France’s economic ouis and woes
Structural reforms are key to boosting growth, writes Kenneth Rogoff
MORE than ever, the French economy is at the centre of the global debate about how far one can push the limits of state size and control in a capitalist democracy. To those on the left, France’s generous benefits and strong trade unions provide a formula for a more inclusive welfare state. To those on the right, its oversized and intrusive government offers only a blueprint for secular decline. For the moment, the right looks right.
Once nearly the economic equal of Germany, France has fallen well behind over the past decade, with per capita gross domestic product (GDP) now about 10% lower.
Few people feel confident about France’s economic future. The good news is that France is not quite as French as it pretends to be. Yes, there is a 35-hour work week, but companies can negotiate around the limit by offering to pay more for overtime. The effective work week for most workers is perhaps closer to 39 hours.
Yes, France has in effect banned the car service Uber, whose business model has arguably been one of the most transformative advances of the decade. But while this is a triumph for taxi unions and a tragedy for passengers and Uber drivers, France has also started focusing on nurturing small, highpotential technology companies.
The French government is no longer placing all its bets on big, state-led projects, as it did in the ’70s heyday of massive investment in high-speed trains and Airbus.
President François Hollande has given France’s Economy Minister Emmanuel Macron a wide berth to try to implement desperately needed structural reforms of labour and product markets.
Progressive economists love the French government for spending a staggering 57% of GDP, compared to government expenditures of 44% of GDP for Germany. And it must be acknowledged that the French government provides excellent value in some key areas. France’s health service justly receives much better reviews than the UK’s. French citizens might pay a lot of taxes and suffer a high degree of regulation, but at least they get something in return.
Still, France’s supersize government is hardly a source of unalloyed dynamism. And indeed, one sus- pects that France’s GDP and productivity measures are flattered by the fact that, for lack of market prices, statisticians assume that citizens get one dollar of value for each dollar spent on government, which might be an overstatement.
Worryingly, it is not clear how well France’s culture of inclusiveness can ever extend to immigrants. The same strict firing laws and high levels of minimum wages that are intended to protect native French workers from globalisation make it difficult for newcomers to land jobs. Yet virtually every study of global inequality suggests that gains from allowing greater labour mobility dwarf gains from redistributing income among natives.
The centre of Paris and other French cities may be grand, but many immigrants from North Africa and elsewhere live in squalid ghettos on the outskirts. Although the rate of unemployment for par- ticular ethnic groups is not known (French law precludes collecting data by ethnic classification), anecdotal evidence suggests much higher levels for immigrants and their descendants.
True, the government provides generous welfare benefits; but this alone does not produce inclusiveness. Strong popular support for Marine Le Pen’s anti-immigration National Front party, together with French recalcitrance about accepting migrants escaping the war in Syria, indicates the problems with applying the French model in diverse societies.
Another obstacle to applying the French model elsewhere is that France enjoys certain unique advantages that are arguably critical to its success.
Elite French managers are widely considered among the best in the world, and are frequently selected to head major international corporations. Corruption is certainly a problem, but significantly less so than in most of the eurozone’s south. Lastly, France arguably has one of the world’s most favourable natural environments.
A healthy French economy would do wonders to help lift the eurozone out of its malaise. It could also provide an example to other countries of how inclusive capitalism can work. But that assumes that the government will embrace the structural reforms France’s economy so desperately needs.
Rogoff, a former chief economist of the International Monetary Fund, is professor of economics and public policy at Harvard University.
French citizens might pay a lot of taxes … but at least they get something in return