ECONOMIC FREEDOM NETWORK CONFERENCE

November 1 to 3, 2000

Liechtenstein

Liechtenstein - A Special Example of Economic
Freedom and a Free Market Economy?

Ambassador Dr. Hubert Büchel,
Director of the Office of National Economy, Vaduz

Ladies and Gentlemen

It gives me great pleasure to extend a warm welcome to you all. I am delighted that you are holding your conference here in Liechtenstein, and it is an honour for me to have the opportunity of giving you a brief overview of the economy of Liechtenstein.

I would like to explain our particular situation by comparing it with business. If you are running a company, it is of a certain size, it produces certain products, or it deals in certain goods for a certain customer base in certain markets. All these criteria are variable and, depending on business acumen, you discover the optimum size for these functions, as well as the best way to combine them.

Now take a small - a very small - country instead of a business, and consider how its management might appear from an economic point of view. As you will have guessed, that country is Liechtenstein, with its population of 33,000.

If we consider the wide range of state responsibilities in larger countries, this comparison instantly exposes a problem. In a country the size of ours, certain functions simply cannot be carried out, as they would not be economically viable.

In carrying out its tasks or in defining its performance, this small country can hardly rely on the benefits of mass production (economies of scale) or reaching economic minimum capacities or project sizes. Only a larger area or a larger population can achieve the scale of operations necessary for carrying out all the state functions and responsibilities.

So what is the way out of this dilemma? Firstly I can examine all the responsibilities of the state and establish which of them are really necessary. For example, I may be too small to defend myself militarily. If I am also lucky enough to find myself in a favourable geographical position between friendly and well disposed neighbours - Switzerland and Austria are of course neutral countries - then the decision is easy and I can save myself some of the state's expenditure.

Secondly I can examine those duties of the government which really are necessary from the most rational perspective. But this is not only a matter of cost, but of limited availability of personnel. The apparatus of state must be kept small; it is not viable to employ an army of specialists for all the many and varied situations. This means that every official has to be a jack of all trades, taking on as many different tasks as possible. Experts can still be contracted in - on a temporary basis - for genuinely specialised tasks.

The third step of course is to seek the co-operation of our neighbours. To some extent it is possible to benefit from spillovers from the services offered in surrounding countries. However, it would be detrimental to our own reputation, and in the long term put a strain on relationships, if we hitched a free ride every time. So it appears necessary to enter into agreements with neighbours that provide for financial recompense, but which - on the other hand - ensure legally secured access.

Thus, for the small country, the need, or even the compulsion for openness is demonstrated. We cannot endanger anyone, and neither are we in a position of power. So the small country becomes adaptable. Similarly, there can be no over-estimating oneself, wanting to control everything according to one's own ideas, or, as they say, trying to reinvent the wheel.

From an economic point of view, openness and having little power mean you must do without the politics of protectionism. In theory of course, an autarchic self-limitation would be conceivable, however only at the cost of limiting one's prosperity to the potential of the domestic market. Setting a goal of economic development demands increased openness, necessitates free markets and requires clear and internationally recognised legal standards for the exchange of goods.

The price of such policies is of course increased dependence through being tied in to the obligations of bilateral, international or multilateral contracts. This also means doing without elements of one's own sovereignty. One hazard of these policies of seeking support from other countries is of course that of a loss of independence and of sovereignty.

Liechtenstein has been in existence for 300 years, and has clearly shown it is capable of surviving, albeit with a bit of luck and God's grace. Liechtenstein can also serve as an illustration of some of my earlier statements: as an agriculturally oriented country, which Liechtenstein still was at the beginning of the 20th century, it was possible to feed only about 8000 inhabitants using the means of production then available. As a result, when the population exceeded this size, there were repeated waves of emigration.

Between 1852 and 1918 Liechtenstein was tied into a customs agreement with the Austro-Hungarian monarchy. At that time a few textile factories were founded by Swiss companies. Their sales territories in the Habsburg monarchy were lost at the end of the First World War. At the same time the Krone currency and our minimal reserves were devalued.

This was the moment to turn towards our neighbour in the west, Switzerland, which drew Liechtenstein, their small neighbour fallen on hard times, under the wing of the customs union agreement which came into force in 1924 and is still valid - and important - today. Liechtenstein also adopted the Swiss franc as its currency. This emergency situation resulted in all manner of discussions on ways in which income could be earned for the national budget. One idea was to offer favourable company formation and tax regime terms for the foundation of registered businesses that had no activities in Liechtenstein.

A devastating flood of the Rhine in the late 1920s, together with the economic crisis that followed shortly after was no foundation for sustainable economic development. Only after the Second World War, from which Liechtenstein was mercifully spared, was there a real upturn, on an industrial basis. In the 1940s several industrial concerns were founded, some by individual Liechtenstein citizens and some from abroad. In 1950 the secondary sector of the economy accounted for over half of the workforce, whilst the tertiary sector employed about a quarter and the primary sector was still over 10%. As I said, that was 1950. So how do things look today?

If you look under "Liechtenstein" in one of the large German encyclopaedias, you will find the following details under the heading of "Economy": "Milk production and animal husbandry are more important than agriculture. Metal working, equipment manufacturing and the textile industry have close links with Switzerland. The sale of postage stamps and tourism are important."

I wonder what your first impressions were when you arrived here? The outward appearance of our country may well have matched this picture of a landscape mainly dedicated to agriculture and tourism. Even the strange business of the national revenue reputedly being based mainly on the sale of postage stamps, may sound oddly familiar. But both the details and especially the overall image are incorrect, totally incorrect.

Nowadays only 1% of the workforce is engaged in farming and about 3% in tourism. The textile industry has virtually died out and the close relationship with Switzerland is put into perspective by the much more important ties with the global economy. Stamps are now of only slight importance to the national budget.

If we were to sum up the economy of Liechtenstein today, in a few words, it would run something like this: "A high-tech, industrialised country with a strong financial services sector and a national budget that is balanced in the normal way."

From 1950 to the present day the number of jobs has increased by 300% - it has quadrupled. There are 25,000 jobs in Liechtenstein, a country with a population of 33,000. 40% of the workforce lives in neighbouring countries, and commutes cross-border. The proportion of foreign nationals in the population is 35%. This foreign labour was needed so it was brought to Liechtenstein. In total, the proportion of foreign workers in the workforce amounts to over 60%, so the Liechtenstein nationals are in a minority of less than 40%.

In the 1990s alone, when Europe saw high unemployment, the number of jobs in Liechtenstein grew by 25%. The unemployment rate has always remained below 2%, and it is currently 1.1%. 45% of the workforce is still in industry and manufacturing; the service sector accounts for 54%, and the primary sector the remaining 1%. A good mix of sectors and a pattern of wide diversification within sectors are worth noting.

The export industry is the largest single element in the economy. For example, the manufacturing programme includes instrumentation, electronic control devices, precision tools, vacuum and heating technology, lighting technology, dentistry products, false teeth, pharmaceutical preparations, foodstuffs etc. The per capita value of exports is about 10 times the corresponding value for Germany, Austria or Switzerland. The total value of exports increased by 77% during the 1990s. The main consumers are the USA followed by Germany, Switzerland, France and Italy. Taiwan and Hong Kong are also amongst the 10 most important buying nations.

As the possibilities for growth in the domestic market are limited, industry in Liechtenstein employs three times as many people in its offices abroad as it employs in Liechtenstein.

At first glance, conditions for our local industry do not appear very promising. There are no domestic raw materials, and very little energy production. Land prices are high and the employment market exhausted. We have high wages, limited opportunities for growth, and we lack policies for economic promotion and development or other forms of state support.

So what is the reason for the high level of Liechtenstein's industry and its international success? In the first place, we shall see that the disadvantages I have mentioned, whilst they might appear burdensome at the micro-economic level, do at the macro-economic effects look very different. The lack of raw materials has prevented the development of a basic industry. The scarcity of both labour and land, combined with their high price levels and the absence of state support, make it clear to every potential entrepreneur that he can only operate successfully here if he, his business and his product prove themselves in the market place, and if he can manufacture products or offer services which will find buyers despite being expensive.

In this way, there is to some extent an automatic concentration on high value added sectors, without special national planning and support. If your prices are high, you can only succeed in the market place if your quality is excellent and your service outstanding. It goes without saying that this situation requires special research efforts. Looking at it another way, the economic climate described, when accompanied by the availability of adequate capital at favourable interest rates, leads to a capital-intensive economy. The necessary labour can be sought in the European market. But as there are restrictions governing the establishment of one's residence in Liechtenstein and the employer must consider carefully the appointment of staff, thus he will tend to seek highly qualified employees.

All in all this produces exactly the effect I suggested earlier: there is a concentration of high tech, capital-intensive and research-intensive manufacturing. Of course it should be mentioned that a considerable number of smaller and medium sized businesses are to be found alongside the export industry - in the role of suppliers. They also offer business to business services, or particularly in the construction industry and associated industries, profit from the high level of investment.

The favourable climate for investment in Liechtenstein is clearly not just based on the characteristics and mechanisms described already. Special characteristics of the location include the stable legal, social and economic order, a fundamentally liberal attitude which approves of entrepreneurial freedom and economic success, a co-operative social partnership (there has never been a strike in Liechtenstein), a well educated and hardworking population, long working hours, a solid finance policy for the public budgets, little bureaucracy, low taxes with special advantages for holding companies and foundations, confidential banking with the objective of safeguarding the privacy of the investor, the currency and customs union with Switzerland, membership of the EEA (European Economic Area) etc. These are the main factors in a favourable climate for entrepreneurs.

Of course these location factors are also valid - in part quite especially so - for the service sector, which I would like to go into in more detail. The most important parts of this sector are financial services, with 16 banks, 13 insurance companies and some 40 investment companies and investment funds. Five years ago there were still only five banks and one investment fund in Liechtenstein. Considerable expansion has taken place because, with membership of the EEA, European markets have opened up, and also because the Swiss market is open to Liechtenstein. It is also because the legal framework for business has consciously been kept advantageous, but of course linked to conditions that are intended to ensure both high quality and stable development.

The instruments for this are clear conditions relating to the foundation of businesses in these sectors, as well as effective, permanent supervision. Quality assurance in the financial sector means that not every type of business is regarded as acceptable. Quite unequivocally, we have no interest at all in the proceeds of crime. Any other attitude would be most harmful to the maintenance of our finance sector's good reputation and its sustainable further development. That is why the European regulations on combating money laundering have been implemented. The due diligence act makes everyone employed in the finance sector responsible for establishing the identity of their client or the ultimate beneficial owner of the monies deposited. Finally, there are no anonymous accounts: banking secrecy is not valid in every situation, but may be lifted for the judge during a prosecution.

Nonetheless Liechtenstein has been criticised recently in these areas and blacklisted. That has demonstrated to us that despite the basically high level of legal standards, further regulation is desirable, bearing in mind the volume of money value, which is high for the size of the country. It has also become clear to us that enforcement and various processes could be improved. Here to some extent, the highly pragmatic and unbureaucratic attitude of the authorities, which I described earlier works to our disadvantage. But now, when organisational structures and manning levels such as are found in other countries are often asked of us, from our point of view questions may also be raised, about whether it is only a matter of examining the methods employed, or not actually about achieving the desired objectives efficiently, i.e. preventing the abuse of the financial system. There is perhaps a suspicion that it is not a matter of ethical principles, but simply competitiveness and preventing competition between the tax systems. But we cannot escape the fact that on its own our country has no chance of enforcing its view of things purely from a position of power.

I would also like to emphasise that in this situation the broad diversification of our economy represents an important strength. The financial services sector is indeed important, yet it accounts for only 14% of jobs and 28% of GDP. The overwhelming part of the economy is made up of industry, manufacturing and other service sectors.

Before I come to a conclusion I would like round off my discussion by mentioning a few other pieces of statistical information. The size of the public budgets, national and community, representing the two levels of government, amounts to SFr. 850 million (560 million Euro). The total value of exports amounts to SFr. 4 thousand million (2600 million Euro.) The total balance of the banks reaches a value of SFr. 35 thousand million (23 thousand million Euro) and the clients' funds managed by the banks are worth SFr. 110 thousand million (73 thousand million Euro). We are conscious that simply comparing these values may be misleading. Nevertheless the comparison between these volumes does show us that the country, although it is not impecunious, does lack the financial muscle to support the private economy or even provide assurances regarding inappropriate developments in individual businesses.

Liechtenstein's state apparatus spends its money mainly in the areas of social welfare, education, transport and public security. This picture does not differ greatly from that of larger regions, with perhaps one exception: there are no outgoings on servicing debt. On the revenue side the greater part is tax revenues, (3/4 of receipts), then charges and - this is an unusual feature - investment income. These last have their source in the fact that the country has invested its budget surplus at interest, and as the majority share holder of the Landesbank (National Bank) receives dividend payments. There is no public debt.

Liechtenstein safeguards its foreign policy in particular through membership of international organisations. It is a member of the UNO, the WTO, the Council of Europe and the EEA, to name just the most important, in addition to the agreements with Switzerland. There are diplomatic missions at the headquarters of these organisations, whilst elsewhere we are represented abroad by the Swiss diplomatic branches.

Now, if I were to paint you a pretty picture of little Liechtenstein that emphasised the attractive side, I should not forget to admit that naturally we are not immune to many of the problems which afflict larger countries. The high standard of living and the high level of economic performance required also have their downside. Likewise, the life of an official with responsibility for the country's economy is not a bed of roses. But I have said enough.

Now we have come full circle. For politics as a whole, and for economic policy in particular, it is good to concentrate on what is important: support from partners and inclusion in international agreements and internationally valid legal standards. Like a small business, which wishes to succeed in the market, Liechtenstein seeks out niches for itself, so that it can continue to exist as a sovereign state, in harmony with the international community, and with good prospects for the future. Its small size offers advantages: clarity of overview, flexibility, speed because of the short distances, and recognition by its own citizens because of its prompt adaptation to current preferences.

A famous economist once coined the phrase "Small is beautiful". Does this apply to Liechtenstein? I hope you are now in a position to decide for yourself. Thank you for your attention.

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