Introduction

Luxembourg can currently claim one of the highest standards of living in the world. In 2001, the GDP (Gross Domestic Product) per inhabitant was approximately EUR 48 700, compared with EUR 39 400 in the United States and EUR 23 200 on average among the 15 EU countries. The GDP per inhabitant certainly isn't the only or the most reliable instrument for measuring the standard of living and well-being.Nevertheless, these figures reflect a very favourable economic situation.The route taken by Luxembourg to reach this level has been far from straight.

• An eventful history
• The years preceding the First World War
• The 1913-1951 period
• "Les trente glorieuses"
• The world economic crisis of the 1975-1985 period
• Recent economic development
• Luxembourg's place within international comparison

An eventful history

We will limit ourselves to a brief outline of economic development from the beginning of the 20th century. A glance at the table showing the average annual GDP growth rate and the population growth rate gives some idea of the cycles the Luxembourg economy has been through during this period.

The years preceding the First World War

Sustained growth in the steel industry marked the years preceding the First World War.This industrial sector, based on the iron ore deposits located in the south of the country, is rooted in the latter half of the 19th century. However, it was the construction - during the two decades preceding the First World War - of the large integrated steelworks (such as Differdange and Belval) that were able to convert cast iron into steel and then rolled steel on the same site, which was crucial to the subsequent development of this economic sector. Some of these investments were made possible thanks to German capital. The production of rolled steel rose from 145 313 t. in 1900 to 1 115 004 t. in 1913 and steel-making accounted for around 60 % of total industrial employment before the First World War.

Residential population 1875 - 2001

The population grew rapidly, rising from 211 088 in 1890 to 235 954 in 1900 and 259 891 in 1910. So over a twenty-year period, it increased by nearly 50 000, while during the previous two decades (1870-1890) there had only been a rise of some 13 500.The population increase went hand in hand with a concentration of the population in the City of Luxembourg and in the Canton of Esch (the mining and steel area).Whereas in 1880, 11.4 % of the total population lived in the Canton of Esch, the proportion reached more than 26 % in 1910. The City of Luxembourg and the Canton of Esch shared 45 % of the total population on the eve of the First World War, compared with under 26 % in 1880.

The demographic growth was due in particular to a wave of immigration (first Germans and then Italians) associated with the strong demand for labour in the steel industry and iron mines. The proportion of foreigners in the total population practically doubled over 20 years, increasing from 8.5 % in 1890 to 15.3 % in 1913. This immigration trend overlapped with an emigration trend. Between 1840 and 1907 around 80 000 Luxembourgers left the country. Precarious living conditions may well explain the departures between 1840 and 1870. During the later period, which was marked by the boom in the steel industry, emigration seemed more of a socio-cultural phenomenon, with Luxembourgers reluctant to move into industry.

Nevertheless, according to the 1907 population census, nearly 40 % of the total working population was already employed in the industrial sector. Judging from the incomplete figures available for the previous period, Luxembourg industry employed barely 20 % of the working population in 1870.

Working population by major economic sector (in %)

Coal and coke supplies for the steel industry were facilitated by membership of the Zollverein (customs union), which was also the main outlet for steel products. At the same time, this economic sector underwent a phase of financial and industrial concentration and rationalisation. In 1911, ARBED (Aciéries de Burbach, Eich, Dudelange) resulted from the merger of three mediumsized firms.This company was to become one of Europe's biggest steel-producers.When it merged with USINOR and ACERALIA in 2001, ARBED helped create the biggest steel group in the world, ARCELOR.

Economic growth between 1900 and 1913 was reflected in the population growth rate, which was 1 % a year on average. During this period, the foundations of social security legislation (accident, sickness and pension benefits) were laid.

The 1913-1951 period

The 1913-1951 period was affected by the great upheavals caused by two world wars and the Great Depression of the late 1920s and early 1930s. A certain amount of social unrest, which was associated with changing economic and social structures resulting from difficult living conditions, prevailed at the end of the First World War and during the immediate post-war period. This situation soon had repercussions in the field of employment legislation. Between 1918 and 1926, there were many social improvements: an eight-hour day in heavy industry, worker representation within firms,unemployment aid,sliding salary scale (i.e.automatic linking of salaries to the cost of living) for public employees, the creation of professional bodies, regulations relating to the health and safety of workers as well as paid holidays for staff and then labourers.

The withdrawal of Luxembourg from the "Zollverein" agreement at the end of the First World War created a need for economic re-orientation. In 1921, the "Belgo-Luxembourg Economic Union" (BLEU) was formed. Many traditional small and medium-sized enterprises that had been geared towards the German market before the war found it very difficult to adapt.

Following the withdrawal of German capital, the steelworks were taken over by groups with Franco-Belgian-Luxembourg capital. Despite fiercer competition due to the emergence of new producer countries, the Luxembourg steel industry managed to diversify its outlets, to raise its productivity and to increase its output before the world slump took its toll after 1930. The 1930s were a period of economic stagnation, although a brief upturn in 1937 brought the tonnage of rolled products back up to its 1929 level. During the war years, steel production only exceeded the low 1939 level in one single year (1943).

Production of iron ore (in metric tonnes)

The variations in iron ore production reflected the cycles in steel. After non-stop growth up to 1913, the First World War brought a big drop in mining output.The favourable climate in the steel industry during the latter half of the 1920s and the slump in the 1930s had a direct impact on the volume of ore extracted. Moreover, the general level of output achieved by Luxembourg's iron mines just before the First World War was never exceeded later on. Even the huge increase in steel production from 1945 to 1974 didn't result in a parallel increase in mining output. The Luxembourg ore (minette) was in fact "low" in iron and, even before the First World War, the steel industry was moving over to the "richer" ore from France and - after the Second World War - from Brazil and Sweden as well.The amount of indigenous ore consumed by Luxembourg's steel industry dropped from 56 % on average during the 1920s to 44 % during the 1930s. From the early 1960s, this percentage shrank significantly, reaching 30 % on average between 1970 and 1974. This situation heralded a trend that was to lead to the closure of the last iron mine in 1981.

As regards the labour market during the interwar period, immigrant labour played a balancing role. In 1922, the proportion of foreigners (around 33 400) in the total population was only 12.8 %, compared with 15.3 % in 1910. As a result of the relatively favourable climate in steel during the latter half of the 1920s prompting a new wave of immigration, the size of the foreign population reached 18.6 % in 1930, before the worldwide depression began. By 1935, the foreign element had receded to its 1922 level, standing at 12.9 % of the total population.

As often happens in times of crisis, major social innovations were introduced during the 1930s. For instance, 1936 brought the creation of a Conseil National du Travail (National Labour Council), a conciliatory body responsible for preventing and ironing out social conflicts at work, composed equally of employee and employer representatives. Many collective labour agreements were made within this framework, especially in the steel and mining industries.

Over the 1913-1951 period as a whole, the GDP growth rate can be estimated at an annual average of around 1.6 %. Population growth barely reached 0.3 % on average per annum, compared with 1 % between 1900 and 1913. In addition, the State's role tended to take on increasing importance during the inter-war period. Budgetary expenditure represented 7.8 % of the national revenue in 1913, compared with 16.6 % of this revenue in 1935.

"Les trente glorieuses"

Economic reconstruction after the Second World War resulted in an exceptional growth rate of 6.7 % on average during the period 1946-1951. From the early 1950s until 1975 - i.e. until the first oil crisis and the simultaneous steel crisis, average growth returned to a more modest pace of 3.9 %.

Steel production 1890-2001

Despite significant fluctuations in added value within the steel industry, this industrial sector largely determined the growth rate for the whole Luxembourg economy during the "trente glorieuses"- the "thirty glorious years" from 1945 to 1974. Raw steel production rose from 2.45 million tonnes in 1950 to 6.45 million tonnes in 1974. During the early 1970s, the steel industry represented some 30 % of the sum total of added values in the Luxembourg economy and more than half the total added value of industry (including construction). The steelworks and iron mines provided work for around 25 000 employees in 1974, i.e. 16 % of the total workforce of the Luxembourg economy.

However, from the late 1950s, industrial diversification policies and efforts to promote Luxembourg abroad, especially in the United States, were stepped up. The arrival of Goodyear in 1951 was, as yet, an isolated event, but between 1959 and 1972 around 50 new companies set up factories in the country, including Dupont de Nemours in 1963.

The steel industry's favourable development up to 1974 should not overshadow the growth in the tertiary sector (commerce,hotels and restaurants, public administrations, etc). In 1970, the proportion of the population working in services was 48.6 %, compared with 34.5 % in 1947. Conversely, the proportion working in agriculture was tumbling rapidly, falling from 27 % of the working population in 1947 to 7.5 % in 1970.

Reliance on immigrant workers made it possible to meet the general increase in the demand for labour. The foreign element of the total working population - a mere 11.4 % in 1947 - reached 21 % in 1970.

On the social front, progress was particularly pronounced during the years immediately after the Second World War, and from 1965 to 1975. For example, 1944-1945 brought the creation of the Conférence Nationale du Travail (National Labour Conference), replacing the 1936 Conseil National du Travail (National Labour Council) and the Office National de Conciliation (National Conciliation Service). The conference provided a system for arbitration and declaring wage agreements generally binding. In December 1944, the "salaire social minimum" (minimum wage) was introduced.

As regards the second period of intense legislative activity in the social field (1965-1975), it is worth highlighting the 1965 law on collective labour agreements which imposed the inclusion of a clause index-linking salaries to the cost of living (sliding scale) and introduced the idea of national representativity. In 1975, the system of automatic and integral indexation was extended to all employees. The working week for labourers was restricted to 44 hours by a law dated December 1970, which also provided for the introduction of a 40-hour week on the 1 January 1975.We should also mention the foundation, in 1966, of the Conseil Économique et Social (Economic and Social Council), a consultative body composed of employee and employer representatives and experts designated by the public authorities.

Finally, attention should be drawn to Luxembourg's active participation in the process of European integration. Luxembourg was a signatory of the Treaty of Paris founding the European Coal and Steel Community in 1951 and the Treaty of Rome creating the European Economic Community (EEC) in 1957.

The world economic crisis of the 1975-1985 period

The world economic crisis of the 1975-1985 period, which was linked to the first and second oil crises, had a powerful impact on the Luxembourg economy. At the same time, the steel industry was facing grave problems resulting, in particular, from worldwide overproduction that put prices under serious pressure. In 1983, raw steel production stood at only 3.2 million tonnes (compared with 6.45 in 1974). So it had slumped back to its 1955 level. In 1985, the steel industry employed around 13 400 workers, i.e. half the number employed in this sector in 1974. Over the 1975-1985 period as a whole, the average annual GDP growth rate was 2.3 %, whereas between 1953 and 1975 the corresponding figure was nearly 4 %.

There were social, institutional and economic responses to the crisis. The social response consisted notably of the creation of Travaux Extraordinaires d'Intérêt Général/TEIG (Extraordinary Works of General Interest) in 1975 and the setting up of the Division Anti-Crise/DAC (Anti-Crisis Division) in 1977. At the end of this same year, legislation relating to early retirement, accompanying the reduction of the steel workforce,was passed. It enabled steelworkers to bring forward their retirement date. However, it wasn't possible to completely stem the rise in unemployment - the number of registered unemployed rose from 23 in 1974 to 3 874 in 1984 - but these measures helped avoid mass lay-offs without compensation. Between 1975 and 1986, around 14 800 workers left the steel industry, and nearly 30 % of them (4 300) benefited from the early retirement scheme. This scheme was extended to all commercial sectors of the economy in 1987.

On the institutional front, the creation of the "tripartite" marked these years. Under the law of 26 July 1975,authorising the government to take steps to prevent redundancies for economic reasons and maintain employment, a Comité de Conjoncture (Economic Committee) with a tripartite structure (employers, employees and public authorities) had already been created in 1975. The Committee's task was to monitor the development of the economic situation and report to the government on a regular basis. As the crisis worsened, a tripartite "steel" conference, which met during the second quarter of 1977, drew up an action plan to maintain economic growth and full employment, resulting in the law of 24 December 1977 that instituted a Comité de Coordination Tripartite (Tripartite Coordination Committee). In March 1979, the Conférence Tripartite Sidérurgie (Tripartite Steel Conference) reached an agreement relating to the restructuring and modernisation of the steel industry. The "tripartite" has become a permanent feature, and currently lies at the heart of what is known as the "Luxembourg social model", i.e. a system where finding consensual solutions to socio-economic problems has become the norm.

On the economic side, the responses came firstly from the steel sector itself. Between 1975 and 1979, investments from steel companies increased and in 1978, for the first time since the 1950s, they exceeded the average for the other European countries. Furthermore, the industrial and financial rationalisation trend (stake acquisitions and mergers), which began in the 1960s, accelerated. By the end of the 1970s, ARBED was the only remaining steel company in Luxembourg.The State's contribution to handling the crisis involved, firstly, the implementation of social support measures (creation of works of general interest and help with funding the Anti-Crisis Division) but also investment aid (ordinary and extraordinary capital subsidies, etc.). The particularly bad climate in the early 1980s led to a cut-back in the investments planned under the tripartite agreement of 1979, and a financial restructuring of this debt-laden sector, coupled with synergy agreements with the Belgian steel industry. The Luxembourg State played a major role in this restructuring, notably through the Société Nationale de Crédit et d'Investissement (National Credit and Investment Company). By the end of the operation, it held 42.9 % of ARBED's total capital (and 30.9 % of the voting capital).

Therefore, it was a remarkable joint effort that ensured the survival of the steel industry, which constituted (and still constitutes) an important strand of Luxembourg's industrial fabric.Approximately 5 % of average budgetary expenditure for the period 1975-1987 was devoted to saving steel. In addition, the increase in technical productivity of steelworkers (see earlier table) shows that modernisation and rationalisation efforts in this industrial sector have continued in recent years.

The "happy" outcome of the 1975-1985 crisis period is also linked to three other factors:

• the boom in financial services, which practically coincided with the decline in steel;
• the stepping-up of the economic diversification policy;
• a pay moderation policy in the early 1980s - resulting in particular in the suspension of the automatic index-linking of salaries in 1982 - which helped to restore the cost-competitiveness of the Luxembourg economy.

Finally, it's worth mentioning the increase in the general government expenditure (central administration, local administrations and social security) that occurred during the 1975-1985 decade. In relation to GDP, this expenditure rose by some 15 points between the early 1970s and the early 1980s.This increase resulted, from rather weak GDP growth rates and, mainly, from the increase in welfare transfers (to households) which rose from just under 14 % of GDP in 1974 to nearly 24 % of GDP in 1981. The social measures accompanying the restructuring of the steel industry obviously contributed to this rise, however, there was a more general improvement in welfare payments and social security benefits.

General government expenditure (in % of GDP)

Recent economic development

From the mid-1980s until 2000, the average GDP real growth rate reached a level hitherto unknown in Luxembourg over such a long period (more than 5 %) and far exceeded that of the other European countries, apart from Ireland. This accelerated growth meant an increased reliance on immigrant and cross-border workers. The foreign element of the population, which had been 18 % according to the 1970 census, rose to nearly 37 % in 2001. Luxembourgers accounted for only a 35.5 % share of domestic salaried employment in 2001, while cross-border and resident foreign workers accounted for a 37.5 % and 27 % share respectively.

Let's briefly cite the main factors behind this remarkable development since 1985, namely:

• non-stop growth in the financial sector;
• the favourable development of different economic sectors, such as business services (whose development has been led partly by financial services), IT services and also transport and communications;
• a productive and competitive industrial sector, although its relative share of the sum total of the economy?s added values is decreasing - mechanically - following the remarkable growth in services;
• high-level and growth rates of investments;
• relatively low salary deductions (income tax, social security contributions) helping keep labour costs at a competitive level;
• a global rate of tax and social security deductions and falling public expenditure (in relation to GNP) during the period.

Some of these factors are linked. For example, the strong growth, led to a large extent by the financial sector, allows a certain amount of flexibility in fiscal policy which, in turn, enhances the competitiveness of the Luxembourg economy and constitutes a growth factor.

Average GDP real growth rate 1985-2001 (in %)

The economic swing in 2001 meant a clear decline in GDP growth (by volume) which has dropped from 8.9 % in 2000 to 1 % in 2001, and won't exceed 1 % in 2002. However, we shouldn?t prejudge the future trend, which depends firstly on a worldwide economic upturn and secondly on the results in the financial sector.

Luxembourg's place within international comparison

Owing to the growing importance of aspects of national competitiveness within the context of globalisation, the practice of "ranking" or "benchmarking" has become very widespread over the past few years. Luxembourg is included in a certain number of international indexes.

In the case of the pure "economic performance" indicators - GDP per inhabitant, apparent working productivity (GDP/job) - Luxembourg is among the leading industrialised countries.The high GDP growth rate between 1985 and 2001 enabled Luxembourg to occupy this place.

In competitiveness tables, like those of the IMD and the WEF, account is taken - besides "objective" macroeconomic indicators - of the "subjective" perceptions of economic decision-makers about factors that are thought to determine competitiveness. For instance, the IMD calculates its overall index and establishes the "rankings" using more than 300 criteria, both objective and subjective, relating in particular to the efficiency of public action, the adjustment of infrastructures and policies to economic requirements, etc. In the IMD table for the year 2002, Luxembourg held third place, behind the United States and Finland and ahead of the Netherlands, Singapore, Denmark and Switzerland.

There are also some more specific international tables in the economic and social field. The Index of Economic Freedom is a synthetic index compiled by the very liberal Heritage Foundation, based on criteria such as the level of tax and social security deductions, capital flows and foreign direct investment, government intervention in the economy (e.g. collective consumption of public administrations), regulation of the financial sector, government intervention in prices and wages, etc.The authors rely on statistical data but also the assessments of the Economist Intelligence Unit. Together with New Zealand, Luxembourg occupies third place in the Index of Economic Freedom, behind Hong Kong and Singapore and ahead of the United States, the United Kingdom, etc.

An index showing perception of corruption is published annually by the non-governmental organisation Transparency International, whose aim is to fight corruption. The organisation uses information from other publications instead of first-hand information to compile this synthetic index. For Luxembourg, it refers to the answers to questions put to economic decision-makers - under the enquiry led by the IMD - concerning the bribes and corruption existing in the economy. Luxembourg is placed seventh in this index, together with the Netherlands and Canada. Among the European countries, only Sweden, Denmark and Finland have achieved a better score.

These synthetic indexes present some reliability problems in that the methodologies are often rather imprecise. Similarly, the selection of indicators and their weightings are frequently arbitrary, and ideological considerations sometimes introduce bias into the ratings. Nevertheless, comparative tables can help reveal certain economic or social weaknesses in a country. The Human Development Index (HDI) is a case in point. Luxembourg's slide in the HDI, compared with the other indexes that all give it a very favourable position,makes it clear that the situation in the fields of education and public health (life expectancy at birth indicator) can be improved (see also chapter 3.2.).

Most of the economic and social themes addressed in this document are treated in a comparative way, which may modify the image of Luxembourg portrayed in the abovementioned international tables.