Industrial Re-construction Or Colbertist Illusion for France?
Written by Hilary Barnes
When France’s new minister for industrial “redressement”, Arnaud Montebourg, took office in May last year, he started his career by bawling out industrialists and blaming them for all the ills of the country. Since then, however, he has undergone a conversion and applied his energies to the construction of a plan for the country’s re-industrialisation.
The plan was presented to the nation today (September 12) by President Francois Hollande, who declared that over the next 10 years it would generate 475,000 new jobs in industry and increase value added by €45bn.
If so, it would be a start: it would replace somewhat more than half the 830,000 jobs lost in industry since 2000, reducing the share of industrial jobs to about 11% of the labour force.
France has a tradition of developing industries through government support for major projects such as Airbus, its defence industries, high speed trains, and the construction of commercial nuclear power reactors that supply about 75% of the country’s electric power.
This time is different, however. The cash strapped government, fighting to cut a huge budget deficit and national debt of around 92% of GDP, is not intending to invest large sums of government money under the new plan just €1.7bn in fact.
It is drawing up industrial road maps for 34 separate industrial sectors regarded as having a bright future. They include the development, by Airbus, of electric propulsion systems for space craft and a car that does 100km on 2 litres of petrol. The energy transition, meaning more “sustainable” energy, and the digital transition are the sectors that dominate.
Each plan will will be piloted by one or more industrialists from the private sector, whose jobs will be to encourage and assist where possible the firms to invest and grow. Better co-operation between the public administration and the industrial firms, as well as better co-operation and coordination between the myriad administrative departmentss of the public sector itself.
The plan has come as something of an ideological shock to France’s socialists, who have long been addicted to demand-side management as the macro-economic tool of choice, which, in practice, has meant a steady expansion of public sector expenditure, now about 57% of GDP and the highest, along with Denmark, in the industrialised world.
President Hollande, however, has adopted supply-side socialism as his trade mark, although those who have seen the heavy increases his government made in taxes on the corporate sector in general and the rich in particular wonder if he knows what he is talking about.
However, the government has in effect conceded that it went too far when it increased taxes on business in last year’s budget (revenues from corporate income tax up in the first seven months of this year are up by 29%) and earlier this year it introduced substantial tax rebates on corporate income, applying over the coming three years (some of it already feeding through in advance this year). Revenues from income tax on persons has risen by “only” 24%! Hardly surprising, perhaps, if the general value added sales tax has only increased by 0.3%
The new plan obviously raises some serious questions. It identifies promising industrial growth sectors and then assumes that with encouragement from industrial coaches they will do what is required to make France an important industrial power once more.
But the slide in output and employment in manufacturing is caused by fundamental factors that are not taken into consideration in the new plan, such as rising wage costs relative to manufacturers in other countries, Hourly wage rates in France were about 10% lower than in Germany in 2000; now they are about 10% higher.
Consistently low profit margins and low investment are other bugbears, which shows up in a significantly lower number per of robots in French industry than in German industry and only about half the number per capita in Japan and South Korea.
A vast regulatory apparatus (France is not alone in this, of course) takes a big step up if a firm has more than 49 employees, so most don’t.
High income and wealth taxes, increased by the present government, that have not stopped innovative firms from doing well, but make other countries with less vicious tax regimes more attractive for entrepreneurs to set up their businesses. Wealth taxes also mean that successful entrepreneurs soon have to sell shares in their companies in order to pay taxes. Before long they lose control of the company they created. A Bill Gates story is difficult to conceive in France.
In a book just out, “Ten Ideas That Are Sinking France” (my translation), David Thesmar (France’s “best young economist” of 2007) and a colleague, Augustin Lander, patiently explains to the French, that there is no special merit in having a large manufacturing sector.
“The dream of an increase in the share of employment in manufacturing industry to the detriment of services is an illusion.”
[It is] “the immaterial part of the economy, conception, commercialisation, finance [and] after sales service which adds the essential value and not manufacturing as such…..Capitalism is displacing human activities towards the immaterial economy, that of services.”
Fortunately for France, this is happening, but not fast enough. Employment in scientific research and development activities, information and communications, the finance industry and transport increased by 461,000 between 2000 and 2013, according to France’s official office of statistics, INSEE, but that only makes up up for half the losses in manufacturing.
One reviewer of the book concluded that it gave an excellent insight into the way in which the only thing that Montebourg employs is
“a taste for theatrical declamation and the lyrical illusions of Colbertism French style“.