Commentary: The world’s strongest currency is also super-competitive

NEW YORK: Amid all the talk about whether the US is keen to devalue the mighty dollar as one way to revive American manufacturing, it is worth noting that the dollar is not the world’s strongest currency and has not been for decades.

That title goes to the Swiss franc, and the mighty franc has done nothing to undermine Switzerland’s competitiveness.

The world’s richest major economy has both a strong currency and a strong manufacturing base. The Swiss franc has been the top-performing currency over the past 50 years, 25 years, 10 years and five years.

It is near the top even over the past year when some of the more beleaguered currencies have staged a comeback against the dollar. Nothing can compare for durable strength. 

Yet Switzerland also defies the assumption that a strong currency will undermine a nation’s trading prowess by making its exports uncompetitive. Its exports have risen and are near historic highs both as a share of Swiss GDP (75 per cent), and as a share of global exports (near 2 per cent).

The global conversation has become unduly obsessed with currency valuations, which are just one of the factors that shape a nation’s competitive position.

Like Germany and Japan in their heydays, Switzerland has gained a reputation for goods and services of such high quality that the rest of the world is willing to pay a currency premium for the “Made in Switzerland” label. 

DIVERSE AND DYNAMIC GOODS

Despite its lingering reputation as a haven for illicit fortunes, the country’s economy has long shown extraordinary dynamism and competitive range.

For more than a decade, it has dominated a UN ranking of the most innovative economies, both for the resources it puts into innovation – for example through practical university education and research and development – and for its returns on these investments. 

It generates more than US$100 in GDP per hour worked – that’s more productive than any of the other 20 largest economies. Its decentralised political and economic system encourages the rise of small enterprises, which account for over 99 per cent of Swiss companies.

It also has a large share of globally competitive businesses in sectors from pharmaceuticals to luxury goods.

Harvard’s Growth Lab ranks Switzerland number one among major economies for the “complexity” of its exports, a measure of the advanced skills needed to produce them. And its exports range from chocolates and watches to medicines and chemicals – belying the notion that strong currencies kill factories. 

At 18 per cent of GDP, its manufacturing sector is one of the largest among developed economies. Over half its exports are “high-tech” – more than double the US level. Since advanced goods are more expensive, this has helped Switzerland keep its current account in surplus, averaging more than 4 per cent of GDP since the early 1980s.

Income from trade is recycled into significant investments abroad. The country now runs a net international investment surplus of more than 100 per cent of GDP, which helps it resist external shocks.

This is the opposite of the US, with its heavy deficits in the current account and net investment. 

If Switzerland has a weakness, it is a huge run up in private debt as a share of GDP. Yet unlike the US and many other European countries, it does not have a large population of zombie companies – which earn too little to pay even the interest on their debts. 

HOW TO STAY COMPETITIVE

Quietly, the Swiss have built an all-weather economy. The franc has appreciated steadily whether the dollar was rising or falling, and whether the global economy was in recession or recovery.

They just seem to understand how to stay competitive. In 2015, the franc surged on a shift in central bank policy and manufacturers responded by moving even more sharply to sophisticated exports, which are less sensitive to currency shifts.

Many policymakers think the East Asian “miracles” devalued their way to prosperity. Undervalued exchange rates did help countries from South Korea to China grow their manufacturing export bases rapidly.

But other factors including infrastructure investments and opening to foreign capital played a bigger role. Meanwhile, the importance of exchange rate valuations faded as they moved up the development curve.

Developed economies need to compete more on quality than on price. For them, devaluation can backfire by encouraging domestic producers to focus on making cheaper goods.

The Swiss lesson for nations such as the US is that a cheap currency is no fix for a broken manufacturing sector.