Why is Luxembourg the Richest Country in the World? Rags to Riches

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The small European nation of Luxembourg is the world’s last remaining Grand Duchy, meaning its ruling monarch is a duke rather than a king, but this isn’t the only thing to make the country unique. With a GDP per capita of over $140,000, which is over $50,000 more than the next runner-up, Luxembourg is the richest country in the world, but you’re probably wondering why.   

Landlocked and enveloped by dense Ardennes forest, Luxembourg is an unlikely contender when it comes to extreme wealth. It’s home to a small population of less than 650,000, but despite its mostly rural setting and medieval history, Luxembourg has a thriving financial sector, which is just one of the reasons it has grown to be the richest country on the planet. 

Our guide explores the shift in industry, trade, and private banking in Luxembourg and a host of other competing factors, so we can answer once and for all, just why this small European powerhouse is the richest country ever. Let’s get into it.

Why is Luxembourg the richest country in the world?

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Luxembourg is a tiny nation and one of the smallest in Europe. With an approximate area of 2,500 square kilometers, it’s not even as big as Rhode Island, the smallest state in the USA. Luxembourg is also home to one of the smallest national populations in Europe with around 630,000 people calling the landlocked country home, although it has one of the highest population growth rates, with foreigners accounting for nearly half the population. Rather than hinder its success, Luxembourg’s meager population has done quite the opposite.

As of 2022, Luxembourg is the richest country in the world. But what does this mean? National wealth is often calculated by the GDP per capita or the average economic output per person in any given country. Such a calculation seeks to determine prosperity through personal economic growth, but remember, it’s not always indicative of the average wage.  

As these averages are calculated in local currency and are always changing, especially when it comes to countries experiencing extreme wealth, it can be hard to pinpoint the front runners. However, Luxembourg’s GDP per capita is so far ahead of the ever-changing second, third, and fourth place scorers, with the exception of Liechtenstein and Monaco who are usually discounted from these lists, it’s clear that Luxembourg is a top contender. 

On top of its $140,000 GDP per capita, Luxembourg has a PPP per capita value of around $118,500, and an average household net wealth of $941,000, which is almost three times the average in the US. As a country landlocked by Belgium, France, and Germany in the center of Europe, you’re probably wondering, why is Luxembourg the richest country in the world. And when did it get so wealthy? 

Well, that’s what we’re here to discover, and as it turns out, Luxembourg’s story is a true rags-to-riches one with its fortune and prosperity changing almost overnight in the mid-19th century. 

Industry

Luxembourg the richest country in the world
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Luxembourg wasn’t always the economic powerhouse it is today. The country’s advanced and diversified economy is now based on banking, steel, and manufacturing, growing at a rate of 4.6 percent every year on average, but this wasn’t the case in the early 1800s.

At the start of the 19th century, around 80 percent of Luxembourg’s population were employed in agriculture, living hard and laborious lives. Poverty was so bad that around a third of Luxembourg’s population fled to other countries in search of a better quality of life, with most of them heading to the US. 

That was until the significant discovery of iron ore reserves in the mid-1800s changed the country’s economy forever. Mines and factories popped up all over the country and Luxembourg’s lucrative steel industry was born overnight. The small landlocked nation became one of Europe’s leading steel producers and employment sky-rocketed in the 1900s.

In the 1960s, iron and steel accounted for 80 percent of the total value of exports from Luxembourg. However, when industry started to decline in Europe, and production became much cheaper overseas in countries like China, this wasn’t the end for Luxembourg’s prosperity.  

Location

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Being landlocked is often a cause of setbacks for developing countries. Lack of territorial access to seas inhibits exposure to world markets, incurring higher transportation costs or halting trade altogether. A country’s growth is thought to be reduced by around 1.5 percent annually as a result of being landlocked, and of the world’s 44 landlocked nations, 31 are still developing and 16 are among the poorest countries on the planet. 

This is why it might come as a surprise that Luxembourg’s location has been beneficial over the years. In fact, Luxembourg, Switzerland, and Liechtenstein are all noncoastal but have experienced extreme growth nevertheless. Often, this has a lot to do with the countries that surround them, and, as it turns out, being landlocked in the heart of Western Europe isn’t too bad. 

Luxembourg is bordered by Belgium to the west and north, Germany to the northeast and east, and France to the south. It hasn’t always been its own political unit as a result, coming under the control of a number of rulers and states over the years. Still, it has been an autonomous state since the 10th century, gaining full independence as a Grandy Duchy in the 1800s.

Luxembourg has always been able to use its position to its benefit. In fact, the ancient Saxon name for the capital city, Lucilinburhuc, means “Little Fortress”, referring to its strategic placement, straddling a major military route. The country, as a whole, is a point of contact between Frankish and Germanic territories. Today, Luxembourg employs three national languages: Luxembourgish, German and French – a testament to the country’s close relationships and common interests with its neighbors. 

Luxembourg became a founding member of some important international economic organizations in the 20th century. The most significant being the Benelux Economic Union, of which the Grand Duchy was one of the first original members. Luxembourg’s economic power linked it with Belgium and the Netherlands, eventually forming the core of the European Economic Community, which later became the European Union. 

As well as international banking and financial services, Luxembourg also involved itself in noncommercial activities, such as hosting intra-European political events in the 20th century. This all propelled its economic vigor and Luxembourg was an important financial center by the late 20th century. To this day, Luxembourg remains the home of the European Court of Justice, as well as the seat of the European Investment Bank, the European Parliament’s Secretariat, and the European Court of Auditors.  

Private Banking 

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By the end of the 1900s, Luxembourg was a force to be reckoned with in the financial world. This was, in part, due to its becoming home to many foreign-owned banks, largely facilitated by favorable tax laws and general banking secrecy. Such laws have come under scrutiny from other countries, but they remain the principal reason for Luxembourg’s continued wealth in the 21st century. 

The government started to encourage foreign holding companies to register in Luxembourg around the 1930s. Such companies would be controlling a number of secondary companies, but many countries in the world would heavily tax them for this. 

Luxembourg’s strategic low taxes allowed these large corporations to make huge savings, luring them to the Grand Ducky. Still, with Luxembourg being so small, a tiny cut of so many big companies’ profits still massively profited the government and continues to today. For example, Skype and Amazon are just two of the corporate supergiants that have their European headquarters in Luxembourg. 

This system also resulted in bountiful high-paying jobs in the banking and financial sector. Luxembourg became an important job market as a result and the average annual salary of its people started to go up. What’s more, around half of Luxembourg’s financial workers started coming from Germany, France, and Belgium to cash in on the lucrative banking sector. Many of these workers were able to maintain residence in their country of origin, thanks to Luxembourg’s close proximity to them. Seeing as citizens can only depend on the welfare of the country they live in and not the one they work for, this led to even more government surpluses for Luxembourg. 

All of Luxembourg’s financial growth has led to diversification within the banking sector and it remains a leading player in the European financial industry.

Employment, Taxes, and Welfare Benefits

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The financial sector employs around 50,000 people in Luxembourg, of which 50 percent work in banking. Today, less than five percent of the population in Luxembourg are unemployed and this has had a great effect on the economy. Taxes remain very low for local businesses and workers, which continues to boost other sectors of Luxembourg’s economy, raising incomes on a broad scale. 

Luxembourg has also been able to boost incentives for its workforce, promoting employment and raising the quality of life for everyone even more so. The Grand Duchy’s robust social security scheme as a result of years of wealth has given its residents a wide choice of welfare perks. Public healthcare, pensions, parental leave, and even unemployment benefits are all well-funded in Luxembourg. And just as the Scandinavian countries have shown us, happy populations lead to less crime, more productivity, and general constructive citizenship. 

There is still high demand in the financial sector in Luxembourg, despite the popularity of jobs, meaning more and more foreigners continue to relocate there. Thanks to demand, this has also pushed housing prices through the roof and local Luxembourgese families are able to profit even more by selling or renting their properties to newcomers.  

Is Luxembourg safe?

With such extreme wealth, comes great public funding meaning Luxembourg has an efficient police force, fair judiciary system, and a relatively law-abiding population with less than a 0.5 percent poverty rate. This means Luxembourg is not only one of the safest countries in Europe, but it’s one of the safest countries in the world and its economic and political stability have a lot to do with it. Even petty crime rates are low and you can walk around Luxembourg City or any of its smaller towns at night with little to worry about. Thanks to its location, Luxembourg also isn’t vulnerable to natural disasters or extreme weather. 

Is Luxembourg expensive?

As the richest country in the world, Luxembourg isn’t cheap, but with its mostly rural setting, you can find places that aren’t as pricey at you might expect. Luxembourg doesn’t have the same touristic appeal as other wealthy countries like Switzerland and Monaco which are popular tourist destinations as well as economic giants. Although Luxembourg City is one of the top ten most expensive capitals in the world, the rest of the country is no worse than the UK and US when it comes to average costs. However, the property can be expensive wherever you buy in the Grand Duchy.

When is the best time to visit Luxembourg?

Luxembourg’s rolling mountains and dense forests can be enjoyed all year round, but the country experiences its best weather from June to August with average highs hovering in the mid-70s and plenty of blue skies. Luxembourg gets very chilly in winter, with temperatures regularly dipping below freezing from December to February and average highs of just 35 degrees Fahrenheit. However, this tiny European gem with its medieval cities and snow-covered castles is magical around Christmas time, but it will be more expensive during these two seasons.  

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Esmé is an English literature graduate and freelance writer. Originally from London, Esmé is lucky enough to call Bali home. Her travels have taken her from the far corners of the East to the islands of the Caribbean. When she's not writing, you'll find her lying on a beach somewhere, lost in a crime novel.