If you really want to find the New Economy – and the underestimation of productivity gains – look no further than Switzerland.
Greetings from Davos. I am basking in the sun on the terrace of the Schatzalp, the alpine meadow which overlooks the conference centre. The Americans are in town. Bill Clinton and his entourage have just passed through.
The hotels are filled missionaries of the New Economy, and every session with an ‘e’ in the title is full to overflowing. Larry Summers, the US Treasury Secretary, has been here to explain the American miracle. If we would only listen and follow, we too could enjoy high productivity, low inflation, and falling unemployment. Christian Sautter, the French finance minister looked sheepish as he shared the platform with Mr Summers, and assured his audience that France.com was on its way. Most of the transatlantic visitors are too polite to address their patronising messages directly to their Swiss hosts.
But when the International Monetary Fund came to Switzerland last year its officials showed no similar restraint. The Swiss were no doubt gratified that the IMF “commended the authorities for their successful macroeconomic management that had contributed to Switzerland’s improved economic performance since 1997”. However this encouragement was only to mitigate their strictures on what had gone before. “The long recession during the first half of the 1990’s came on the heels of an already sub-par long run GDP growth performance since the mid 1970’s.” The IMF went on to prescribe the now familiar nostrums: “Directors emphasised the need for more vigorous implementation of structural reforms to improve Switzerland’s long-term growth performance”.
But when I used the advanced technology available at Davos to look up the facts, it did not seem that the Swiss have anything to apologise for. When the World Economic Forum first met in 1970, dollar output per head in the United States was almost 50% higher than in Switzerland; the same comparison in 1999 shows Switzerland 15% ahead. Last year Alan Greenspan, chairman of the US Federal Reserve, gave the United States the twin blessings of low inflation and low unemployment. But the Swiss National Bank delivered even lower inflation and even lower unemployment than the Fed. As it has done in 24 of the 30 years that the World Economic Forum has assembled. When I recounted this to an American visitor in one of the Davos taverns, he complained loudly about the price of his cup of coffee. And he had a point.
The high cost of property and services in Switzerland means that the real incomes of the Swiss are not as high as their productivity would suggest. On the other hand, Switzerland has large and increasing foreign assets, while the United States has large and increasing foreign debts. And Switzerland seems to do pretty well on those components of the standard of living that the national income statistics don’t pick up.
There are parts of the United States as beautiful as the surroundings of Davos, but they are not the parts of the United States in which most of the population lives. That is one of the reasons why Klaus Schwab finds it easy to attract so many American visitors here. Most Swiss enjoy an aspect over clean lakes and clear mountains, and have ready access to an enviable transport network and state school system.
If you focus on living standards rather than productivity, the story is less marked but essentially the same. There was once a gap between Switzerland and the United States but Switzerland has caught up.
How are these economic statistics to be reconciled? If Switzerland has experienced slower growth than the United States over the last thirty years – and the IMF correctly reports the Swiss government’s own figures – how can it be that Switzerland’s economy has overtaken that of the United States in precisely the same time frame?
The answer to this question is interesting and unexpected. One of the claims of the New Economy geeks is that conventional measures of economic growth don’t ‘get it’. We fail to record properly the impact of new technology in creating new goods and improving the quality of old ones. And there does seem to be evidence that this is true – for Switzerland. Whatever Harry Lime may have thought, Switzerland no longer rotates with the cuckoo clock.
While tourism and financial services remain important, the modern Swiss economy is based on speciality chemicals and precision machinery. These account for about 60% of Swiss exports and almost a quarter of total output. The value of these sales in global markets has increased very rapidly since 1970. The variety and quality of Swiss goods – measured by the acid test of what international customers are willing to pay – has been steadily improving. And the output statistics to which the IMF refer essentially omit this improvement in the terms of trade. The price insensitive demand for technology-based Swiss products explains why Switzerland, unlike the United States, runs a large trade surplus. And why the value of Swiss output, and the real incomes of Swiss people, have moved ahead of the United States.
The New Economy is here, in the canton of Graubunden. Not only in the seminar rooms of the Davos Congress Centre. But in the factories the Forum participants barely noticed as their limousines sped by on the way from Zurich airport.
There the knowledge economy is already being incorporated into products for which there are paying customers.