Liechtenstein; Proof Decentralisation Works!

There is something almost irritating about Liechtenstein. According to much modern political thinking, a country like this should either not exist or should have been swallowed long ago by something bigger, more centralised and supposedly more efficient. Instead, squeezed into the Alps between Switzerland and Austria, this tiny principality has survived into the twenty-first century as one of the wealthiest countries on Earth.

Liechtenstein has an area of only about 160 square kilometres and a population of roughly 40,000. Yet international statistics put its GDP per person at extraordinary levels. The German Federal Statistical Office, drawing upon international data, gives 2024 GDP per capita at about US$210,700. Comparisons involving tiny economies need considerable caution, particularly because Liechtenstein imports a large part of its workforce each day, but there is no serious question that this is an exceptionally prosperous little country.

It is easy to explain all this away with the magic words "tax haven." Certainly taxation matters. Liechtenstein's corporate income-tax rate is 12.5 per cent, although very large multinational groups are now subject to the OECD/G20 global minimum-tax arrangements. But reducing the country to a collection of bank accounts misses something much more interesting. Liechtenstein has a substantial productive economy. Official figures show manufacturing as an unusually important part of economic activity, and the country actually has more jobs than resident workers available to fill them. Thousands of people therefore cross the borders from Switzerland, Austria and elsewhere to work there each day.

This is not Monaco with mountains. Nor is it simply a picturesque financial centre that somehow acquired a flag. Liechtenstein manufactures things, exports things, attracts capital and employs an extraordinary number of people relative to its population. Its economic success is consequently worth examining rather than dismissing as some Alpine accounting trick.

Then there is the state itself. Here things become even more interesting.

Liechtenstein is a constitutional hereditary monarchy, but Prince Hans-Adam II and, in practice, Hereditary Prince Alois, who exercises the head-of-state functions as regent, belong to a monarchy that retains meaningful constitutional authority. Laws require the sanction of the Reigning Prince. The government, meanwhile, consists of a prime minister and four ministers and is responsible to both parliament and the Prince.

To an Australian accustomed to federal, state and local governments, enormous administrative systems and seemingly endless layers of agencies, departments, regulators and authorities, the scale is almost comic. Liechtenstein has a national government with five members. Yet the country somehow continues to have roads, schools, businesses, courts, public finances and everything else that civilisation apparently requires.

More surprisingly, strong monarchy has not eliminated popular democracy. Liechtenstein has extensive mechanisms for initiatives and referendums. Citizens can challenge legislation and financial decisions and can initiate proposals themselves. For ordinary legislation, 1,000 eligible citizens can trigger a referendum; constitutional matters and certain treaties require 1,500. In a country of about 40,000 inhabitants, these are not meaningless theoretical rights.

The result is a constitutional arrangement that does not fit neatly into contemporary ideological boxes. There is a hereditary monarch with substantial powers. There is an elected parliament. There is a small executive government. And there is direct democracy giving citizens mechanisms for intervening in political decisions. Perhaps political arrangements do not always have to fit the templates provided by political-science textbooks.

The economic figures are equally striking. Liechtenstein's official statistics report that government revenues exceeded expenditure by CHF 326 million in 2023 and put consolidated government-sector net assets at CHF 9.9 billion. Its fiscal ratio, the ratio of taxes and compulsory social contributions to GDP, was reported at 21.5 per cent. There are qualifications surrounding any international comparison, but these are hardly the statistics of a state staggering beneath its own administrative weight.

Contrast the underlying philosophy with what has happened across much of the Western world. The normal response to almost every social problem is another programme, another regulator, another department, another funding package and another layer of administrators overseeing the administrators who administer the programme. Government becomes larger partly because large government creates constituencies whose occupation depends upon the continuation of large government.

Liechtenstein suggests that scale itself deserves more attention. When a political community is small, government is physically and psychologically closer. The people making decisions cannot retreat quite so easily into an abstraction called "the public." Politicians, officials, business owners and citizens inhabit the same small social world. Mistakes are harder to conceal inside an administrative machine containing hundreds of thousands of people.

Smallness can also impose discipline. A tiny country cannot pretend indefinitely that economic reality has been repealed. Capital can cross the border. Workers can cross the border. Businesses can cross the border. Liechtenstein therefore has powerful incentives to remain a place where productive people actually want to operate.

Its corporate income-tax rate of 12.5 per cent illustrates the point. The country has chosen to make itself attractive to capital rather than treating successful businesses primarily as objects waiting to be harvested. At the same time, Liechtenstein is no anarcho-capitalist experiment. It has social insurance, regulation and public services, and it participates extensively in European and international arrangements. Since 2024 it has also implemented the 15 per cent global minimum tax rules applying to qualifying large multinational groups.

There are other qualifications to the fairy tale. No country is paradise. Liechtenstein benefits enormously from its geographical position beside Switzerland and Austria and from access to larger European markets. It uses the Swiss franc and participates in the European Economic Area. Its extraordinary GDP-per-capita figure is affected by the huge number of people who produce output inside Liechtenstein while living elsewhere. A country of 40,000 people cannot simply be scaled up into a model for a continent of hundreds of millions.

Its political history is not a straightforward libertarian fairy tale either. Women obtained the vote at national level only in 1984, extraordinarily late by Western European standards.

Yet acknowledging these qualifications makes Liechtenstein more interesting, not less. The principality demonstrates that there is no single institutional formula for becoming a prosperous modern society. It combines arrangements that contemporary political culture often treats as incompatible: monarchy and direct democracy, tradition and international commerce, national sovereignty and European integration, a small state and a sophisticated economy.

Most striking of all is the relationship between size and accountability. We have become accustomed to assuming that bigger institutions are more capable institutions. Universities merge because bigger is supposedly better. Councils amalgamate. Government departments expand. International organisations acquire responsibilities once exercised nationally. National governments acquire responsibilities once exercised locally. At every stage the citizen becomes slightly further removed from the person exercising power. Liechtenstein points in the opposite direction. Perhaps some things work precisely because they are small.

There is something deeply human about political organisation on a comprehensible scale. A nation of 40,000 is not an administrative abstraction containing millions of strangers. Its territory can be crossed in an afternoon. Its political institutions remain close enough for citizens to comprehend them, and its referendum system gives those citizens unusually direct means of intervening when they dislike what their representatives have done.

There may even be a conservative lesson in this that goes beyond taxation. Liechtenstein did not become successful by deciding that everything inherited from the past had to be demolished before modernity could begin. The monarchy survived. Local communities survived. National identity survived. At the same time, the country embraced international commerce, advanced manufacturing, finance and modern technology.

Tradition and modernity therefore need not be mortal enemies. Sometimes stable inherited institutions provide precisely the framework within which experimentation and economic change can occur.

For Australians, Liechtenstein is obviously not a blueprint. Australia cannot become an Alpine principality of 40,000 people, and it would be absurd to pretend otherwise. But experiments do not have to be reproducible in their entirety to teach us something.

Liechtenstein asks an uncomfortable question of the modern administrative state. If prosperity requires ever larger government, ever more political centralisation and ever more distant decision-making, why has this absurdly small remnant of old Europe done so extraordinarily well?

Perhaps there are advantages in government being close enough to see, taxation low enough to tolerate, political communities small enough to comprehend, and rulers close enough to their people that neither side can entirely forget the existence of the other.

Liechtenstein looks like something that escaped from an older Europe: a prince, castles, villages, church spires and mountains enclosed within borders barely large enough to notice on a map. Yet underneath the fairy-tale appearance is an economically formidable modern state.

The remarkable thing about Liechtenstein is therefore not that it survived. It is that this tiny political curiosity has prospered sufficiently to make the supposedly sophisticated countries around it worth questioning.