ce? Why and Why not? Term Paper BBA Summer Semester 2004Can the Australian Reform Model beapplied to France?Why and Why not?May 2004Table of Contents:I.SubjectII. Introduction……………………………………………………………………………..
III.The barriers and obstacles towards changes and reforms…
IV.Is the National Competition Policy applicable to France ?.
I. Subject: Question 1:Compare and contrast the Australian economy and its recent reforms to another country of your choice. What lessons and reforms are applicable to this other country and if not, why not?II.
Introduction Australia did operate in the two decades changes that had very positive results on an economy, which was described 20 years ago as moribund. After 13 years of economic growth ( N 1), it now shows a very low unemployment rate compared to the major occidental countries and in addition a low inflation rate.
The major European economies such as France and Germany would envy this very favourable situation. I will in this paper focus on France, try to apply some of the Australian model reforms on the French economy and explain why it is possible – or not possible – to apply them to my country.
Is France in decline? ( N2) This question keeps popping up again and again. Some clear economical indices can guide to this easy conclusion.
France growth rate in 2003 was only 0,5%, (N3) this rate is fairly low compared with the Australian growth rate of 4%. ( N1) The same type of comparison can be made with the unemployment rate: in March 2004 there were 2,4 million individuals unemployed, corresponding to a 9,8% unemployment rate.(N4)A survey done in January by the survey institute CSA ( N5) showed that the French population believes, it is time to reform the economy and the hole French social welfare model. But barriers still remain and there is still a long way to go before the French government will be able to operate such radical reforms as it was done in Australia.
Another problem is the heavy public sector that is still remaining in France. Can a country such as France by benchmarking reforms carried out according to the National Competition policy reform some sectors of the industry that are heavily subsidised and also reduce its large public sector? What are the threats and what can be copied or adapted from the Australian model?III. The barriers and obstacles towards changes and reforms.
The first barrier is an ideological one, as it was explained in an article of the very liberal Economist in April: Most European voters now accept as a general proposition, that if their economies are to return to faster growth, and unemployment is to be cut, their bloated pension, welfare and health care systems, and their rigid labour market regulations, all need fairly radical reforms. ( N6) This is what most voters tend to say, when a survey is done about the reforms that should be done in order to avoid the bankruptcy of our system. The voters are conscious that in general the European welfare model is facing big problems and that reforms have to be done.
But this position does not seem to be transposed into their ballot papers: Yet at national or local elections, they are proving quick to punish governments that put forward any specific proposal that would inflict pain. ( N6) The ruling right centre party of Jean Pierre Raffarin was heavily defeated 6 weeks ago during the regional elections, winning only in one of the 26 regions, the others being all won by the oppositions socialist party lead by Francois Hollande.( N7)The socialist party is deeply opposed to the reform proposals done by the current centre right government. The main reforms consist in lining up the state employees retirement system on the one of the private sector. Another main reform is to pay the state employee, not any more as it has been done for the last 50years, on their seniority but on their productivity. More generaly thenew policy consists in a reduction of the welfare state in France and of the influence of the state on the economy. (N8)This situation is a paradox, the population believes that reforms are needed but does not support the governments implementing them.
The danger is that politicians may respond to electoral setbacks by slowing down the pace of change. (N6) The governments are not encouraged to implement changes, but the problem that France is facing now is that we have to change, if we do not want the future generations to pay a heavy duty of the currents generations reluctance to change.
Our public debt is representing 63% of our GDP not respecting the Maastricht agreement and leaving a debt of 980 billion that will only raise if the reforms are not implemented very fast. ( N9) Jean-Pierre Raffarin declared that the reforms would continue at the expected pace (N10) but will he still be able to push his reforms through? The UMP, the party of president Jacques Chirac, has a large majority in the French National Assembly, but their fear of loosing power at the next elections ( European Parliament deputy elections in June) will perhaps freeze the reform process.
The danger is that politicians may respond to electoral setbacks by slowing down the pace of change. (N6) The French voters do not tend to have this consensus attitude as the Australians do.
Another question can be asked : Why didnt the major reforms take place in the 1980s as it was the case in Australia with the Hawke Keating government?In the 1980s the socialist government empowered in Australia was the one pushing though the reforms and liberalising the markets from the states influence. In 1981 after 36 years of centre liberal governments the socialists did finally win the major election in France, the presidential one.
It is interesting to notice that the previous government was as in Australia a conservative one.(Valerie Giscard dEstaing 1974-1981) This government was not able to reform the country as it was expected after the heavy 70s oil crisis,under its two successive governments, the Chirac and the Barre one.
The Barre government tried to liberalise and give the economy a more market driven impulse, but the second oil crisis disturbed his attempt to reform.(N11)This government, to the contrary of in Australia, failed to do the reforms and instead started nationalising the companies that were facing difficulties, such as the bankrupted steel industry.( N12) It created a special agency the Comit interministriel de lamnagement des structures industrielles , Interdepartmental Comity for the Development of Industrial Facilities, in order to save the industries.
It was reported that fewer than one dozen firms were receiving more than 75% of the public aid to the industry. Most of these were uncompetitive and in declining sectors.
These resources were not needed to restructure and position themselves in niche markets but to avoid heavy lay-offs. ( N13)This is an example showing that the policy followed between 1974 and 1981 was not adapted to the needs of the new market economy and the New Right ideology, (N1) which was going to spread among the Anglo-Saxon countries with Margaret Thatcher or Ronald Reagan.
Till 1981 the Australian scenario and the French one are still pretty close, because as in Australia the socialists won the elections.
When in Australia the Hawke Keating government started to reform the economy with positive consequences, France took a different way.
The major difference between the French socialists and the Australian one is that the French one did get elected with the help of the Communists.
The backgrounds and general ideology were also different: the French socialists believed in the Providence State. (N14)The Mauroy Government nationalised key sectors such as the the banking and finance one and the electricity. (N11)It expanded the welfare state and because of its alliance with the communists was unable to shift the resources from traditional to emerging sectors in order to protect jobs at all costs. (N15)All in all Mitterrand trapped by the communists and by its very unionised Blue collar worker voters was unable to reform the French economy as the socialists did in Australia.
He did the opposite, he reinforced the states weight on the French economy.
The result was a stagnation in policy until 1995 and the election of Jacques Chirac as president and Alain Jupp as Prime Minister.
As expected the government could not reform because of the demonstrations and the heavy strikes organised by the unions. (N16)Later on in 1997 the Socialist Party obtained the majority. Lionel Jospin became prime minister under Jacques Chirac presidency, thus creating a typical French situation of Cohabitation (it is when the prime minister and the president are not from the same political party). This type of government is a clear brake to any reforms. Reaching a consensus as it was possible in Australia will be hard but is a necessity.
The problem is that if you want to reform in France you have to diminish the state outputs (subventions ) and the inputs (the taxes). As the Laffer model indicates,too much taxation reduce the overall amount of taxes collected.
But most of the French do not understand that reforming is also loosing some aids and subventions in order to pay less taxes in a narrow future; people understand that the state needs to be reformed ( Survey CSA RTL Source:n5) but do not want to pay the tribute for it. French people are not as pragmatic as Australians!IV. Is the National Competition Policy applicable to France ? Can we apply to France the measures taken in Australia?Can France implement a competitive neutrality of the government and implement a financial incentive package as it was done in Australia for the state and the companies following its policy?Despite significant reform and privatization over the past 15 years, the government continues to control a large share of economic activity: Government spending, at 53.5% of GDP in 2002, is among the highest in the G-7. Regulation of labour and product markets is pervasive. The government continues to own shares in corporations in a range of sectors, including banking, energy production and distribution, automobiles, transportation, and telecommunications.( N17)France remains very regulated and controlled by the state. Competition exists among some industries but subsidies and hidden aids are still a common rule in the French economy.
The very famous French tariff policy did take an end when France signed the Maastricht treaty in 1993 and entered the European common market.
But the openness of the French economy has always been a delicate theme. The 1997 Amsterdam treaty was not submitted to any popular ratification as it was the case for the Maastricht one in 1993. This treaty did open the French economy to the European goods and services. Some exceptions still remain such as the agriculture and cultural goods. ( N18)Turning from a Keynesian model as in Australia before the reforms to a deregulated market driven economy could not happen without a kick in the teeth. This was the Hilmer report in 1993 on the National Competition Policy. (N1) The French population ignores the cost of subsidies and of the various inefficiencies of the state owned companies.
Agriculture is a delicate subject when talking about France. The latest television hit in France is called La Ferme des clbrits a TV show were second hand celebrities spend some time locked up in a farm, filmed 24 hours a day by cameras and pretend to live as people used to live a century ago.
This show has a very big success in France, demonstrating how attached the French are when talking about agriculture. ( N19)This attachment makes it even harder for any French government to risk any deep subsidies cut. The farmers population represents today only 3,5% of the working population. ( N3)The French farmers are also very well organised, with 3 major unions, the Coordination Rurale, the FNSEA, the famous Confederation Paysanne led by the also famous Jos Bov. (N20)These organisations show up as soon as any change is mentioned about the heavy European agriculture subsidies. The existence of these unions, the attachment of the French population to his farmers and the tendency of the farmers to vote conservative (President Chiracs first mandate was as a deputy in the rural Corrze) makes it very hard to apply any type of policy like in Australia, even if some changes may occur. Germany and some other European countries are pressuring France and the other European agricultural nations to reform the subsidy policy. (N21)If any change will occur they will have to be operated on a global scale according to the French minister of agriculture Herv Gaymard in a speech at the European Parliament in Brussels in Mai 2004. ( N22 )By saying this he was meaning that if any changes would operate they would have to be global, which means that the United States would also have to stop subsidising their farmers. Even if because of the close American presidential elections a status quo will be observed about the hidden American subventions. Reforming the French farming sector will be very hard and doing so the Australian way seems to me pretty tough. The politicians will not risk any clash with the farmers and therefore it can only be done slowly and step by step.
Competition neutrality is one of the essential features of the National Competition Policy. This means that state companies will have to compete with the private sector as it is already the case in Australia. France has one of the largest public administration: 27% of the total French workforce is working for the state, which is a very high digit compared with the 15% average of the other European countries. ( N23) France has in 2004 almost 3 million public employees. How did we reach such a high amount? ( N24)From 5% of the total French active population in the 1950s to the 27% mentioned above, the number of state employees did boom in the last 50 years. (N25)As mentioned previously the state plays a major role in the French economy. While the unemployment was growing the number of state employees was also growing. (N25)The state was using the recruitment of state officials as a buffer against unemployment. The dirigisme ( translation: interventionism ) of the French state, which was translated into for example nationalisations at the end of 70s and beginning 80s did also increase the trend towards a large public function. (N26)The fact also that still a large amount of key industries are under state control such as the postal service, energy supplies – electricity and gas – increases considerably the amount of state employees. The job security and seniority payment can also be mentioned, because more and more young graduates tend to choose the public administration to make career. The results are large inefficiencies and a distortion of the competition. ( N26) Could the French government reform and use the Australian model to do so ?I would tend to say no for two major reasons:Firstly since decades in France the politicians are high rank state officials, the most famous of them was the Gnral De Gaulle, who was in the military before becoming French president. (N25)This is due to the fact that French politicians have the right to go back to their previous job in the administration once their political career for whatever reason is ending. This makes it very hard for people of the same corporation to reform a system from which they are largely benefiting.
The second one is more similar to what the Australian governments had to face when implementing the National Competition Policy, the unions.
The share of the union membership among the state employees is about 26%. You may say it is weak but still very powerful enough compared to the 9% membership in the United States. (N27)Their power also comes from the French law according to which you cannot break a strike. There is no minimum service as it is the case in Spain for example. (N28) And when the state employees have the monopole on services such as transport it becomes a real headache to reform.
You cannot fire and replace the employees as it was done in Australia with the pilots because it is not allowed by law. This is a major obstacle to implement any type of reform forcing these employees to face competition or even commercialisation of their service.
As in every situation things are not totally black but tend to be grey. Some reforms through the membership to the European Union were taken, companies such as Air France or France Telecom have now to compete with foreign competitors and some others are still to come such as the privatisation of the giant energy company Electricite de France. (N29)The government as often in France is trying to put into action step by step some reforms that look pretty similar to those done in Australia.
The French government plans to outsource some state activities such as the logistic for the French government. They want to change the status of the state employees to avoid life time jobs and also a real revolution they intend to implement a salary that would be related to performance and not anymore to seniority.
( N28)The government success in this area is hard to predict: state employees and their status have always been in France a question subject to many polemics.
V. Conclusion Some sides of the Australian model may be interesting to adapt to the French one such as increasing competition, reducing the subsidies and introducing a certain flexibility of the workforce. Others such as reducing the welfare net to a minimum may be impossible on the short term to implement or only at a very slow pace.
Cultural and economical differences may explain why it is so hard to reform in France. Reaching a consensus as it was the case in Australia is not possible in France. Differences in the political opinions are to big and voters tend not to support changes.
France as many European democracies such as Germany must reform, because their system that used to be successful is not any more adapted to the needs of the 21st century, and reforms are badly needed.
I think the European Union, through the convergence criteria voted when adopting the single European currency, will push countries such as France to reform as it was previously the case with the openness of some sectors of the economy.
This virtuous reform circle may push to further reforms and help countries such as France to have growth digits comparable to Australia.
A question still remains: which model to adopt? I think that France due to many factors will have as Australia in the 80s to find its own model taking in account the countries particular situation and create hopefully a successful model that could be called: The New Miracle of the Reformed French Economy: Why it works and why it cannot go wrong!VI. Bibliography 1: Script Dr. Scott Prasser2 : Expansion Janvier 2004 Issue 6853 : http://www.insee.fr/fr/indicateur/cnat_annu/cnat_annu.htm4: http://bourse.lesechos.fr/IDE/graphes/efrchdm.htm5: Capital January 2004 Issue 1486 : The Economist April 2004 European leaders need to make a better case for reform.
7: http://www.interieur.gouv.fr/avotreservice/elections/reg2004/8: The Economist Countries profile The state still plays an important role in the economy9: http://www.lemonde.fr/web/article/0,emailprotected,36-356768,0.html10: Le Monde 7/5/200411: Microsoft Encarta Encyclopaedia History France 12: http://www.sciences-sociales.ens.fr/hss2001/travail/chronologie/chrono74-82.html13: Les Cahiers Franais, La Politique Industrielle , Marguerite Boucher 06/1983 14 : http://www.conscience-politique.org/politique/arvisechecconservateurs.htm15 : Directing Adjustment? Welfare and Work in the Open Economy: Diverse Responses to Common Challenges. Levy, Jonah (2000). France , Fritz Scharpf and Vivien Schmidt, Oxford University Press.
16: http://www.archives.premier-ministre.gouv.fr/juppe_version1/PRESSE/EVENTS.HTM17: http://www.state.gov/r/pa/ei/bgn/3842.htm18: http://www.ces.fas.harvard.edu/working_papers/Meunier.pdf19: The Economist 5/8/2004 20: http://www.quid.fr/selection.html?catid=46&subcatid=44821 : Southeast Farm Press, Laws, Forrest, 7/16/200322: Liberation 14/05/200423: LExpress 04/07/200224: The Robert and Collins French-English Dictionary Fifth Edition 2000 Harper Collins Publishers25: Le Figaro 28/11/199726: La tentation hexagonale: La souverainet l’preuve de la mondialisation. Cohen, Elie (1996). Paris, Fayard27 : The Economist 11/16/200228: LExpansion April 2004 Issue 68529: Acquisitions Monthly March 2004 Issue 233
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