 | ||||
Is
the French economy really so different from that of other
industrialised nations? As this brief guide shows, the answer is
generally no; as regards fundamentals, the French economy is run on the
same lines as that of other developed nations. But in the details,
there are some differences that can cause raised eyebrows when seen
from abroad.......
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The French economy: strengths and weaknesses |
There is a popular view, often seen or heard in the media, that the French economy is somehow vastly different in its operation from other modern economies. France is even sometimes depicted as a something close to a rogue economy, where workers are constantly on strike, businesses are held hostage to all powerful unions, and free enterprise is virtually impossible.
Like most myths, the rogue economy myth - largely perpetrated by people with an axe to grind, or by outside commentators who have never set foot in the country - has just a little grounding in reality; but like all myths it is a caricature where weaknesses are blown out of all proportion, and strengths swept under the carpet. For all its weaknesses - and its strengths - the French economy is alive and well, and performing above average in G20 terms.
While Standard & Poor's downgraded France's rating from AAA to AA+ in January 2012, neither Moody's nor Fitch, the two other main ratings' agencies, have yet followed - though Moody's has France on close watch.
Comparing national economies
According to the OECD, France in 2008 was the world's fifth economic power, behind the USA, China, Japan and Germany, and just ahead of the UK. But ranking national economies in a table is not always as clear-cut as it might seem. In monetary terms, the relative value of national economies varies with exchange rate fluctuations which are partly due to currency speculation, not to economic performance.
In order to evacuate the exchange rate variable from international economic comparisons, an alternative and more objective way of comparing economies is to do so at "purchasing power parity" - a system that takes into account the cost of living in each country. In terms of GDP (Gross Domestic Product) at PPP rates , France in 2008 was in 9th position, below the UK, Germany, India and Russia. In terms of GDP per inhabitant at PPP rates, France is going down. In the world ranking table (which includes micro nations such as San Marino, the Cayman Islands or Liechtenstein), France fell from 39th place in 2008 to 41st place in 2009. When such microeconomies are excluded, France ranked 19th among major industrial nations.
According to the OECD, France in 2008 was the world's fifth economic power, behind the USA, China, Japan and Germany, and just ahead of the UK. But ranking national economies in a table is not always as clear-cut as it might seem. In monetary terms, the relative value of national economies varies with exchange rate fluctuations which are partly due to currency speculation, not to economic performance.
In order to evacuate the exchange rate variable from international economic comparisons, an alternative and more objective way of comparing economies is to do so at "purchasing power parity" - a system that takes into account the cost of living in each country. In terms of GDP (Gross Domestic Product) at PPP rates , France in 2008 was in 9th position, below the UK, Germany, India and Russia. In terms of GDP per inhabitant at PPP rates, France is going down. In the world ranking table (which includes micro nations such as San Marino, the Cayman Islands or Liechtenstein), France fell from 39th place in 2008 to 41st place in 2009. When such microeconomies are excluded, France ranked 19th among major industrial nations.
Like all developed economies, France has suffered since 2007 from the effects of the global recession; but the effects in France have been partly cushioned by a more cautious banking and investment sector, and by a tradition of state intervention in the economy. In addition, France is world-leader when it comes to the proportion of the labour force working in public sector jobs: 25% in 2005 - few of whom were affected by the economic downturn.
Preceived strengths of the French economy
In many sectors, the French economy is among the strongest in the world. France is among the leading industrial economies in the automotive, aerospace, and railways sectors, as well as in cosmetics, luxury goods, insurance, pharmaceuticals, telecoms, power generation, defence, agriculture and hospitality. France is also the world's leading tourist destination.Regarding its labor market, France has one of the highest levels of graduates, and the highest number of science graduates per 1000 workers of any European country.
In the years following the second world war, the French economy developed massively from a largely agrarian economy with over 40% of the population still living on the land, into a modern industrial economy with world-class coprorations and business leaders. In the years 1945 - 1975, known as "les trente glorieuses", the French economy grew by an average off 4.1% in terms of GDP per inhabitant, far faster than the USA or the UK though slower than Germany or Japan. The French state - which for most of this time was in the hands of Conservatives - played an active role through the establishment of a series of four year plans (Contrats de plan), whereby the state set economic targets and economic priorities, but left it up to private enterprise to achieve or apply them. For example, the rapid development of the French motorway system was achieved (and is still being achieved) by public investment offset by the sale of long-term concessions to private or semi-private companies to operate and maintain them.
Between 1945 and 1986, political leaders from de Gaulle (a conservative) to Mitterrand (a socialist) embarked on policies of nationalisation and state intervention.
For de Gaulle, nationalisation was seen as a tool of economic development, guaranteeing a stable environment for key sectors of the French economy, but also ensuring support from his opponents on the left. Car-maker Renault was nationalised by de Gaulle in 1945 as much to help it recover from the war, as to placate the Communist opposition and the unions.
For Mitterrand, nationalisation was ideological. During his first presidency, from 1981, Mitterrand initiated a series of nationalisations in a range of different sectors, including banking, insurance and pharmaceuticals. However, for his second presidency, he advocated the famous "ni-ni" doctrine (the neither nor doctrine), proposing neither nationalisation nor privatisation. In actual fact, this was a way of admitting the failure of his previous policy; during Mitterand's second presidency, France embarked on a wholescale policy of privatisation, which continued during the Chirac presidency, reaching its peak under the government of socialist prime minister Lionel Jospin.
Yet beyond the issue of nationalisation or privatisation, the French state has maintained an above-average ability to intervene in economic affairs, remaining a major shareholder in utilities such as EDF where it has a majority holding, or France Telecom (Orange), in which it has a 27% holding.
As a result of its hands-on approach to economic management, France has been able to ensure some remarkable economic success stories. Among the most visible of these is France's world-leading success in the field of rail infrastructure. France was the first country in the world to propose, plan and set up a dedicated high-speed rail network; today the country can boast the world's most extensive high-speed rail network, one which runs without interruption from the North Sea to the Mediterranean, and east-west from near the German border to the lower reaches of the Loire. State intervention in the automotive sector has helped Renault become one of the main world players; the French government still holds a 15% stake in Renault which, in turn, is the leading investor (almost 45%) in Nissan.
When it comes down to hard facts, critics of state intervention in the French economy have to tread carefully.
Perceived weaknesses of the French economy
Paradoxically, the extent of the French state's involvement in the economy has proved to be one of its main weaknesses, as well as one of its main strengths. In recent decades, the development of state favors and aid in certain economic sectors, along with the cost of major infrastructure programs and social services, have led to a huge increase in the budget of the French state. To finance its programs, the French government, like all others, has had to resort to increased taxation; but in France, a larger than usual proportion of this taxation has fallen on business, rather than on private individuals.French business is currently burdened by the world's highest level of payroll tax (cotisations sociales), which at 43% are far higher than in any other country. The next highest rates are found in Spain and the Czech Republic (30%), while businesses in the UK pay a payroll tax (NI contributions) of just 11%, and those in the USA just 5%. In an increasingly global economy, this disparity is damaging for French industry, and is one of the perceived causes of endemic high unemployment in France. It has also led the French economy to suffer from offshoring, the export of jobs and manufacturing capacity to low-wage countries. But the fact that the burden on employers of payroll taxes is almost four times higher than that of NI contributions in the UK is not something that cripples French industry in the way that advocates of low payroll taxes would like to imagine.
High tax burdens do nevertheless damage some parts of the French economy, and they are particularly felt by small businesses. However numerous counter-measures have been introduced by successive governments to offset their effect; these include lower levels of payroll tax on workers paid at minimum wage, tax breaks for the hiring of young employees or apprentices, aids for employers in certain high-unemployment areas, and more. In all there are dozens of forms of aid available to companies – and that is a problem in itself, as finding one's way around the maze can be a daunting task. The system needs to employ hundreds of civil servants just for administration. "Simplification" is one of the most frequently heard demands made by small businesses in France.
The high level of corporate taxation in France is logically one of the principal causes of the falling competitiveness of French industry on the global market, and its fgrowing trade deficit. These in turn contribute to France's systemic problem of high unemployment.
Employee rights - though a great advantage from the employee's point of view - are seen as another weakness of the French system, specially by employers. Many aspects of France's social systems are piloted by complex management arrangements involving the state, management and the unions - referred to collectively as "les partenaires sociaux". Though less than 10% of workers in France belong to trade unions (far less than in the UK or the USA), unions wield considerable power through their role as partenaires sociaux. Thus, over the years, successive French governments of both the left and the right have given in to union demands in order to buy stability and popularity. The result is a system whereby employees in France enjoy a high level of job protection and guaranteed salary levels. In large corporations this is not too much of a problem; but in small businesses employers frequently hesitate to create jobs for fear of being unable to lay the new employees off without considerable penalties. Alternatively they outsource work to foreign suppliers rather than employ staff locally, or resort to temporary contracts rather than offering full-time permanent jobs. This situation also depresses salaries. All this is bad for employment, since in all developed economies, it is small businesses that create most of the new jobs.
Finally we come to those two big myths about the French economy; a) that the French are always on strike, and b) that the French work less than other nations.
If a nation's workers were constantly on strike, that would be a serious economic handicap; fortunately this is not the case in France, and commentators who suggest otherwise are just making things up. According to the IMD survey of 2008, France continues to lose less days to strikes per 1000 inhabitants (3.67 days) than either the UK (10.06) or the USA (5.67). The problem in France is that strikes are highly visible, because they tend to be concentrated in large public services and give rise to major protests and demonstrations in Paris.... within a few hundred yards of bureaux of many of the world's main TV stations, press agencies, newspaper correspondents and other purveyors of news. When French public servants strike, the world knows all about it. Conversely the world never hears much about the vast majority of employees in France who never go on strike.
As for the perception that French workers work less than their counterparts in other countries, that is not borne out by facts. According to the International Labor Organization, management level employees in France work among the longest hours in Europe (almost 10% longer than in the UK), while the workforce works slightly below the European average, putting in comparable hours to workers in Sweden, but more than workers in the Netherlands, Norway or Denmark. ILO figures (2008) also show that labor productivity in France, in terms of GDP per hour worked, is the second highest in Europe after Norway, and only fractionally lower than in the USA. Thanks to this, France is able to remain a major exporting nation and one of the top six economies in the world.
In the end, perhaps the main perceived weakness of the French economy is that it is not run on quite the same model as what the French refer to as the "Anglo-Saxon" economies. This does not make it any less successful, just different, though not so very different. France is home to many world-scale corporations; it has its millionnaires and its entrepreneurs, its top business schools, its rich and its poor. However the gap between the rich and poor is not as flagrant as it is in many other countries, and the French want to keep it this way. The French - as a nation - believe in strong state and state intervention. Though they complain about high taxation, they do so less than people in other countries, and generally accept that it is a necessity required to pay for their excellent welfare state. They would rise up in rebellion (like citizens in the UK or virtually any other western nation) if any governement suggested curtailing the public health care system in order to reduce taxes.
Since 2007, France like other countries has had to adapt to new global economic realities. It is doing so through measures designed to modernise its economy; but modernisation in France is often a difficult process. The Sarkozy government has become deeply unpopular in part (though not exclusively) through its programs of "reform", which do not go down well with many French voters, particularly those who see themselves losing out. France suffered less than the UK and many other major economies from the economic downturn in 2007; but three years later it is also seen to be slower in bouncing back.
At the end of 2011, the economy, growing at over 1%, is doing better than many, but deficits are continuing to rise. The budget deficit for 2010 was estimated at 7.1%, but is scheduled to fall this year (2011) to 5.7%, then to 4.5% in 2012, and be balanced by 2016. In the 2010 Autumn budget, the government announced a large package of public spending cuts and the closing of some tax loopholes, designed to reduce the public deficit by 2% in 2011 - a target which should be achieved. Yet France's national debt will continue to rise until 2012, reaching a high of 87.4% of GDP, before it stats to fall back.
France is not alone in its economic difficulties. Like other European nations, it has announced firm intentions to get its economy back on an even keel, and in line with European Union targets. And as in other countries, France's belt-tightening does not go down well with citizens, and is leading to criticism and protest in parliament and in the street. Whether the targets set by president Sarkozy will be met or not, only time will tell.
Budget deficit or public deficit : The amount by which a government's annual spending exceeds its annual income.
GDP (Gross Domestic Product)
: the total value of economic activity (i.e. wealth generated by work
or investment) within a country in a year. GDP is measured either as an
aggregate (total GDP, i.e. the size of an economy), or per person (GDP
per capita).
National debt: An indicator at a given point in time: it is the value of money owed by a government to all its creditors, both nationally or internationally. Servicing the debt, i.e. paying interest on the money it owes, is a major spending item in the budgets of many nations.
National debt: An indicator at a given point in time: it is the value of money owed by a government to all its creditors, both nationally or internationally. Servicing the debt, i.e. paying interest on the money it owes, is a major spending item in the budgets of many nations.
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