2005.28
Many of them work in management, teaching, and medicine.29
The 2008 shock to the worldwide financial system – a blessing in disguise?
Of course, there is always a downside to globalization, emphasis on the “down.”
What started out as a bursting of the U.S. real estate bubble and the September 2008
collapse of Lehman Brothers ended up as a worldwide economic crisis. Switzerland was
not spared from the destruction and entered a recession in the second half of 2008.30
Actions taken by the country to recover from this disaster included (1) the SNB’s
lowering of the target interest rate mentioned previously, (2) purchasing foreign
currencies, and (3) two stimulus packages endorsed by the Swiss parliament.31
All of
these would affect the IS curve by shifting it to the right and raising GDP, if they work as
intended. (1) and (3) would work to increase investment and consumption while (2)
weakens the franc, which would increase the Swiss trade balance.
In addition to the above monetary and fiscal policy measures, the Swiss also
decided to bail out UBS, which along with Credit Suisse suffered investment losses into
the billions of CHF.32
Credit Suisse made the effort to reduce the risk and size of its
trading portfolio and balance sheet as well as raise capital without any help from the
public sector. However, the government let UBS unload $60 billion USD in illiquid
assets onto the SNB for them to liquidate later, as well as lending them CHF $6 billion.33

13. 13
The smaller banks with a domestic business focus were well insulated from the
global banking crisis, and in fact even strengthened their liquidity via money being
moved out of the big banks and into them instead.34
But the lesson here isn’t that
countries should turn more inward-facing in order to avoid the possibility of getting
caught up in crises originating abroad. In fact, the current situation forces even greater
international efforts in preventing similar events from happening in the future. (For its
part, Switzerland has imposed greater restrictions on the big banks – capital requirements
that are double what they are now and a balance sheet total to capital base leverage ratio
of 20 times.35
) All countries would have an incentive to participate in making
fundamental long-term changes to the banking model since they have clearly seen that
once a financial meltdown happens in one place anywhere in the world, it can quickly
spread and invade home shores.

14. 14
Works Cited
1. http://www.swissworld.org/en/economy/
2. Ibid.
3. Ibid.
4. Ibid.
5. http://locationswitzerland.ch/internet/osec/en/home/invest/worldwide/handbook/overview_switzerland/
switzerland_in_figures.html
6. http://www.heritage.org/Research/tradeandeconomicfreedom/bg2320.cfm
7. http://www.heritage.org/Research/tradeandeconomicfreedom/images/b2320_table1.gif
8. The World Bank, Doing Business 2010: Switzerland.
9. http://www.swissworld.org/en/economy/
10. Ibid.
11. Ibid.
12. http://snb.ch/en/iabout/monpol
13. http://snb.ch/en/iabout/monpol/id/monpol_strat/9
14. http://snb.ch/en/iabout/monpol/id/monpol_strat/11
15. http://snb.ch/en/iabout/monpol/id/monpol_strat/12
16. Swiss National Bank, Monetary policy assessment of 17 September 2009.
17. http://www.global-rates.com/economic-indicators/inflation/consumer-prices/cpi/switzerland.aspx
18. http://snb.ch/en/iabout/snb/org/id/snb_org_stock
19. http://snb.ch/en/iabout/snb/org/id/snb_org_indep
20. http://snb.ch/en/iabout/snb
21. http://snb.ch/en/iabout/snb/annacc/id/snb_annac_profit
22. Swiss National Bank, Interim results of the Swiss National Bank as at 30 September 2009.
23. http://www.census.gov/foreign-trade/statistics/highlights/top/top0909yr.html
24. http://www.swissworld.org/en/economy/
25. Ibid.
26. Ibid.
27. Ibid.
28. Ibid.
29. Ibid.
30. Swiss National Bank, 2009 Financial Stability Report.
31. Ibid.
32. Ibid.
33. Ibid.
34. Ibid.
35. Ibid.