Policy Brief: Economic Survey of Switzerland, 2007

A vigorous economic expansion has allowed Switzerland to emerge from a decade of weak economic growth. However, some of the factors fuelling the current upswing are likely to prove temporary, as manufacturing has benefited from currency depreciation and financial intermediation from a rebound in global and domestic capital market activity, which could be coming to an end. The recent large inflow of immigrants has the potential to make a longer lasting positive contribution to aggregate supply. But, held back by weak competition in sectors not exposed to international trade, the productivity level is still moderate, and prices are high in comparison with other high income countries, lowering living standards.

The government has taken a number of steps to remove barriers to product market competition. Some have just come into force or still await parliamentary approval.

Nonetheless, the pace of reform remains slower than in other OECD countries, entailing the risk that relative living standards may slip further in the medium term. While the government has stepped up efforts to control overall outlays, the trend rise in mandatory social spending is unbroken, limiting the extent to which public finances could serve to increase potential growth. The labour market has been fully opened to the residents of most EU countries and will remain attractive to other migrants, so the authorities will have to continue to try to make the most of immigrants’ potential contribution to domestic prosperity. Therefore, to turn the recent cyclical upswing into a lasting improvement in growth outcomes, the policy challenges are as follows:

• Public finances should focus on medium- and long-term sustainability so as to support potential growth. The general government has moved into a surplus position. However, welfare reform efforts need to halt the trend increase in mandatory social spending and preserve high labour-force participation. To this end, incentives for disability beneficiaries to return to work need to be improved. Mixed hospital funding responsibilities are problematic. Pension system design must confront demographic change. Tax reform could help to stimulate economic activity by lowering compliance costs and reducing distortions.

• Competition in product markets should be strengthened to raise productivity and lower prices. Measures taken to eliminate barriers to competition in product-market regulation need to be followed up if their benefits in terms of improved performance are to be reaped. Conditions are not yet in place to guarantee that new entrants in the network industries do not suffer discrimination by incumbents. Enforcement of general and sector-specific competition legislation would be improved by providing regulators with more resources and powers and by ensuring their independence. In agriculture, remaining production-related support and barriers to structural change in land law need to be removed.

• Immigrants’ labour-market performance and human-capital acquisition should be nurtured. While most immigrants are well integrated in the labour market, discrepancies in outcomes between immigrants and natives are marked, and migrants’ children under-perform in education. The acceptance of immigrants’ foreign credentials needs to be facilitated. Stronger incentives for foreigners to acquire local language skills would be helpful. Access of immigrant families to early childhood education and childcare needs to be widened, and non-selective lower secondary schooling should be developed. Such reforms would lower the impact of socio-economic background on all children’s education outcomes.

OECD: Switzerland and the OECD http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-surveys-switzerland-2011_eco_surveys-che-2011-en

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