TCS Daily

Unfit to Compete

By Sylvain Charat - September 7, 2004 12:00 AM

Competitive companies plus a competitive state. That's the required equation for a country to be a leader in the post Cold War global economy. A failure to grasp this reality will keep a country out of the economic elite in the years ahead. France is failing.

French economic growth seems to be fairly acceptable this year since it grew in the second quarter by an estimated 0.8 to 0.9 percent of GDP, leading the government to expect a 2.5 percent growth for 2004. This is much better indeed than the 0.5 percent growth in 2003. But the substantial problem does not lie here. The heart of the matter is that the growth is too slow: 1.8 percent on average over the last 15 years, not enough compare to the United Kingdom with 2.3 percent and the United States with 2.9 percent. France's main economic trouble comes from the fact that even if French companies are competitive, the French state is not.

French companies are competitive. Indeed, they are mainly successful abroad, with such industry leaders as L'Oreal in cosmetics, Air France in air transport, Michelin in tires, Dannon in dairy products, just to name a few. But besides the stars, a real trend exists. According to the OECD, French companies invested abroad some $60 billion between 1995 and 2001, just behind the United States ($100 billion) but ahead of Germany ($56 billion). The IMF confirmed this economic dynamic; French exports amounted to about $5,500 per person in 2002 whereas US exports were at $2,400. It's the same situation concerning the sale of services, placing France in excellent position with $1,400 per person for $900 for the United States.

Those data paint a pleasant international picture of France as producing competitive entrepreneurship. But the domestic picture is quite different due to a French government that does not create a competitive economic context. Consider three main factors. First, there is always more public spending. The biggest public deficit in all of Europe belongs to France: 4.1 percent of GDP in 2003 (about $70 billion), and its accumulation in recent years creates a public debt reaching today more than $1 trillion (63 percent of the total French GDP). Moreover, even if half French households do not pay income tax, they are all subject to compulsory deductions on wages to fund public expenditures, whether they be local or social, amounting in total to $780 billion (46 percent of GDP).

Second, there is always more regulation and taxation on work. The state of the art of work regulation is the 35-hour-law: French are working less than others, 1,561 hours a year, or 20 percent less than Americans. Furthermore not enough French are at work: 61 percent compared to 72 percent in the United States. And finally French work costs are 20 percent higher than the European Union average before enlargement, and 40 percent higher than the United States.

Third, there is too much unemployment. The jobless rate has reached 9.9 percent and economic growth is too weak to create new jobs. In France's case, it is estimated that jobs could be created if the growth level were between 1.5 and 2.2 percent. The 2.2 percent level would allow 60,000 more jobs, but when considered in light of the working population increase, this would not be sufficient to reduce unemployment. And knowing that the French growth average is 1.8 percent, there are no reasons to be optimistic.

According to those data, French economic growth relies more on exports and consequently on the economic health of other countries than on its own domestic performance. National economic structures are leaning more towards dirigisme than free trade. Re-engineering the French state must be a top priority if we want a truly competitive France that is keeping up in the race for economic leadership. But French government officials, whatever their political parties, seem to forget the fundamental economic new deal of the new world order: competitive companies need a competitive state. This means that in the global economic train, France is a wagon, not the engine.

The author is Director of Policy Studies in the French think tank Eurolibnetwork.


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