Sunday, September 02, 2007


Despite the historic highs in economic growth, some European countries are economic laggards. Marred by tight labor market conditions, protectionist policy, high unemployment benefits and generous welfare expenditures, France's global position currently emulates low output growth rates. Meanwhile, the aggregate tax burden as a share of the GDP is among the highest in the world. Recently, France's president intiatiated several panel proposals to boost France's global competitiveness and economic performance.

In international comparison, French economy has a relatively high productivity rate. But behind this measure, there is a cautious explanation. Since France has one of the largest population of retirees in the world, the aggregate productivity depends on the ability of the existing labor force to sustain competitive productivity growth rate. In addition, a large amount of per unit productivity is penalized by high taxes and welfare contributions rates. Recent surveys (OECD, 2007) have shown that France has a high rate of hourly productivity and that there is a significant sectoral variability of the growth rates of productivity respectively.

The reason for a rachitic aggregate productivity level is the length of the workweek. Previously, French policymakers imposed a 35-hour working week. The overall loss of productivity gains has been immensive while the relative gap of productivity outfall further diminished the competitiveness of the French economy in the international perspective. One of the most hindering characteristics of a rigid labor market is the negotiating power that labor unions possess over wage claims and strikes against pro-growth measures aimed at an improvement of the company performance and aggregate productivity as well. There is much empirical evidence on negative correlation between growth behavior and extensive collective bargaining, meaning that deregulated labor market does not impede the growth of productivity since the allocation of resources absorbs the gains from output behavior easier than under extensively regulated conditions set by the misallocated collective instruments exercised in the labor market. The fact is that collective trade unionism lacks the use of information and knowledge to reach optimal decisions regarding choice aspects. In the state of collective bargaining over working time and labor utilization, there is always an expense at which the most productive labor units are penalized while the under-productive labor force, which generates a majority of extensive trade union power, gains. Consequently, the most productive labor force which usually does not engage in wage claims, face an overall loss since the output of productivity is generated into consumption and wage claims by the external income redistribution.

France's climate and environment for doing business is ranked way below the most competitive and business-friendly destinations for entrepreneurship (link). For instance, the cost of property registration is 6,8 percent of the property compared to the average of 4,3 percent in the average of OECD countries. The operating conditions of the economic climate and confidence is further depressed by the low score of economic liberty where France ranks 45th in the world and 21st in Europe. One of particular concerns is a restrictive and regulatory code regarding the investment conditions. Despite a relatively high level of the sophistication of financial products and market incentives, the regulation of product and financial markets is high and companies face significantly high payroll and income taxes. The fact that the investment climate is not dynamic and open is the notion that foreign direct investment is restricted in a number of sectors such as airplane transport, telecommunications, tourism...

France, known for its tradition of old-style Gaulist state intervention, currently prolongs a very rigid labor market with all of its damaging symptoms such as rigid restrictions regarding the increase in working hours, high non-salary costs of employing workers from the labor market, high tax wedge levied on the most productive workers and staunch rules regarding hiring and firing. Sarkozy's agenda on the state of labor market seems favorable to the prospects of productivity growth as well as to the reduction of external costs:

"On tax and labour-market policy, Mr Sarkozy is pursuing a deregulating agenda, hoping to free up business, and stimulate growth and job creation. On industrial policy, however, it is far from clear that Mr Sarkozy believes in letting the market decide."

Source: The Economist (link)

It will surely be interesting to see what the outcome of Sarkozy's market agenda will be since the size of government spending in France is among the highest in the industrialized world. Total government expenditures in France, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 53,7 percent of GDP. The revenue from state-owned firms equals 3,9 percent of the GDP. There is a numerous evidence on the negative comparative effects of state (political) ownership of firms since the government ownership of enterprises is subject to political agenda instead of setting market objectives. Another negative side-effect produced by government ownership of industrial companies and firms is that the aim is not to pursue value and quality to its customers but rather to protect domestic firms against external competition such as sectoral strategic, direct or portfolio investment of foreign-owned firms.

If French policymakers really want to pursue the liberalization of the market, then it would be silly to push for larger state intervention such as protecting the industrial companies against the competitive pressures without which the economy would stagnate in the medium-run and sustain rachitic, minimal output growth.

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