Economic Development of Luxembourg

What about Luxembourg?

Luxembourg, one of the smallest countries in the world with a population of less than 650,000 as of 2021 (World Bank), is the richest country in the world. Its GDP per capita was the highest at US$110k in 2021 (Trading Economics) and its minimum wage is one of the highest in the world at €1,923 per month. Consequently, with such wealth, it is 13th in the world in terms of quality of life QOL, above Japan, Sweden and Canada (Numbeo), and one of the safest countries in the world.

Natural resources kick-started its growth

Its shining ray of hope was its iron ore deposits discovered in the 1840s, which allowed it to launch its industrial revolution, and its membership in the Zollverein. That was the period of the industrial revolution, so steel was used in almost everything and thus was in very high demand. This accelerated Luxembourg’s trade. Subsequently, it played an active role in the European Community (Britannica), including through the establishment of the Belgium-Luxembourg Economic Union in 1921 and participation in the North Atlantic Treaty Organisation. It also had a sound position within the European Coal and Steel Community. 

The 1929 Holding Law was instrumental in its continued success (discontinued)

Companies were allowed to hold multiple subsidiaries under one holding company, which provided many tax benefits to these corporations (Mondaq). This drew many MNCs into the country, pumping investment, jobs and skills into the country. The economy took off in the 1970s when big US holding conglomerates expanded to European markets and chose Luxembourg to hold their European headquarters (HQ) because of the tax benefits. There were also many big banks, law firms and accounting firms that were already operating there, which helped these big conglomerates to set up the HQ. 

The arrival of Big Tech grew its economy exponentially

The 2000s was an era of the dot com boom, in which their economy doubled within 5 years (World Bank), and has been growing exponentially. Luxembourg was the ideal location in Europe for tech companies and was also becoming a financial hub. To date, Luxembourg is the second-largest investment fund centre and a worldwide leader in cross-border fund distribution. There are more than 14,800 Luxembourg-domiciled funds with more than €4.7 trillion in assets as of December 2019. It has a stable business, political and social environment and a wide treaty network and a favourable tax regime (EY). 

Sacrifices of economic progress
Income inequality has been rising. The Gini Index of the country has been increasing over the last few decades (World Bank). 21.5% of its residents live on the brink of poverty and social exclusion, and 18.7% of its working population is considered “the working poor”, who have low-income jobs that fall below the poverty line (SDG Watch Europe). This proportion is one of the highest in the EU. 

Prosperity in the country may not have been the same for everyone. Foreigners make up more than 60 per cent of the workforce (Harrington), holding high-paying jobs, pushing up the cost of buying a house. Furthermore, its public services such as education are lagging behind. Only 74 per cent of adults aged 25-64 finished their upper secondary education, compared to the average of 79 per cent in the OECD (OECD).

My thoughts on the future
I opine that there are two approaches to ensure sustained prosperity and happiness in Luxembourg, namely through continued upside development and reduced downside development. The country is doing good in thinking ahead, as seen by its “City of the Future” blueprint which aims to improve infrastructures, such as through digital transformation and transition to a green economy, such as through improved waste management and reduced energy consumption (Digital Luxembourg). I believe that more can be done, or perhaps done more visibly, in terms of improving its education system and addressing social mobility issues. These mean investing in the people who are the future of the country and modifying or introducing policies to improve their lives.  

The current tension between global powers and the teetering of a global recession paints a grim picture for the financial hub in Europe. The financial sector which makes up more than a third of its GDP will likely shrink or stagnate, possibly causing its GDP to follow behind. Expats might move back to their countries, causing a brain drain and potentially impairing the sector. The country will be less affected by the lack of gas due to the Russia-Ukraine war in the future if it is successful in its transition to alternative sustainable energy systems. Overall, once market activity picks up, its economy will probably pick up as well.