Case study: France and the new economy

How is France embracing its third economic revolution in fifty years? 

This is the third economic revolution France is undergoing in less than fifty years. The first one took place in the Fifties and the Sixties, and was about modernisation. Admittedly, France had been a very rich and innovating industrial country, second only to the United Kingdom, since the very beginning of the 19th century. But then, during the first half of the 20th century, it had been bypassed by newcomers like the United States, Germany and even Italy, Russia and Japan – a factor that, along with a weak demography, contributed in no small measure to the ignominious defeat of 1940. Post-War France made economic recovery and reindustrialisation a top priority – and succeeded in an amazing way.

By the late Seventies, it was the fourth economic power in the world, right after West Germany, and an undisputed leader in such strategic fields as cars, avionics, space, high-speed railways, underground railways, nuclear power, oil, public works, pharmaceutics and medical research. While agriculture’s share in the economy had sharply declined in relative terms, from 35 % of the GDP to less than 15 %, it remained very significant in absolute terms, against a rapidly growing overall GDP: the traditional peasantry had been replaced, in fact, by a state-of-the-art food industry catering not just for native consumers but for the world. The same was true about the restructured prestige industries (fashion, luxury goods). As for services, from banking to travel to the hotel industry, they had grown from less than 40% of a sluggish GDP right after the War to over 60% of thriving GDP some thirty-five years later.

The second economic revolution took place in the Eighties and the Nineties. It was about freedom. For all its achievements, France’s renaissance from 1945 to 1981 had been a largely statist affair. It first entailed the most comprehensive and possibly the most generous network of government-sponsored schools and universities in the world, with a genuinely meritocratic system of examination and graduation. Then, it was based on a huge State-owned sector that included not just traditional monopolies like railways, the tobacco industry, broadcasting and TV or the post office, but also most or all of such key sectors as the car industry, coal, oil, steel, chemicals, banking, insurance, and even advertising. Even private companies were eager to co-ordinate their strategies with the state and tended to appoint senior public servants on leave as senior executives. And last but not least, unions were bribed into the system through a wide range of incentives, from Soviet-style low cost housing to membership into the constitutionally sanctioned but unelected nation’s third assembly, the Economic and Social Council (Conseil Economique et Social).

Ironically, it took a socialist president, François Mitterrand, to overhaul the system. For two years, from 1981 to 1983, Mitterrand allowed an over-statisation of the economy and even more companies to be nationalised. The results were so clearly catastrophic that a complete change of policies was decided in 1983 and put into effect by staunch free market converts like Laurent Fabius and Pierre Beregovoy. State companies were privatised. Employment was made more flexible. Union powers were curtailed. Adjustment to the world market was turned into a dogma. Moreover, Mitterrand saw to it to couple France’s economic liberalisation with the gradual setting up of a European single market and a European single currency. There were many social side-effects, like a surge in unemployment and the emergence of an underclass of “new poors”. By and large, however, the free market revolution dramatically enhanced France’s economic standing and helped to rival Germany as the leading country in Europe. Whatever their second thoughts, neither the Classic Left, with Lionel Jospin and Dominique Strauss-Kahn or, again, Fabius, nor the Conservative Right (who, in France, can often be as Statist-minded as the Left), with Edouard Balladur and Jacques Chirac, have sought to resist the change or to reverse it.

The third revolution, which can be dated from the late Nineties and has taken off for good only a few months ago, is about the New Economy. Some figures are quite impressive. By the first half of the year 2000, eight out of the forty companies listed in the Paris CAC-40 index belong to the digital economy. Their combined capitalisation amounts to over 50 % of the total index capitalisation and they can be seen as the driving force behind a bullish Paris Stock Exchange. When introduced on the French Nasdaq, Nouveau Marché, ‘new economy’ companies are usually making spectacular advances, with stock prices soaring by 100 % or 200 %. More established companies are equally attractive. France Telecom, the leading company in telecoms and internet-related operations, achieved a 25% increase in one single day, in March, when its CEO, Michel Bon, disclosed his plans for letting its internet provider Wanadoo go public. Two months later, its daring acquisition of Orange helped the market to rebound right after the mini-crash that affected some e-business companies. Global investment for start ups (the French have coined a rather sexy word for them : “gazelles”) seems to be increasing by 300 % every year. New Economy companies are burgeoning all over the country and have already changed the face of several neighbourhoods in Paris, from the old garment-industry district Le Sentier, rechristened “Silicon Sentier”, to the 11th arrondissement, along Rue Oberkampf and Avenue Parmentier, formerly one of the city’s dullest areas and now a hotbed of smart, little office buildings and trendy cafés.

France’s New Economy revolution owes a lot to its two previous ones and may even be described as their culmination. What is the New Economy, anyway? Is it just the Old Economy being digitalised? By their sheer volume and their sophistication, the French industry and services have provided a strong market basis for the emerging computer and internet related technologies. This was true even within a context of State-run juggernauts. By the late seventies, the then largely nationalised banking industry was instrumental in the launching of the “smart” credit card. A lot can be said against Minitel, the computerised home network set up by the then fully state-owned France Telecom some twenty years ago: it was incredibly slow and ineffective and expensive, and its main commercial application was sex fora. Nevertheless it was the world’s first attempt in global on-line services before the Internet explosion of the Nineties. It became even truer within the more open and more entrepreneur-friendly environment of the Nineties.

But what about the future? France may have to face hard choices quite soon. One vexing instance, in that respect, is the brain drain. France’s superior educational system has generated brilliant graduates in almost every field. Until recently, they were happy to contribute to their nation’s renaissance. But the more successful the French economy is, the more global it is becoming. And globalisation, in turn, means that young people from France are more likely than in the past to look for better opportunities abroad. Some 250,000 French people are said to live in Tony Blair’s free market Britain. Some 500,000 are deemed to have migrated to the United States. California’s Silicon Valley alone may host 60,000 French expatriates. They are attracted by higher salaries, more generous stock options, lower taxes, more enticing opportunies to start one’s own business, to get rich (really rich) and to enjoy more flexible working patterns. Similar developments may occur in the future between France and Germany if Gerhard Schröder’s fiscal reforms are to be fully implemented.

Will France manage not only to reverse the trend but even to attract more brains and more qualified personnel from the rest of the world? The present Minister of Economy and Finance, Laurent Fabius, certainly has a clear perception of what is at stake. Other leaders may be more confused about it. But the decisive answer will come from the people themselves. My guess is that, all and all, the French are quite thrilled by the shining prospects of the New Economy and ready to undergo some drastic changes in order to get it consolidated. The third economic revolution has only just begun, after all.

©OECD Observer No 221/222, Summer 2000 

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