comparative analysis of the economies of liechtenstein and kerala
TRANSCRIPT
CIA II ASSIGNMENT- APPROACHES TO GROWTH AND DEVELOPMENT
Department Of Economics
COURSE CODE : A.ECO.5.04
LIECHTENSTEIN AND KERALA:
A COMPARATIVE ANALYSIS
NAME- NAMRATA BHATNAGAR
ROLL NO- 057
UID NO- 120217
CLASS- TYBA
Liechtenstein or The Principality of Liechtenstein is a landlocked microstate in Central Europe
bordered by Switzerland and Austria.
COUNTRY PROFILE-
BACKGROUND-
It is one of the smallest countries in the world (6th in rank) by area and thus, was not always a
significant presence in the international markets. Today, this country is a constitutional
monarchy which means that the power rests in the hands of a system which consists of a mix of
monarchic rule and a democratically elected Parliament. The Prince of Liechtenstein, Hans-
Adam II is the reigning ruler of the country and exercises considerable power in the system.
Liechtenstein as a distinct geographical territory has existed ever since AD 814 and its national
borders have remained unchanged since 1434. During the early part of 20th century, like its
neighbor, Switzerland, Liechtenstein resorted to a position of neutrality in the two World Wars
even when all the powerful countries around it were major players in both of them. Until the end
of World War I, Liechtenstein was closely tied up with Austria for its political and economic
affairs however, it parted ways and entered into a monetary union with Switzerland in the year
PARAMETER VALUE
Capital Vaduz
Area 160 square kilometers approx.
Population 36,656 (2012)
GDP per capita (PPP) $141,100
HDI rank 24 (2012)
HDI value 0.883
ADDED NOTES
Microstate
High standards of
living
Hence- Very high
Human Development
group
1919 and this treaty culminated into a partnership between the 2 countries which continues to
last till today.
It was after joining forces with Switzerland that Liechtenstein began its journey upwards and
took steps for enhancing its presence not just within Europe through economic integration
measures, but also on the international forum.
TURNAROUND-
At the time the II World War ended, the country was very poor and largely agrarian and this state
continued till the years around 1970. These couple of years, especially 1970 proved to be the
turning point for the economy of this country, which transformed from being largely agriculture
based and with limited natural resource reserves to being one of the most industrialized countries
in the world. Over a period of approximately 40 years, this change took place and placed
Liechtenstein among the richest nations in the world.
As seen in the graph, Liechtenstein’s GDP growth rate was at an all-time high of 10.41% in the
year 1999 and this was a few years after it joined the European Free Trade Association (EFTA)
and European Economic Area (EEA) in the year 1995. Opening up its markets to trade and
following the framework instituted by the Eurozone (EU), even though it’s a non-member of EU
helped to integrate the economy of this principality and attract investments from abroad.
MAIN REASON FOR TURNAROUND-
Its sudden transformation into an economy driven mainly by industries and services sector today
from an agrarian one earlier was made possible by significant capital formation and mobilization
measures. The most important of these was lowering of business taxes in the country and inviting
companies and investors to setup offices in the same. Liechtenstein has a reputation for being a
country with over 73,000 Holding companies having nominal offices. Thus, it is seen that the
country is driven by not just a strong industrial and service sector, but also a very lucrative
financial sector, the latter of which has been more or less responsible for the flourishing of the
former 2 sectors.
TAXATION-
The Government in Liechtenstein taxes both personal and corporate income and also wealth. The
personal income tax rate is very low at around 1.2% and the business tax rates are also around
20% providing 30% of the State’s revenue.
After the World War era when Liechtenstein started on its journey of economic growth and
development the country’s agricultural and textile sector were the only sectors actively yielding
any income. Thus, opening up of markets and attracting foreign investments in the country
received little support from the government which used to provide subsidies only to the
agricultural sectors.
Today the financial sector accounts for 33% of the country’s income, providing 17.4%
employment and providing the environment of a financial center of sorts, where financial
intermediaries are engaged in handling of funds of multi-nationals from all over Europe and the
world.
The policies regarding taxes and loose incorporation laws coupled with strict bank secrecy laws
have attracted companies in the recent decades to invest and setup their offices here. These led to
the 2008 Liechtenstein tax affair where a series of investigations were carried out in the country
with charges of money laundering and tax evasion. In 2009 however, OECD freed Liechtenstein
of these claims and ever since the Liechtenstein has taken measures to increase transparency,
integrate into the EU policies and get rid of the label of being a ‘tax haven’.
SECTORIAL CONTRIBUTION-
- The economy is supported by a very strong Industrial sector. The main industries are the
ones dealing in machine and tool engineering, plant construction, precision instruments and
food and dental sectors. In all these area, the companies focus on producing high-tech
products of high quality showing a greater capital investment and Research and Development
initiatives in this export-oriented industrial sector, which is mainly the job of companies
themselves since the Government doesn’t provide for cost-intensive research and innovation
but it does provide a conducive policy environment for the same. The most notable feature of
the Industrial sector in Liechtenstein is in the balance between economic and environmental
8%
37%55%
SECTORIAL SHARE IN GDP (2009)Primary sector Secondary sector Tertiary sector
activities. Many enterprises have adopted environmental management systems and have ISO
certification.
- The most significant contribution over the years has been of the financial sector which
makes this country an important financial center. With its low tax rates, loose incorporation
lows and high prioritization to bank secrecy has attracted large amounts of foreign funds to
the country and financial intermediaries handling these form one of the main employment
source to the country.
- The country is a member of EFTA and EEA and its increased integration over the years has
led to an increase in foreign trade with the country.
- Its export-import figures within the EU are 60% and 89.4% respectively, however it is also
involved in trade with the US, UK, Taiwan and Japan. (ESPON 2013)
- Tourism in the country has developed as a result of government efforts and it has turned into
a lucrative industry with major arrivals concentrated in the city of Vaduz and the Alpine
mountains. With respect to this sector as well, there are investments in the training of
personnel with a focus on their neighbor, Switzerland’s vocational training regulations. In the
future, this sector will see more focused marketing to diversify tourist offers and provide
greater access to certain parts of the country. This has to be complemented by growing
transportation infrastructure and energy supply. (ESPON 2013)
FROM ECONOMIC GROWTH TO DEVELOPMENT-
The Nobel-prize winning laureate Amartya Sen defines development as-
“Development has to be more concerned with enhancing the lives we lead and the freedoms we
enjoy.”
It is- “….not the things a person has or the feelings these things provide but, what a person is or
can be and does or can do.”
Similarly, the United Nations Expert Committee also defines development as a change in the
social life of people and not just material changes.
These statements about development can be substantiated with respect to Liechtenstein through
the following points-
(Johannesburg Summit: Country Profile- Liechtenstein, 2002)
SECTOR/AREA FACTS INFERENCE/NOTES
INDUSTRIALIZATION -Industrial sector- 37% of
GDP (2009)
-Since 1970s has captured and
mobilized funds to invest heavily in
technology.
-Is one of the highly industrialized
countries in the world
INFRASTRUCTURE
-Physical
-Human
-One of the best connected
by road and rail in Europe
-Invested in transport
infrastructure to increase
access to sea ports; enhance
tourism
-Stated as ‘Applied Science
Area’
-R&D investment- $140
million (2000)
-The country has been able to
overcome its geographical
shortcomings by investing in
increasing connectivity.
-Gives it ability to specialize in
applied knowledge
-Is very important in this export-
oriented economy
EDUCATION -Mean Years of Schooling
(2012)- 10.3
-Expected Years of
Schooling (2012)- 11.9
-Ministry of Education is the
responsible body and provides a
regulatory framework under-
Education Act, Occupational
Training Act
-Includes environmental education in
school curricula
-With University grants has managed
to develop in knowledge and
networking in Europe
HEALTH -Health Care Act
-Center of Motherhood
-Programs of Health
Insurance providers
-Funded by State and Private Health
Insurance
-for pregnant women
-Girls of 17 years age and above are
invited for free gynecological exams
SOCIAL
ATMOSPHERE
-34.3% people- Foreigners
-State’s publicly assigned
work program
-Autonomy to its 11
Municipalities
-Family and social support given to
all through policies
-Assigns work to lower income
households in need of assistance
-Citizens can participate and
intervene in the decision-making
process
ENVIRONMENT Environment Kuznets Curve
model analysis using
Location Quotient (1995-
2006)- 0.53
-In terms of air pollution levels, one
of the lowest in Europe owing to
environmentally sound policies
INTERNATIONAL
CO-OPERATION AND
AID
-Contributions to the United
Nation’s High
Commissioner for Refugees
(UNHCR), UNICEF, Red
Cross
- In 2000- 10.4 Million
Swiss Francs (1.5 % of total
expenditure) for aid
-Greater integration into the global
community
-To the developing countries in
Eastern Europe undergoing
economic transition
CONCLUSION-
Thus, it can be stated that a country with a high GDP per capita which ensures a socially,
economically, politically and culturally free, safe and secure environment to its residents
while also ensuring basic need requirements of the same, can be termed as a country that is
converting its economic growth into economic development. In such a case as that of
Liechtenstein, the people not only enjoy high income levels but overall improved standards of
living. The table below provides an overview of some of the country’s strengths and weaknesses.
ANALYSIS
REASONS FOR SUCCESS CHALLENGES
-Realizing its limited natural reserves and
overcoming those by relying on investments in
infrastructure building.
-In light of 2008 allegations, need to bring
greater transparency in banking secrecy laws to
build trust with international community.
-Focusing on capacity building in people and
improving socio-politico structures to improve
quality of its citizen’s lives.
-Expand foreign trade with countries outside of
the EU
-Emphasizing on Environment along with
growth
-Reduce dependence on EU nations for
meeting energy requirements (currently: 85%)
-Increasing connectivity by increasing
transport infrastructure, roads and railway
networks; Thus, giving way to Tourism
industry to flourish
-Graying Population- 74% of the population in
the age group of 15-64 years; This points to a
need for sustenance of present levels of
educational infrastructure in the future as well
THE KERALA STORY-
PROFILE AND BACKGROUND-
The Indian state of Kerala in the south of the country is similar to Liechtenstein in economic
tonality because of one major reason- both the countries depend on exogenous variables for their
incomes. It has been termed as a ‘remittance state’ and around 25% of the State’s revenues
come from remittances by Non-resident Malayalees (NRMs). Hence, it is heavily dependent on
these remittances from abroad especially the Gulf countries for its continued growth.
Kerala since the 13th century has been a major port of the country’s foreign trade. After
Independence as well, Kerala has been noted to have had a higher per capita income than the rest
of the country in the year 1955-56. Coinciding with Globalization in the latter part of the 1980s,
especially the year 1987-88, the economy of Kerala has seen a turnaround. Today the economy
of the state is driven to a large scale by its service sector and remittances from abroad.
With a high literacy rate of 98.9% (2013), the number of people working abroad exceeds the
number working in private and public establishments in the state.
14%
25%61%
SECTORIAL SHARE IN GDP (2008-09)Primary Sector Secondary Sector Tertiary Sector
Figures for 2006-07- [Rajan and Zachariah 2007, George and Remya 2010]
Total No. of Emigrants (Lakhs) 18.48
Employment in Public and Private sector
establishments at the end of the year (Lakhs) 11.11
CHALLENGES-
Some of the main challenges faced by Kerala are (George 2011)-
Unemployment - this is a problem because most of the unemployed people are educated
and the rates are even higher among the educated females.
External Dependency - Its dependency on NRMs opens up the state economy to
vulnerabilities and uncertainties. Also Kerala relies for import of basic food resources on
the rest of the country to a great extent.
Degradation of the environment including instances of soil erosion, water logging, over
exploitation of resources.
FINAL REMARKS-
From a discussion about the economies of Liechtenstein and Kerala, it is seen that both the
economic spaces resemble each other in the flowing areas-
Strong Service Sector
External Dependence
High Growth rates in the recent past
All these point to a high economic growth however, in the case of Liechtenstein these have been
taken a step further to focus on developmental goals and to better standards of living of the
people. In the case of Kerala, even though social indicators provide a positive picture,
unemployment, gender disparities in unemployment, income inequalities and ecological
degradation do exist. A comparison between the 2 can thus be used to state that even though both
have registered impressive economic growth rates in the recent years particularly, Kerala has
been unable to transcend this and provide equitable distribution of resources for all its social
groups. Both, Liechtenstein and Kerala face an urgent need to reduce their external dependence
(Liechtenstein- for Income and energy; Kerala- Income, Basic commodities like food materials)
to shield themselves better against turbulences in the foreign countries and be able to aim at a
status of self-sufficiency.
On one hand, Liechtenstein has made significant improvements for the all- round development of
its society and people, Kerala needs to invest in better resources, planning and execution
strategies to be able to bring about needed changes in the overall social life of its residents.
BIBLIOGRAPHY
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