The federal system in Switzerland, though threatened by some centralization tendencies, has largely contributed to economic competitiveness, a new study has found.

A term often bandied about but sometimes less than fully understood, federalism is, alongside direct democracy, a proud cornerstone of the Swiss political system.

A study unveiled Thursday now makes the link between the system and Swiss economic robustness; namely, that the federal system, mainly by allowing cantons to jostle and compete on tax rates and business, drives competitiveness in the country.

The ‘Federalism and Competitiveness in SwitzerlandExternal link’ study, commissioned by the intercantonal group Fondation ch along with the Union of Cantonal Banks, was written by professors from the Universities of Freiburg (Germany) and Lucerne.

It shows that, contrary to some received wisdom about bureaucratic roadblocks, the institutions of federalism do not deter inward investment – rather the opposite.

In the Swiss case, some of the lowest corporation tax rates in the world, which help foster economic development, are the fruit of fiscal competition between cantons, it said. The economy also benefits from efficiency in governance, driven by voter accountability.

Professor Christoph Schaltegger, one of the authors, said that the diversity of regulations across the country create something of an ideas-lab of innovation: “it’s necessary to have the courage to test different solutions and learn from those that don’t work,” he said.

Can the centre hold?

The report also touched upon the challenges facing the federal system in the 21^st century: notably, the tendency towards centralization and a creeping overlap of competences from federal to local authorities.

The redistribution mechanism, a federally-managed redistribution of funds from richer to poorer cantons, could also be problematic: if the system is too generous, the question of moral hazard could weigh on the economy, the researchers found.

The report is not the first to flag a centralizing tendency: in June, the ‘Swiss Federalism’ report found that much of the creep has been in the legislative sphere (rather than the economic or administrative) and has shunted Switzerland somewhat closer to the German model of decentralized governance.

Speaking in Bern on Thursday, parliamentarian Benedikt Würth, also president of the Conference of Cantonal Governments, warned that such trends could endanger the Swiss “success story”.

The launch of the book (currently only available in German) is thus a way to remind the government about the boons of a decentralized system, Würth said.

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