the case of switzerland

7/28/2019 The Case of Switzerland

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Free trade and toleranceThe case of Switzerland

Victoria CURZON PRICEUniversity of Geneva

MPS Regional MeetingIceland 21-24 August 2005

Small western states tend to be wealthy. The only major exception to this ruleused to be Ireland, but the Irish have remedied this in a spectacular fashion inthe short space of 20 yearsproof that sensible policies can work wonders.

The main reason why small states tend to be wealthy is simply that they trademore than big ones. You could say that this is not a matter of choice, but ofsimple economic geography. But you would be wrong. Any state, large orsmall, must have a policy with regard to foreign trade, and protectionism can befound everywhere (see, for instance, New Zealand and Ireland before the

1980s). The set of small, wealthy states that exists today is a mere remnant ofthat which used to exist before the political consolidation of the UnitedKingdom, France, Germany and Italy. I would argue that only those smallstates managed to resist the loving embrace of their larger and moreaggressively inclined neighbours, which were wealthy enough to defendthemselves. Some, like Austria (after 1918), Belgium or Luxembourg, wereoften invaded and only survived as independent entities through sheer luck.But many, many nations disappeared during the 17th-20th centuries: Scotland,

Wales, Bavaria, Saxony, Brittany, Normandy, Burgundy, Savoy, Catalonia,

Sienna, Florence the list is endless. But Switzerland, the Netherlands and theNordic countries actually survived. Perhaps geography helped, but they werealso serious traders, rich enough to raise strong armies or navies in time ofneed. So free trade, it could be argued, was part of the story of their politicalsurvival.


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Switzerland is an even more curious case. It was briefly invaded by Napoleon(who was not?), but otherwise managed to keep itself independent from itsmuch larger neighbours, for all the well known reasons, among them the factthat the great powers could not let any one of their members control the

Alpine passes to the detriment of the others, so they agreed to recognizeSwitzerlands neutrality from an early date. But I would like to point to someinteresting lessons to be drawn from this little country all the same.

Un peu dhistoireSome time in the 12th century (no one knows the exact date)1 some toughmountain peasants threw a bridge across the deep Alpine gorge through whichrushed the river Reuss, transforming a dead-end valley (known romantically asthe Trou dUri) into a major trading route leading to the Saint Gothard pass.

The inhabitants of the forgotten valley soon became wealthy, from the tolls

charged on crossing the bridge, the nice hotels they built for weary travelers,and from becoming themselves traders between the North and the South ofEurope.

What did they do with their newfound wealth? They bought their freedoms.These were feudal times, so this meant offering the distant overall EmperorFrederic II a once-and-for-all cash indemnity (the actual amount is unknown),in order to escape from the local feudal overlord, one Rudolph of Habsbourg(whose descendants later became Emperors themselves) in exchange for theright to appoint their own judges, to run their own affairs and to answer to no

one, except the Emperor himself. By the time Rudolphs successors hadwoken up to the fact that a small, wealthy and strategic group of mountainpeople had escaped their grasp, and had sent in armies to beat them intosubmission, the three original founding states of the Swiss Confederationpossessed enough military strength, and love of freedom, to send theHabsbourg armies packing.

Love of freedom is not enoughThis episode tells us something. In the 12-13th centuries, many towns andregions became wealthy enough to buy their freedom in this way, but very

few managed to keep it: local gangsters soon conquered them again, becausethe Emperor was far away and engaged in other battles (mainly with the Pope).

The Uranais had no monopoly on the love of freedom, but they were able to

1 The facts which follow are taken from the following excellent and very readable history of Switzerland:

William MARTIN,Histoire de la Suisse: essai sur la formation dune confederation dtats, Payot,

Lausanne, 1966.


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maintain it because they remained wealthy through trade, able to spend enoughon mercenaries and military hardware to keep the aggressors at bay.

Not only did these simple mountain people have a taste for freedom(otherwise, why spend good money buying it?), but the success of their venturemeant that more and more people, from more and more adjacent valleys,

wanted to join them. Love of freedom proved contagious and widespread.Switzerland dates its foundation from 1291, when three mountain communities(Uri, Schwyz and Unterwald) made a solemn and secret vow to stand togetherfor ever against the Habsbourgs or whoever else aimed to take their freedomsaway. This original pact between the three mountain communities snowballedinto a broad military alliance, embracing ever more members and becomingever stronger. Maintaining independence from the Habsbourgs occupied thefollowing centuries, constant battles forging links between what became, over

time, a curious collection of Northeners, Southeners, Germans, French,Italians, Romanches , Catholics, Protestants, mountain peasants and traders.This loose confederal structure of some twenty distinct and fully sovereigncommunites lasted until 1848. Every time internal conflict threatened to tearthem apart, with Prussia, France and the Austro-Hungarian Empire waitingeagerly to pick up the pieces, in the end the desire to be free from foreigndomination kept them together.

Love of freedom was the common thread which transcended ethnic, linguistic,religious and geographic divides.

A voluntary, contractual StateDare I say that Switzerland, along with the United States, is one of the few trulycontractual states ever created? Most other states were created throughconquest and submission. Switzerland was created by a set a voluntary treaties,entered into by small sovereign entities, not at a single sitting, as inPhiladelphia, but progressively over something like 800 years. And it hassurvived, no mean feat, when surrounded by some of the most aggressive nation-states ever to have emerged in the course of history. It is therefore no surpriseto me that Switzerland has not joined the EU, of which France and Germany

(ancestral enemies, despite the linguistic and cultural affinities with differentparts of the country) are founding members

Direct democracyAnother aspect of the free and voluntary nature of the Swiss state is its systemof direct democracy. I dare say that Iceland may have something similar,because it, too, may have escaped the fate of conquered peoples. But the


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Swiss, as far as I know, are pretty unique. It is as nice an example of aninstitution which spreads because it contributes to the success of the people

who adopt it as one could wish to find. The three original Cantons were nomore than high mountain valleys, in which the tough climate and terrainimposed rigorous and forward-looking survival strategies. Among other things,it made no sense to graze cattle on private plots of land. Such land as there washad to be managed collectively, with no margin for mistakes. So all able bodiedmen took the relevant collective decisions together, and open air democracy

was born. Curious! There was no feudal lord, because he was far away inVienna or Aix-la-Chapelle, and no local gangster chief emerged, perhapsbecause these mountain herdsmen would have slit his throat in the night Inany event, the news soon traveled, and as more and more Cantons joined theoriginal three, their own people claimed the right to this extraordinaryinstitution which, more than anything else, symbolized their escape from

coercion under a feudal lord and gave their love of freedom tangible form.After all, the leaders couldhave decided otherwisethey could have joined anynumber of neighbouring kings, dukes and princes, all eager to enlarge theirdomains. But they decided to join the curious Swiss Bundinsteadand foundthat direct democracy was often part of the bargain. By 1848, when thesovereign communities finally decided to pool their sovereignty and agreed tocreate a federal state (after a short civil war), direct democracy had spread toalmost all the members of the Bund. After 1848, it was also extended to thefederal state itself, which was subjected to referenda and intitiatives on thepart of the people. Thus the pooling of sovereignty did not imply

submission to a higher authority, since the people remained in charge. Andthis is no myth.

To this day, the Swiss are constantly voting on all sorts of matters atCommunal, Cantonal and Federal level. The votes often appear contradictory

for instance, last spring, the Canton of Geneva voted (a) not to increasetaxes, (b) not to reduce unemployment benefits and (c) to proceed to abalanced-budget constitutional amendment. It drives the politicians mad,because what the voters were really saying was reduce public sectoremployment. No surprise that there is a widespread movement among the

political class, from both ends of the political spectrum, to limit the right to callfor referenda, raise the number of signatures needed and reduce the time-frame

within which to do so, all in the name of efficiency. So far, predictably andsensibly, the people have rejected such notions.

Direct democracy and the EU


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Direct democracy is the principal institutional reason why Switzerland cannotjoin the EU: every EU directive would be submitted to a referendum, with

very little chance of success. As it is, the bilateral treaties which Switzerlandhas painstakingly negotiated with its giant neighbour are constantly threatened

with rejection. In a months time, on 25 September 2005, we shall be voting onwhether or not to extend the free movement of workers to the new membersof the EU. If we say no, all previously negotiated treaties become null and

void and we shall return to the 1972 free trade area in industrial products.According to the polls, it will be a very close call either way. The political classis frantic. They want to join the EU and abolish direct democracy

Size of StateYou might think that with such a break on the State, Switzerland would have avery small ratio of public to private expenditure. Not so. Switzerland is well

up with the rest of the OECD, after a remarkable burst in the growth of socialspending since the 1980s, which just goes to show that there is no law againsteconomic suicide, and even the most democratic country in the world can still

freely decideto destroy its economy.

Actually, Switzerland is not quite there yet, and there is still hope that itstradition of tough self-reliance will gradually replace the woolly do-gooders, theapparently harmless soft socialists who just want the world to be a better,kinder place and to round out the hard edges of capitalism In other words,Switzerland has not escaped the general climate of the times, prevalent in

Western Europe since 1945, and which is perhaps only now beginning torecede in the face of zero growth and high unemployment.

Free tradeWhere Switzerland differs from many other European countries is that it hasnot turned its back on free trade. With the known exception of farming, whichI shall return to in a moment, Switzerland does not protect its tradable goodssector, and has always appeared to me fairly open in most commercial servicesectors, like legal services, banking and insurance. The reason is, I believe,quite easy to spot. In all other parliamentary democracies, as Buchanan and

Tullock have taught us, political parties are always trying to buy support frommarginal voters, by offering this or that group some protectionist privilege orother, while other voters remain in blissful rational ignorance. This simplydoes not work in Switzerland, where every proposal to raise taxes on this orthat imported product, immediately divides the country along its numerouscommunitarian fractures: religious, ethnic, linguistic, professional, geographicetc. The winners and losers are immediately identified, the latter raising a


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storm of protests and threats of multiple referenda. In Switzerland, voters arenot rationally ignorant. If anything they are rationally ungovernable. It is likepublic choice theory in reverse: since any policy change inevitably involvessome losers, they are immediately alerted and begin working the directdemocracy levers. The mere threat is often enough to stop the proposal deadin its tracks. The downside to this is extreme conservatism. It takes a verylong time to change anything, even when it is clear to almost all that somethingneeds changing urgently.

Although Switzerland is nominally a normal majoritarian federal democracy,with all the usual institutions (upper and lower houses at federal and often alsoat cantonal level), Swiss politicians know that they have to negotiate a verybroad consensus if they are to avoid failure of their policies before thepeople.

Both North2 and de Jasay3 argue convincingly that in normal parliamentarydemocracies, when economic change threatens the existing pattern of incomedistribution, upon which the State depends for the consent of the governed,those suffering a decline in their fortunes will claim, and often obtain,protection from the State, for the general reasons given by Buchanan and

Tullock. As we have just seen, Switzerland is immune from this processbecause of its complex multicultural setup, and the institution of directdemocracy.

Free-riders, parasites and predatorsThe free-riders in Switzerlandand there are somehave basically inherited aprivileged position from some way back. This is true of farmers, who havebenefited from a 60-year post-war thank you for having saved the countryfrom starvation during the second World War. It is also true of many parasiticcartels which survive, rather anachronistically, in the non-traded goods sector,especially the building trades, personal services (especially medical) and retaildistribution, contributing to the notoriously high price level. These privilegesare gradually succumbing to competition in services imposed on Switzerland by

WTO and/or the EU. Without the help of these two external pressures,

Switzerland would be caught indefinitely in its web of conservative immobilitybut as it is, things are gradually changing. In fact, the strength of theagricultural lobby is waning as memories of the war years fade and as the

2 Douglass C. NORTH, Structure and Change in Economic History, Norton & co., New York etc. 1981, pp.

201-209, later fleshed out in greater detail inInstitutions, Institutional Change and Economic

Performance, Cambridge University Press, Cambridge, 1990.3 Anthony de JASAY, The State, Liberty Fund, Indianapolis, 1998, especially pp. 205-249.


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population becomes more and more urbanized. Of true predators there arenone: there are no big monopoly public service providers, no subsidizednational champions (Swissair was allowed to go bankrupt); there is noindustrial policy at all, and very little by way of inter-cantonal fiscal transfers.

Fiscal federalism and tax competitionThere should be more fiscal competition between Cantons than there is4. TheCantons have basically succeeded in forging a tenuous fiscal cartel, and fiscalcompetition is the exception rather than the rule. However, this does notimply harmonization of Cantonal tax rates, which remain very different.Furthermore, politicians (and the public) at Cantonal level are anxious topreserve their discretionary power in this areathe power to tax remains, afterall, an important attribute of sovereignty. Rather, the different rates ofCantonal tax should be seen as reflecting an equilibrium, keeping the relative

position of different Cantons, with very different fiscal potential, more orless stable. Rich and economically dynamic Cantons tend to have high taxrates, poor and agriculturally dominated Cantons tend to have low ones, andreceive various federal subsidies as a result. The motor car and a decent roadnetwork may be disturbing this traditional equilibrium, as more and morepeople choose to live in one low-tax Canton and work in another, high-tax one,creating huge traffic jams on motorways at rush hours.

Fiscal federalism extends all the way down to the Communes, of which thereare over 3,000. Frontiers between one local tax jurisdiction and another are

ever present and very close to each other. People are hyper-vigilant. They lookout for fiscal spill-overs like hawksdont try leaving your garbage in anotherCommunes bins If your Commune has no crche, too bad theneighbouring Commune will put you right at the bottom of the waiting list. Itis said, but I have not seen any studies to support this hypothesis, thatregulatory and fiscal competition is much more lively at the level of theCommunes than at the level of the Cantons. If so, think about it: 3,000autonomous decision-making units for a country with a population of 7.2million, makes for an average unit size of only 2,400 inhabitants, of whichprobably only two thirds have voting rights (allowing for children and

foreigners). Combined with direct democracy, this provides people with anamazing hold over their political destiny (average weight of a vote =1/1,800th,

compared with 1/40 million in the UK, for instance) . And yet voter apathy

4See my Fiscal Decentralisation : the Swiss Case ,Journal des Economistes et des Etudes Humaines,

Vol. XIII, No. 4, 2003, pp. 527-544.


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is a problem. Abstentionism is on the rise. People are costly content, most ofthe time.

ToleranceWe now can explain how a culturally complex country like Switzerland canactually work. It works because federalism is pushed to the extreme. Theprinciple of subsidiarity is elevated to virtually religious status. It turns out thatin practice, public expenditure is split evenly 1/3+1/3+1/3 between the threedifferent levels of government. Only the federal 1/3 requires inter-communitarian negotiations, the remainder being reduced to local, fairlyhomogenous social groups. So nobody is forcing the French or Italianspeaking minorities to get along with the German speaking majority. They gotheir own ways most of the time.

But thereby hangs a story. As part of the Congress of Vienna in 1815, theCanton of Bern acquired some new territory in the Jura mountains, on thefrontier with France. The inhabitants of this new province were a mixture ofFrench and German, of Catholics and Protestants. But the lines were blurred.For a long time the French and German Protestants so outnumbered theFrench and German Catholics that no separatist movement developed. Butafter World War II, the linguistic divide began to take precedence over thereligious, and a Jura libre movement started. After a 20-year struggle5 andone violent death, a new French-speaking Jura Canton was created in 1975.

This in itself is a remarkable fact, but even more remarkable is the level ofdecision-taking which was involved, and the fact that the process of creation

was only started in 1975it did not end for another twenty years. The jigsawpuzzle of communal sovereignty6resulted in jagged and irregular cantonalboundaries and some enclaves (or exclaves, depending on how you look atthings). Thus there are to this day small bits of Geneva in the Canton of Vaud,and several bits of Bern were left in the new Canton of Jura (and vice versa).

The process of creating the Canton of Jura finally came to an end in 1995,when the enclaved commune of Vellerat (with 70 voters, the majority of whomwere French speakers) chose to leave Bern and join Jura7.

According to Steinberg (p.88), splitting political units in this way acts toreduce friction or, at least, to contain it in the smallest element of tolerable

5 The details of which will not retain us here, but which can be found nicely summarized in Jonathan

STEINBERG, Why Switzerland?, Cambridge University Press, Cambridge, second edition 1996, pp. 89-98.6 STEINBERG, op. cit. p. 887 idem p. 97


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dissatisfaction the system works because the parts are moveable. The partsare moveable if the sovereign saysthey are.

Conclusion

The story of Switzerland, from the Grtli pact of 1291 to the creation of theCanton of Jura in 1995, is one of people who have little in common save anotion of independence and love of freedom from outside interference. Thecounterpart to this is that they also have very little desire to get involved inrunning other peoples affairs. The Canton of Bern, once the French-speaking

Jura minority made its feelings clear, had no imperialistic wish to run the affairsof a hostile minority. While the splitting of political units into tiny elementsprobably entails some cost in terms of lost economies of scale in the provisionof some public goods (and even this is debatable), there is a huge gain in terms

of the legitimacy of the State. Anthony de Jasay reminds us that a state obtainsobedience in one of three ways: repression, bribery and consent8. Mostmodern democratic states end up using, and abusing, the second of these (withthe political class bribing marginal voters to maintain power). The populationbecomes disheartened by the endless churning and redistribution of income,and rulers have to put up with an increasingly dissatisfied and sullen electorate.

The art of democratic government is to obtain the willing consent of thegoverned bylegitimacy. In such a case, scarce resources do not have to be

wasted in repression, or misallocated in churning. They remain with civilsociety, whose members can pursue their objectives in peaceful prosperity.

The story of Switzerland shows, furthermore, how misguided the EuropeanUnion is when it strives to regulate as many matters as possible from thefederal centre in the name of building Europe. At this stratospheric level ofgovernment, the EU enjoys no legitimacy whatsoever (how can it if detailedregulations have to apply equally to 25 nations?), and although it uses its entirebudget to obtain obedience by bribery, this is clearly not working either (thebudget is too small). So shall we be seeing, in due course, the EU facing adire choice between using repression (impossible and unacceptable) or justturning a blind eye when EU directives are increasingly ignored?

8 de Jasay, op. cit. p. 76

the case of switzerland

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