Development Policies (cross-country case report)

1.

Development Policies
(cross-country case
report)
How Did Austria (Nearly) Catch Up with
Switzerland?

2.

Plan:
◦ General comparison
◦ GDP and Comparative Performance
◦ Causes of Divergence
◦ Fiscal Policy and Monetary Issues
◦ EU Influence
◦ Key Takeaways
◦ Lessons Learned

3.

Switzerland
◦ Geographical location: Both Austria and
Switzerland are located in Central Europe.
◦ Total surface area: Both countries are relatively
small in size.
◦ Natural conditions: Both countries share similar
natural conditions, including mountainous
landscapes and a temperate climate.
◦ Population size: Both Austria and Switzerland
have similar population sizes.
◦ Language and culture: Both countries share
much in terms of language and culture, with
German being the official language in both.
Austria

4.

1974-1976
Both countries experienced
recessions, with Austria
seeing a mild 0.7%
decrease in GDP per capita
and Switzerland suffering a
deep 10.3% fall.
1977-1990
2
1991-1997
Switzerland experienced a
prolonged recession, with negative
GDP per capita growth in four
years: 1991 (-1.9%), 1992 (-1.0%),
1993 (-0.7%), and 1996 (-0.2%).
Austria, on the other hand, saw
slower but positive growth during
this period.
GDP
1
3
Austria and Switzerland
each recorded one year of
negative GDP per capita
growth, with Austria in
1978 (-2.0%) and
Switzerland in 1982 (2.1%).
◦ Economic growth rates: Switzerland had a
higher GDP per capita growth rate (3.3%) than
Austria (4.8%) during the period 1951-73.
◦ GDP per capita gap: The absolute difference in
GDP per capita between Austria and
Switzerland narrowed over time, from
approximately $6,000-$8,000 in 1974 to $1,200
in 2003 (in constant 2000 U.S. dollars, PPP
adjusted).

5.

ECONOMIC
GROWTH
RATES

6.

GDP PER
CAPITA
GAP

7.

INDICATOR
AUSTRIA
SWITZERLAND
GDP per capita growth (19511973)
4,8%
3,3%
GDP per capita (2003)
$27,600
$28,800
Recession Depth (1974-1976)
- 0,7%
-10,3%
Negative GDP per capita
growth (1977-1990)
1978 (-2.0%)
1982 (-2,1%)
Negative GDP per capita
growth (1991-1996)
None
1991 (-1.9%), 1992 (-1.0%), 1993
(-0.7%), 1996 (-0.2%)
Productivity Growth (19912000)
Higher
Lower
Privatization Revenue (19902001)
5,9% of GDP
2,5% of GDP
Comparative
Performance:

8.

Causes of
Divergence:
External Shocks
The periods of economic
contraction in Switzerland
coincided with global oil
shocks, such as the one
following the Arab-Israeli
war in 1973. During these
downturns, Swiss export
growth slowed
significantly compared to
Austria, likely due to
Switzerland's greater
reliance on exports to the
United States and
developed Asian markets,
which were more affected
by the shocks.

9.

Causes of Divergence:
Slower Productivity
Growth in Switzerland
Slower GDP growth in
Switzerland in the
period 1991-2003 was
primarily due to slower
total factor productivity
(TFP) growth, or lower
labor efficiency,
compared to Austria.
This was evident in both
the manufacturing and
services sectors.

10.

Causes of Divergence:
Fiscal Policy
Switzerland's fiscal policy was more
procyclical, with public spending increasing
significantly during recessions. This may have
prolonged the recovery periods, in contrast
with Austria's more neutral fiscal approach.

11.

Deeper Dive in Fiscal Policy and Public Debt Issues
In the mid-1970s and
early 1990s, Switzerland
experienced larger
increases in public
spending relative to GDP
compared to Austria. This
was primarily due to an
increase in transfers,
which are less
"productive"
expenditures.
From 1990 to 2003,
public debt increased by
26 percentage points of
GDP in Switzerland,
compared to 12.6
percentage points in
Austria. Austria
implemented fiscal
consolidation measures to
meet the Maastricht
criteria for euro zone
entry.
Austria introduced tax
reforms in the late 1980s
and 1990s, including
reductions in personal
income tax rates and the
elimination of progressive
corporate income tax in
favor of a single-rate tax.

12.

Monetary Challenges
Switzerland's monetary policy based
on monetary targets faced difficulties
in estimating money demand and
containing the excessive appreciation
of the Swiss franc during economic
downturns.
Prices in Switzerland were much
higher than the EU average, even
after a decline in the 1995-2003
period, suggesting a lack of
competition in the domestic product
market. In contrast, price levels in
Austria decreased, indicating
increased competition.
Austria undertook more extensive
reforms to deregulate and liberalize
its product markets, particularly in
network industries and professional
services, leading to increased
competition and productivity growth.

13.

Macroeconomic Policies
01
02
03
Monetary Policy: Switzerland's
monetary policy framework
based on monetary targets led
to greater inflation volatility, as
the Swiss National Bank
struggled to estimate money
demand and contain the Swiss
franc's appreciation.
Fiscal Policy: Austria's fiscal
policy was more neutral and
adaptive to the business cycle,
while Switzerland's procyclical
fiscal policy may have
prolonged economic
downturns.
Structural Reforms: Austria
undertook more extensive
deregulation and privatization
efforts, particularly in the leadup to EU accession, which
helped increase competition
and productivity in its
economy.

14.

Austria's exports were more oriented
towards faster-growing markets in
Germany and Central/Eastern
Europe, while Switzerland's exports
were more focused on the United
States and Asia, which were more
affected by global downturns.
Austria undertook more extensive
deregulation and privatization efforts,
particularly in the lead-up to EU
accession, which helped increase
competition and productivity in its
economy compared to Switzerland's
more regulated markets.
Austria's deeper integration with the
EU single market, including lower
trade barriers and import prices,
provided a boost to its economic
growth compared to Switzerland's
more limited trade integration.
Austria's more neutral and adaptive
fiscal policy approach helped mitigate
the impact of external shocks, while
Switzerland's procyclical fiscal policy
may have prolonged economic
downturns.
So How
Exactly Did
Austria
(Nearly) Catch
Up with
Switzerland?

15.

Similarity
Both Austria and Switzerland are "small" economies with
similar geographical, natural, and population characteristics.
Difference
Austria experienced faster economic growth and a narrowing
of the GDP per capita gap with Switzerland in the period
1974-2003.
Cause
Switzerland's economy was more vulnerable to external
shocks, such as global oil crises, and its macroeconomic
policies were more procyclical, contributing to deeper and
longer recessions.
Productivity
Austria's more extensive reforms to deregulate and liberalize
its markets, driven by EU integration, led to increased
competition and faster productivity growth compared to
Switzerland.
Trade
Austria's deeper integration with the EU single market,
including the free movement of goods, capital, and labor,
provided a boost to its economic performance relative to
Switzerland's more limited trade ties.
Key
Takeaways:

16.

Learning Experience
Importance of External
Shocks:
The Swiss economy was
more vulnerable to
global economic shocks,
such as oil crises and
exchange rate
fluctuations, which had a
deeper and more
prolonged impact on its
growth compared to
Austria.
Role of Macroeconomic
Policies:
Switzerland's more
procyclical fiscal policy
and monetary policy
framework based on
monetary targets may
have exacerbated the
effects of external shocks,
while Austria's more
neutral and adaptive
policies helped mitigate
the impact.
Importance of
Structural reforms:
Austria's more extensive
deregulation and
privatization efforts,
particularly in the leadup to EU accession,
helped increase
competition and
productivity in its
economy, contributing to
its stronger growth
performance.
Benefits of Trade
Integrations:
Austria's deeper
integration with the EU
single market, including
lower trade barriers and
import prices, provided a
boost to its economic
growth compared to
Switzerland's more
limited trade integration.

17.

THANK YOU FOR
YOUR ATTENTION!

18.

Privatization
◦ Austria's privatization program was more
extensive, covering a wider range of
sectors, including industry, finance,
telecommunications, public utilities, and
transport. In contrast, Switzerland's
privatization efforts were more limited,
mainly focused on the telecommunications
sector.

19.

Trade Ups and Downs
◦ Switzerland's high import tariffs, especially
on agricultural products, and other trade
barriers contributed to higher prices and
reduced competitiveness compared to
Austria, which benefited from deeper
integration with the EU single market.
◦ Austria's exports were more oriented
towards Germany and Central/Eastern
Europe, which experienced stronger
growth, while Switzerland's exports were
more focused on the United States and
Asia, which were more affected by global
economic downturns.

20.

European Union
Integration Role
◦ Austria's integration with the EU internal market
resulted in lower import prices, while Switzerland's
high import prices accounted for a significant portion
of the retail price differences between the two
countries.
◦ Austria's accession to the European Economic Area
in 1994 and the European Union in 1995 served as a
catalyst for deregulation and liberalization reforms,
which helped increase competition in the Austrian
economy. Switzerland, on the other hand, remained
outside the EEA and faced higher trade costs and
barriers.
◦ Austria's preparations for EU integration and
participation in the single market led to a series of
deregulation reforms, extending competition
principles from the manufacturing sector to other
areas of the economy. Switzerland's reforms were
largely modeled on those implemented in the EU, but
with a slower pace and narrower scope.