Are the Irish richer than the Swiss?

Meet the Celtic Tiger. www.whm.org

If the OECD is to be believed, Ireland has overtaken Switzerland in terms of economic "wealth" – pushing the once-mighty Swiss into fifth place worldwide.

But Ulrich Kohli, a member of the governing board of the Swiss National Bank, told a conference in Zurich that a closer look at the figures made him “rather sceptical”.

The OECD figures, published in January based on data from 2002, have fanned the flames of the already lively debate about Switzerland’s economic “growth deficit”.

Kohli questioned whether gross domestic product (GDP) was the most appropriate measure of national income, particularly in the case of Switzerland.

And he said real annual economic growth in recent decades had probably been one to 1.5 per cent higher than the GDP figures suggested – due in large part to the Swiss economy’s dependence on exports.

Kohli conceded that growth was still sluggish, but said: “It is probably only half as bad as it looks.”

Better measure

In Kohli’s view, gross national product (GNP), which includes net income earned abroad, would be a better measure: in Switzerland GNP exceeds GDP by as much as eight per cent.

Changing the benchmark calculation would also place Switzerland comfortably above Ireland in terms of national income per capita.

Irish GNP in 2002 was about 21 per cent lower than its GDP – and the real figure for Swiss national income would therefore exceed the Irish figure by about 30 per cent.

As Kohli wryly observed, while the difference may seem technical, it is “hardly trivial”.

Another factor that may have pushed up Ireland’s “income” is transfer pricing, as multinationals have an incentive to overstate profits earned in low-tax countries (and vice versa).

Kohli says another “distorting factor” is the use of so-called purchasing power parity (PPP) exchange rates, in place of market exchange rates.

Distorting

He says PPP rates attempt to compare the prices of both traded and non-traded goods and services, despite the fact that the latter are “country-specific” and therefore “essentially incomparable”.

“How can one compare the rental prices of two apartments – one in Zurich and one in Dublin? The size might be similar, but differences in location, view, setting, equipment and comfort are almost irreconcilable.”

Even so, direct comparisons of tradable goods suggest that Irish prices are not significantly lower.

Kohli commented: “Irish people themselves do not feel that they live in a low-price country, as the mere existence of the popular Internet site www.ripoffireland.org suggests.”

The quality of public services – i.e. education, health care, transport infrastructure – also has a major impact on overall standard of living, but is not reflected in the national accounts.

Growth paradox

Looking at the wider picture, Kohli highlighted Switzerland’s “growth paradox”.

Over the past 25 years, Switzerland has come bottom of the OECD economic league table, with a real average annual growth rate of about 1.5 per cent.

However, other studies show that Switzerland also had the second lowest per capita average growth rate of 12 European countries from 1880 through to 1995.

As Kohli remarks, this is a puzzle: “19th century Switzerland was poor by European standards – [so] how has it managed to become one of the continent’s richest countries?”

Part of the answer could be that official figures not only underestimate real national income – they also underestimate annual economic growth.

For example, Switzerland’s terms of trade – the price of exports relative to imports – have increased by about 35 per cent over the past two decades.

However these improvements – just as real as the economic benefits of technological progress – are ignored by GDP accounting, which treats them as “price effects”.

Another factor underestimated – though difficult to measure – is the real economic value added by the large Swiss financial services sector.

Taken together with differences in the annual growth rate of GDP and GNP, these and other factors probably account for about one to 1.5 per cent of annual growth “going missing”.

Prices and wages

Does all this mean the Swiss have nothing to worry about? Kohli certainly doesn’t go that far.

Even if all his sums add up, distorted measurements still only account for half the picture.

While high Swiss prices partly reflect the high wages – and productivity – of its workers, they are also partly the result of “lack of competition, rigidities, administrative hurdles and inefficiencies”.

And the SNB economist concludes: “If current trends persist, Ireland will eventually pass us.”

swissinfo, Chris Lewis in Zurich

Key facts

The conference – Growth Deficit Syndrome: Differences in Diagnosis and Therapy, was organised by leading think-thank Avenir Suisse.
Issues discussed ranged from how to measure growth and income to how to interpret the results.
There was general agreement that, measurement anomalies aside, Switzerland needs more growth to stimulate employment.

In brief

Kohli says the economy has probably grown by about twice as much as the official figures show for the past few decades.

GDP and related economic measurement conventions tend to understate Swiss income and growth – in particular, gains from trade.

However, Kohli says measurement anomalies should not hide the real need for economic reforms.