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French News in English 

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Editor: Arvind Ashta

Editorial Committee:

W. W. Strangmeyer,

Emmanuelle Ashta

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FRANCE NOW

(French news in English)

December 1998, Monthly, Issue No. 20

(Only highlighted articles available for online consultation)







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Aspects of local participation in national affairs


France has layers of decentralised local levels: 22 regions, 100 departments and more than 36,500 communes. A large majority of these communes group together in threes or fours to carry out most of their tasks: these cooperative establishments are referred to as intercommunes - a form of horizontal cooperation seldom witnessed elsewhere in Europe, forming a fourth level of local administration.

State - Regional Plans

Since the beginning of the 1980s, contracts between the French State and its regions permit France to meet the challenges of economic development, accelerating industrial changes and the advent of the single European market. Such contracts are concluded between the State and the regions, but other levels of local government are consulted (departments, communes, city agglomerations). The next contract is for the seven-year period 2000-2006, with a revision in 2003. The seven-year contract would be accompanied by a general forecast of projects until 2015.

Already, France is getting ready to prepare the plans in a way to obtain the maximum benefit from the European Structural Funds. For this, there has to be some harmony between the State-Region Plan Contracts and the program documents submitted to Europe for financing local projects. Territorial Development zones will be defined through discussions with the European Commission.

The seven-year Plans are developed by regional prefects after consulting all the local economic and social development actors, and approved by the President of the Regional Council. For the first four years, the forecasts are quite firm, indicating details of financing. The prefects can have the help of the Treasurer and General Paymaster of the Region (TPG) in preparing such details. The forecasts for the last three years are firmed up in the fourth year, but the total engagement for the seven-year period is not revised.

Such contracts have two parts: regional and territorial. The regional part of the contract takes up projects affecting the region as a whole, where the equipment or the strategic action is linked to the regions. Priorities include employment generation, environmental protection, reduction of social inequalities and linkages to plans for other local levels. This part has to indicate the financing by the State, by the region and by other local actors (departments, communes, intercommunes, public establishments and enterprises).

The territorial part of the contract takes up strategic initiatives favoring local development and a better organization of the territory. These include operations to incite new economic activities creating new job opportunities taking into consideration the environment. State and regional financing are also indicated. This part of the contract forms the basis of selection of contracts with the local authorities (communes and towns).

Similarly, there is also a contract for cities, taking into account problems specific to urbanization. The importance of these contracts is linked to the strategy of regional nodes developed to encourage local concentration and yet regional decentralization (people are gathered in clusters in different parts of the country). For this, it is even planned to decentralize government offices from Paris to different regional metropolitan cities.

State financing of regions is determined primarily by regional economic indicators (regional wealth, unemployment, problems of alienation, and environmental importance) as well as inequalities in providing basic public services to the residents. Secondarily, the State takes into account the status and nature of territorial projects and their conformity to national development priorities as laid out in a document entitled «State strategy for the Region» developed on the basis of initial plans of the Prefects and the priorities of the different government ministries. An attempt is being made to usher in a system of equalization enhancing State subsides to the poorest as well as by transfer payments directly from richer to poorer communes.

In all cases a zero-based reexamination of ongoing projects is also required. The strategy propositions of the Prefect are accompanied by a brief note on the major challenges and problems facing the region and its integration into the European Union.

See also: Circular of the Prime Minister, Lionel Jospin, July 31, 1998.



State-Local Finances

The State-Regional plans form the global vision of projects which are to be undertaken. As stated above, these may be financed by Europe, by the French State or by local French administrative bodies. It is therefore apparent that there is a bit of fiscal autonomy for localities (regions, departments, communes and other local bodies). This is represented by their own tax receipts and expenses on their own administration and projects. The most important local taxes are the taxes on property (constructed or not), the residence tax (taxe d'habitation) and the professional tax, all levied often by many levels of local administration for any area. This means that some amount of local horizontal fiscal competition is allowed to prevail and that, for any particular region, there is also a degree of vertical tax competition between levels of local administration. Total expenses of localities of all sorts were FF 845 billion in 1997, about half of the expenses of the French State or about 10% of the French GDP.

The localities are of course partly dependent on the State for subsidies. In 1997, subsidies represented FF 250 billion, about 30% of total expenses. The Ministry of Finance would like to categorize these subsidies in two broad categories: active and passive aid. In 1997, FF 174 billion could be classified as active aid and the balance FF 76 billion as passive aid. The latter arises because at times, the French State decides to exempt a category of the French population from some local tax. The most striking examples are that 40% of households receive abatement (total or partial) of the residence tax. Similarly, the Professional tax has been capped in relation to the value added. In all such cases, the local bodies therefore lose some of their fiscal receipts due to State benevolence to the taxpayer. The State then reimburses the local bodies from its own tax collections.

Within the active subsidies (FF 174 billion), in the last few years, the government has been distinguishing between those which form part of the Financial Stability Pact (FF 158 billion) and those meant for equalization (FF 26 billion). The Financial Stability Pact requires that subsidies given for different projects (administration, equalization of the professional tax, national equalization, local elected, equipment, decentralization, school facilities and compensation of the Public Treasurer) be limited to the growth of a consumer price index. The other FF 26 billion of the payments for equalization (Urban solidarity, Minimum Administrative Services, Compensation of regional disequilibrium) were not yet included in this total fixed package of subsidies to localities.

For the triennial starting 1999 (to 2001), the government now plans to rename the Financial Stability Pact as the Growth and Stability Pact and include the equalization payments within this pact.

Source: Projet de loi de finances pour 1998, notes bleues de Bercy, vol. 145.



Local aid to business

Of different levels of French localities, most aid to business is provided by communes, regions and departments. Communes provide about FF 6 billion, regions about FF 5 billion and departments about FF 3 billion. The legal foundation of local aid to business is determined by a decentralization law of 1982, as modified from time to time. This law validates regional intervention. The lower-level bodies justify their aid as additions to regional aid.

Public accountants distinguish between direct and indirect aid. The former actually entails a direct benefit to the donee (subsidies, loans and advances, purchase of land and buildings, bonuses, interest reductions). Indirect aid does not yield in direct financial advantage (financial guarantees, participation in the capital of the company, developing industrial zones).

Total local aid to business hovers around FF 14 billion. 80% of local aid (a little over FF 11 billion) is direct. The balance is indirect (a little less than FF 3 billion).

According to a survey1 the benefit is mainly to the category called "commerce, industry and artisans" - about FF 6 billion. The "housing industry" gets FF 3 billion, and "agriculture" gets FF 2 billion. "Public works", "tourism" and all the others get the balance FF 3 billion. Of course, since this survey does not give the total number of enterprises in each sector and the corresponding numbers of beneficiaries, such broad aggregates mean little. Since only 4% of French population is involved in agriculture, the FF 2 billion provided to this sector may represent more to each beneficiary than that distributed to commercial or industrial enterprises.

1 See Notes bleues de Bercy, no. 145.




Softening the Quit France order: Reinsertion Education


Irregular immigrants whose applications for regularization were not accepted were asked to quit France. Harsh as it seems, this is politically, socially and economically necessary. If such measures are not undertaken, the French feel that the whole world would come to France to share their GDP, leaving little for everybody.

To soften the blow, expatriates of certain countries would be given training in France and in their country, in order to help their reinsertion in their own country with dignity. This is the scheme known as the Contract for Reinsertion in the Home Country (CRPO - Contrat de réinsertion dans le pays d'origine). The undesired immigrant has to apply to the OMI (Office des migrations internationales) for professional education. If the application is accepted, the OMI would ask the Prefect to issue a Provisional Residential Permit as «Trainee», for a period of three months (renewable). Such training may last from a few weeks to six months.

During the period of training, the beneficiaries of the contract would get a stipend of FF 2002 per month, and social security coverage.

The whole scheme is monitored by the OMI as well as Associations helping immigrants to settle in their home country within the overall framework of co-development. Such co-development initiatives require the «Home Country» to also set up Professional Education institutes to help orient the persons sent back. For the moment, Mali, Morocco and Senegal have opted for such co-development offers and the benefits of the CRPOs are therefore limited to people from these three countries.

Who makes money?

1. The immigrant makes FF 2002 per month for a maximum of six months. The Key Success Factors are the abilities to sneak into France, apply for regularization, get oneself refused and show a project which one could manage with appropriate training.

2. The Professional Education bodies (in France as well as abroad) earn money from the OMI for dispensing the education. Key Success Factors include certification by the local Departmental Directorate for Labor, Employment and Professional Education, and a close marketing with OMI officials so that the immigrant is assigned to their school.

3. The Associations who assist the immigrant in all the formalities are also given financial aid. Key Success Factors include contact with the Home Ministry to have a list of immigrants of the three countries who are refused regularization, certification by the OMI to obtain aid within the overall framework of the co-development aid budget, ensuring that their sponsees' projects are reasonable and that they should get the required education.




Juvenile delinquency


Juvenile delinquency has become a major problem for French society. Juvenile delinquency includes verbal and physical violence, damage to property, racketing, using or trafficking in drugs, arms or dangerous objects. The twenty-six departments most affected include the eight suburbs of Paris. Whatever the socioeconomic causes (no economic future implies no incentive to conform?), the biggest problem is what to do about it now.

Since the Internal Security Council met on the 8th of June, circulars have been sent by the Prime Minister and many of the concerned ministers (Employment & Solidarity, Justice, Education, Home).

Lionel Jospin's circular dated November 6 resumes that these minors must be brought to book and would have to accept responsibility for their acts. It also seeks to be bring in the responsibility of the parents, as also that of the schools which are usually the scenes of initial misconduct before such delinquency spreads to other walks of life. While imprisonment should be used for extremely serious crimes, as far as possible educative measures are needed, although taking the child to another area could be used as a possible corrective device.

The Internal Security Council of Ministers had decided that priority should be given to the environment of the young: increasing parental responsibility, reinforcing the preventive role of the school, increasing access to jobs for the youth, insulating minors from certain media, fighting drugs. At the same time, the delinquency act itself requires a prompt response - warnings, reminders of the law and reparation of damages in the case of petty offenses and more severe sanctions for serious offenses.

For this, the Justice is going to be reorganized to ensure that offenses by minors are treated immediately, reinforcing the role of the Children's Judge. In addition, the culprit would have to go through a procedure where he would listen to his victims and their families. Besides developing special prisons and quarters to take care of such young people, host families are also sought to ensure that such children have a place to be sent to, if it is decided to remove them from their immediate vicinity.

New police forces are being formed to take action specifically on this front, especially in the most seriously affected (twenty-six) departments.

A lot of measures deal with delegating responsibility to the departments and associations concerned. Most of these are required to provide a forum of ideas on how to deal with the problem as well as to analyze the causes of the problem. Special training is to be imparted in appraising all public servants of local juvenile delinquency problems and how to deal with them.

To this end, Claude Allègre, the minister for Education, Research and Technology, sent a circular to other concerned ministries and all responsible all the way down to headmasters of schools, reminding them how they should deal with this problem. The first measure he outlined is education, including civic education, imparting knowledge of the internal regulation of the schools, creating extra-scholarly classes and holiday activities, informing and developing the role of the parents. A second measure includes publication of the school rules, especially on the carrying of arms and the use of drugs and alcohol. In all such cases, the offending child must be isolated and any bags the suspect has checked. A third measure seeks to monitor absenteeism and, where required, getting in touch with appropriate socio-psychological bodies which could provide moral support for the child.

A well-defined procedural relation should be established with the local police or gendarmerie to help in inspecting alarm systems, responding promptly to distress calls and conducting surveillance and preventive actions.

All punishments should be of an educational character. Even if a child must be expelled from the establishment (after proper formalities), he cannot be barred from pursuing further education.

The minister took care to remind all concerned of some laws: Firstly, ragging or hazing (bizutage) is considered an offense (délit). In all cases, serious offenses have to be reported to the Public Prosecutor. In addition, any offense or absenteeism is to be included in the regular monthly report to the administrative authorities. Secondly, Professional Secrecy is not a valid defense for any violence to minors less than fifteen years of age or to old people. Thirdly, not assisting people in danger is a crime (unless this would have caused danger to oneself or others).

A partnership should be developed with Departmental agencies helping children and parents in difficulty. Similarly, local service contracts can be established with the Mayor to increase patrolling of areas around schools in dangerous areas.

Finally, civic education and health committees can also be used to watch over potentially dangerous minors.






François Bourguignon: Taxation and Redistribution

Lecture notes


Before setting out our comments, let us indicate our gratitude to Mr. Bourguignon for his lucid presentation of taxation and redistribution, a paper published by the Economic Advisory Committee to the Prime Minister. Stimulated, we would like to present our thoughts.

Commercial enterprises and employers blame high French social security as one of the main drawbacks of France. They compare the social security payments as a percentage of GDP and exclaim that it is 22.1% in France and only 8.5% in the USA. In his analysis of taxation and redistribution, François Bourguignon points out that this is not so, because American employers pay retirement and health insurance on their employees to private organizations and so it is not reflected in public accounts. If we include private retirement schemes, this insurance is apparently another 7% of American GDP, halving the difference between American and French social security costs. And if we include contributions to private medical funds, the difference would probably disappear.

Since this background observation seems eye-opening enough to feature in Mr. Pierre-Alain Muet's introduction to the paper, it is worth commenting upon. Employers decide employee salaries based on the total cost to the company. They equate the Marginal Cost to the Marginal Productivity. If the charge on employers is 22.1% or 8.5% or 15.5%, it makes little difference, because the employer merely adjusts the gross salary offered accordingly, ensuring that his total cost remains the same. But he can do this only at high salary levels. The problem comes if there is a minimum salary constraint and if this is a binding constraint. To give a simple example, if the minimum salary in the US is, for example FF 5,000 and a social security charge of 15.5% were added, the total cost to the employer could be FF 5775. If the employer was in any case ready to incur FF 6000, the minimum salary constraint in the US would not be a binding constraint. Now, for the same marginal product, if the French minimum wage is FF 6800 with a 22.1% social security addition (actually it is closer to 40%), the French minimum cost to the employer becomes FF 8302. The difference between the two labour costs is no longer 6.6% (22.1-15.5) but 44% [(8302 - 5775)/5775] or 38% [(8302-6000)/6000]. The difference approaches 6.6% as Marginal Cost or Marginal Product approaches the French Minimum Wage, but broadens if the Marginal Cost - Marginal Product equilibrium approaches the American minimum wage. All this to say that aggregate differences of social security pressure, even adjusted, should be treated with caution before assuming their impact on employer recruitment motivation (and growth) because the real problem is the (un)employment of unskilled labour. Mr. Bourguignon includes a passing mention of the effect of a minimum wage on his analysis. He reasons that it would increase labour's disincentive to work (by increasing his marginal rate of net taxation) especially for part-time workers within his poverty trap concept.

Mr. Bourguignon treats French retirement policy as a transfer to a later state in life - as if we are saving for the future, although he takes pains to point out that he knows that this is not so. French pensions are a transfer from the young today to the old today, in the hope that tomorrow's young will transfer to us when we are older. But since future pension benefits are indexed to current contributions, he would still like to continue with his illusion. But perhaps his analysis may not give the same results if he includes transfers to the retired. The most simple way of questioning the validity of his assumption is to ask: if the French economy collapses with no one working, who will pay for us? Are we entitled by our savings to draw on the public pension funds? Or, even more specifically put to today's governing socialists who, in spite of ideological opposition, are nevertheless forced to bring in savings-based private pension funds to gradually replace the current redistributive public pension funds: if we continue to contribute only to the public retirement schemes, can we expect the same generous retirement allowances as contemporary retirees? Even Martine Aubry, the Minister for Employment & Solidarity is talking about only a minimum retirement eventually being available from the public system. An easier option would have been to hypothesize (and perhaps even check out) that

1. Rich people manage to place their children well.

2. The rich people get higher pensions.

3. Their (rich) children contribute more to social security, especially retirement.

4. Conversely, poor people get lower pensions and their children contribute less since they earn less.

5. This implies, the inter-generation transfers of pension funds are from rich children to their parents (and poor ones to theirs), with the State or the pension fund taking an administrative cut.

6. So, for the larger family unit, there is no real redistribution.

This logic, if found to be empirically valid, would provide a more rational reason for excluding retirement transfers from his analysis.

Coming to the crux of his analysis, the first part concerns redistribution in France and makes clear reading. The second part concerns an international comparison of redistribution and here it seems less confident and less clear, probably reflecting our own conceptual weaknesses. A third part examines the efficiency of redistribution.

The main purpose of the report seems to be to show that France redistributes income (politically necessary for the majority of electors) but that the redistribution is not more than that in the UK, for example (politically necessary to stop the outflow of capital, notably to the UK). It indicates that the income of the lowest quintile of French population is increased by 70% thanks to social transfers, i.e. the poor gain a lot. This is mostly thanks to a 16% reduction in the income of the top quintile, i.e. the rich do not lose much. The top quintile earns 7.6 times that of the lower quintile, before redistribution. However, thanks to redistribution, the difference is reduced to half, i.e. 3.8 times, socially and politically more acceptable.

Now, everyone in France seems to have got the message that RMIsts (those long-term unemployed on the minimum dole) won't work at the SMIC, at least not part-time, because with all the transfer income provided at low income levels, they probably make as much by doing nothing. In the third part of his essay, devoted to analysing efficiency of redistribution, Mr. Bourguignon provides a quantified economic explanation based of marginal rates of net levies. The analysis is well presented for France. He is careful to note that the analysis is suggestive.

As usual, one gets lost once one gets into the international comparisons. This is because the report would not like to suggest that France redistributes less and has less inefficiency losses due to redistribution than its neighbours (diplomatically incorrect?), although the analysis presented indicates that France taxes less. This is because France does not use the same taxes as its neighbours. The reporter finds that the other taxes (mostly indirect) indicate some degree of proportionality and therefore marginal rates equal average rates and this must be added on to the marginal rates of net direct taxation used in the report. As a result, on the whole, the taxation pressures of France should be as high as Germany. In other words, one gets a feeling that Mr Bourguignon feels that his analysis is insufficient, that a new more complicated analysis is necessary, but in the absence of this, his instinct should be accepted as if it were backed by his quantitative analysis. What is nevertheless admirable is his willingness to take economic analysis one step forward, knowing that the goal of perfect explanation will not be achieved in this article.

Regarding the inefficiencies created by redistribution, the report could have noted that a tax does not always lead to a disincentive to work. If I want to earn an income Y for which I need to put in 30 hours of work a week and I know there is a tax rate t, I will try to work more (30/t) to get Y/t gross and Y net (ceteris paribus). So a higher marginal rate of taxation would push up the incentive to work due to this reasoning. Of course, as taxes go beyond a certain point, the disincentive theory would apply. But if the report indicates that French marginal tax rates are not so high, then the assumption that we are creating disincentives does not necessarily follow.

The conclusion that we introduce a citizens' allowance is not based on the analysis presented in this work, but in other coauthored works. He indicates that their conclusion has the merit of simplifying the system and redistribute more and reduce the inefficiency losses created by the redistribution. If, at the same time, we get rid of the minimum wage (SMIC), they would come to the same conclusion suggested by ourselves earlier this year, not only improving the efficiency of redistribution but also solving the unemployment and immigration problems.

All in all, the 37-page article in a 100-page report makes stimulating reading, especially for economics graduates and students who don't have the time or funds to devote to their own modelling experiments. Besides which the report forms the analytical background to the recent decree permitting people to keep their doles if they take small part-time jobs. More on this next month.

Note: François Bourguignon: Taxation and Redistribution, Documentation Française, 1998.







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