🇨🇭 🇱🇺 2 Richest Countries in the World (per capita) | Switzerland & Luxembourg

Which counties have the highest GDP per capita in the world? What are the causes of this wealth?

▪ Introduction

GDP per capita is commonly used as a measure of welfare. In 2021, the countries with the highest GDP per capita were: Luxembourg, Ireland and Switzerland. However, it should be remembered that GDP per capita does not show the actual distribution of generated income (it is calculated for the average citizen of a given country). The standard of living is influenced by far more factors than the production volume itself and the rate of its increase. With this in mind, in today’s episode we will analyze what influences the economic attractiveness of two selected countries – Switzerland and Luxembourg.

▪ The economy of Switzerland

One of the richest and most developed countries in the world is Switzerland. One of the causes of Switzerland’s wealth is its economic and political stability. Switzerland is a country that prides itself on neutrality1, with a GDP per capita among the highest in the world. In 2021, it was $ 86.602 per person2. Inflation in Switzerland is 1.9%, while in the euro area it is 5.9%. in the USA, 7.9 percent3. Switzerland enjoys the status of an “economically free” country continuously since 2010. Openness to foreign business and investment stimulates the dynamic and crisis-resistant economy of Switzerland. In the ranking of economic freedom 2022, i.e. according to the Index of Economic Freedom – Switzerland took second place in the world. It is a measure that reflects the restrictive nature of regulations and the scope of the use of coercion by the apparatus of power in the economic sphere in various countries of the world, published by The Wall Street Journal and the Heritage Foundation4. Switzerland is a country with a low unemployment rate. In January 2022, the unemployment rate was 2.40%, which placed it in the third place in the world of countries with the lowest level of unemployment5. The assessment of the level of corruption is also positive. In the corruption perception ranking in 2021, Switzerland scored 846, placing it seventh in the world7. What else, apart from the presented statistical data, showing the current state of the Swiss economy, proves its economic attractiveness?

Cantonal Autonomy and Tax Competition. Switzerland consists of 26 cantons, i.e. various regions with high independence and powers in tax, educational, legal and economic policy. The government consists of only seven ministers who are delegated by the four largest parliamentary parties, representing various, often contradictory political programs8. An attractive tax system is associated with cantonal autonomy. It reflects the different political priorities of cantonal governments, the different preferences of residents, and the recognition that tax competition plays a positive role in keeping tax rates and public spending under control. The tax burden and public spending in each canton are decided by voters, the parliament and the government. Small-scale tax competition makes it possible to compare government performance. Residents can evaluate the policy outcomes in their jurisdiction compared to others. The closeness of political structures also allows for greater civic control, and tax competition improves the quality of political decision making. Due to the existence of tax competition, individuals and enterprises can freely choose their location, and the administration and politicians are forced to offer an attractive ratio of the quality of public services to the lowest possible tax burden9. The Canton of Zug offers foreign investors the lowest fiscal burden in Switzerland. Thanks to its liberal reforms, it achieved enormous success. Interestingly, from 2021, taxes and administrative fees in the canton can be paid using the Bitcoin and Ether cryptocurrencies. Additionally, to attract investors, Canton of Zug offers cryptocurrency startups a tax rate of 12%10.

Highly developed service sector. The structure of the Swiss national income is as follows: services – 73.7%, industry – 25.6%, agriculture – 0.7%. The main areas of the economy include microtechnology, advanced technology, biotechnology, pharmaceuticals, as well as banking and insurance. The service sector employs the largest number of people. Most of the people working in Switzerland are employed in small and medium-sized enterprises, which play a very important role in the Swiss economy11.

Developed banking infrastructure. The Swiss economy is dependent on exports and the banking and insurance sector. United Bank of Switzerland (UBS) is the leading bank in Switzerland. It is the largest and one of the best banks in Switzerland. The bank is present in almost all major financial centers around the world. The Swiss banking system administers over half of the world’s private deposits, thanks to a specifically practiced banking secrecy (tax offenses are treated only as an administrative and not a criminal offense). It is worth emphasizing that Switzerland is gradually increasing the scope of interbank information exchange and restricting the free flow of untaxed money12.

Innovation and Education. Year by year, Switzerland is increasing its level of innovation in all categories, providing an extremely stable political and business environment. In the Global Innovation Index 2021, Switzerland ranks first13. Switzerland’s economy is based on a highly skilled workforce. It is a country that attracts the brightest people from all over the world and has some of the most respected universities in Europe. Their top two institutions (EPFL and ETH Zurich14) consistently rank in the top 20 in several world university rankings15.

▪ The economy of Luxembourg

Another country that is characterized by economic and political stability is Luxembourg. Despite its small area and population, Luxembourg is one of the richest countries in the world in terms of GDP per capita. The country is recording a steady increase in GDP per capita. In 2021, it amounted to as much as $ 136,606 per person16. Inflation in Luxembourg is higher than in Switzerland, amounting to 6.1%. in 202217. In the ranking of economic freedom 2022, i.e. according to the Index of Economic Freedom – Luxembourg came fourth in the world18. In April 2022, the unemployment rate in Luxembourg was 4.7%, which placed the country in tenth place according to the adopted order of countries with the lowest unemployment rate in the European Union19. In the corruption perception ranking in 2021, Luxembourg scored 81, placing it ninth in the world20. What else, apart from the presented statistical data, showing the current state of Luxembourg’s economy, proves its economic attractiveness?

The financial center of the world and a competitive tax system. The Grand Duchy of Luxembourg, which is located in the heart of Europe, is the European center of investment funds and wealth management. It is also an important financial center and one of the major players in the insurance and reinsurance markets. Luxembourg insurance companies specialize in life insurance linked to investment funds. In Luxembourg, banking activities are conducted by almost all global banks in the world. The country’s financial importance lies in the highly competitive Luxembourg tax system. The basic VAT rate is 15%. and as professor Sleszynska points out, it would probably be even lower, if the EU regulations did not impose this minimum. Luxembourg companies pay a maximum of 24.94% of tax by way of tax. revenues, including 17% corporate tax, municipal business tax in the amount of 6.75 percent. and 1.19% contribution to the employment fund21.

Highly developed service sector and foreign trade.

The most important sectors of the Luxembourg economy in 2020 were: financial and insurance activities (25.1%), wholesale and retail trade, transport, accommodation and catering services (14.9%), public administration, defense, education, health care and welfare (17.5%). Moreover, it is worth noting that Luxembourg has always played a pioneering role in the European media sector. Two media and communication giants were born and continue to develop their activities here: RTL Group and SES. Around these two pillars, numerous other companies operating in the fields related to the media and information and communication technologies have gradually sprung up. Trade with other EU countries accounts for 80% of Luxembourg’s exports (28% to Germany, 16% to France and 12% to Belgium). Exports to the United States and the United Kingdom are 3% each. As for imports, 89% come from EU Member States (34% from Belgium, 27% from Germany and 11% from France). Imports from the United States are 3% and imports from Japan are 2%22.

Innovation and education. One of the factors determining the improvement of the innovative capacity of the Luxembourg national economy is ensuring the dynamism of the scientific community. The country boasts one of the highest concentration levels of public and private research institutes in Europe. When it comes to higher education, people from nearly 120 countries study at the University of Luxembourg, making it one of the most international academic centers in Europe. The world innovations developed in Luxembourg include, among others: flooring material in railway carriages, Luxembourg’s contribution to the creation of the highest tower in the world – Burj Khalifa tower, Freedom Tower – based on steel giant profiles produced in Luxembourg, satellite pioneers from Luxembourg, the first a polar station with zero emissions of harmful substances for the environment, or innovative technologies for the production of tires23.

A comprehensive and efficient social security system. The social security system in Luxembourg is not a cause of wealth. It is, however, an example of the effective spending of this wealth. In 2020, Luxembourg spent the equivalent of 20.6% of GDP on social spending. In the European Union countries, France spends the most on social spending, at 27.3% of GDP, and the least – Ireland, ie 10.2%. The average of the European Union countries is 22% of GDP. Luxembourg is slightly below this average. So the point is not even that Luxembourg spends less than others on welfare, but that it spends wisely. Luxembourg’s social security system is considered very efficient thanks to proper coordination. In the area of welfare, there are institutions that are financially independent and managed by social partners. Employers and employees are equally represented. Various groups of self-employed are also represented. The institutions are subject to statutory supervision exercised by the general inspection of social security, as well as hierarchical control exercised by the competent minister.
The high level of GDP per capita is a factor facilitating the financing of, among others, the pension system. There are relatively high labor costs in Luxembourg, which translate into high retirement and disability pensions. The pension system in Luxembourg is an efficient solution that secures the financial needs of elderly people at a very high level.
A pro-family fiscal policy is carried out at a high level, covering various types of family allowances, such as childbirth allowance, maternity and paternity leave, adoption leave and parental leave; financial assistance in the field of childcare; aid for education, etc.
Healthcare, which provides primary care, is also of a high standard24.

▪ Summary

To sum up, it can be said that Switzerland and Luxembourg have made their competitive advantage out of a favorable business climate. They want to attract as many quality jobs as possible, therefore they try to compete with low taxes and effective budget spending. The strength in these countries is also the education itself and the high level of innovation.

Dr Justyna Ziobrowska

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