“There cannot be stable money within an environment dominated by ideologies hostile to the preservation of economic freedom.”
Ludwig von Mises firmly asserted that the most critical ingredient for a stable economy is its liberty, i.e. an economy that is free from government intervention and central planning. Many economists have since established a strong correlation between a free market economy and the prosperity and welfare of society. This correlation is palpably evident in the case of Switzerland.
Switzerland is exemplary when it comes to decentralization and free trade, and particularly welcoming to business and investments, thanks to its long tradition of respect for private property rights. According to this year’s Economic Freedom of the World report, Switzerland is still the most economically free country in Europe, while it ranks 4th in the world. While this is good news for the Swiss today, in this article we look into what it could also mean for the future of the country and the opportunities it presents for international investors, particularly those focused on the long-term view.
The Top 5
More than 70 think tanks have taken part in compiling this year’s Economic Freedom of the World report, including the Cato Institute and the Canada-based Fraser Institute. Their findings were also in line with the Heritage Foundation’s “Economic Freedom Index”, which was published earlier this year and which also ranked Switzerland in fourth place globally.
The Fraser Institute conceptually determined economic freedom as present “when economic activity is coordinated by personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights”. Accordingly, the index calculates “the degree to which the policies and institutions of countries are supportive of economic freedom”, using forty-two data points. These include the size of government, structure and security of property rights, access to sound money, freedom to trade, and regulation of credit, labor, and business. In essence, the index could be seen as a measure of “what a foreign investor looks for” when considering going offshore.
Hong Kong and Singapore, once again, occupy the top two positions in the index, while New Zealand comes third, in a tight race with Switzerland, 4th. Canada came in 5th, while the United States ranked 16th. Not only was Switzerland the only country on the European continent in the top five positions, but with a rating of 8.25, it also surpassed the average 7.7 rating for advanced countries.
Economic Freedom: A virtuous cycle
A closer look at the findings of the Economic Freedom of the World report, reveals some interesting correlations: Countries with more economic freedom are more likely to have substantially higher per-capita incomes, more rapid growth, lower extreme and moderate poverty levels and higher life expectancy, a variation which can reach up to 20 years. Perhaps the most important correlation, however, was the one linking higher economic freedom with more political rights and civil liberties.
In essence, a country upholding economic freedom encourages trade and competition, provides incentives for entrepreneurs to establish businesses and invites foreign investment, international talent and innovative ideas. As Ayn Rand wrote, “a free mind and a free market are corollaries”, and indeed we find that many of the countries with the highest levels of economic freedom are more likely to enjoy democratic systems that uphold civil liberties.
A recent study from the Independent Institute in Texas also analyzed the findings of major think tanks like the Fraser Institute, the Heritage Foundation and Freedom House. While their results again confirmed that economic freedom enhances the wealth of nations, their analysis of empirical studies showed that the reverse is also true: rising prosperity encourages countries to pursue and persist on economic reform towards free-market policies. In other words, high quality of life, political freedom and overall prosperity are the result of economic freedom, but they also ensure and safeguard its perpetuation.
This not only holds true for Switzerland, but for Hong Kong and Singapore as well, as their liberal market policies have helped increase the countries’ per capita income tremendously, when reviewing their historic data. As a result, they have made additional strides towards further liberalizing their economies and markets.
The Swiss advantage
Switzerland’s scores reaffirm the above correlations, as the country boasts relatively low levels of poverty, more rapid growth, the second-highest per-capita income internationally, and most importantly, more political rights and civil liberties. These factors combined, provide solid grounds for future stability. In Switzerland, the conditions that ensure economic freedom have been firmly in place and proved resilient over decades, rendering it practically self-perpetuating: Backstops are constitutionally in place, ruling out the possibility of forceful regression towards centralization and increased federal government control. Conversely, subsidiarity, limited government through decentralization, rule of law, protection of property rights, and an independent and fair judicial system, as well as low trade barriers, together create an exceptionally attractive business and investment climate. Overall, the country’s history and structure reinforce an optimistic outlook for Switzerland as a haven of economic freedom in the long-term. This is not mere conjecture; the trend has been clear for decades: in terms of economic freedom, Switzerland has been well ahead, exceeding both the European and world averages, as seen in the chart below.
Switzerland as the optimal candidate for jurisdictional diversification
Over the years, economists and analysts have recognized Switzerland as the most economically free nation in Europe, by far, and it is undoubtedly one of the world’s most competitive, open and innovative economies. More importantly, its political system of direct democracy goes hand in hand with its respect for liberty and the protection of private property rights. The Swiss public has demonstrated in recent elections and referenda that it has direct oversight on government practices, and safeguards the core values of the nation.
As we approach the last couple of months of 2016, a rather turbulent year in an already deteriorating economic landscape, investors need to take prudent decisions and plan ahead more carefully than ever. In the coming year, concerns abound with the U.S. elections around the corner, referenda and potentially game-changing elections in Europe, all exacerbated by the risks of a fragile global economy.
In these uncertain times, it is important for investors to be prepared and to keep a key rule in mind: never put all your eggs in one basket. Jurisdictional diversification is the most meaningful strategy to protect and preserve value over the long-term. When considering candidate countries it is important to look for the ones who have a history of stability, rule of law, limited government and legal predictability: Switzerland is the only time-tested constant in an ever-changing world.
This article originally appeared on MountainVision.com
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