Even the geographically illiterate know that Switzerland and Venezuela are not neighbors and yet, there they were, cheek by jowl, on the home page recently of the Wall Street Journal. Their respective headlines read:
And therein lies a lesson, not in geography but in economics, that all countries, as large as the United States and as small as the Cayman Islands, should pay heed to.
How could this disparity between Switzerland’s and Venezuela’s national balance sheets possibly be so different?
After all, in a side-by-side comparison, it would appear that Venezuela had the clear advantage.
Venezuela’s population is nearly four times that of Switzerland. Venezuela has a tropical growing climate, a long ocean coastline and the largest known oil reserves in the world. In fact, Venezuela sits on a sea of oil so vast that to many economists (not tourists), it would appear more beautiful than our Caribbean Sea.
Switzerland, while topographically has its inviting Alps, has little else in bankable natural resources. And yet, much of the world does its banking in Switzerland (and Cayman) – certainly not in Venezuela.
So what explains the success of Switzerland and the disastrous plight of the people in Venezuela?
Simply put, Switzerland has a free-market economy with sensible taxation and lean regulation. Venezuela has a dictatorial, socialist government that has saddled its people with untenable debt, stifling their ability to object or influence their own destinies. (Life has become so dire in Venezuela – little food in the markets, nonexistent medical supplies in the hospitals – that President Donald Trump said over the weekend the United States was considering intervening with military force in the South American nation.)
As protests continue against President Nicolás Maduro and his constituent assembly – which has seized power, jailed opposition leaders and placed the country in a stranglehold – the long-term threats to the nation’s economy only continue to worsen. The cash-strapped government and its state-owned oil company Petroleos de Venezuela SA (PdVSA) have $5 billion in debt coming due before year’s end – money the country does not have and is unlikely to raise from a global community outraged by Venezuelan leaders’ abuses of power and disregard for the rights of its citizenry.
Just last week, Credit Suisse stopped trading in two Venezuelan bonds – a sovereign issue due in 2036 and PdVSA’s bond maturing in 2022 – and indicated it would not trade in bonds from any Venezuelan entity that were issued after June 1. More such informal “sanctions” are expected to follow.
Meanwhile, the Swiss National Bank has amassed $750 billion in stocks, bonds and cash – a surplus that was built through foreign investment and shrewd monetary policy. The central bank’s profit last year alone was 24.5 billion francs (US$25.4 billion).
Here’s the caution: As the Wall Street Journal reported earlier this month, the bank’s success has some Swiss lawmakers discussing the possible creation of a “sovereign-wealth fund” that would invest a portion of those profits inside the country – perhaps to upgrade infrastructure or provide strategic investments in key industries – at politicians’ discretion, of course.
Apparently, the political classes dream similar dreams of what magnificent improvements they might make – if only they had access to more of the country’s wealth.
Luckily, Swiss politicians are not likely to get their hands on the funds that (not coincidentally) grew so steadily and well just outside their grasp.
The bank and Switzerland’s executive branch want to keep the money far away from government – as well they should. Switzerland’s people – and those of us fortunate to live in free societies – must be vigilant against government “mission creep” and interference in private enterprise.
Remember, the wealth of nations – all wealth of all free nations – is generated by the private sector, not the government sector. Put another way, the business sector makes, the public sector takes.