Switzerland Report Sustainable Governance Indicators 2016 - Klaus Armingeon, Wolf Linder, Reimut Zohlnhöfer (Coordinator) - SGI Network

 
Switzerland Report Sustainable Governance Indicators 2016 - Klaus Armingeon, Wolf Linder, Reimut Zohlnhöfer (Coordinator) - SGI Network
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SGI 2016 | 2                                                                 Switzerland Report

               Executive Summary
               Governance in Switzerland showed considerable continuity in the 2014-2015
               period. This applies to the country’s overall quality of democracy, policy-
               specific performance and management structures. By implication,
               shortcomings as well as strengths have been preserved. Many challenges that
               existed a year ago still exist, and some have even been amplified to an extreme
               degree (see “Key Challenges”). Most dramatic in this regard are probably the
               developments in relations with the European Union, where Switzerland risks a
               confrontation with unclear outcome. Very little progress has been made in
               regulating the conflicts with the EU during the past year, solutions to which
               must be found by February 2017.

               In addition, conflicts regarding the extent to which Swiss society should be
               opened toward the international environment and conflicts between economic
               interests and the political goal of sovereignty have intensified. Closely related
               to these issues is the continuing political strength of national-conservative and
               populist forces. The two largest right-wing parties, the Swiss People’s Party
               (SVP) and the FDP Liberals, won an additional combined 3.2 % of votes in the
               national election on 18 October 2015, allowing them to secure a majority of
               seats in the National Council (Nationalrat) together with a few smaller right-
               wing parties.Green parties lost 2.1%, the centrist Christian Democrats lost
               1.2%, while the Social Democrats won 0.6 percent. This tilt of power toward
               the political right suggests that the extent to which Switzerland should open
               itself up has become a much more divisive issue to which issues regarding the
               environment or social welfare have taken a backseat.

               In September 2015, the Council of States (Ständerat) reached a compromise on
               the urgently needed reform the pension scheme. Given the new distribution of
               power in the National Council, it is unlikely that this compromise will hold.

               There is no doubt that Switzerland is a stable and well-functioning democracy.
               The country certainly belongs to the group of countries with a high quality of
               democracy. This applies to the input functions as well as the output of a
               responsive and responsible government. As in the previous period, the former
               consociational and corporatist style of Swiss democracy has been normalized
               in various ways. Switzerland is still a consensus-based democracy, but much
               less so than was the case 20 or 30 years ago, as populist tencencies have grown
SGI 2016 | 3                                                                 Switzerland Report

               and divisive conflicts in political relations have become increasingly
               acceptable. And while the social partnership system continues to facilitate
               smooth economic operations and the incorporation of interest groups into
               legislation development, the impact of individual firms and lobbyists in
               exerting pressure has grown. At the same time, the strength of traditional
               social partnership organizations has weakened.

               In terms of policy performance, Switzerland must be regarded as extremely
               competitive. Compared with other European countries and previous SGI
               survey periods, its policy performance has improved. A major challenge is the
               exchange rate of the Swiss franc to the euro. On 15 January 2015, the Swiss
               National Bank ceased to support a lower limit of 1 euro corresponding to 1.20
               Swiss francs. This led to a further appreciation of the franc, injuring the
               country’s export position. Thus far (December 2015), the consequences have
               been met with considerable success. However, it is unclear whether the
               country will continue to maintain its competitive position.

               There are signs that the policy decisions made in 2014 regarding a cap on
               immigration will lead to greater reluctance on the part of foreign firms to keep
               up the close trade and production relationships of the past. A failure to reach
               an understanding with the EU would in all likelihood lead to huge economic
               costs, provided Switzerland insists on the implementation of the new
               constitutional article allowing for a cap on immigration. Throughout 2015,
               however, unemployment rates have remained low and public finances have
               been strong as the country has maintained a budget surplus. In addition,
               Switzerland continues to enjoy the benefits of a sustainable welfare state
               excellent education system.

               Having lagged from the 1970s until about 2005, Swiss economic growth has
               today become more dynamic. The country weathered the post-2007 crisis
               period, the instability of the euro zone, and the shocks of the European
               sovereign debt crisis remarkably well. While some economic liberalization
               was introduced over the past 15 years, this trend has not been continued in
               recent years. For example, the attempt to amend the law on cartels has failed,
               and domestic industries – in particular farming – have been greatly supported
               by new legislative projects, including the implementation of the “Swissness”
               law in June 2013. In 2015, several conflicts emerged between protectionist
               interests – in particular in agriculture and the food-processing industries – and
               demands for a further liberalization of the domestic economy.

               Professionalization within the country’s political and administrative elite is
               somewhat limited. Political positions in the legislative branch are based on the
               so-called militia   system (or Milizsystem, which is referred to as such
SGI 2016 | 4                                                                 Switzerland Report

               because, like soldiers in the Swiss Army, these are not full-time positions).
               This applies also to many executive and administrative positions at the lower
               levels of the political system. Coordination within and across administrative
               offices is often poor.

               As was the case in the previous period, populist sentiment, often in tension
               with international human rights discourse, has grown in Switzerland. Swiss
               political discourse traditionally emphasizes the sovereignty of the Swiss
               people, and this is manifest in popular referenda that are only marginally
               influenced by international legal norms. The gap between popular Swiss
               perceptions of sovereignty and global human-rights norms was not mitigated
               in 2014 – 2015. Rather, in the spring of 2015, the Swiss People’s Party began
               collecting signatures for an initiative to amend the constitution in order to
               grant Swiss law precedence over international law, excepting narrowly defined
               peremptory norms (jus cogens).

               Changing patterns of immigration have spawned increasing conflict. For
               decades, Switzerland has been dependent on a flexible inflow both of highly
               qualified and low-skilled employees. As a result, the recruitment of foreign
               labor was always bimodal, showing a strong overrepresentation of foreigners
               at the bottom and top of the job hierarchy. On the one hand, these labor
               inflows relieved Switzerland from the burden of paying for the training and
               education of a large segment of its highly skilled labor force. In addition, this
               flexibility helped alleviate pressure on the welfare state, since the nation’s
               demographic profile was shifted toward a younger, often foreign-born
               population with a high employment-participation rate.

               In addition, since most of the economic growth in recent years has been
               primarily a consequence of an increasing volume of labor (i.e., the number of
               hours worked has increased due to the presence of more workers, leading in
               turn to a higher gross domestic product), the growth model is dependent on an
               increasing inflow of foreign labor under the condition of large markets for
               Swiss exports. On the other hand, these high immigration rates – representing
               about 1% of the population annually – continue to produce considerable social
               costs associated with integration. The country’s liberal refugee policy has
               become the subject of controversy and presents a second source of political
               conflict as some two-thirds of refugees have not been integrated into the labor
               market even after years of residence and more than 80 percent of refugees
               depend on welfare (KEK-CDC 2014).

               In the past, opposition to immigration came largely from lower-class Swiss
               citizens, who felt themselves to be in competition with foreign workers in the
               areas of employment, housing and education. But the new immigration
SGI 2016 | 5                                                                                   Switzerland Report

               patterns have also intensified the concerns felt by middle-class Swiss citizens,
               who have hitherto enjoyed almost unchallenged status and employment
               opportunities.

               During the period under review, Switzerland was forced to accept that some of
               its policies were no longer practical, and that some advantageous solutions of
               the past were no longer sustainable.

               Under pressure from the United States, the Swiss government abolished in
               2014 its veil of banking secrecy. In 2015 and under pressure from the EU, the
               government began consultations regarding the introduction of a new tax
               system for enterprises. The goal here is to terminate the Swiss cantons’ long-
               running policy of taxing the profits of national and international firms
               differently (so-called ring fencing). Swiss elites thus learned the hard way that
               their sovereignty is strictly limited in certain policy fields.

               The decline of banking secrecy and the tax reform offered a stark contrast to
               the dominant national discourse, which argues that Switzerland can pursue
               autonomous and smart strategies in a globalized world by occupying policy
               niches left open by the great powers. The traditional discourse of sovereignty
               through intelligence increasingly conflicts with the realities of an integrated
               Europe, in which neighboring countries have criticized Switzerland as a free
               rider.

               Finally, after the passage of the initiative against mass immigration in
               February 2014, a large number of domestic politicians claimed – and some
               may also have indeed expected – that the EU was willing to enter into
               discussions with Switzerland about the free movement of labor. However, the
               EU made it clear that it was not willing to enter any such discussions. This
               forces Switzerland to develop strategies which are compatible both with the
               views of the majority of the citizenry and the country’s economic interests.
               One such strategy would be to propose a new popular initiative that could
               repeal the vote of February 2014. Another, and probably more likely strategy,
               would be to save face by muddling-through and revising the constitutional
               rule, thereby giving bilateral treaties precedence over the initiative-based
               restrictions on immigration.

               Citation:
               KEK-CDC, 2014: Erwerbsbeteiligung von anerkannten Flüchtlingen und vorläufig Aufgenommenen auf
               dem Schweizer Arbeitsmarkt. Studie im Auftrag des Bundesamtes für Migration, available at
               https://www.sem.admin.ch/content/dam/data/sem/integration/berichte/va-flue/res-studie-erwerbsbet-va-flue-
               d.pdf
SGI 2016 | 6                                                                 Switzerland Report

               Key Challenges
               Switzerland faced interrelated challenges as the 2014-2015 period closed, all
               of which were also evident in the previous period. Arguably, Switzerland’s
               government cannot avoid developing – or seeking to develop – a convincing
               strategy with regard to each of these issues. These include the challenges with
               regard to European integration, to national identity and being a country with a
               huge share of foreign workers and inhabitants; the increasing problems related
               to implementing popular referendums; and the need to reform the pension
               system.

               First, the country’s relationship with the European Union remains founded on
               a provisional and increasingly fragile basis. The realities of domestic politics
               have, in the past, made bilateral agreements the only practical solution, as
               neither a policy of “going it alone” nor EU membership seemed feasible
               strategies. However, the bilateral solution is becoming increasingly difficult to
               maintain. Switzerland will have to offer an institutional solution enabling
               existing treaties to be updated and further developed, as well as systems of
               legal conflict resolution that meet the requirements of the European Union. In
               the fall of 2015, negotiations reached a stalemate, requiring the process to start
               once again. However, any new institutional agreement between Switzerland
               and the EU will face resistance in domestic politics. The national-conservative
               populist Swiss People’s Party has already declared its intent to oppose any
               reduction of sovereignty vehemently.

               Even more importantly, in February 2014, the Swiss people passed an
               initiative on mass immigration that requires a cap on immigration and the
               renegotiation of all international treaties that could violate this cap. This is
               clearly at odds with existing bilateral treaties with the EU. As implementation
               of the policy nears, Swiss political elites are confronted with either having to
               renegotiate, terminate or deliberately violate the existing treaty with the EU on
               the free movement of labor. Renegotiating the treaty does not seem to be
               politically feasible at the moment, as the EU has made a very clear statement
               in this regard. Terminating or violating the bilateral treaty (partly as a
               consequence of other bilateral treaties) would in all likelihood have serious
               economic consequences for Switzerland. And while the need for a way out of
               this impasse continues to grow, media analyses show that most of the
               country’s political elites continue to present Switzerland as holding strong
               negotiating position vis-à-vis Europe and that the stop immigration initiative is
               a feasible option in reducing immigration.
SGI 2016 | 7                                                                  Switzerland Report

               Similarly, the challenge of limiting political conflicts generated by migration
               has grown. The share of foreigners within Switzerland’s population is among
               the highest worldwide. Moreover, an extraordinarily high proportion of elite
               positions in the economy and the higher education system are staffed by
               foreigners. Immigration has stimulated economic growth. Some observers
               even argue that it is essential for the country to continue recruiting highly
               skilled labor in order to sustain the country’s high economic growth rate. But
               immigration has also prompted considerable concern, most notably among
               Swiss workers, about housing prices, jobs, and the use of infrastructure such as
               roads and public transportation. Swiss workers constitute the base of the right-
               wing populist Swiss Peoples Party (SVP), which is today one of the strongest
               such parties in Europe in terms of votes, representation in government and its
               success in referenda. This strength is not due to an extraordinary large share of
               citizens with strong xenophobic attitudes. At least in international comparison,
               Switzerland and some of the Nordic European democracies show a relatively
               low level of xenophobia overall. Nonetheless, the SVP has been extremely
               successful in mobilizing xenophobic elements in the population, as
               demonstrated by its electoral win on 18 October 2015.

               This points to another challenge, which has become more important given the
               growing number of popular initiatives that have been approved in recent years.
               These popular initiatives concern new articles in the constitution that have
               been developed outside the parliamentary process. In some cases, these
               initiatives are in conflict with the views of the government and the federal
               administration, and frequently they are difficult to implement. This has
               contributed to a significantly larger share of initiatives that are not or are
               incompletely implemented. The non-implementation of constitutional
               amendments derived from initiatives is not entirely new. Historical examples
               of provisions left unimplemented include the prohibition on absinth (1908) and
               the ban on gambling houses (1920/21). However, these precedents are few and
               the exponents of these initiatives were not in the center of the political system.

               By contrast, the number of successful initiatives has grown in recent years, and
               advocates of these initiatives such as the SVP and related organizations are
               politically powerful. These initiatives remain only partially implemented
               because full implementation would violate either international law or
               international treaties. This puts the administration in a difficult position: While
               full implementation would violate international rules, partial implementation
               gives rise to accusations among right-wing politicians that the “will of the
               people” is not respected. In turn, this generates debates (also in parliament)
               regarding the institutional aspects of direct democracy. Should there be legal
               restrictions to popular initiatives that potentially violate international law? The
SGI 2016 | 8                                                                 Switzerland Report

               question is highly controversial as the SVP has launched an initiative aiming
               to grant domestic law considerable priority over international law.

               Finally, as in most other mature democracies, Switzerland’s pension system
               must cope with demographic changes involving a considerable increase in the
               share of the population being aged 65 and older. To date, the system has been
               sustainable and provides relatively generous pension payments. But in the long
               run, absent exceptionally strong growth in productivity or gross domestic
               product, either the average retirement age will need to be increased or the level
               of benefits reduced. After several failed attempts at modernization, the
               government recently proposed a plan that combines various strategies, so that
               even those that lose under some reform elements will benefit from others.
               However, this balanced proposal has been heavily attacked from all political
               quarters. If this plan fails, however, it is very unlikely that a new plan can be
               developed and implemented before the demographic developments cause
               major problems with regard to financing the present pension system. In the fall
               of 2015, the Council of States arrived at a compromise. However, given the
               new right-wing majorities after the national election on 18 October 2015, it is
               very unlikely that this compromise will be supported in the National Council.
               Given the fact that Switzerland has a strictly bicameral system, it will likely
               take a long time for a new compromise to be hammered out.
SGI 2016 | 9                                                                    Switzerland Report

                  Policy Performance

                  I. Economic Policies

                  Economy

Economic Policy   The Swiss economic policy regime combines a variety of elements. The
Score: 8
                  common denominator is the practice of muddling-through as standard
                  operational procedure and heterodoxy as the primary philosophy underlying
                  economic policymaking. For example, it is a very liberal regime with regard to
                  the regulation of the labor market, in particular to hiring and firing. The rules
                  in this area are very close to those of the United States. By contrast, it was in
                  the past a very illiberal and politicized regime with regard to the in- and
                  outflow of foreign labor. The country’s economic policy regime is based on
                  the integration of employers and trade unions into the policymaking process,
                  with employers having the largest amount of influence (“liberal corporatism”)
                  and trade unions serving as junior partners. For trade unions, this corporatism
                  has made sense, since it resulted in a regime of full employment (at least for
                  Swiss citizens), high wages and generous private social policy implemented on
                  the firm level. In addition, public-sector social policy has been expanded in
                  terms of programs and expenditure levels.

                  Throughout the 20th century, Switzerland maintained a very protectionist
                  policy regime, allowing for cartels and the exclusion of competition. The main
                  beneficiaries were farmers, who were protected from world market
                  competition by high tariffs and strict non-tariff barriers, as well as small and
                  medium-sized businesses and service providers producing for the domestic
                  market. Furthermore, collusive pricing was tolerated, while competition
                  between providers and producers was limited by the variance in cantonal
                  regulations. This latter aspect made it very difficult for businesses to make
                  competitive offers and win bids outside their home cantons. The former policy
                  of protectionism has changed considerably since the mid-2000s due to a
                  deliberate strategy of market liberalization. This seemed to come to a halt in
                  the period under consideration, since about 2005. For example, an amendment
SGI 2016 | 10                                                                Switzerland Report

                to the law on cartels failed, since it would have reduced the influence of the
                primary economic interest organizations within the competition agency’s
                governing board. Likewise, parliament passed a law on “Swissness” in 2013,
                which established rules on whether a product may be labeled “Swiss made.”
                Some rules expected to be implemented as a result would benefit strongly
                domestic producers, in particular farmers

                Economists have attributed the Swiss economy’s strong growth since about
                2005 to some of its liberalizing reforms. Others point to the fact that most of
                the increase in domestic product is not due to higher productivity (GDP per
                capita), but rather to the increasing volume of hours worked, which itself is at
                least partially a result of population growth (1% per year, mostly due to
                immigration). This growth is conditional in export markets. In the past 15
                years, Switzerland’s current account balance has been positive, with exports
                exceeding imports. A considerable share of recent economic growth is
                therefore export-driven, which makes Switzerland very much dependent on
                export markets. The appreciation of the Swiss franc since 15 January 2015 and
                the country’s increasingly rocky relationship with the EU pose imminent
                dangers to the continued success of its export-oriented economy.

                The government levies low taxes on both labor and capital, producing
                relatively small tax wedges. In return, this liberal state does not make
                significant interventions into the business cycle. Rather, it used to pursue a
                prudent and basically pro-cyclical fiscal policy. In times of major economic
                problems, such as in 2008 and 2009, fiscal stimulation packages have been
                implemented. However, for institutional and political reasons, these packages
                have typically been very limited in size. In addition, it proved difficult to
                implement these packages swiftly. In fact, many of the resources contained in
                these fiscal programs have not been taken up by employers.

                Industrial policy as a means of actively influencing industrial structure has
                been eschewed by the Swiss government. Rather, the government has
                restricted itself to facilitating the modernization of industries by creating
                favorable conditions for economic activity. In the financial field, Switzerland
                has improved its surveillance of banks and has set high standards for
                prudential banking regulations since the onset of the “great recession” in 2008.

                The country’s policymakers have long placed particular emphasis on
                maintaining a prudent fiscal policy (low deficit and debt levels) and price
                stability. This prudence has resulted from a combination of institutional
                factors, in particular the fiscal weakness of the federal state compared to the
                cantons, rules limiting excessive deficits and debts (for example, a so-called
                debt brake), and the effects of direct democracy. Citizens have typically been
SGI 2016 | 11                                                                 Switzerland Report

                reluctant to accept any policy changes that might imply an increase in taxation.
                These institutional factors have been further reinforced by the distribution of
                political power, in particular by the weakness of the political left, and the
                presence of a strong party (the Free Democrats, which are in this respect
                liberal) that supports a constrained tax state. Responsibility for price stability
                is left to the independent National Bank, which is tasked with maintaining
                price stability as a primary goal, and has the tools of monetary and interest-rate
                policy at its disposal.

                In general, decision-makers have pursued a very pragmatic and heterodox
                economic policy, and have shown themselves willing to disregard liberal
                norms of policymaking if the need arises. For example, in recent years the
                Swiss government and the Swiss National Bank intervened massively to
                prevent the bankruptcies of Swiss International Air Lines, the national airline,
                and UBS, one of the country’s two major banks. The support of the UBS
                turned out in the end to be a success for taxpayers.

                This policy regime, which has been both liberal and protectionist, has come
                under pressure due to various changes in the economic environment. For one,
                deindustrialization and a marked shift to a service economy has meant a
                change in the demand for labor. The industrial sector once offered a large
                number of jobs with low skill requirements. These jobs were staffed to a
                disproportional extent by foreign labor. Due to the rules of the work permit
                system, many foreign workers gained access to unlimited work permits
                between the mid-1970s and the mid-1990s. However, given their low skill
                levels, there is not enough demand for these employees in the modern high-
                skill service sector. Hence, the unemployment curve has shifted upward, and is
                today characterized by high rates of unemployment among foreign workers
                with low skills.

                At the same time, employers are recruiting increasingly highly skilled labor for
                the service sector. It is true that Switzerland has depended on the inflow of
                highly skilled employees for the last century, but this process has further
                intensified during the last 20 years, when the proportion of highly skilled
                employees among immigrant workers rose. In 2014, the share of foreign
                workers with tertiary education among all foreign workers is almost the same
                as this share among Swiss employees (36% as compared to 37%). In contrast,
                the share of foreign workers with low qualifications among all foreign
                employees is more than double (25.6%) the respective share among Swiss
                employees (11.5%), which has contributed to growing social tensions.
                Historically, the highly educated Swiss middle classes have been very much in
                favor of a pro-foreigner policy, as long as these foreigners did not offer major
                competition for this social sector’s jobs and housing opportunities. With the
SGI 2016 | 12                                                                Switzerland Report

                increasing inflow of highly skilled German labor, this tolerance might have
                eroded. For example, the 2014 initiative capping immigration has won
                majority support among all educational groups except those with tertiary
                education at universities and universities of applied science or those with a
                high school diploma. But even within these groups, the initiative received 30%
                or more.

                Globalization has also led to the increasing importance of international
                organizations such as the WTO. Given its reliance on sectors such as
                chemicals and machine production, banking and tourism, Switzerland has had
                no option but to accept the liberalization of trade and services. Moreover,
                liberalization was accelerated by the bilateral treaties with the European
                Union. Even beyond these treaties, practically all new economic law has
                followed EU standards. As a consequence of globalization and
                Europeanization, most sectors once strongly shielded by protectionist policies
                have become liberalized. Agriculture offers a major case in point. As a result
                of this liberalization from outside, the previous complementarity between
                protected domestic industries and a world-market-oriented industry – the
                driver of Switzerland’s post-war economic successes – has become strained.
                The potential increase in tensions between the export and domestic sectors has
                not resulted in open conflict, with the exception of some minor actions at the
                beginning of the liberalization period. Yet these developments have
                increasingly undermined the country’s system of interest representation and
                the corporatist structure of interest intermediation. Interest organizations, in
                particular employers’ groups, have lost support, while their members have
                increasingly turned to lobbying on an individual-firm basis.

                On a related note, Switzerland has not yet solved the question of its long-term
                relationship with the European Union. In the 2014-2015 period, the quest for
                politically and economically sustainable solutions became more pressing.
                Previous solutions have entailed bilateral agreements between the European
                Union and Switzerland, which have had major implications for the further
                liberalization of the service and agriculture sectors. In addition, immigration
                policy has changed substantially. Switzerland has abstained from any further
                recruitment of foreign labor from non-EU countries (for which there is little
                demand anyway), and has instead liberalized the immigration regime with EU
                countries. Essentially, this has meant free movement of labor between
                Switzerland and the European Union, intensifying the new problems and
                cleavages associated with the recruitment of highly skilled employees from
                abroad. However, this bilateral strategy faces major problems today. The
                European Union has requested new institutional solutions to complement and
                reinvigorate the bilateral relationship. It argues that the implementation and
                update of bilateral agreements has become too costly in terms of time and
SGI 2016 | 13                                                                  Switzerland Report

                internal conflict. Specifically, the EU has insisted on the creation of
                independent institutions for the settlement of disputes on the basis of the
                bilateral agreements, as well as mechanisms for updating bilateral agreements
                without having to resort to new full-scale negotiations. As of fall 2015, no new
                institutional solutions have been found yet. Rather, in October 2015, the
                negotiations on an institutional agreement came to a halt, making a new start
                necessary, thereby calling Swiss-EU relations into question. Given the
                country’s close integration with the EU market – between 59% (2010) and
                45% (2014) of Swiss exports go to the European Union, and between 78%
                (2010) and 66% of its imports come from the EU – Switzerland is highly
                dependent on a functional working relationship with this much larger
                economic partner, although the importance of EU trade has declined somewhat
                in recent years. By contrast, the EU is much less dependent on Switzerland.

                The public initiative to cap immigration when it serves Swiss economic
                interests that was passed in February 2014 has exacerbated EU-Swiss tensions.
                Any international treaty that is not compatible with this limit must be
                renegotiated or terminated within three years. The treaty between Switzerland
                and the European Union on the free movement of labor will either need to be
                renegotiated or Switzerland will effectively deliberately violate the treaty.
                However, shortly after the initiative’s passage, the EU signaled that it was not
                willing to enter negotiations on this issue. This poses a major challenge for the
                Swiss economy and economic policy, since it endangers the inflow of the
                (highly skilled) labor from the European Union on which the Swiss economy
                in combination with access to international markets depends. Since the treaty
                on the free movement of labor is also linked with several other important
                bilateral treaties – if one treaty is terminated, the other treaties are also
                terminated automatically – this represents a major threat to economic
                exchange between Switzerland and neighboring EU nations. At the moment,
                there is no solution in sight, and in all likelihood, Switzerland will have to give
                in – which may give rise to considerable frustration among those citizens who
                voted “yes” in February 2014 and who expect their government to reduce the
                inflow of foreigners.

                Broadly perceived as a laggard in the development of its welfare state,
                Switzerland caught up in the post-war period. Today it has a mature and
                generous liberal-conservative welfare state. In times of demographic change,
                this welfare state is only sustainable through high rates of economic growth. It
                is far from clear whether these high rates of growth can be realized in the
                future, in particular if the inflow of foreign labor from and trade with the EU is
                negatively affected by the implementation of the constitutional article on mass
                immigration.
SGI 2016 | 14                                                                 Switzerland Report

                Labor Markets

Labor Market    Swiss labor-market policy is largely a success story, with some blots on the
Policy
                record. Labor-market flexibility in terms of hiring and firing rules is very high;
Score: 9
                trade unions and their representatives or allies on the firm level have no legal
                ability to interfere with employers’ human-resources decisions (in contrast to
                Germany), and there is no minimum wage – a policy that was rejected by the
                Swiss people in a popular vote in 2014. Although the “golden age” of
                containing unemployment through the political management of the inflow and
                outflow of labor from other countries is past, the achievements of Swiss labor-
                market policy remain remarkable. In September 2015, unemployment stood at
                3.2%. Youth unemployment (among 15- to 24-year-olds) is only
                insignificantly above the average unemployment rate (3.5% in September
                2015), and the employment ratio (the working population as a percent of the
                working-age population) of 84% in the 2nd quarter of 2015 was well above the
                average employment rate in neighboring countries.

                Nevertheless, a few major problems are evident. The high employment rate is
                due to a particularly high share of part-time work. About 17% of men and
                more than 60% of employed women work part-time. The employment rate of
                women overall has increased dramatically in recent decades. In 2014, the
                female employment rate was 75%. However, the employment rate for women
                is still considerably lower than that among men (84%).

                A number of other inequities are also evident. Unemployment rates are highest
                among low-skilled foreign workers. There is still considerable wage inequality
                between men and women. In 2014, the median monthly wage in the private
                sector was CHF 6,189 for all employees, CHF 6,536 for men and CHF 5,548
                for women. Not all of these differences can be attributed to different skill
                levels; discrimination and the high share of part-time employment among
                women, which is an impediment to establishing a standard career, also play a
                role.

                Highly skilled workers from EU countries pose few problems for Swiss labor-
                market policy, particularly since these employees are quite likely to return to
                their native country after a period of employment in Switzerland (Cueni and
                Sheldon 2011). In contrast, low-skilled foreign workers tend to stay in the
                country even if they become unemployed.

                The employment rate among older workers is very high in international
                comparison. The government rejected any proposal to raise the age of
                retirement arguing that there is not sufficient demand for workers over 65.
                Raising the retirement age has been a major issue in the current pension
SGI 2016 | 15                                                                              Switzerland Report

                system reform, although those in favor of raising the age are aware that this
                proposal is doomed to fail if put to a popular vote.

                Citation:
                CUENI, D. & SHELDON, G. 2011. Arbeitsmarktintegration von EU/EFTA-Bürgerinnen und Bürgern in
                der Schweiz. Schlussbericht zu einer Studie im Auftrag des Bundesamtes für Migration (BFM), Basel,
                FORSCHUNGSSTELLE FÜR ARBEITSMARKT- UND INDUSTRIEÖKONOMIK (FAI).

                Taxes

Tax Policy      The Swiss tax ratio is significantly below the OECD average, and tax rates,
Score: 9
                particularly for business, are moderate. Taxation policies are competitive and
                generate sufficient public revenues. Fiscal federalism (the responsibility of the
                municipalities, the cantons and the federation to cover their expenses with
                their own revenue) and Swiss citizens’ right to decide on fiscal legislation
                have led to a lean state with relatively low levels of public-sector employment
                so far. Nonetheless, it is important to note that due to the principle of
                federalism, tax rates can differ substantially between regions, as individual
                cantons and local communities have the power to set regional tax levels.

                However, it should be noted that Switzerland’s apparently small government
                revenue as a percent of GDP can be attributed in part to the way in which the
                statistics are calculated. Contributions to the occupational pension system (the
                so-called second pillar) and the health insurance program – which are non-
                state organizations – are excluded from government revenue calculations. The
                share of government revenue as a percent of GDP would be about 10
                percentage points higher if contributions to these two programs were included.
                This would bring Switzerland up to the OECD average in terms of public
                revenue.

                Tax policy does not impede competitiveness. Switzerland ranks at or near the
                top of competitiveness indexes, and given its low level of taxation is highly
                attractive for corporate and personal taxpayers both domestically and
                internationally.

                Tax policy has contributed to an excellent balance between revenues and
                expenditures. Switzerland has a very low public debt (35% of GDP in 2014)
                and a positive financial balance – that is, the government’s revenues exceed
                government spending.

                The country’s tax policy has come under pressure from the OECD and
                European Union because of the ability to treat national and international firms
                differently on the cantonal level. The federal government has responded to
SGI 2016 | 16                                                                    Switzerland Report

                   these pressures, introducing a reform of corporate-taxation policy. This reform
                   has progressed substantially in 2015 and will prohibit Swiss cantons from
                   taxing the profits of national and international firms differently (so-called ring
                   fencing).

                   Budgets

Budgetary Policy   Budgetary policy in Switzerland is fiscally sustainable. Gross public debt
Score: 10
                   (general government) started to increase in the mid-1990s from a low level of
                   38% of GDP to reach a peak of 58% in 2004, but had receded to 35% by 2014.
                   Structurally adjusted budgets were balanced even during the crisis of 2008 –
                   2009. In 2015, the federal state ran a positive balance, spending less than it
                   received.

                   This fiscal sustainability is mainly due to the political decision to have a low
                   tax load and a lean state. In addition, keeping the public deficit and debt low
                   has been a major concern of politicians at all levels of the political system.
                   Various rules and means have been developed in order to avoid the dynamics
                   of expanding budgets. For example, on the federal level, there is the
                   constitutional debt brake (Article 126, Article 159): “The maximum of the
                   total expenditures which may be budgeted shall be determined by the expected
                   receipts, taking into account the economic situation.” Direct democracy offers
                   another effective means of keeping the budget within limits. In popular votes,
                   the people have proven reluctant (compared in particular to members of
                   parliaments when elections are drawing near) to support the expansion of state
                   tasks with a corresponding rise in taxes and/or public debt.

                   Even taking into account the fact that some individual cantonal and municipal
                   governments do pursue unsustainable budgetary policies, the total (i.e., general
                   government) budgetary policy achievement arguably puts Switzerland in the
                   OECD’s top group in terms of fiscally sustainable national policies.

                   Research and Innovation

R&I Policy         Switzerland’s achievement in terms of innovation is considerable. It spends
Score: 9
                   3% of its GNP on research. A total of 75% of research spending is corporate
                   spending with the direct aim of economic innovation, an important factor in
                   the country’s strong overall competitiveness. With a share of about 25%,
                   public research funding plays a lesser role, and depends on five main actors:
                   the cantonal universities, the two federal institutes of technology, the National
                   Science Foundation, the Federal Commission for Technology and Innovation,
SGI 2016 | 17                                                                   Switzerland Report

                   and the academies of sciences. These actors are independent of each other, but
                   cooperate on the basis of complementarity and (although limited) competition.
                   The various institutions are highly autonomous, and research policies and
                   processes are driven by bottom-up operations. Thus, Swiss research policy is
                   not centralized, but rather relies on a concept of decentralized innovation with
                   periodic intervention by the federal government.

                   The output of the research system is impressive. The Federal Institute of
                   Technology Zurich (Eidgenössische Technische Hochschule Zürich) is one of
                   the top-ranked universities in the world and the universities of Basel, Bern,
                   Geneva, and Zurich regularly appearo on the list of the 200 best universities
                   worldwide.

                   Some deficits persist, however, such as the coordination of universities and the
                   new universities of applied sciences or the weakness in social science and
                   humanities research relative to that conducted in the natural sciences or
                   technological field.

                   Global Financial System

Stabilizing        Switzerland is one of the world’s most significant financial markets. Swiss
Global Financial
                   banks such as UBS and Credit Suisse are global financial players. The post-
Markets
Score: 8
                   2007 global crisis and the economic problems of UBS in Switzerland – which
                   forced the Swiss government to intervene massively in order to avoid
                   bankruptcy of this major bank in 2008 – triggered banking reforms within
                   Switzerland. The federal government, bankers and international organizations
                   such as the OECD claim that Swiss private and public actors have been active
                   on the global level in reforming the international banking system, in particular
                   in interaction with the regulatory bodies in the United Kingdom, the United
                   States and the European Union.

                   After the financial crisis of 2007 and 2008, the government introduced
                   measures to deal with the problem of banks being “too big to fail.” Though it
                   remains unclear whether these new rules and institutions will be sufficient in
                   the event of a major crisis, the Swiss approach numbers among the most sound
                   and prudent systems of regulation worldwide.
SGI 2016 | 18                                                                    Switzerland Report

                   II. Social Policies

                   Education

Education Policy   Switzerland’s education system is strongly influenced by the country’s federal
Score: 8
                   and decentralized structure, as education policy falls under the jurisdiction of
                   the cantons and municipalities. The system provides a high-quality education.
                   The university system performs very well, as is the case in many other small
                   and open European countries. Vocational training is very solid, and seems to
                   be one of the most important factors in the low levels of unemployment,
                   particularly among younger people. The permeability of vocational and
                   tertiary education has improved as compared to other countries. The number of
                   students enrolled at universities, universities of applied sciences and colleges
                   of education nearly doubled from 2000 to 2015.

                   While women and – with some exceptions – persons from peripheral regions
                   have equal access to higher education, the Swiss education system continues to
                   discriminate at all levels against students from families with low social status.
                   There is no empirical evidence that the education system discriminates against
                   foreigners born in the country. Their lower success rates can be explained as a
                   special case of discrimination against students from families with low social
                   status.

                   In this context, we have to mention a federal particularity in higher education.
                   Some cantons such as Geneva and Tessin have followed international trends
                   favoring general qualification for university entrance, while others, especially
                   in the German-speaking portions of the country, have focused instead on a
                   split system of university and vocational education. Thus, in the cantons of
                   Ticino 53% of all 19-21 year-olds acquire the matura secondary-school exit
                   diploma, allowing them to go on to university followed by the cantons of
                   Geneva and Neuchatel with 46% while in the canton of Uri, only 30% of 19-
                   year-olds gain direct access to universities (2014). However, the effect of this
                   “federal” discrimination is somewhat reduced by the permeability within the
                   school and university system. Likewise, the vocational-training system offers
                   considerable career prospects. Finally, resource allocation within the
                   educational system seems to be very efficient.

                   In general, the quality of the Swiss education system is outstanding. However,
                   given the strong impact of parents’ social status on access to higher education,
                   there are questions about overall equity in terms of access.
SGI 2016 | 19                                                                    Switzerland Report

                   Social Inclusion

Social Inclusion   Switzerland is largely successful at preventing poverty. This is due to an
Policy
                   effective system of social assistance, in particular with regard to older
Score: 8
                   generations. It is rare to fall into poverty after retirement.

                   The main social-insurance programs regulated on the federal level (addressing
                   sickness, unemployment, accident and old age) work effectively and are
                   comparatively sustainable. A generous level of benefits is provided. Social
                   assistance is means-tested, and some stigma is attached to its receipt.

                   Life satisfaction is very high, income inequality is moderate, the share of
                   working poor in the population is small and gender inequality has been
                   reduced substantially in recent years. However, some problems and tensions
                   relating to social inclusion are evident.

                   First, the transition to a knowledge-based service society entails new social
                   risks. These will be faced by workers who cannot cope with the challenges of
                   such a society, such as young people who lack either the cognitive or
                   psychological resources to obtain sufficient training and start a normal career;
                   single mothers who are unable to finish vocational training; highly skilled
                   female employees who cannot reconcile work and family; persons (in practice,
                   typically women) who have to care for frail elderly people and cannot devote
                   sufficient time to a full-time job, and other such individuals. Like most
                   continental welfare states, Switzerland has not sufficiently reformed a welfare
                   state with roots in an industrial-age economy to address the challenges of a
                   service-based society.

                   Second, tensions between Swiss citizens and foreigners over the benefits
                   provided by the welfare state, as well as their financing, is increasing. In 2013,
                   foreign workers representing 30% of the workforce accounted for 48% of the
                   unemployed and 47% of social-aid recipients. It should be noted that
                   unemployment and poverty is pronounced among low-skilled workers, where
                   foreigners are over-represented. At the same time, highly skilled foreign
                   employees subsidize a Swiss welfare state that benefits low-skilled foreign
                   workers and middle-class Swiss workers (BSV 2015). In addition, the growing
                   population of foreign workers increases the burdens placed on infrastructure
                   such as railways and highways, competition with Swiss citizens on the housing
                   market, and tightens competition for highly paid and desirable jobs as well.
                   This state of affairs has fueled the number of conflicts and sparked tensions
                   and frustration on all sides. To date there has been no constructive discussion
                   and search for solutions within Swiss society, a process that could include the
                   termination of the mythology attached to sovereign Swiss citizenship. Instead,
SGI 2016 | 20                                                                               Switzerland Report

                right-wing populism is on the rise, with the right-wing populist Swiss People’s
                Party (SVP) becoming the strongest political force in the country.
                :
                BSV (Bundesamt für Sozialversicherungen), 2015: Faktenblatt - Auswirkungen der Personenfreizügigkeit
                EU/EFTA          auf       Sozialversicherungen          und        Sozialhilfe, available       at:
                http://www.bsv.admin.ch/themen/internationales/aktuell/index.html?lang=de

                Health

Health Policy   Health care in Switzerland is said to be qualitatively excellent. A
Score: 9
                policymaking health insurance mandatory ensures that the total population is
                covered, but care is expensive. Cost efficiency is a potential problem, in
                particular with regard to the organization of hospitals. Life expectancy is very
                high, life expectancy at birth is 81 years for males and 85 years for females.
                As of 2014, a 65-year-old male could expect to live for another 19 years on
                average, while a woman of the same age could look forward to another 22
                years. This is about two years more than in Germany. Obviously, the health
                care system is important in this respect but is not the only explanatory
                variable; differences may also be due to the country’s socioeconomic
                resources, natural environment, or other variables.

                Health insurance is managed according to a very liberal formula. Premiums for
                health insurance do not depend on income, and premiums do not take into
                account the number of family members. Hence, insurance must be bought for
                each member of the family, although premiums are reduced for children. In
                recent years, this liberal model has been modified through the provision of
                subsidies for low-wage earners and their families. These subsidies vary by
                canton, and policy change is frequent. For example, the canton of Bern has
                reduced subsidies in recent years. In general, health care reforms have not
                been particularly successful in terms of improving efficiency or controlling the
                structural rise in health expenditures.

                Health care insurance is provided by a large number of competing mutual
                funds (non-profit insurance programs), all of which are required to offer the
                same benefits. Hence, there is no competition in the area of benefits, but only
                in the field of premiums, which is largely a function of administrative costs
                and membership structure. Considerable discussion has focused on whether
                this competitive market structure should be replaced by a single insurance
                company. In 2014, the people decided in a popular vote to retain present
                system.

                Even given these problems, the quality and inclusiveness of Swiss health care
                has shown itself to be outstanding, and there is no reason to expect any major
                change in this respect in the coming years.
SGI 2016 | 21                                                                  Switzerland Report

                Families

Family Policy   In international comparison, Swiss family policy does relatively little to enable
Score: 4
                women to enter the workforce. In a recent analysis examining the ability to
                reconcile work and family, looking at data from 2005, Switzerland scored
                lowest among 21 OECD nations. The new federal law providing subsidy
                payments to families, which took effect in January 2009, has done little to
                change the country’s ranking in international comparison; nor has it changed
                the fact of substantial cantonal variation, one of the most salient characteristics
                of Swiss family policy. The new federal law defines minimum child and
                education benefits, but cantons may add a variable amount to this basic federal
                benefit level.

                In general, Swiss family policy has a clearly conservative outlook with a
                strong liberal undertone. It is mildly supportive to the traditional family; there
                are some tax deductions and a period of parental leave offered to mothers (but
                not to fathers), as well as a very limited amount of child-care facilities. As is
                virtually always true in Switzerland, there are substantial cantonal variations.
                The canton of Ticino has a very generous family policy aimed at helping
                mothers to reconcile work and family; other cantons (and their municipalities)
                fail to offer any substantial help such as child-care facilities on a broad scale.
                Likewise, tax policies providing incentives either to stay at home or reenter the
                labor market vary from canton to canton. However, taking the median canton
                and municipality, the portrait of a liberal-conservative family policy applies.
                Policies tend to create incentives for young mothers to stay at home during the
                first years of their children’s lives. Afterward, mothers are provided with
                reasonable opportunity to find employment; however, these are in most cases
                part-time jobs. This allows mothers to care for their children, while also
                having some limited employment. Taking part-time jobs usually reduces the
                ability to have a sustained career as compared to the opportunities offered by
                full-time jobs. Hence, the system works in the sense that it mobilizes women
                within the labor market, but without giving them opportunities for income and
                career advancement equal to those afforded to men.

                In March 2013, Swiss citizens rejected a proposal that would have added an
                article on balancing work and family life to the constitution. The proposal
                would have obliged the federal government and cantons to provide child-care
                facilities in sufficient quantity to enable mothers to continue working if they
                desired to do so.
SGI 2016 | 22                                                                  Switzerland Report

                 Pensions

Pension Policy   The Swiss pension system is based on three pillars, each with its own logic of
Score: 10
                 financing and redistribution. The underlying concept is that pension income
                 should not fall below the subsistence level, and should provide 60% of average
                 pre-retirement income. The first pillar guarantees a basic income. The
                 minimum benefit level for a couple as of 2015 was CHF 28,200 (about
                 €23,500) per year, while the maximum benefit was CHF 42,300 (about
                 €35,250). Employers and employees finance this through contributions. It is a
                 pay-as-you-go system, and is highly redistributive, since the maximum benefit
                 level for couples (provided to high-income earners) is just 1.5 times that of the
                 minimum benefit level, while contributions are proportional to income.

                 The second pillar is a funded system financed through contributions by
                 employers and employees. Contributions and benefits are proportional to
                 income. Employees whose income from the first pillar already covers about
                 60% of their wage income are not entitled to this system. Many pension
                 programs, particularly in the public sector, are very generous, and provide
                 pension incomes (first and second pillars combined) that exceed 60% of
                 previous income.

                 The third pillar takes the form of personal tax-deductible savings of up to CHF
                 6,768 (about €5,640) per year. This system benefits high-income groups, since
                 they can afford to put aside these sums and have the highest returns on these
                 savings given the tax advantages.

                 Demographic changes will present major challenges to the first pillar over
                 time. Provided there is no major change in GDP or productivity growth rates,
                 the ability to sustain this pillar will be strained unless the average age of
                 retirement (currently 65 for men and 64 for women) is increased or benefit
                 levels fall. However, given the solid basis of the pension system overall,
                 Switzerland faces less pressure than many other European countries to adapt to
                 demographic change.

                 However, Switzerland has tried to modernize its system at a relatively early
                 stage. After several previous reform failures, the Social Democratic minister
                 for social policy embarked in 2013 on a strategy for achieving compromise
                 that has previously proved successful in other areas. This consists of
                 compensating those who are going to lose as a result of policy changes with
                 gains in other areas. This implies that the reform is necessarily a package of
                 policies. However, at the time of writing, this reform plan was in jeopardy. In
                 September 2015, the Council of States agreed on a compromise that was rather
                 close to the initial proposal. In all likelihood, this compromise will not be
SGI 2016 | 23                                                                        Switzerland Report

                     supported in upcoming National Council debates followiing the national
                     elections of October 2015, which delivered a slim majority of those parties
                     opposing the idea of a package where losers of the reform are substantially
                     compensated.

                     With regard to poverty prevention, the pension system is highly efficient.
                     Every citizen can claim additional payments if he or she is not entitled to the
                     first pillar’s minimum pension. The system as a whole has a high degree of
                     intergenerational equity, as it rests on three different pillars, and only the first
                     pillar is based on intergenerational payments.

                     Financial sustainability will be a potential problem over time, but remains
                     stronger than in comparable countries such as Germany.

                     Integration

Integration Policy   For many years, Swiss integration policy was predicated on the perception that
Score: 7
                     foreigners were “guest workers,” whose limited stay meant that broad efforts
                     to encourage integration were unnecessary. As many foreign workers gained
                     access to unlimited work permits between the mid-1970s and the mid-1990s,
                     the policy approach grew inappropriate over time. Accordingly, a number of
                     efforts to improve integration have been made, starting as early as
                     kindergarten. Nonetheless, integration policy cannot broadly be called a
                     success in Switzerland, particularly given the very high share of migrants in
                     the population (accounting for about one-quarter of the country’s residents).
                     Yet if the lack of a coherent federal integration policy is undisputable, this
                     does not mean that integration policy is failing as a whole. Many local
                     authorities are doing a good and sometimes innovative job of integration,
                     especially for second-generation migrants. According to OECD statistics,
                     second-generation migrants in Switzerland perform better in school and are
                     better integrated into the labor market than is the case in other European
                     countries.

                     This is not to say that foreigners – who are granted rights equal to natives with
                     the exception of political rights – have equal opportunities in all respects. If
                     immigrants’ unemployment rates and dependence on social aid is above the
                     national average, this is due to the fact that the share of low-skilled workers
                     with a correspondingly higher risk of unemployment is also above average
                     among immigrants. But the lack of a coherent integration policy may add to
                     the problems, and social discrimination is not limited to the labor market.
                     Within the housing market, for instance, some groups of immigrants may find
                     it comparatively difficult to rent apartments.
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