We greatly welcome that the preliminary results of the Attali’s Commission have prompted a swing in the debate on growth-boosting policies towards the urgency of enhancing competition into tightly regulated services. Recent evidence suggests indeed that stringent market regulation along with employment legislation lie at the heart of the “French malaise”.
The preliminary results of the Attali’s Commission – set up by Sarkozy to tackle France’s declining growth performance – have revived the debate on the best ways to enhance French GDP potential. Intriguingly, the Commission’s policy suggestions are challenging Sarkozy’s electoral promises along unexpected directions, in that they put a stronger focus on the need to deregulate services markets, while they relax the grip on labour markets liberalisation. Admittedly, the dropping of any reference to the unique labour contract – an intellectually enticing idea but perhaps too complicated to be put in practise – does not come as a major surprise after Sarkozy’s recent softening in rhetoric, though the toning down of the debate to the introduction of a “contract de projet” (a project-based contract expiring at the project’s termination) is very disappointing. On the other hand, the emphasis has shifted toward relaxing zoning and pricing rules that have been restraining competitive pressures in retail and distribution at a clear and substantial cost to consumers. On balance, we greatly welcome that the reform debate has reverted to the key role of competition in securing a better use of inputs and higher levels of added value. We regretted that Sarkozy’s economic agenda lacked an adequate (albeit unpopular) focus on supply side rigidities other than those stemming from the inefficiencies of the labour market, especially in view of the widely accepted merits of a more comprehensive approach.
The creation of an umpteenth commission dedicated to economic reforms underlines Sarkozy’s willingness to openly acknowledge and address the widespread sense of an apparent exhaustion of the French model in creating wealth. Unlike his predecessors, Sarkozy has firmly voiced the case for change, and promised households to make them wealthier through a breakout strategy – the much-touted “rupture”. As a matter of fact, popular malaise has been simmering for a while, but the unfavourable comparison with Germany – that during the current upswing has witnessed a strong growth revival after a prolonged period of painful corporate sector restructuring – has added to individual disquiet. Moreover, the rapid convergence of large emerging market economies upsetting established rankings in terms of GDP per capita have also reinforced the sentiment that France is losing ground.
The French Malaise
GDP per head at PPP (100=1995)
General government expenditure (% GDP)
Source: UniCredit Global Research
But what happened to France? Under stiff pressures from globalization, the country has met increasing difficulties to remain competitive while keeping satisfactory social protection levels. Even piling up debt didn’t deliver too much relief. Leaving aside an outstanding health care sector performance, France’s fiscal profligacy has not produced more growth, or more income per capita, or better employment performances, or better education. This malaise – far from representing a French exception – can be traced back to employment legislation along with stringent market regulation, which hampered the country adjustment to a fast-changing environment by inhibiting the reallocation of factor inputs toward the most productive uses. Moreover, these measures have given rise to secondary effects that eventually backfired on original social objectives. The adoption of the minimum wage is a stark example: designed to preserve the income of low-skilled workers, it ended up preventing those workers from pricing themselves into jobs. Similarly, attempts to protect domestic industries by lifting trade barriers costed more jobs that they aimed to save. Politicians share some responsibility in having done little to oppose ill-conceived demands from the electorate and explain, for example, the flaws of any strategy aimed at protecting the job security of insiders at the cost of creating an underclass of workers with almost no chance of ever becoming insiders.
These facts are supported by a recent IMF study that econometrically tests whether France’s distance from the technological frontier in the manufacturing sector (defined as the United States) is related to labour market rigidities, namely the replacement ratio (a measure of the amount of income replaced by benefits in the first year that an employee is made redundant) and the ratio of the minimum wage to the median income. The results present strong evidence that both variables have a negative impact on growth rates in total factor productivity (TFP) – intuitively defined as changes in total output that do not result from variations in inputs. These conclusions appear consistent with the argument that future increases in TFP growth may depend significantly on the reform of institutions, such as the minimum wage and pricing rules for the large distribution, which currently induce workers to delay returning to work, and firms to use inputs suboptimally and slow down innovation (with negative implications for TFP). Sectoral evidence from the new EU KLEMS Growth and Productivity Accounts database reinforces this message. Despite an increase in the contribution of ICT capital to total investment, France’s transition towards a more service-oriented economy has not been accompanied over the past ten years by any improvement in total factor productivity. This is largely explained by a sizable deceleration in total factor productivity growth within distribution, construction as well as financial and business services. The fact that these are the sectors more heavily constrained by anti-competitive regulation in France may not be a fluke. It suggests that the implicit low level of competition could be a good candidate for explaining the lack of positive spillovers effects from the development and adoption of ICT technologies to TFP. For instance, there is some evidence that the Galland law on anti-predatory pricing – that the Attali Commission aims at removing – has eventually distorted price competition by prohibiting large-scale retailers from selling below invoice prices, while de facto allowing suppliers to pay retailers off-invoice discounts in return for special promotional services.
Interestingly, and contrary to conventional wisdom, evidence from the EU KLEMS data also suggests that the significant improvement in TFP in the French manufacturing sector over the past ten years has not come at the expenses of employment, following the displacement of labour toward the services sector. It would be naïve, however, to pretend that a similar relationship between labour input and TFP applies generally. On the contrary, it is important to acknowledge that the opening up of markets to increasing competition needs not have the effect of boosting employment.
 EU KLEMS (European level analysis of capital (K), labour (L), energy (E), materials (M), and services (S) inputs) is a statistical and analytical research project financed by the European Commission, latest update March 2007. In regard, see also ECB Bulletin on “Sectoral patterns of total factor productivity growth in the euro area countries”, October 2007
 “Alternative strategies for fighting unemployment: lessons from the European Experience”, Gilles Saint Paul, 2006, IDEI Working Papers 446