Economic Growth

How can France prove inclusive capitalism works?

Kenneth Rogoff
Maurits C. Boas Chair of International Economics, Harvard University
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More than ever, the French economy is at the center 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, France’s 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 GDP now about 10% lower. France may punch above its weight politically, but it punches far below its weight economically.

Whenever someone proposes turning the eurozone into a transfer union, as France’s economy minister, Emmanuel Macron, recently did, the presumption is that Germany will carry everyone else on its shoulders. But why should only Germany have that responsibility? France’s economy is roughly three-quarters the size of Germany’s. Persuading the Germans that the French are willing and able to pay their fair share could make room for a lot of necessary compromises that until now have seemed impossible.

For now, 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 workweek, but companies can negotiate around the limit by offering to pay more for overtime. The effective workweek for most workers is perhaps closer to 39 hours.

Yes, France has just effectively banned the car service Uber, whose business model has arguably been one of the most transformative and important 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, high-potential technology companies.
The French government is no longer placing all its bets on big, state-led projects, as it did in the 1970s heyday of massive investment in high-speed trains and Airbus. President François Hollande has given Macron wide berth to try to implement desperately needed structural reforms of labor and product markets. Of course, it remains to be seen just how much political support such market-oriented policies can sustain.

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 United Kingdom’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 suspects that France’s GDP and productivity measures are flattered by the fact that, for lack of market prices, statisticians blindly 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 globalization make it much more difficult for newcomers to land jobs. Yet virtually every study of global inequality suggests that gains from allowing greater labor mobility dwarf gains from redistributing income among natives. By contrast, the more liberal labor laws in the United States and the United Kingdom ensure more opportunities for outsiders.
The center 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 precise rate of unemployment for particular ethnic groups is not known (French law precludes collecting data by ethnic classification), anecdotal evidence suggests much higher levels of joblessness 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. (The Italian state is also large and intrusive, but it does not produce the high-quality public services that the French government does.) Lastly, France arguably has one of the world’s most favorable natural environments, with fertile soil and an exceptionally temperate climate.

A healthy French economy would do wonders to help lift the eurozone out of its malaise. It could also provide an example to countries everywhere of how inclusive capitalism can work. But that assumes that the government will embrace the structural reforms that France’s economy so desperately needs.

This article is published in collaboration with Project Syndicate. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Kenneth Rogoff is the Professor of Economics and Public Policy at Harvard University.

Image: Businessmen are seen on the esplanade. REUTERS/Christian Hartmann.

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