Switzerland

SWITZERLAND Rank: 9 Regional Rank: 4 of 41 witzerland’s economy is 79.1 percent free, according to our 2007 assessment, which makes it the world’s 9th freest economy. Its overall score is 1 percentage point lower than last year, partially reflecting new methodological detail. Switzerland is ranked 4th out of 41 countries in the European region, and its overall score is much higher than the regional average. S The economy is 79.1% free 100 80 @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ Switzerland has high levels of investment freedom, trade freedom, financial freedom, property rights, business freedom, and freedom from corruption. The average tariff rate is low, and commercial operations are protected by the regulatory environment and aided by a flexible labor market. Inflation is extremely low, and foreign investment is welcome and subject to only a few restrictions. The national financial sector leads the world and is both protective of privacy and open to foreign institutions. The judiciary, independent of politics, enforces contracts reliably. Corruption is virtually nonexistent. Switzerland could improve its fiscal freedom and freedom from government. As in many other European social democracies, personal income taxes are high, particularly at the provincial level, and in some areas are nearly 42 percent. Unsurprisingly, total government spending equals more than a third of GDP. BACKGROUND: Stable currency and politics, low taxes, secure banking, and incentives for new investors make Switzerland an attractive investment location, particularly for small manufacturing. In general, there are no overall restrictions on the percentage of equity that foreign firms may hold, and some cantons waive taxes on new firms for up to 10 years. Larger businesses are highly competitive, but the protection of smaller businesses, particularly those related to agriculture, has led to higher food prices. Although the growth in GDP has been weak during the past two decades, reflecting the low growth in productivity, per capita income remains high. 60 @@ @ @ @ @ @ @ @ @ @ @ @ @ 40 Europe Average = 67.5 World Average = 60.6 20 0 1995 2007 QUICK FACTS Population: 7.4 million GDP (PPP): $244.1 billion 2.1% growth in 2004 1.3% 5-yr. comp. ann. growth $33,040 per capita Unemployment: 3.9% Inflation (CPI): 0.8% FDI (net inflow): –$20.7 billion Official Development Assistance: Multilateral: None Bilateral: None External Debt: $856 billion (2005) Exports: $181.6 billion Primarily machinery, chemicals, metals, watches, agricultural products Imports: $146.3 billion Primarily machinery, chemicals, vehicles, metals, agricultural products, textiles How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index. 353 SWITZERLAND’S TEN ECONOMIC FREEDOMS Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 83.3 77 78.6 68.6 83.6 70 70 90 91 78.4 0 INVESTMENT FREEDOM — 70% Switzerland is generally open to foreign investment. Formal approval is not required, and screening applies only to foreign investment in real estate and national security establishments. Cantonal laws generally require 51 percent Swiss ownership in mining activities, and foreign firms must have less than 51 percent ownership in petroleum exploitation operations. Both residents and non-residents may hold foreign exchange accounts. There are no restrictions on repatriation of profits, payments for invisible transactions, or current transfers. Purchases of real estate by non-residents must be approved by the canton in which the property is located. L L L L L L L L L L 50 100 100 = most free, = world average BUSINESS FREEDOM — 83.3% Starting a business takes an average of 20 days, compared to the world average of 48 days. Both obtaining a business license and closing a business can be relatively easy. The overall freedom to start, operate, and close a business is protected by the national regulatory environment. FINANCIAL FREEDOM — 70% Switzerland is a leading international financial center, and its institutions are highly developed and well regulated. The credit, currency, and equity markets are open to foreign investors without restriction. The federal government is not a shareholder in the central bank but does have authority over appointments and approves its regulations. Banks may offer a wide range of financial services, and credit is allocated on market terms. Banking secrecy has been loosened to prevent money laundering and tax evasion. Switzerland’s two biggest banks, UBS and Credit Suisse, dominate the Swiss market and rank among the world’s top 10 financial institutions. Twenty-four cantonal banks, owned by the cantonal governments, are involved in savings deposits, mortgages, and lending to public authorities. Approximately 44 percent of all banks in Switzerland are foreign controlled, and they can operate only if their country of origin grants reciprocal privileges to Swiss banks. The insurance industry is well developed. The stateowned postal service is a leader in the payments system through its Postfinance operation, which offers mutual funds, insurance products, and interest-earning savings accounts. Capital markets are strong, and Switzerland has Europe’s fourth largest stock exchange. TRADE FREEDOM — 77% Switzerland’s weighted average tariff rate was 1.5 percent in 2001. Prohibitive agriculture tariffs and quotas, restrictive biotechnology regulations, import taxes, export subsidies, and service market access barriers add to the cost of trade. Consequently, an additional 20 percent is deducted from Switzerland’s trade freedom score to account for these non-tariff barriers. FISCAL FREEDOM — 78.6% Taxation in Switzerland is more burdensome at the cantonal levels than it is at the federal level. In addition, tax rates vary widely between regions. The top income tax rate can be as high as 41.5 percent, and the top corporate tax rate can be as high as 25 percent. Other taxes include a value-added tax (VAT), a property tax, and a vehicle tax. In the most recent year, overall tax revenue as a percentage of GDP was 29.4 percent. FREEDOM FROM GOVERNMENT — 68.6% Total government expenditures in Switzerland, including consumption and transfer payments, are high. In the most recent year, government spending equaled 36.6 percent of GDP, and the government received 0.6 percent of its revenues from state-owned enterprises and government ownership of property. PROPERTY RIGHTS — 90% The judiciary is independent, and the government respects this independence in practice. Contracts are secure, and the judiciary is of high quality. FREEDOM FROM CORRUPTION — 91% Corruption is perceived as almost nonexistent. Switzerland ranks 7th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005. MONETARY FREEDOM — 83.6% Inflation in Switzerland is low, averaging 1 percent between 2003 and 2005. Such stable prices explain most of the monetary freedom score. The prices of some products, primarily agricultural goods and pharmaceutical products, are directly influenced by government measures, and the government is also able to influence prices through regulation, subsidies, and state-owned utilities. Consequently, an additional 10 percent is deducted from Switzerland’s monetary freedom score to account for these policies. LABOR FREEDOM — 78.4% The labor market operates under relatively flexible employment regulations that could be improved to enhance overall productivity growth. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee is relatively costly. 354 2007 Index of Economic Freedom