The Limitations of Democracy

“It has been said that arguing against globalization is like arguing against the laws of gravity.”    

 ——Kofi Annan

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The world is opening up every day, yet the Swiss voters decided to go the other way in a crucial aspect of globalization. Although with a marginal difference (50.4% supported the proposal), the Swiss referendum of February 9th on immigration policy was clear in its outcome: the (slight) majority of the Swiss citizens will feel more comfortable with significantly less foreign nationals living and working in Switzerland. At present, around 25 percent of the Swiss population (8 million) is made up of foreigners, the second largest in Europe, after Luxembourg.

We all are well aware that protectionist policies are nothing new. The ideas behind them have already been around for quite a few centuries. Time and time again experience has shown, with no memorable exception, their futileness. Protectionist policies are value destroyers, not value creators.

From the legal and constitutional standpoint, the referendum outcome is impeccable and crystal clear. Thus, the legal and constitutional aspects of this process are not debatable. The Swiss law is very clear on referendums, and it was observed at all times throughout this process. And above all, the voice of the people in a democracy cannot and should not be disregarded, particularly so in a democracy with such strong credentials and tradition as Switzerland’s.

Thus, legal aspects aside, what about the practical implications of such an outcome?

History and experience show that, on the average and in the long-run, the more open borders are in investments, transit of goods, services, and labor,  the better off the citizens will be. Being fully aware of this, the Swiss government was logically behind the open markets campaign, which finally lost. So, the referendum outcome is a blow for the Swiss government.

The referendum outcome is problematic in several fronts:

  • For the Swiss government which, in most likelihood, will have to renegotiate a lengthy number of clauses in its multiple treaties with the EU. Although Switzerland is not formally part of the EU, for practical purposes it can be assumed that it is. In addition, there is also the unfortunate precedent that this referendum establishes. Notwithstanding Switzerland’s small size in population and economic mass, it is a very prosperous leader nation, an exemplary one in several aspects and one of the wealthiest nations per capita in the world. Switzerland’s stability, civility and neutrality have made it a favorite hub for global businesses and international organizations. So, potential repercussions can be big, unfavorable, and linger with us for years to come.

  • For the EU the referendum outcome is also a headache. Swiss is a member of the Schengen Agreement, and as such, Swiss citizens have had essentially all the rights of any EU citizen, except the right to vote in EU matters. According to the spirit of the Schengen agreement, reciprocity must be observed at all times; otherwise, the EU will have the right to retaliate and likewise be more stringent in accepting Swiss nationals living and working inside its borders.

Any position the EU assumes as a reaction to the referendum outcome —between being a hardliner on one extreme, or being understanding and flexible in the other extreme—  also poses a complex set of risks and opportunities. There are no easy answers to this quagmire. The referendum outcome added a significant amount of unnecessary tensions between Switzerland and the EU.

  • It is also problematic for multinational organizations, which may find it difficult and costly to adjust in order to fully comply with the new Swiss immigration and labor laws. The new immigration and labor landscape may very easily cause severe disruptions and force costly reallocations of key personnel among multinational corporations headquartered in Switzerland. It is very likely that these corporations will end up losing competitiveness as a result of the referendum outcome.

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The otherwise admirable Swiss political system has shown a big flaw. It’s as if Switzerland were shooting itself in the foot.

Why the population’s disconnect with reality?

There is no easy answer to this misconnection, other than stating that even in a developed nation of Switzerland’s caliber, there are some highly specialized and rather complex topics like immigration policy that are well above the average knowledge of the population. Voters can be a relatively easy prey for populist movements and propaganda.

So, however laudable a democratic system is —the Swiss case is one of the most advanced—  there are some very clear limitations inherent to it. The average voter is more often than not  insufficiently informed, and therefore unaware about some significant (unintended) consequences —both of voting in one direction or another.

Will the Swiss population persist in being foolishly independent, assuming the lower living standards associated with it? Or, will they eventually come to senses and rectify once they realize the very onerous consequences of the decision they made and accept the diminishing sovereign rights associated with an intense and prosperous exchange with the EU and even the rest of the world?

Sovereignty is one of the least understood concepts in a globalized world. By necessity, a well-globalized world is a world where significant concessions are made by nations in pursuit of the higher good.

On the positive side, this outcome will not necessarily determine Switzerland’s long-term future. In the past, the Swiss population has shown a fairly pragmatic approach to changing the direction of a referendum once they’ve realized they have made a big mistake. In addition, albeit not very likely, it is possible that the outcome can be watered down by the Swiss government, once the regulations to enact it are drawn.

The Swiss recently also approved an initiative to limit the excessive remuneration of top management. The spirit behind it is truly commendable, but is also a thorny issue. Yet, reaching a functional regulation concerning excessive executive remuneration, minimizing unintended consequences —like an exodus of multinationals headquartered there— can be a completely different story.

At the very end of all these types of challenges, however, lies a most fundamental question.  How to improve a political system once its obvious flaws have surfaced? The outcome of the multi-referred referendum is a case in point. Personally, I do not advocate any specific solution in that regard for developed countries, given the many sides and inherent complexities of this issue. See my proposal for failed nations: the Turbo-charged Global Project  (TGP).

It is painfully obvious that democracy, like any other human structure, is not a panacea. As Sir Winston Churchill famously admonished in a  House of Commons speech on Nov. 11, 1947:

“Democracy is the worst form of government, except for all those other forms that have been tried from time to time.”

The world truly has a gigantic set of challenges to overcome before reaching the stage of a highly meritocratic society.

 

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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.

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  1. […] occasionally there are rare instances where harmful results materialize at the polls (see The Limitations of Democracy). More so, in aspiring democracies like Turkey, where PM Recep Tayyip Erdogan has recently resorted […]

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