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Amidst all the talk about whether the U.S. is willing to devalue the strong dollar as a way to revive American manufacturing, it's worth noting that the dollar is not the strongest currency in the world and hasn't been for decades. That title belongs to the Swiss franc, and the strong 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 best-performing currency over the past 50 years, 25 years, 10 years and five years. It's also been near the top over the past year when some of the hardest-hit currencies have made a comeback against the dollar. Nothing compares to that for sustained strength.
However, Switzerland also challenges the assumption that a strong currency will undermine a nation’s trading ability by making its exports uncompetitive. Its exports have grown and are near historic levels both as a share of Swiss GDP (75 percent) and as a share of global exports (close to 2 percent).
The global conversation has become overly fixated on 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 earned a reputation for such high-quality goods and services that the rest of the world is willing to pay a higher foreign exchange premium for the "Made in Switzerland" label.
Despite its persistent reputation as a haven for illicit wealth, the country's economy has long demonstrated remarkable dynamism and competitive range. For more than a decade, it has dominated a UN ranking of the most innovative economies, both in terms of the resources it invests in innovation - for example through practical university education and research and development - and in the returns on those investments.
Switzerland generates more than $100 in GDP per hour worked — more productive than any of the other 20 largest economies. Its decentralized political and economic system encourages the growth of small enterprises, which make up over 99 percent of Swiss companies. It also has a large share of globally competitive businesses in sectors from pharmaceuticals to luxury goods.
The Harvard Growth Lab ranks Switzerland first 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 — disproving the idea that strong currencies destroy factories.
At 18 percent of GDP, its manufacturing sector is one of the largest among developed economies. Over half of its exports are “high-tech” – more than double the level of the United States. Since advanced goods are more expensive, this has helped Switzerland maintain its current account surplus, averaging more than 4 percent of GDP since the early 1980s.
Trade revenues are recycled into substantial investment abroad. The country now has a net international investment surplus of more than 100 percent of GDP, which helps it withstand external shocks. This is in contrast to the United States, with its large current account and net investment deficits.
If Switzerland has one weakness, it is a large increase in private debt as a share of GDP. However, unlike the US and many other European countries, it does not have a large population of zombie companies - which earn too little to even pay the interest on their debts.
Quietly, the Swiss have built an economy that can withstand all conditions. The franc has consistently appreciated whether the dollar was rising or falling, and whether the global economy was in recession or recovery. They simply seem to understand how to stay competitive. In 2015, the franc appreciated due to a change in central bank policy, and manufacturers responded by shifting even more sharply toward sophisticated exports, which are less sensitive to currency fluctuations.
Many policymakers believe that the East Asian “miracles” undervalued their path to prosperity. Undervalued exchange rates helped countries from South Korea to China rapidly expand their manufacturing export bases. But other factors, including infrastructure investment and openness to foreign capital, played a larger role. Meanwhile, the importance of exchange rate valuations waned as they moved up the development curve.
Developed economies must compete on quality rather than price. For them, devaluation can have the opposite effect, encouraging domestic producers to focus on producing cheaper goods. The Swiss lesson for countries like the US is that a cheap currency is no solution to a broken manufacturing sector./ FinancialTimes
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