Why is it so difficult to carry out structural reforms in France?

10.14.2021 8 min
Transcript of my speech at Journées de l’économie 2013, the topic of which was: “Is the French economy weakened by its institutions?”
portrait Olivier Klein

First of all, as we are thinking about the institutional difficulties in carrying out structural reforms, it is important to take the word “institutional” in the broad sense, that is, in the sense of culture, history, the State’s role and off-market regulation.

Structural reforms need to be initiated and implemented gradually. Fundamentally, structural reform means increasing growth potential. In France, we currently have a terribly low growth potential of around 0.5 or 0.7%. Increasing growth potential makes it possible to preserve or increase wealth per capita, reduce public deficits without suffering, control public debt, find fiscal solvency and ensure the balance of social systems. If growth is not sufficient, our social system equilibrium is not maintained, and it is therefore financed either by debt or ultimately by a drastic reduction in social protection.

Countries such as the Nordics and Canada carried out very successful structural reforms during the first half of the 1990s, as Germany did in the first half of 2000. The southern countries such as Spain and Portugal are currently doing so but are having great difficulty because they are doing it completely on the fly, during this major crisis period. France is struggling to implement these reforms, as everyone, on the right and on the left, is pushing back against them. The question is determining why it cannot be achieved simply, while, on the substance, there is a convergence of extraordinary ideas in all the reports that have been published (the Camdessus Report; the Pebereau Report; the Gallois Report; the Attali 1 and 2 Report).

The important thing is that the growth potential of an economy is increasing with labour productivity gains. That is, technical progress, capital intensity and an increase in the working population. Also with the increase in structural competitiveness, by seeking efficiency for the State in order to have, for a given capacity, the best efficiency in public spending. In France, there is a fundamental issue: we have the highest public expenditure on GDP and the highest GDP tax in Europe, while a public service delivered is average for Europe, that is to say well below the level of expenditure. It is therefore necessary either to significantly improve efficiency or, for a given capacity, to seek to achieve savings.

For competitiveness, obviously we need to look at the cost of labour. But beware: there is the cost of labour for a given productivity and the cost of labour for a given quality. Germany’s labour costs are very slightly lower than France’s, while its current account balance is in surplus, its growth rate is much higher and its unemployment rate is much lower. Nevertheless, we have a fundamental problem in France, and that is the quality of production in relation to the cost of labour. On this subject, it is important not to reason in terms of the “average” but rather pay attention to fact that the cost of labour is dependent on the qualification of people and to ensure that unqualified workers work, even if social benefits protect them as a supplement to low wages. And then it is essential to increase the average quality of our industry and our services in order to justify the high labour costs. Everyone agrees on the need to work on product lines and the importance of research and development. And for several years, France has been making great strides on this subject. Everyone is also aware of the need to invest. To invest, companies must have a sufficient rate of profit. For the past ten years, however, France has been the only country to have lowered the profitability of its companies, that is, the rate of profit on added value. This does not facilitate investment, modernisation, innovation, etc.

In this context, our working population needs to be increased because it is a determining factor in long-term growth. Immigration must, of course, be well chosen and correspond in particular to the desired product ranges. The establishment of a family policy is also necessary to promote the opportunity and desire to work. Pension reform must also increase the working-age population. France is one of the least long working countries both in terms of hours worked per year and years worked in life. This obviously leads to difficulties in achieving sufficient growth potential. Several issues need to be addressed, such as pre-retirement to encourage work, childcare, or, of course, minimum income in relation to labour income. The incentive to search for work also involves assistance in training, return to employment and flexisecurity. France offers the longest and highest unemployment protection for an extremely high unemployment rate. We know, however, that the correlation between the length of protection, the height of protection and the unemployment rate is real. There is an urgent need to accelerate and accentuate the incentive to return to employment. This will happen through better protection, better training and better support for this return to employment.

So, since ideas are converging in the same direction, why are we having such a difficult time carrying out these reforms in France? Certainly, it is better to do them when there is growth. But growth, when it is present, does not encourage or drive reform. Another way of thinking about this is to say that “we are not having enough of a crisis” to undertake them. All these rationales relate to cyclical and non-institutional issues. Let us try, with humility and without pretending to be exhaustive, to find some institutional reasons in the modes of regulating French society in order to understand the difficulties in carrying out these reforms on which everyone agrees. Here are two.

The first reason concerns our historical, conflicting culture and power relationships. Since Louis XI, and then Colbert, Louis XIV, Napoléon and continuing with the post-war period, France has created itself as a hyper-powerful, centralising state. We built ourselves as a country with a French elite, gradually becoming an Elite state, occupying the entire political space, but also that of businesses. So, what is preventing this powerful state from making reforms? Its intermediation. Because of its omnipresence, the State intermediates the relationship between everyone and society, between each individual and others. Thus, instead of feeling responsible to the community, to feel that we have rights but also duties, there is continuing demand from the State which acts as “mum”. This explains the particularly anxious nature of the French population. As soon as something goes wrong, whether you are a business manager or a private person, we turn to the State, asking for solutions. And we refuse reform.

The second reason, undoubtedly linked, is that in France – as everywhere else – there are corporate interest groups seeking to defend each of their own interests. But this situation leads to a vacuum in the construction of the social system in which only the state and the special-interest groups are present. And finally, instead of having a working social democracy, we have a kind of social-corporatism coupled with a social-technocracy. That is why reforms are difficult to accept because we expect everything from the State, refusing to believe that everyone’s rights and duties should be able to justify and protect social protection, growth and well-being.

Responses in the post-speech debate

On France’s ability to carry out these reforms

In France, we live according to principles that are very strong and very good in and of themselves, but we often forget that in order for these principles to work, we must understand the causes that allow them to function. Bossuet said: “God laughs at men who complain of the consequences while cherishing the causes”. As soon as we want to combat inequality and unemployment, it is necessary to agree to clearly analyse their causes and to take action accordingly to maintain our social protections and defend this principle of equality.

Let’s take the example of university. As soon as there is no sufficient selection, it is clear that the students who emerge are less likely to be hired than those from a large school. Quite simply because there is an asymmetry of information on the side of the employer, who will employ the surest option, to make fewer mistakes, even though excellent profiles are also coming out of the university. It is therefore necessary for universities of excellence, to make these profiles converge through excellence. Today, the failure rate in the first year at the French university is one of the highest in Europe. And many of those who leave university in the first year do nothing. So why not select better upstream? But to select better, you obviously do not need a very general baccalaureate where, at the end, students are directly asked to specialise in medicine, law or economics, even though they do not know what these professions are about. The system must include a longer and more comprehensive common starter core, in which students will be able to choose their subjects.

Basically, we have to succeed in overcoming “compassionalism”. And there is no policy today that dares to go against compassion. Just because one thing moves the population doesn’t mean that the state must do everything straight away. It is fundamental to find the real causes, to have the courage to analyse them and to carry out the appropriate reforms to protect the system. Fortunately, in many French people, the principle of equality is always dear and highlighted. And everyone understands that the state cannot do everything, does not have all the resources, because there are too many demands for public spending and that it cannot tax enough in exchange without stifling the economy. Society must be pushed to agree, to evolve; there must be fewer but more representative trade unions in order to promote consensus, negotiation, consultation, and not the conflict that is freezes everything and prevents development.

On disenchantment with politicians and the fight against inequality

It is bad to oversell the ability of women or politicians to solve everything. Redefining the role of the State and the possibility of the politician would be preferable. We need to move towards a strategist State rather than an omnipresent State. Politicians efforts in terms of reflection and honesty vis-à-vis society is necessary.

Reflection on inequality. In society, there are natural inequalities between those who have talent and those who have less talent. It is not inequality in itself that is unbearable; it is injustice. Moreover, France is one of the few countries that, for the past 20 years, has practically not aggravated economic income inequality. The level of income inequality is stable. The real issue is that of injustice, unequal opportunities, of saying that we are capable of doing something but not doing so because we are blocked. The blockage in a society that is too hierarchical, too “mandarinal”, which overvalues diplomas, is considerable. We must work on this concept of injustice that we find throughout society, in our businesses, in education, etc., which is even more fundamental than that of income inequality.

On the simplification of the French bureaucratic system and the return of efficiency

For a very long time, companies’ operations were very hierarchical, which could limit each individual’s ability to express talent, initiative capacity and entrepreneurship. Although some are still very hierarchical, most companies now operate less vertically, in networks. To obtain an authorisation, we no longer need to go through our manager, who in turn goes through their manager. Network-based operation improves efficiency by involving everyone more, which also generates more confidence. The hierarchical society, which worked thirty or forty years ago, creates less confidence as the absolute power of the very small elite is challenged because times are more difficult, because changes are stronger. It is therefore difficult to expect everything from the top.

These profound changes that we are experiencing require a more flexible, less hierarchical organisation in order to recreate a working environment that prevents injustice and allows us to express ourselves, regain this trust and this desire to do. The desire to do is fundamental. It promotes the company’s competitiveness in the sense that it promotes the development of a team spirit and an ability to move forward and fight. Perhaps the State should also think about this. Decentralisation is good if we pay attention not just to juxtaposing the levels. Otherwise, in all public authorities, the State creates certain places where tax is collected and others where tax is spent. The situation is catastrophic as there are fewer collective responsibilities.

On “the French economy weakened by its institutions”

There are certainly many countries in which the institutions operate less well than in France. This is not the issue. The issue is not to look at institutions in the sense of justice, roads or ministries. We need to ask ourselves how to position ourselves in the face of the current trend. Given the low potential growth, the current account deficits, the public debt, the unemployment rate… are we not heading for a gradual impoverishment of our country? Will our regulatory methods, which are not strictly commercial, adapt well to the world that is arriving? Certainly not well enough. Pedagogy is essential to make it clear that if hell is often paved with bad intentions, it is also paved with good ones. For example, it is not enough to want fewer unemployed people to have fewer unemployed people. In France, we agree on the need to reduce unemployment, but in practice the number of unemployed is still very high. We therefore need to be able to determine the real causes of this. Fortunately, collective awareness is progressing on the importance of carrying out reforms, which will certainly require effort, but essential effort to protect what is essential. And the act of changing to protect what is essential is increasingly shared through these concepts of individual responsibilities and collective responsibilities towards society.

Olivier Klein
CEO of BRED and Professor of Financial Macroeconomics and of Monetary Policy at HEC Business