Why Switzerland was ranked the most economically free nation in Europe

Switzerland was placed fourth globally in the 2016 Economic Freedom index published by the Heritage Foundation on Monday. One of only five countries declared economically free, Switzerland ranked top in Europe and was the only country in the top five not to lose any ground. In fact it improved by half a point. 178 countries were ranked and the average score was 60.7. The overall rankings can be seen here.

Why did Switzerland score so well?

With an overall score of 81 out of 100, Switzerland was well above the world average on nearly every measure. 80 is the threshold for being declared economically free, so along with only four other countries the nation was among the rare few achieving economic freedom. The other four were Hong Kong (1st – score 88.6), Singapore (2nd – score 87.8), New Zealand (3rd – score 81.6) and Australia (5th – score 80.3).

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© Wavebreakmedia Ltd | Dreamstime.com

The index looks and four things:

1. Rule of law

Secure property rights give people confidence to undertake entrepreneurial activity, save, and make long-term plans. Burdensome barriers, including regulatory red tape and high transaction costs, can incentivize bribery and favour those with insider connections rather than those with the most talent and best ideas.

Palais de Justice Geneva - © Marie Sprunger | Dreamstime.com

Palais de Justice Geneva – © Marie Sprunger | Dreamstime.com

Switzerland scored 3rd on property rights and 5th on freedom from corruption.

2. Government size

This was Switzerland’s area of weakness. Its tax take of 27.1% of GDP, and relatively high marginal tax rates, as high as 40%, earned it a score of 70.9 (136th) on fiscal freedom.

At 33.5% of GDP Swiss government spending exceeded the 27.1% collected in taxes. As a result Switzerland received a score of 66.3 (100th) on government spending.

The report points out how taxes and spending vary by canton, so some of the low-tax cantons might rise to the top of the ranking if they were analysed separately. While cantons like Geneva, with their high taxes and budget busting spending, would probably slide out of the ranks of the economically free if viewed separately.

© Leslie Banks | Dreamstime.com

© Leslie Banks | Dreamstime.com

Set in a european context Switzerland’s performance in these areas looks somewhat better. Neighbouring nations such France (47.7), Germany (61.5), Italy (55.8) and Austria (50.7) all scored appreciably lower than Switzerland’s 70.9 score on fiscal freedom (taxation). The gap was even greater on government spending. France (2.5), Germany (41.3), Italy (22.1) and Austria (22.4) were all well behind Switzerland’s score of 66.3 for government spending. Unsurprisingly Greece scored zero on this front.

3. Regulatory efficiency

Regulations can make it difficult for entrepreneurs to succeed. Freedom to find work and the ability of businesses to freely hire and fire redundant workers when they are no longer needed is essential to enhancing productivity and sustaining overall economic growth. Switzerland ranked well on these regulations that often impinge on business. Business freedom (20th), labour freedom (37th) and monetary freedom (4th) were all not too far from the top.

4. Open markets

The degree to which government hinders the free flow of foreign commerce and finance has a direct impact on the ability of individuals to pursue their economic goals.

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© Antonio1962 | Dreamstime.com

On trade freedom Switzerland ranked 1st equal with a score of 90. Foreign investors suffered little discrimination (investment freedom – 10th) and sources of financing were plentiful (financial freedom – 3rd).

Why does any of this matter?

Over the 21 years that the Heritage Foundation has been calculating the index, they have discovered that those given more freedom to prosper economically, are healthier, better educated, better protectors of the environment, and live longer than those who aren’t.

A surprising under performer

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Despite its reputation for launching impressive and innovative companies such as Google and Apple, the US performed quite poorly. With an overall score of 75.4 it was placed only 11th. The US scores badly on taxation, or fiscal freedom, and government spending.

Despite taxing less than Switzerland (25.4% vs 27.1% of GDP) the US has one the world’s highest corporate tax rates at 35%, and its government spending of 39% of GDP, is well ahead of the income it collects from taxes. This is digging a fiscal hole for future generations of Americans that will limit their economic freedom.

Those at the bottom

At the bottom were the usual suspects. North Korea was last with a score of 2.3, behind Cuba (29.8), Venezuela (33.7), Zimbabwe (38.2), Turkmenistan (41.9), Eritrea (42.7), Rep. of Congo (42.8), Iran (43.5), Equatorial Guinea (43.7) and Argentina (43.8). Other nations such as Afghanistan, Iraq, Libya, Somalia, Sudan, Syria and Yemen would have probably joined these countries at the bottom if analysis of these states had been undertaken.

Defining freedom

One factor that seems to be absent from this analysis is the impact of politics on economic freedom. This study’s leader, Hong Kong, had its economic freedom brought into question recently, when according to an article in the Economist, an owner of a Hong Kong bookshop mysteriously disappeared, only to reappear in China. Police in Hong Kong said they had found no record of the man having crossed the border, and his wife reported that he had no travel documents. In addition, she told a television news channel that he had later telephoned her from China to say that he was “assisting in investigations”. She said he had sounded harried, and, unusually for him, had spoken Mandarin – the official language of mainland China – rather than in Hong Kong’s local Cantonese dialect. This man is one of five now missing from Hong Kong.

 © Waihs | Dreamstime.com

© Waihs | Dreamstime.com

BBC correspondent Rupert Anthony Wingfield-Hayes reports on the Hong Kong bookseller mystery in the short video below.

The book trade at least, does not appear to very free in Hong Kong these days.

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