By Eben McDonald, Contrepoints
As Luxembourg, Switzerland and Ireland show, it is not necessarily social spending and redistribution that raises the level of the poorest.
The Social Democrats often praise the Nordic countries as examples of the success of progressive taxes, generous welfare states and powerful unions.
Free trade advocates responded that not only did these countries get richer long before these policies were put in place, but they also have as much regulatory agility as the United States, according to World Bank data.
However, we should also turn our eyes to those countries which have adopted what is called neoliberalism as a means of enriching themselves and reducing poverty. It turns out that this strategy has proved its worth and that some countries in Europe have living standards just as high, if not higher, than those of the Scandinavian countries. Here we will look at three examples.
LUXEMBOURG, SWITZERLAND AND IRELAND
The World Economic Forum is famous for its willingness to ‘reset’ capitalism so that it can “steer the market towards more equitable outcomes, taking into account environmental and social risks and opportunities and not just focusing on short-term financial profits ”.
However, each year the World Economic Forum presents the Global Competitiveness Index. The aim is to rank the most economically developed and most productive countries on the planet in terms of infrastructure, education and public health.
This composite index has twelve main indicators: the two most relevant for our purposes are the first and seventh indicators, “institutions” and “labor market efficiency”.
Within each indicator there are smaller sections. Institutions include factors such as ‘property rights’, ‘weight of government regulation’ and ‘waste of public spending’, while labor market efficiency includes “the effect of taxation on incentives to work”.
Data from the World Economic Forum can easily be used to demonstrate that the world’s most prosperous countries are market-oriented and business-friendly. Here, our example is
According to the Pew Research Center, a low-income person in Luxembourg is richer than a low-income person in any other Western country, including the Nordic countries.
The country can boast of having the second richest middle class in the world and the highest median income in the world. Unfortunately, the Pew Research Center does not set the limits for the income percentile for each category. To complete our comments, Eurostat information shows that in 2019, the poorest 10% in Luxembourg were the fourth richest in Europe.
How to explain this phenomenon ? Does the Luxembourg government devote considerable sums to social assistance?
While social spending is slightly above the OECD average, at 21.6% of GDP, Luxembourg remains below many of its neighbors. In fact, tax deductions represent 33.8% of the Luxembourg economy, which is much lower than the average; many even consider Luxembourg to be a tax haven. Thanks to favorable tax rates on property, companies and capital, Luxembourg ranks fifth in the tax competitiveness index.
This is where the data from the World Economic Forum makes sense. Admittedly, Luxembourg is poorly ranked for the ease of starting a business.
However, it ranks:
* Ninth for the weight of government regulation on business, that is, the degree of freedom of a business from bureaucracy;
* In fifth place for property rights;
* Third for the protection of intellectual property;
* In tenth place for the effects of taxation on incentives to work;
* Eighth for the effects of taxation on incentives to invest;
* Ranked twelfth for total taxes as a percentage of profits.
According to these criteria, Luxembourg is a true market economy. It has a long history of embracing economic freedom. Between 1970 and 2001, it consistently held one of the top ten spots on the Fraser Institute’s Index of Economic Freedom.
Ludwig von Mises taught us that the marginal productivity of labor, and therefore wages, are determined by the ease with which companies can invest and accumulate capital, without red tape, without taxes, without bureaucracy, without public debt and without inflation. Luxembourg’s business-friendly environment explains why the country has the most productive workers in the world. Therefore, by international standards the poor in Luxembourg have a very high standard of living.
Switzerland ranks with Luxembourg at the top of the World Economic Forum indicator ranking.
It is classified:
* Third for property rights;
* Twelfth for the weight of government regulation on businesses;
* Tenth for the effects of taxation on work incentives (it ranks very well for the rest of the parameters I used. I am not selecting data);
* Fourth, just ahead of Luxembourg, on the tax competitiveness index.
The country is also known for its fiscal discipline. In 2001, 85% of Swiss voters voted in favor of a debt brake that essentially forces the government to spend according to revenue growth. Since the law came into force in 2003, the public debt of the Swiss economy has fallen from 60% of GDP to 41% today.
Switzerland’s emphasis on direct democracy means that government money must be spent efficiently and prudently. One study found that direct democratization in Swiss cantons (the equivalent of states or congressional districts) reduced social spending by an average of 19%. Swiss voters clearly have a level of pragmatism that most politicians in other countries would hate.
For example, in a referendum in 2012, two-thirds of voters rejected a proposal to extend the country’s compulsory annual leave, which “could have added 6 billion Swiss francs (5 billion euros, 6.52 billion dollars) to the labor costs of employers, according to the Swiss Union of Arts and Crafts (USAM), which represents approximately 300,000 companies”.
Switzerland’s overall tax levy (28.5% of GDP) is one of the lowest in the OECD, and its social spending is 16.7%, well below the level of its partners.
Yet, far from what the socialist economic model would have predicted, the poorest 10% in Switzerland are the third richest in Europe.
Just like in Luxembourg, labor productivity in Switzerland is incredibly high, the third highest in the world. Taxes and red tape are low, and since Switzerland is the most open country in the world, foreign capital, technology and investment have easy access to Swiss markets.
However, the Swiss economy has stagnated in recent years. In 2020, unemployment reached an all-time high – an unbearable rate of 4.85%. This clearly suggests that low taxes and flexible labor market regulation can mitigate the impact of economic recession / stagnation.
Ireland has not always been an enthusiastic market economy. In 1970, in the grip of deep political and religious strife, Ireland had a score of 6.55 on the Fraser Institute’s Economic Freedom Index, which placed it in roughly nineteenth place. For example, in 1980 Ireland’s per capita income was lower than that of any Western European country worthy of the name; its unemployment rate was over 12%; Inflation was running at 20%.
However, the government began to reform: taxes and spending were cut, and since 1980 Ireland’s economic freedom score has increased by 22%.
Today Ireland is famous for its corporate tax rate of 12.5% and its attractiveness to businesses. Taxes account for just 22.7% of the Irish economy, and social spending a tiny 13.4%. Although below the other two countries we looked at, Ireland is at the top of the basket in terms of property rights protection, regulatory flexibility and profit tax rates.
Many argue that Ireland’s prosperity is due only to large social transfers from the European Union. However, a study indicates that this position is wrong.
First, it is pointed out that these transfers subsidized agricultural businesses. While they increased the incomes of rural communities, they discouraged migration to urban areas, where these people would inevitably have been more productive. Transfers have therefore been an obstacle, not an asset, for economic growth.
Second, the study points out that while growth rates in Ireland have increased, EU subsidies have actually declined: Ireland started receiving subsidies after joining the European community in 1973. Net revenue from the EU averaged 3% of GDP during the period of rapid growth (1995-2000), but during the period of low growth (1973-1986), they represented on average 4% of GDP. In absolute terms, net receipts were at about the same level in 2001 as in 1985. Throughout the 1990s, Ireland’s payments to the EU budget increased steadily, from 359 million euros in 1990 to 1527 million euros in 2000. Yet in 2000, receipts from the EU were 2488 million euros, lower than the level of 2798 million euros in 1991.
Third, the study indicates that if subsidies could explain Ireland’s strong growth since the 1990s, one would expect other countries that also receive large payments from the EU to show high levels of growth and similar prosperity.
However, this is simply not the case:
The EU’s structural and cohesion funds accounted for 4% of Greek GDP, 2.3% of Spanish GDP and 3.8% of Portuguese GDP. None of these countries has achieved a growth rate close to that of the Irish economy. Spain recorded an average GDP growth of 2.5%, while Portugal recorded an average growth of 2.6% and Greece an average growth of only 2.2% between 1990 and 2000.
So it was free markets, not EU investments, that boosted Ireland’s prosperity.
By American standards, Ireland remains a relatively poor country. However, since economic liberalization, the country has made tremendous progress in reducing poverty and increasing income through economic growth. For example, a study found that absolute poverty fell from 50% in 1993 to 20% in 2000 (a greater reduction than in all Nordic countries).
Reducing the poverty rate by 60% in just seven years is truly impressive. According to the Pew Research Center, between 1990 and 2010, incomes in the lower income category increased by 73% (overall, the median income increased by 70%). Eurostat data also corroborate this, as since 2011 alone, the incomes of the poorest 10% of Irish people have increased by a third.
Progressives use the Nordic countries as examples of successful socialist systems. While this is simply not the case, supporters of free trade should use these three countries – Luxembourg, Switzerland and Ireland – to show that it is not necessarily social spending and redistribution that is raising the bar of the poorest. Rather, it is economic growth, productivity gains, entrepreneurship and property rights that make the poorest among us richer.
Contrepoints is a French online journal that covers current affairs from a liberal perspective.