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France: A lesson in how not to run an economy

Canada has some of the top-performing economies in the world in the provinces of Alberta, Saskatchewan, and Newfoundland and Labrador, each of which get an "A-plus" in the Conference Board of Canada's How Canada Performs analysis.

Nova Scotia and New Brunswick are the two Canadian provinces that got "D" grades but things could be worse – they could be France, which finished last among the Canadian provinces and 16 advanced economies that were rated.

The Conference Board annually compares Canada's economy with that of major industrial countries on eight indicators of performance, which generates an overall grade. This year, for the first time, the analysis also compares the 10 provinces with each other and with a comparator group of 16 large, wealthier Organization for Economic Co-operation and Development countries (including Canada as a whole).

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Just how badly did France do? On eight indicators, it received no fewer than four "D" grades. French per capita income is third from the bottom of the 26 jurisdictions. Employment fell by nearly 1 per cent in 2013; labour productivity barely grew; and an economy the size of France should be expected to attract more foreign direct investment than it does.

France received three "C" grades, and its only "B" (on inflation) is also cause for concern. With an inflation rate in 2013 of 0.9 per cent, France is at risk of deflationary forces, which, by discouraging consumption, could impair a recovery in growth.

The near-term economic outlook for France is little better than recent results. Although France has recovered from recession, economic growth is forecast to be only 1 per cent or less. Indicators like job creation and income growth will also be weak, so France should expect to remain a "D" economic performer for the foreseeable future.

It takes a long time for a former great imperial power with colonies around the globe to dig itself into a hole like this. France's dismal performance is due to a compounding combination of factors.

At the core is France's dirigiste philosophy, a "government knows best" attitude toward economic policy making that tends to discourage competition, entrepreneurship, innovation and risk-taking.

Next, a set of rigid labour market policies and practices discourage job creation, notably for youth and immigrants. By levying heavy payroll taxes and imposing stringent regulations, French businesses have a hard time shedding labour in difficult times.

A generous, yet unsustainable, set of socio-economic policies has added to the malaise. These include: overwhelming generosity in social programs such as state welfare, pensions and unemployment benefits; a bloated public sector of large ministries and state enterprises; a complicated web of business regulations and subsidies; and non-commercial policy intervention in banking and insurance. With slow economic growth and generous social programs, chronic fiscal deficits have led to a heavy public debt. The debt burden, in turn, is compounded by high rates of personal and business taxation and social levies.

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The public sector now represents nearly 60 per cent of French gross domestic product. The Socialist government last year raised the top marginal tax rate on personal incomes to 70 per cent (about 90 per cent after social charges are included) – only to discover that wealthy and prominent French nationals were quite prepared to leave France and take their incomes and innovative energy with them.

Popular support for the government has slowly evaporated, but there is little national consensus on the policy mix that could bring about a change in fortune – nor much recognition that the system of still-generous social programs is unaffordable.

France is the most visited country on earth, and it is bound to remain a great place for visitors – with spectacular scenery, architecture and galleries; great food and drink; and a certain joie de vivre. But a strong balance of trade in tourism cannot begin to compensate for the rigidities and excesses that have built up in its controlling economic system. Unfortunately it has become a case study in what not to do.

It took decades France to earn its "D" economy grade. It will take much effort and sacrifice over many years for France to materially improve its economic standing. It may require new leadership and a fundamentally new direction – but something must change soon. France does not have the luxury of time before fomenting its next economic revolution.

Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.

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About the Author

Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline. More

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