The Truth About the French Economy

I’ve been meaning to respond to this Matt Yglesias post for a while, since it rests on a supposition that isn’t quite true. Matt:

For the past thirty years a broadly neoliberal tide has swept all over the world, but France has gone much less neoliberal than other developed countries. As a result, it’s seems to have developed comparative advantage in state-owned firms and now has a lot of economic specialization in activities that are either inherently non-competitive (managing trains and electrical grids) or incredibly capital intensive (airplanes and nuclear power plants). My guess is that if everyone tried to copy France, it would be a disaster for everyone, but that to the extent that the bulk of the world has moved in the other direction this constitutes a broadly beneficial kind of specialization.

This isn’t exactly wrong – there is still a quite significant state-owned sector in France. But it isn’t exactly right either. Pepper Culpepper tells the story in Quiet Politics and Business Power. His argument goes as follows. First – the 1980s saw the beginning of a large-scale privatization of state owned companies in France. This did not lead to an immediate embrace of neo-liberalism, but instead to the construction of networks of firms with cross-ownership – so-called noyaux durs – to resist foreign takeovers. However, these networks effectively collapsed in 1998 and 1999 leading to a major change in the organization of French business.

These interlocking French shareholdings among large French firms were replaced by the growing weight of foreign (mostly British and American) institutional investors, which by 2003 owned more than forty percent of the outstanding shares in CAC-40 companies. … As Michel Goyer has demonstrated, the influx … has been dominated by mutual and hedge funds, not pension funds.

The result has been not only an openness among the French business elite to hostile takeovers that would be unimaginable in Germany, but a desire to open up other European markets for corporate control so that predatory French firms can more easily expand internationally. As Culpepper argues:

French politicians like nothing better than to proclaim their opposition to free markets … Yet the reality of markets for corporate control is often far removed from the rhetoric of political leaders.

[Cross-posted at the Monkey Gage]

Henry Farrell

Henry Farrell is an associate professor of political science and international affairs at George Washington University.