FRANCE NOW: Oct. 2003

  France Now Association
Oct 18

Recruitment in Public Service

  The great need in France is to reduce public spending at the same speed as the reduction in taxes, thus maintaining reasonable deficits. Although the government has often mentioned freezing recruitment to the public service, so that the retired are not replaced, in practice this has been empty words and public employment has risen. Quite likely, the government wants to reduce the rank of the unemployed and also keep syndicates happy.

One possible solution is to limit all new recruits to the public service to half-time employment (20 hours), preferably paid at the SMIC. Since public employment is secure, and jobs are scarce in any case, there would be enough takers. Half of the SMIC is about the same level as the RMI, France's minimum welfare handout. So, the cost to the exchequer should not increase significantly. But with the Work Bonus (Prime pour l'emploi) and the attached identity (I am somebody, I am not nobody) and social benefits (less time for crime, violent manifesting), there should be enough of an offer, especially in view of the large army of unemployed. The proposed RMA scheme (Revenue Minimum d'Activité) is along these lines.

A side-possibility could be to let these people look for work part-time or full-time in the private sector. Or, use their remaining time in creating an enterprise. Being in touch with work reality with their half-time public sector job, their employability with private employers would be better. Besides which, why should the advantage of flitting from public to private sector and exploiting contacts be reserved for high-flying ENArchs?

The total payment to these new recruits would therefore be the same (welfare or half-time salaries). However, the social benefits would keep left-wing French conscience at peace. The syndicates also would be happy to see their ranks swell. And public deficit would reduce because of the economies of the entire salary of the retired. Entire? No, there is still the pension to be paid.

 

FRANCE NOW

October 2004

Written  by

Arvind Ashta

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October 18

New enterprises

  On the positive side, the number of enterprises created in September went up by 10%. It is unlikely that this is the effect of the Law on Economic Initiative passed in August 2003. After all, even the application decrees have yet to be passed.

Another explanation could be based on the strong correlation between unemployment rates and creation of enterprise. When all else fails, people are willing to take risks.

The problem is that public employment is very secure. Private employment is quite secure, especially because the downside risk is taken away by the unemployment dole. So the discount rate used to calculate the present value of future earnings from salaries is low in both private and public employment. To get the same present value from business, where there is no downside protection and the value of the discount factor is therefore high, returns should be correspondingly very high.

Unfortunately, the costs of entry into any lucrative business ensure that not many enter. The ones with low cost of entry have nearly perfect competition unless protected by legal aggregation mechanisms. So, the profits, if any are rather low. All this explains why very few people want to start businesses.

Hopefully, the law on economic initiative and the coming budget proposals will both have a stimulating effect by at least removing a lot of legal and fiscal constraints on small entrepreneurs.

 

FRANCE NOW

October 2004

Written  by

Arvind Ashta

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October 18

Difficulties in hiring domestic help/ babysitters

  Domestic employment is also very low because of the nature of social security system. 

You earn a gross 100

You take away net 80 (20% is employee's social contributions)

You pay tax of, say 30% or 24

You are left with a disposable 56.

If you employ domestic help, you pay social security. If you want to pay someone a gross 40, you will pay charges of around 16.

The person will get a net 32.

Hopefully, he or she won't pay tax. If the person pays tax of 7%, he or she will get 30.

All this to say that if you want to employ domestic help at France's minimum legal wage, you need to earn at least 2.5 times the minimum legal (100 = 2.5 times 40). In such a case, you don't lose anything. Otherwise, its better to stop working and do some domestic work. If you included incidental expenses (paperwork, your time) to gain, lets say you need to earn 3 times the minimum wage. 

The minimum wage is 7.19 Euros an hour or 1078 Euros with a 151 hour work week. So, unless both husband and wife are grossing at least 3235 Euros each (about 21217 FF), it is better for one of them to stop working rather than pay someone to look after their children.

With a high unemployment and all the exemptions given to unskilled labour, barely 15% of the French population earn enough. The chance that both husband and wife are in this segment is even less.

The State pays the social security charges if the person looking aftr your children has been Certified for the job. Since Certification in fact blocks the market, Certified babysitters or assistants are in short supply and can charge much more. The employer would then pay the same.

 

FRANCE NOW

October 2004

Written  by

Arvind Ashta

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Oct 18

German unemployment benefits to be slashed

  Germany is going further in its abolition of the welfare State. The unemployed in Germany receive benefits in perpetuity. The new proposal is limiting unemployment benefits to 12 months, after which they would be replaced by a minimalist allowance, like the French RMI. Even this allowance would be need-based and subject to income ceilings.

On the one hand, slowly, European expansionism and globalization are taking the toll. On the other hand, what is amazing, is that all this has withstood so long.

France, of course, will follow German footsteps, in a few years. It has already reduced the main dole to 23 months and is cutting back on the ASS which replaces this for the long-time unemployed.

Everyone is following the American system. One day, Europe and NAFTA will merge. All this is therefore anticipatory regularization.

 

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October 2004

Written  by

Arvind Ashta

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Oct 18

Nicolas Bavarez's book

  Two weeks ago, a friend called to say that a book written by Nicolas Baverez (La France Qui Tombe) was echoing my views expressed a year ago. Its true that I was not aware of most of the things in chapter 2, but on the economics and French political inertness during the last decade, I'm in agreement. If any thing, Nicolas Bavarez ignores the role of the vested business in promoting and hiring politician and syndicate leaders and bureaucrats who would perpetuate their money-making. But then, perhaps he thought it better to be published by someone other than himself and criticizing business interests and media is not the best way to find publishers. 

Bavarez's book made me reflect. He mentions that perhaps the political elite would like to keep status quo to perpetuate their own advantages but perhaps, instead, they are in fact lost and don't know what to do. He himself suggests an abandonment of the 35 hour week and his final solution for a greater Europe and more large-scale mergers should also find appropriate patronage with the existing moneyed class. Nevertheless, the idea that the political class is looking for ideas, any ideas, even his, made me wonder.

This thought is not so weird. After all, they were all taught 30 years ago by professors of another age. Perhaps, in my earlier work, I have not contributed inane suggestions to back up my inane criticisms and can thus be accused of being nihilistic. But this was done keeping in mind that I was happy with what the French had created and thought they were in any case capable of doing a better job than I. But if they are open to  suggestions, I don't mind throwing in my two bits. 

It follows from all this that its  up to us to give them ideas of what their role can be, presented perhaps simply, even simplistically. 

Take for example the problem of immigrants in France's exploding suburbs. My position would be as follows:

1. Our children want to play. Its upto the parents to fend for the family.

2. I want to research and write. I expect the managers of the school to find the necessary funds.

3. Immigrants want to be respected in a new society. Its up to social and political leaders to show them how to be a success.

4. If they found a way to get beyond Maslow's second level needs, there would be far less problems.

There is a role for politicians in every situation. Its up to them to find it.

Other than this, I feel that Raffarin's (or Dutreuil's) enterprise initiative act is along the right-lines given their right-wing mandate. The finance bill for 2004 is also coherent with this and I feel they should be encouraged to do their thing.

I also continue to defend Jospin and Aubry's 35 hour week even if the claim that it created jobs is slowly being diluted by the INSEE under new right-wing political patrons. But keep in mind, that  maybe the decline would have been faster if the jobs had not been rationed. The issue is not that the rise in French productivity slowed: the question is that if unemployment had gone up faster, the havoc caused by demonstrations would have caused a greater loss in productivity.

 

FRANCE NOW

October 2004

Written  by

Arvind Ashta

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Oct 17

Yves Michaud and Marxist interpretation of Chinese and Russian policies

  There's an interesting political economic thought expressed by philosopher Yves Michaud in an interview with Les Echos. Michaud says that both China and Russia transformed themselves from Communism to Capitalism. China first stimulated the economy and then slowly changed the legal and finally the political institutions (both part of the superstructure). This followed the Marxist principle that economic change must precede the change of the superstructure. In Russia, however, they first tried to liberalize the political institutions (superstructure) and then usher in legal and economic progress. This did not work. The gap in the superstructure was filled by mafia and disorder. In terms of human rights, the Chinese model took longer but was more efficient.

Some related thoughts: is the Mafia bigger in Russia or in the US? Does free enterprise go hand in hand with monopoly? Is Mafia just a monopolistic crime organization in the absence of application of Anti-Trust legislation?

 

FRANCE NOW

October 2004

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Arvind Ashta

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Oct16

Coordination Center tax regime

(Quartiers Généraux)

  France has bowed in to pressure from OECD and EU to change its Coordination Center Regime (Quartiers Généraux). This is one of those "cost-plus" tax base assessment regimes used by many countries to reduce tax of large companies and inciting them to employ a few people in the country. Essentially, the coordination office is located in France, for example. The general expenses or overheads  incurred in France are taken as a referral. 5 to 7% of these general expenses are considered profit. This is then taxed at the Corporate Income Tax of 33.33% and surcharge. The real accounting profit is not taxed. The French scheme also conferrred another advantage. France has a secondary progressive corporate tax, called a notional tax (impôt forfaitaire). The regime deemed that only the lowest rate would apply to all income of Coordination Centers. 

What was extraordinary was that the cost of material used (considered outsourced) was ignored in the referral expenses for calculating the notional profit. The practice encouraged MNCs to transfer their profits to France (buy cheap from wherever the goods are made and sell expensive to wherever they are then sold). 5% of cost of a skeleton crew in France would be taxed. 

France has decided to make an amendment to its regime. It will now reduce the rate of deemed profit but include the cost of outsourced goods.

 

FRANCE NOW

October 2004

Written  by

Arvind Ashta

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Oct 12

PIT reduction

  Raffarin's 2004 budget is gambling on reduced tax rates stimulating the economy so that total taxes are higher.

If  this pro-reform budget of lowering taxes does not go through, he will surely blame the EU and get out of his commitments to the nation.

The EU should not be questioning his reduction of PIT rates. These are likely to be stimulating. At best it should be questioning if public expenses can be reduced so that the deficit remains within the 3% guidelines.

However, governments (EU, France) do not want to lose tax revenue. Nor do French politicians want to reduce public spending. How else do you dispense political favours? Neither may be seriously ready for a serious belt-tightening.

 

FRANCE NOW

October 2003

Written  by

Arvind Ashta

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Oct 12

35 hour week

  The debate over the 35 hours is a long-standing diversionary debate.

If French productivity had not improved, the 35 hour week would have considerably increased employment in France. However, any gains from the 35 hour week were eaten up by gains in French productivity.

What complicates matter further is that the productivity increase may in fact have come from the fact that people were working less and their Marginal productivity rose, increasing the average French productivity. Moreover, the 35 hour week was also supposed to provide time for training and this too would have improved productivity. Of course, the productivity of managers may have fallen if they could not manage more transition between employees in the work-place. This may have led to some fall in productivity.

Statistically, there is little possibility of separating the increase in productivity due to other reasons from the effects of the 35 hour week. As a result, an enquiry into the effects is likely to turn out to be political witch hunt.

The reason why French employees are unhappy with this measure is that their productivity gains have not been rewarded through the customary increase in salaries, since employers capped these to employ more people.

Raffarin would do well to consider carefully the effect on unemployment before scrapping this measure of social gain. 

 

FRANCE NOW

October 2003

Written  by

Arvind Ashta

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Oct 11

Following German footsteps

  Three years after the German tax reform, France is slowly replicating the dividend franking credit and replacing it by a 50% exemption of dividends income. Tax harmonization.

French personal income tax rates are declining, but always following the German income tax rates. Tax harmonization.

The work-week reduction to 35 hours for some, 39 for some in France has led to an effective 37 hours worked. Again approaching Germany where people work less. Labour policy harmonization.

The French Franc was linked to the Deutsche Mark and now both are linked to the Euro. Monetary policy is already unified.

Germany is having fiscal deficits. France too. Fiscal policy harmonization.

Both are in trouble with the EU. Political harmonization?

Transparency International rates corruption in France a little higher and ranks it 21st  than corruption in Germany (16th), but neither makes it to the top fifteen. Sociological harmonizaton.

 

FRANCE NOW

October 2004

Written  by

Arvind Ashta

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Oct 10

Following the US?

  The US dollar has depreciated 30% vis a vis the Euro in the last year and a half from 0.90 to 1.17, but only a little bit if one considers that the original parity was more like 1.16610 (www.stox-office.com/histo.htm). Nevertheless, it has been devalued The lowest rate of the Eruo was .82290 to the dollar on 26th Oct 2000, but it was more or less hovering between .87 and .92 in 2001 and even till May 2002.

US tax rates are much lower than France's.

US fiscal deficits are much higher than France's.

US minimum wage rates are much lower than France's.

US sells more arms than France. (Let's say this is neo-colonial plundering because most of the poor countries cannot really afford the arms and have to sacrifice their meager gains to pay the US for their R & D in this area. This way, also, the poor countries remain poor and cannot compete with the US. A self-defeating policy because later they cannot buy American goods. Why the US does not sell development technology in return for the inevitable plunder is not clear, but maybe the foregoing explanation is adequate.)

In spite of all this, if the French are still alive and kicking, its not bad. True, their unemployment figures are twice as much as that of theUS but their unemployed are better off than American ones. Their insecurity (economic and physical) is less than American insecurity.

With all this, if the US is not doing better, it makes one questions the leading standing offered to American Business Schools and American universities by ranking such as those in Financial Times.

 

FRANCE NOW

October 2004

Written  by

Arvind Ashta

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