Swiss economy basks in an ideal balance

Switzerland has today what Credit Suisse economist Hans J. Mast terms ``almost a paradise economy.'' The Swiss National Bank is aiming for zero inflation. Unemployment in this mountainous country runs about 1 percent and is headed down. The economy is growing around 2.5 to 3 percent this year. Even the watch industry is ticking along nicely after some years of stress.

What's behind this success?

Two key factors are a strict monetary policy and an open, competitive economy.

The dramatic strength of the dollar damaged Switzerland's price stability somewhat last winter by boosting the price of imports. Bad weather didn't help. Inflation got as high as 4 percent in February. But inflation has started to slow again. Last month consumer prices were up 3.4 percent from a year earlier.

Just to make sure prices stay down, the Swiss National Bank decided last month to hold the growth of the nation's ``monetary base'' (an indicator of monetary policy) to 2.5 percent this year -- the actual annual growth rate so far in 1985.

The monetary target had been 3 percent. The central bankers decided that with the burst in inflation, however, they would not try to correct their undershooting of the target.

That change, according to Dr. Kurt Schiltknecht, a general manager of Nordfinanz-Bank, Zurich, should lead to 1 or 2 percent inflation some 18 to 24 months in the future. Then the central bank could decide finally to try for zero inflation.

``Zero is the aim,'' says Georg Rich, director of economic research at the Swiss National Bank. (Mr. Rich succeeded Dr. Schiltknecht several months ago when Schiltknecht left the bank to join Nordfinanz.) But the bank figures it should leave some margin for error in determining growth in money, and it will do so on the positive side. It doesn't want to slow economic growth too much.

``If we had 1 percent inflation, we would be quite happy,'' the central banker says.

Both Mr. Rich and Dr. Schiltknecht are puzzled by the sharp variations in money supply growth in the United States.

Dr. Schiltkneckt says it is senseless for the Federal Reserve System to try controlling the short-term trends in nominal gross national product -- the nation's output of goods and services in current dollars. ``They are trying to be perfect,'' he says.

A better policy, he says, would be steady money growth. This would reduce economic uncertainty. As it is, the ups and downs in money growth produce ``huge swings in foreign-exchange rates and in interest rates.''

Dr. Schiltkneckt points out that Japan, by following a ``monetarist'' policy of steadily supplying a low level of new money to the economy, has already achieved zero inflation, as measured by what is called the gross national product ``deflator,'' the broadest measure of inflation. And the Japanese economy is still growing at a real 5 to 6 percent annual rate.

A monetarist policy of keeping inflation down facilitates proper decisionmaking by businesses, Dr. Schiltkneckt says. They can better distinguish between price trends (reflecting demand) for their own particular products and general inflation. Thus businessmen will be less likely to overexpand or underexpand. In turn, this reduces fluctuations in economic activity.

Looking at the Swiss scene, Mr. Rich admits that the current tighter money could prompt slower growth as well as lower inflation. ``But once you have reached your [inflation] objective, I see no reason why the Swiss economy could not grow at a fairly decent rate,'' he says.

Mr. Rich says there is a danger that employees, seeing the current higher inflation, will ask for substantial wage boosts. This would make it harder for business to keep costs and prices down.

Some economists have charged that Switzerland has achieved both low inflation and minimal unemployment only by kicking out foreign workers during a recession. About 954,000 of the roughly 6.5 million living in Switzerland are foreigners.

Mr. Rich denies this. He calculates that during the slowdown in the Swiss economy between 1981 and 1983 a reduction in the foreign labor force accounted for only one-quarter of the decline in employment. The brunt of the slump was borne by women workers, he says. Most of them returned to household chores.

A smaller proportion of married Swiss women work than in some other industrial nations. One reason is a school system that gives children a two-hour lunch break to go home to eat. Many Swiss men, conservative socially, would also rather have their wives remain at home to look after the children and housework.

Switzerland has been helped, however, by the absence of such basic industries as steel, coal, or shipbuilding. These industries have been hard hit in other European economies, adding to unemployment. Further, Switzerland has allowed the industry it does have (machinery, chemicals, drugs, watches, etc.) to do battle with foreign competition.

``The export sector was never protected,'' says Schiltknecht. The result has been a highly competitive industry that is making good profits nowadays. A Thursday column