France: Selected Issues
Author: International Monetary Fund. European Dept.
Publication Date:
08 Jan 2013
eISBN:
9781475576290
ISBN:
9781475576290
Language:
English
Keywords:
ISCR; CR; bank; France; country export market share; exports worth; world Merchandise export; competitiveness problem; collective dismissal; Competition; Exports; Labor taxes; Tax wedge; Global; unit labor costs; labor market rigidity
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The paper identifies France’s structural reforms that would yield the largest competitiveness gains based on macro-empirical evidence, and reviews signs of potential gains from a deregulation of the services sector. It is expected that completing deregulation in the services sector would benefit the entire French economy, by boosting productivity and exports. Econometric results have estimated the impact of reducing the labor taxation and labor market rigidities and of increasing innovation to the average level of other advanced countries.

Abstract

The paper identifies France’s structural reforms that would yield the largest competitiveness gains based on macro-empirical evidence, and reviews signs of potential gains from a deregulation of the services sector. It is expected that completing deregulation in the services sector would benefit the entire French economy, by boosting productivity and exports. Econometric results have estimated the impact of reducing the labor taxation and labor market rigidities and of increasing innovation to the average level of other advanced countries.

Structural Reforms and Export Performance1

1. “In times of severe financial constraints, there is no other choice than to address the structural losses in competitiveness in an urgent and decisive manner.” With these words, Mario Draghi (2012), the President of the European Central Bank, emphasized the importance and the urgency of structural reforms to improve the euro area’s competitiveness.

2. The purpose of this paper is to identify the structural reforms that would yield the largest competitiveness gains based on macro-empirical evidence. This is a difficult task because the list of reforms that could foster competitiveness spans a broad range of policies.

3. The first section briefly provides stylized facts on France’s competitiveness problem. The second section describes the methodology and data. The third section discusses a basic specification showing the main determinants of exports performance. The fourth section identifies the structural reforms that could affect these determinants. The fifth section provides a quantification of the impact of these structural reforms for France.

A. France Competitiveness Problem

Driven by the trade balance, France’s current account balance improved in the 1990s but has steadily deteriorated in the 2000s (Figure 1).

Figure 1:
Figure 1:

france – External Accounts

(In percent of GDP)

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A004

Source: IMF, WEO.

4. As illustrated in Figure 2, the deterioration in the trade balance is attributable to a sharp deterioration in the balance of trade in goods since 1997, while the balance of trade in services appears much more stable (though the surplus is shrinking).

Figure 2:
Figure 2:

France - Trade balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A004

Source: IMF, WEO.

5. The deterioration in the trade balance is caused by a weak export performance. During the 2000s, merchandise exports declined by 1.2 percent of GDP while imports increased by 2.4 percent of GDP. The decline in exports was driven by a sharp decline in exports to the European Union and to a lesser extent to other advanced countries (Figure 3). Pointing to a competitiveness problem, France’s share in world exports (merchandise and services) declines. This decline is larger than in most other advanced countries (Figures 4 and 5).

Figure 3:
Figure 3:

France: Trade in goods by region

(2000-11, in percent of GDP)

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A004

Source: UN Comtrade.
Figure 4:
Figure 4:

Share in World Merchandise Exports

(Change in percent, 1997 - 2011)

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A004

Sources: IMF, DOTS and author’ calculation.
Figure 5:
Figure 5:

Share in World Services Exports

(Change in percent, 1997 - 2011)

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A004

Sources: IMF, WEO and author’ calculation.

B. Methods and Data 2

6. This paper focuses on merchandise exports. Competitiveness is measured as the change in a country’s share in world exports during 1997-2011. The change is in percent in order to take into account the countries’ different initial market shares. The period 1997-2011 is chosen due to data limitations: exports from Belgium and Luxembourg were reported jointly before 1997 in the IMF’s “Direction of Trade Statistics” database (DOTS).

7. Trade and macroeconomic indicators are from the IMF (DOTS, IFS, and WEO databases). Structural indicators are from the STAN database, the Product Market Regulation (PMR) database, and the Indicators of Employment Protection database of the OECD (2009, 2011a, b).3

8. Because several key indicators, notably those derived from the input/output tables, are not provided on a yearly basis but roughly every five years and are available only for a few countries, this paper relies on a cross-sectional analysis using the ordinary least square estimation rather on a panel analysis. The sample consists of the 33 advanced countries listed in Figure 4.

C. Basic Specification

9. Changes in advanced countries’ share in merchandise exports is well explained by the changes in real effective exchange rate (CPI based, REER_CPI) and in unit labor costs (ULC) and by the “barriers to trade and investment” index (dBarriersT_I) computed by the OECD (Table 1). The good fit is remarkable given that this basic specification does not take into account important factors such as the nature of exports (some countries are commodity exporters, some are specialized in mature products while others are specialized in new products), the extent of export diversification, differences in the intensity of competition with emerging markets exports, or differences in export markets.

Table 1.

Basic Specification

article image
Standard errors in parenthesis, *** p<0.01, ** p<0.05.Source: Author’s calculation.

10. The specification shows that in order to improve its export performance a country could affect its real effective exchange rate. However, this is not the only possibility as structural reforms that reduce the unit labor cost and barriers to imports would also have an impact on competitiveness. The next section identifies such reforms.

D. Identifying the Structural Reforms that Improve Export Performance

11. Four structural conditions are found to be statistically significant in explaining the differences in advanced countries’ export performance: trade regime, labor taxation, labor market rigidities, and innovation.

12. The impact of other structural conditions has been tested but was not statistically significant. They include foreign direct investment (as FDI can be a substitute or a complement to exports), education, transportation and telecommunication infrastructure, legal framework and governance, fiscal policies (including spending on labor market policies), product market regulations at an aggregate level as well as at the sectoral level, financial sector indicators (financial development, concentration, regulation, and access to credit), and investment.

13. The impact of some of these structural conditions on export performance may not be appropriately captured in our aggregate econometric approach because of quantification issues or low variance. However, that these conditions, which are important determinants of developing and emerging markets’ exports performance (Hallaert et al., 2011), do not explain advanced countries’ exports performance is not unusual in the literature. For example, Carlin and Mayer (2003) and Manning (2003) show that the strong relationship between financial development and growth highlighted in the literature initiated by Rajan and Zingales (1998) turns weak when the sample is restricted to high-income countries.

Trade Reform

14. The basic specification shows that barriers to trade and investment affect negatively exports performance. In order to guide reforms, it is crucial to be more specific. The “barriers to trade and investment” index has two main components: “explicit barriers to trade and investment” (dExBarriersT_I) and “regulatory barriers to trade” (dRegBarriers). Table 2 shows that they both affect negatively export performance but, looking into more details, among the three “explicit barriers to trade and investment” considered by the OECD (barriers to FDI, applied import tariff, and discriminatory procedures), only the change in applied tariff (dTariffs) has a statistically significant impact.4

Table 2.

Impact of a Trade Reform

article image
Standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1.Source: Author’s calculation.

15. Restrictions to imports may affect exports in various ways. First, because they reduce competition, barriers to imports can have a negative impact on innovation (see Section D) and productivity and, in turn, affect export performance. Second, barriers to imports also limit firms’ access to foreign technology and to better, more diverse, and cheaper of inputs that would increase their productivity and provide exporters a competitive advantage. For the same reason, they also limit firms’ capacity to take part in global supply chain.

16. Table 2 shows the importance of the second channel. Because they reduce the import content of exports (dmcontentxp_manuf), restrictions to imports are found to stifle export performance.5 This is consistent with empirical evidence that imported inputs through their impact on productivity contribute to economic growth and to export growth and diversification.6 In the case of France, Bas and Strauss-Khan (2011), find that the increase in imported inputs during 1995-2005 boosted average firm’s total factor productivity (TFP) by 1.5 percent and that this increase in TFP was the main channel through which imported inputs contributed to export growth and export diversification. Fontagné and Toubal (2011) find that French exports are negatively affected by a low participation in the global supply chain and that the impact of imported input on competitiveness is more limited in France than in Germany.

17. Policy implications are large. A policy that seeks to limit outsourcing or relocate production of inputs in the home country with a tariff, a regulatory barriers or other measures, such as fiscal incentives, is likely to harm export performance and productivity growth.

Labor Taxation Reform

18. Costs and wages are central in determining the ability of firms to compete in international markets. As labor taxation impacts unit labor costs, it may be an important policy variable to improve competitiveness.

19. Results support this idea. Tables 1 and 2 report that changes in unit labor costs are a major explanation of the relative export performance of advanced countries. Replacing in these specifications, ULC with the labor tax wedge (Table 3) increases the sample size from 24 to 27 countries. The impact of the labor tax wedge on export performance is highly significant and substantial: on average the change in a country export market share would be 0.53 to 0.65 percent better if the labor tax wedge was one percentage point lower

Table 3.

Impact of a Reform in Labor Taxation

article image
Standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.102.Source: Author’s calculation.

Labor Market Reform

20. This section investigates the impact of labor market rigidities on export performance. There is empirical evidence that labor market rigidities carry an efficiency cost which may affect export performance. For example, Caballero et al. (2006) find that in countries with strong rule of law, like the advanced countries considered in this paper, higher job security is associated with slower adjustment to shocks and lower productivity growth.

21. The OECD compiles an indicator of the restrictiveness of the labor legislation: the “Employment Protection Legislation” (EPL). Table 4 (columns 1 and 4) shows that strict employment legislation is negatively associated with export performance.

Table 4.

Impact of a Labor Market Reform

article image
Standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1.Source: Author’s calculation.

22. Results also suggest that a labor market reform aiming at improving competitiveness should focus on procedures rather than on the financial cost of regulation. The EPL measures the main aspects of employment protection legislation: (i) the procedures and costs involved in dismissing individuals or (ii) groups of workers, and (iii) the procedures involved in hiring workers on fixed-term or temporary work agency contracts. Each of these aspects is statistically significant but as the indicator capturing the strictness in the regulation of collective dismissal is the most significant (CollDismissal) and the most robust it is the only one reported in Table 4 (columns 2 and 5). Going into more details, CollDismissal can be decomposed in four components. Three captures the procedures (definition of collective dismissal, additional notification requirements for collective dismissals, and additional delays involved before notice can start for collective dismissals) and one its financial cost. An important finding for the design of reforms is that the measures capturing procedures are all statistically significant but the financial cost is not.

23. Complex procedures can lead to “judicial uncertainty,” which may limit firms’ capacity to adjust to changing conditions and thus affect their export performance. Some practioners point that uncertainty related to the validity of the motif économique (the legal validity of the rationale for the collective dismissal) is an important problem with French labor legislation (Rodier, 2012). This aspect is best captured by the component on the restrictiveness of the “definition of collective dismissal” (CollDismissal_1) which, according to the OECD, is in France the most restrictive of the three dimensions of procedures of collective dismissal.

24. The results should be interpreted with caution. The structural rigidities identified by the econometric work (the judicial uncertainty or more generally complex procedures) may be a constraint for export performance only because of the existence of other rigidities such as limited possibilities for flexible time arrangements or enterprise-by-enterprise bargaining.

Innovation Policies

25. Innovation matters for export performance because it improves the production process and thus increases productivity and reduces unit labor cost or because it results in exports of new products.

26. Econometric results show that what matters for export performance is not the amount of investment in Research and Development (R&D) but its outcome (i.e. the number of innovations). The difference across countries in the intensity of Research and Development (R&D spending in share of value added) does not statistically explain differences in export performance. This suggests that simply increasing spending may not improve export performance. In contrast, policies that increase the efficiency of R&D would have a significant impact. Various policies can do so such as a reform of the education system, improving partnership between universities and firms, tax incentives, etc.

27. Efficiency of R&D is measured in this paper by the increase in triadic patents.7 Augmenting previous specifications with the growth in triadic patents (dTriadic) improves substantially the fit of the regressions, while other variables are remarkably robust 6(Table 5). However, it should be noted that innovation is the least robust of all the variables discussed in this paper. Notably, it is not robust to the change in the time period.

Table 5.

Impact of Increasing Innovation

article image
Standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1.Source: Author’s calculation.

E. An Application to France

28. Econometric results suggest that four structural reforms would yield the significant competitiveness gains. This section provides insights of what would the impact of each of these reforms on France’s export performance and the external accounts. It estimates the impact of reducing the labor taxation and labor market rigidities and of increasing innovation to the average level of other advanced countries.8 This exercise is done for illustrative purposes and should not be interpreted as a projection or estimates of the impact of the reforms as it is not a general equilibrium exercise but a counterfactual exercise (it estimates what would be France export performance in 2011 if policies had been different in the past).

Labor Market Reform

29. As discussed above, reducing the strictness of the “definition of collective dismissal” is a labor market reform that could yield the large gains for France’s competitiveness. If during 1997 to 2011, the “definition of collective dismissal” had been as strict in France as it was on average in the 26 other countries considered in the regression (an index value of 4.27 instead of 4.5), France share in world merchandise export would have been 3.36 percent in 2011 instead of 3.30 percent. This represents additional exports worth about 0.4 percent of GDP. The current account deficit would be about 1.8 percent of GDP in 2011 compared to an actual deficit of 2.2 percent of GDP (Table 6).9

Table 6.

Impact of Structural Reforms on France’s Exports and Current Account

article image

Assuming the import content of export is equal to the last available data.

Source: Author’s calculation.

Labor Taxation Reform

30. During the 2000s, France labor tax wedge was one of the highest of our sample of advanced countries (Figure 6). Moreover, the labor tax wedge was in 2011 at the same level than in 2000, while it declined on average by 6 percent in the 32 other countries of the sample and by 3 percent in the 20 other EU members of the sample.

Figure 6:
Figure 6:

Labor tax wedge at average wage 1/

(In percent of wage, average 2000-11)

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A004

Sources: OECD and author’s calculation.1/ Average wage means the average annual gross wage earnings of adult, full-time manual and non manual workers in the industry (ISIC C to K).

31. If, during the period 2000 to 2011, the labor tax wedge had been at 31.7 percent (the average of the 26 countries considered in the regression) instead of 49.6 percent, France’s share in world merchandise exports would have reached 3.72 percent in 2011 instead of 3.30 percent. This represents additional exports worth about 2.7 percent of GDP and a balanced current account compared to an actual deficit of 2.2 percent of GDP (Table 6).1

Innovation Policy

32. An increase in triadic patent similar to the average of other 26 OECD countries of the sample would have a large effect on France export performance because France increase in triadic patent over the period 1997 to 2009 is relatively low (Figure 7). Using the results presented in column 3b of Table 5, France’s share in world merchandise exports would be 3.47 percent in 2011 instead of 3.30 percent. This represents additional exports worth about 1.1 percent of GDP and current account deficit of 1.3 percent of GDP compared to an actual deficit of 2.2 percent of GDP (Table 6).

Figure 7 –
Figure 7 –

Growth in Triadic Patents

(In percent, 1997-2009)

Citation: IMF Staff Country Reports 2013, 003; 10.5089/9781475576290.002.A004

Sources: OECD and author’s calculation.

F. Conclusion

33. Econometric results suggest that four structural reforms have the potential to improve advanced countries competitiveness.

34. Reforming the trade regime. Trade literature suggests many channels through which barriers to imports affect export performance. This study illustrates the importance of two of them. First, barriers to imports reduce the capacity of firms to access better, cheaper, and more diverse manufactured inputs that would increase their productivity and provide exporters with a competitive advantage. Second, barriers to imports reduce competition and thus incentives to be more productive and to innovate. This leads us to the second reform.

35. Promoting innovation. Results show that improving export performance is not simply a matter of increasing research and development spending but of increasing the efficiency of research and development (measured by the number of patents). Various reforms ranging from tax incentives to education and competition policies could promote achieve this result.

36. Reducing the labor taxation. Cutting the labor tax wedge would reduce the unit labor cost which is a key determinant of export competitiveness.

37. Reducing labor market rigidities. By limiting firms’ capacity to adjust to a changing environment, labor market rigidities may affect export performance. Econometric results suggest that simplifying procedures would have a larger impact on competitiveness than reducing the financial cost of labor legislation.

38. Bringing France’s labor tax wedge, labor market rigidity, and innovation to the average level of the other advanced countries would improve significantly export performance. The combined effect of these reforms could increase exports by more than 4 percent of GDP and improve the current account by about 3.5 percent of GDP. The larger impact would come from a reduction in labor taxation.

References

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1

Prepared by Jean-Jacques Hallaert. The author is grateful to Edward Gardner, the members of the European Department Working Group “Growth, Competitiveness, and Structural Reforms,” and participants to the seminar held as part of the 2012 Article IV Consultation at the French Ministry of Finance for their comments.

2

For brevity, only relevant specifications and variables are presented in this paper.

3

Nicoletti et al. (2000) and Conway et al. (2005) describe the PMR indicators, Conway and Nicoletti (2006) the indicators for energy, transport, and communications and Venn (2009) the employment protection indicators.

4

This is consistent with the Lerner symmetry theorem (Lerner, 1936) which demonstrates that an ad valorem import tariff acts as a tax on a country’s export sector.

5

This result is robust to alternative specifications (Tables 3-5). Alternative channels (the import content of production and the share of imported input in total input consumption) have been tested but are not significant.

6

For a review of evidence, see Hallaert et al. (2011). Literature also provides evidence that export diversification fosters economic growth (see Hallaert and Munro, 2009).

7

Triadic patents are the sub-set of patents all filed together at the European Patent Office, at the Japanese Patent Office and granted by the US Patent and Trademark Office, protecting the same set of inventions. Data are from the OECD and available at http://stats.oecd.org.

8

The trade reform is not considered because trade policy is decided at the European level. Although some regulatory barriers are decided at the national level and could be changed, the OECD index used is not detailed enough to estimate the impact of such a reform.

9

Results presented in Table 4 (column 3) of Table 4 are used. Estimates are similar when the results presented in column 2b of Table 5 are considered.

1

The specification of Table 4 (column 2) is used. It is preferred to the specification of Table 6 (column 3b) as it has a better fit for France. Using this alternative specification leads to a market share of 3.66 percent, additional exports worth 2.4 percent of GDP, and a current account deficit of 0.3 percent of GDP.

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Cover IMF Staff Country Reports
France: Selected Issues
Author: International Monetary Fund. European Dept.
Volume/Issue:
Volume 2013: Issue 003
Publisher:
International Monetary Fund
ISBN:
9781475576290
ISSN:
1934-7685
Pages:
79
DOI:
https://doi.org/10.5089/9781475576290.002

france – External Accounts

(In percent of GDP)

France - Trade balance

(In percent of GDP)

France: Trade in goods by region

(2000-11, in percent of GDP)

Share in World Merchandise Exports

(Change in percent, 1997 - 2011)

Share in World Services Exports

(Change in percent, 1997 - 2011)

Labor tax wedge at average wage 1/

(In percent of wage, average 2000-11)

Growth in Triadic Patents

(In percent, 1997-2009)