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

- BBC (2013) [Online]

Available: http://www.bbc.com/news/world-europe-17535108 [20 August 2014]

- [Online]

Available: http://eeas.europa.eu/liechtenstein/index_en.htm [20 August 2014]

- [Online] Available: http://www.eda.admin.ch/eda/en/home/reps/eur/vlie/billie.html [19

August 2014]

- [Online] Available: www.wto.org [15 August 2014]

- Global Post (2013), [Online]

Available: http://www.globalpost.com/dispatch/news/afp/131114/liechtenstein-ends-

banking-secrecy-accepts-oecd-tax-rules [17 August 2014]

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Available: http://www.globalatlanta.com/article/25870/liechtenstein-more-than-a-tax-haven/

[20 August 2014]

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[Online]

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liechtenstein-loses-on-bank-reforms.html [20 August 2014]

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Available:

http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Economy_of_Liechtenstein.html

[20 August 2014]

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Available: http://globaledge.msu.edu/countries/liechtenstein/economy [20 August 2014]

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Available: http://www.newindianexpress.com/states/kerala/article1501987.ece [30 June

2014]

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Available:http://www.mondaq.com/x/57740/offshore+financial+centres/

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[Online]

Available:

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ml?pagewanted=all&_r=1& [20 August 2014]

PUBLICATIONS

- Antczak, E ,2010, ‘Sustainable development of Poland and Europe- Spatiotemporal analysis

and Spatial EKC models’, Acta Universitatis Lodziensis- Folia O Economica

- February 2014, ‘Potentials and Challenges for Iceland, Liechtenstein, Norway and

Switzerland- and for the European Union’, ESPON Programme 2013, Territorial

Observation No.10

- Chakraborty, P, Chakraborty ,L, Nath H.K, A, Mitra,S , January 2010, ‘Financing Human

Development in Kerala- Issues and Challenges’, National Institute of Public finance and

Policy, New Delhi

- 2014, ‘Human development Report 2014- Sustaining Human Progress: Reducing

vulnerabilities and Building resilience’, UNDP

- 2002, ‘Johannesburg Summit 2002- Country Profile: Liechtenstein’, UN

- George, K.K, April 2011, ‘Kerala Economy- Growth, Structure, Strength and Weakness’,

Working Paper no.25, Center for socio-economic and environmental studies-CSES

- April 2007, ‘Stockholm Convention on Persistent Organic Pollutants (POPs’),

Liechtenstein’s National Implementation Plan

- 2013, ‘Human Development Report 2013 The Rise of the South: Human progress in a diverse

world’, UNDP- LIECHTENSTEIN

- March 2014, ‘European Commission- Tourism Industry sub-sectors’, Country Report:

Liechtenstein