Public assistance to industries and trade policy in France

SWP570 Public Assistance to Industries and Trade Policy in France Bernard Bobe WORLD BANK STAFF WORKING PAPERS Number 570 PUB HG 3881.5 .W57 W67 no. 570   WORLD BANK STAFF WORKING PAPERS Number 570 Public Assistance to Industries and Trade Policy in France Bernard Bobe The World Bank Washington, D.C., U.S.A.  Copyright ( 1983 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. First printing September 1983 All rights reserved Manufactured in the United States of America This is a working document published informally by the World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. The views and interpretations in this document are those of the author(s) and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. Any maps used have been prepared solely for the convenience of the readers; the denominations used and the boundaries shown do not imply, on the part of the World Bank and its affiliates, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries. The full range of World Bank publications is described in the Catalog of World Bank Publications; the continuing research program of the Bank is outlined in W'rld Bank Research Program: Abstracts of Current Studies. Both booklets are updated annually; the most recent edition of each is available without charge from the Publications Distribution Unit of the Bank in Washington or from the European Office of the Bank, 66, avenue d'Iena, 75116 Paris, France. Bemard Bobe is professor of economics at the University of Paris-Nanterre and a consultant to the Economic Analysis and Projections Department of the World Bank. Library of Congress Cataloging in Publication Data Bobe, Bernard. Public assistance to industries and trade policy in France. (World Bank staff working papers ; no. 570) Bibliography: p.' 1. France-Commercial policy. 2. Subsidies-- France. I. Title. II. Series. HF1543.B58 1983 338.944'02 83-14827 ISBN 0-8213-0200-0  A Set of Related WORLD BANK STAFF WORKING PAPERS Public Subsidies to Industry The Case of Sweden and Its Shipbuilding Industry Number 566 The Political Economy of Protection in Italy Some Empirical Evidence Number 567 Bureaucracies and the Political Economy of Protection Reflections of a Continental European Number 568 Economics and the Politics of Protection Some Case Studies of Industries Number 569 Public Assistance to Industries and Trade Policy in France Number 570 The Structure of International Competitiveness in the Federal Republic of Germany An Appraisal Number 571   AKNOWLEDGEMENTS I am grateful for the comments of Helen Hughes, Jean Waelbroeck, Lutz Hoffman and Vincent Cable. I am, of course, solely responsible for any errors, and all opinions are mine.  TABLE OF CONTENTS I INTRODUCTION .................................................... P II INDUSTRIAL STRUCTURE AND THE PATTERN OF SPECIALIZATION ......................................... 3 Geographical Trade Patterns ....................... 3 III SUBSIDIES TO INDUSTRIES ............................. 9 Institutional Aspects ........ . . . . . . . . . . . . . . . . . . . . . 9 Sectoral Distribution of the Public Subsidies *.... 13 The Reform of Public Assistance for Industry ...... 20 Some International Comparisons .................... 21 IV FRENCH INTERNATIONAL TRADE POLICY ........ ........... 28 Financial Assistance for Exports .................. 28 Some Aspects of French Trade Policy ................ 35 V CNLSOSumr .......................................... 42 REFERNCLUIOS ........................................... 44  LIST OF TABLES Page 1 Trade Balance with OECD and EC Countries, 1973-80 ... 4 2 Trade Balance with Some Industrial Countries (CIF/FOB), 1970-80 ........... . . *. . .. . . .. . . ............. 5 3 Trade Balances with Non-OPEC Developing Countries and Centrally Planned Economies (CIF/FOB), 1970-80 ...... 5 4 Trade Balance for Manufactured Products, 1970-78 .... 7 5 French Openness to the World Economy, 1970-78 ....... 8 6 Budgetary Appropriations for Government Economic Intervention, 1980 ............................ 14 7 Budgetary Appropriations for Public Assistance to Industry, 1979 .... .................................. 14 8 Sectoral Distribution of Public Assistance to Industry, 1972-76 ............. *.......... *........ 15 9 Financial Assistance to Private Industrial Firms (Excluding Nationalized Companies) .................. 16 10 Distribution of Assistance to Industry, 1976 ........ 17 11 Subsidies to the Industrial Sector in the Federal Republic of Germany, 1978 ........................... 23 12 Government Assistance to U.K. Industry, 1977-78 ..... 25 13 Sectoral Distribution of Public Assistance to Industry in the U.K. Industry Act of 1972, 1972/73-1977/78 ... 26 14 Export Assistance ........... . .. . .. . .. . . .. . .. . .. . .. . . 33  LIST OF TABLES (Cont'd) Page 15 Export Credits to Developing Countries Benefiting from Public Assistance (Loans for 5 Years and More), 1981 Levels ***************..*** .................. 33 16 Geographical Distribution of Mid- and Long-Term Loans of the BFCE (End of 1977) * ..................... 34 17 Tariff Averages for the Main Industrial Sectors, 1976 ***e********.. *a****... .e*****..e*.....*........ 36 18 French Tariff Protection, 1978 ...................... 38 19 Effective Exchange Rates (Relative to a Basket of Currencies Weighted by the World Export Structure) ... 39  ABSTRACT This report is part of an inquiry undertaken by the World Bank in conjunction with scholars from 12 industrial countries into the penetration of the markets of industrial countries by export of manufactures from developing countries. The project sought to establish the shares of industrial country markets held by the developing countries, changes in such shares in the 1970s, and why they vary among industry groups and countries. The aim is to assist developing and industrial countries to improve their policies through a better understanding of trade patterns and protectionist pressures. This paper examines trade policy in France and the tools, particularly public subsidies, used to support industry. It begins by looking at the nature of France's international commerce as it evolved in the 1970s and at French trade policy. Attention is paid to the institutional structure through which trade policy is decided on and implemented. It concludes by assessing probable future trends. As a major objective of the work was to gather information on trade policy and its implementation, to a large extent the material is descriptive. In the 1970s, the bulk of France's international trade was with developed countries. Trade with developing countries was mainly with France's former possessions. Other developing countries have encountered quite restrictive attitudes on France's part. Just 20% of France's trade falls under the Common External Tariff. Among the measures it has used to influence imports have been  quantitative restrictions, exchange rate policy, "safeguard" measures and non-tariff barriers. Subsidies to industry have also been used extensively. The system of subsidies is complex, involving numerous measures and institutions that have evolved piecemeal over 20 years. The same complexity has also characterized government assistance for exports. Beginning in 1981, the government decided to reform the system of public assistance to industry. The effort involved three lines of endeavor: the simplification and harmonization of the system, decentralization of the allocation of assistance to the regions, and greater selectivity in allocations. The new government, while more disposed toward intervention, will probably support this reform program. Moreover, the importance of trade to France's economy will tend to discourage a return to greater protectionism. Another limiting factor is the Community-wide tariffs. At the same time, protectionist pressure remains strong and has support among the public and some politicians, as well as the "bureaus." Combined with protectionist moves in other developed countries, this could lead to greater protection. Trade will also be influenced by the extension of the nationalized sector. The priorities, however, are likely to remain the same, e.g., there will be continued support for high technology sectors.  I INTRODUCTION Government intervention in France has been important since the early stages of commercial and industrial growth.-/ Accordingly, in the 1970s, public assistance was a significant instrument of French trade policy. This was particularly true since France had been facing 2/ substantial fiscal pressures-/ and had an important nationalized 3/ sector.- It is within this context that public subsidies in France are analyzed in this paper*.4/ The changes in industrial structure and patterns of specialization during the 1970s are reviewed briefly, followed by a discussion of the subsidies to industry. Finally, financial assistance for exports is addressed, along with trade policy. As one purpose of this initial analysis was to gather 1/ Non-French-speaking readers can refer to C. P. Kindleberger, Economic Growth in France and Britain, 1851-1950, Cambridge, Mass.: Harvard University Press, 1964; and R. Cameron, ed., Essays in French Economic History, Homeward, Ill.: R. D. Irwin for the American Economic Association, 1970. 2/ Taxes and social security contributions represented 42 percent of GNP in 1980. 3/ During 1977, productive investment represented 10.9 percent of GNP (with 11.3 percent of GNP represented by collective investments and housing). Twenty percent of productive investment came from the nationalized companies and 80 percent from private firms. 4/ This paper describes public assistance to industries and trade policy in France up to May 1981, when a socialist government was elected. Policies since that time have been in a state of flux, and it is too early to make an assessment of the new orientations and their implications.  statistical information,-Y the material is rather descriptive. However, the findings can be interpreted within the general framework of commercial policy as developed by Baldwin and Corden.2/ 1/ The data-gathering was completed in the summer of 1981. 2/ R. E. Baldwin, "Non-Tariff Distortions of International Trade," The Brookings Institution, Washington, D.C., 1970; and W. M. Corden, Trade Policy and Economic Welfare, Oxford: Clarendon Press, 1974.  II INDUSTRIAL STRUCTURE AND THE PATTERN OF SPECIALIZATION International trade and the pattern of industrial specialization in the French economy changed rapidly during the 1970s. Two aspects are worth noting here. First, most French international trade was with developed countries and took place at a deficit. The main commercial surplus came from trade with non-OPEC developing countries, a fact that underscores the importance to France of good relations with the developing countries. The surplus arose mainly in France's trade with its former possessions, most of which were little industrialized. As a result, France was quite free to be restrictive in its trade policies with the other developing countries, as they could not easily retaliate against its trade restrictions (or buy off the restrictions by offering contracts). The second point is that France's economy rapidly became more specialized, and presumably more "efficient," through better use of the trading opportunities offered by the rest of the world. The need to safeguard this efficiency has emerged as a constraint that discourages a backslide into protectionism. Geographical Trade Patterns Nearly 70 percent of France's international trade is carried out with the OECD countries, with EC countries accounting for almost 50 percent of it. The deficit, noted earlier, is shown in Table 1. It began to grow very quickly at the end of the last decade and was very important to the trade in industrial products (intermediate or capital  Table 1: TRADE BALANCE WITH OECD AND EC COUNTRIES, 1973-80 (billions of current francs) 1973 1974 1975 1976 1977 1978 1979 1980 Trade balance (CIF/FOB) OECD -4.0 -6.3 -6.9 -28.8 -20.9 -17.8 -22.2 -50.1 EC -2.5 -4.1 -3.5 -17.8 -14.0 -8.6 -8.7 -22.5 Imports (CIF)/ exports (FOB) (%) OECD 96.8 96.3 96.3 86.6 91.3 93.3 93.2 86.9 EC 97.3 96.6 96.9 88.3 91.8 95.5 96.2 91.4 Source: Customs Administration (Administration des Douanes). goods), particularly with Federal Republic of Germany, the Netherlands and the United States. Table 2 shows that France had a surplus in its trade with Italy (growing because of exports of automobiles and energy) and with the United Kingdom (declining because of oil imports and a decline in exports of automobiles). As shown in Table 3, the total trade balance with the non-OPEC developing countries and with the centrally planned economies was positive. Where the trade balance was positive for industrial products, it was because of surpluses with the developing countries, mainly those in the French franc area and in North Africa. The trade balance with Asian countries was positive until 1979 but became negative in 1980.  Table 2: TRADE BALANCE WITH SOME INDUSTRIAL COUNTRIES (CIF/FOB), 1970-80 (billions of current francs) 1970 1973 1976 1977 1978 1979 1980 Germany, F.R. -2.9 -6.7 -13.2 -10.7 -10.2 -11.1 -16.8 Italy 1.3 3.7 1.6 -0.5 0.3 1.5 5.2 Japan -0.2 -0.5 -3.9 -4.5 -4.6 -4.8 -7.1 Netherlands -0.3 -1.3 -5.1 -5.2 -4.2 -5.2 -8.0 U.K. -1.4 2.4 1.0 2.2 4.7 6.5 2.0 U.S. -5.2 -6.3 -10.5 -8.0 -7.6 -14.0 -24.6 Source: Customs Administration (Administration des Douanes). Table 3: TRADE BALANCES WITH NON-OPEC DEVELOPING COUNTRIES AND CENTRALLY PLANNED ECONOMIES (CIF/FOB), 1970-80 (billions of current francs) 1970 1973 1976 1977 1978 1979 1980 Centrally planned economies Trade balance 1.1 1.3 4.3 2.4 1.9 3.3 -3.1 Imports/exports (%) 137 125 141 120 115 121 87 Non-OPEC developing countries Trade balance 3.6 4.4 12.8 12.1 16.7 18.6 20.1 Imports/exports (%) 133 128 145 137 152 147 142 Source: Customs Administration (Administration des Douanes).  To an extent, bilateral trade balances influence trade policies. The reason is that the deficit country tends to feel that it has less to lose from a trade dispute than does the country against which it is seeking to discriminate. Given the geographical pattern of French trade, this fact may help account for the resilience of protectionist sentiment in France. However, the favorable trade balance surplus in industrial products with the non-OPEC developing countries may have moderated these tendencies, encouraging France's "pro-South" political stance. As remarked above, a detailed analysis of French trade patterns suggests that the second factor did not strongly limit protection for manufactured goods. Policy-makers were aware, however, that there was much to gain from allowing French international trade specialization to increase. The contribution to growth in France that had resulted from the international specialization in recent years was recognized. France's international specialization was studied recently in detail.-1 The research showed important trends in specialization for industrial products.2/ The surplus in industrial products had been 5.7 1/ CEPII (Centre d'Etudes Prospectives et d'Informations Internationales [Center for Prospective Studies and International Data]), "Specialisation et Adaptation Face a la Crise" [Speciali- zation and Adjustment in Response to the Crisis], Economie Prospective Internationale (January 1980); and B. Bobe and S. Becuwe, "Nouvelles Specialisations Internationales et Structures Industrielles de la Region Nord-Pas de Calais" [New Patterns of International Specialization and Industrial Structure in Nord-Pas Calais], mimeo, Universite de Lille, Lille, 1980. 2/ This very brief analysis does not address the French trade balance and the important surpluses in food products and services.  billion francs in 1970, but was 43.10 billion in 1978 (in current prices). Table 4 summarizes the trade balance for manufactured products from 1970-78: it became positive for intermediate goods and even more positive for equipment goods, but negative for consumer products. However, this specialization, which reflects a better adjustment to the pattern of international demand, is less important if volume data (measured in constant francs) rather than values are taken into account. Table 4: TRADE BALANCE FOR MANUFACTURED PRODUCTS, 1970-78 (billions of current francs) 1970 1971 1972 1973 1974 1975 1976 1977 1978 Intermediate goods -4.5 -4.5 -5.5 -7.1 -6.8 0.7 -8.1 3.2 4.6 Equipment goods 5.5 7.3 7.5 7.0 10.5 28.9 26.5 40.1 41.4 Automobiles 5.2 6.1 7.1 7.5 8.7 10.2 11.1 14.2 16.1 Others 0.3 1.2 0.4 -0.5 1.8 18.7 15.4 25.9 25.3 Consumer goods 4.7 4.9 5.1 5.9 4.7 4.3 -1.1 -2.6 -2.9 Source: National accounts. Table 5 shows that the French economy became increasingly open to foreign trade, another indication of its adjustment to the international markets.  Table 5: FRENCH OPENNESS TO THE WORLD ECONOMY, 1970-78 Penetration () a/ Export intensity(x) Z 1970 1974 1978 1970 1974 1978 10 Iron basic industries 24.8 25.4 29.4 26.1 30.3 34.0 11 Steel basic industries 16.7 22.4 29.7 24.4 32.9 41.5 13 Non-ferrous metals and basic products 45.5 56.5 47.8 31.1 44.5 42.6 15 Construction materials and ceramics 9.1 10.4 10.8 6.9 8.3 9.2 16 Glass and glass products 16.3 20.3 19.3 26.5 30.5 30.2 171 Inorganic chemical products 17.2 21.0 21.1 21.2 22.6 21.0 172 Organic chemical products 49.8 50.8 54.3 47.6 51.0 57.2 18 Paints, soaps. cosmetics, perfumes and miscellaneous chemical products 12.6 16.1 20.6 16.5 19.9 25.8 19 Pharmaceutical products 1.6 1.7 3.3 13.4 14.8 16.0 20 Foundry products 2.6 3.6 3.6 5.2 7.8 8.6 21 Fabricated metal products 7.8 11.1 13.0 7.8 11.4 14.2 22 Agricultural machinery 27.0 30.8 26.3 20.7 22.0 19.9 23 Machine-tools 38.2 40.2 40.8 28.0 33.4 41.6 24 Industrial equipment 29.9 31.2 36.2 29.3 33.6 44.1 25 Handling equipment for mines, iron industries, construction 28.2 33.8 40.6 37.4 45.2 59.0 27 Office and data processing equipment 57.6 77.3 63.6 47.7 68.6 56.5 28 Electrical machinery and apparatus 12.9 15.2 19.5 19.6 23.7 32.3 291 Professional electronic equipment 25.1 30.1 30.3 23.5 30.6 32.6 292 Household electronic equipment 33.0 46.4 49.9 18.7 20.6 20.6 30 Household appliances 27.0 33.3 35.8 17.6 24.9 31.6 311 Automobiles, cycles and motorcycles 19.1 23.0 26.3 34.0 38.8 42.0 312 Railroad equipment 6.1 10.8 5.5 30.5 45.7 32.5 33 Manufacture of aircraft 32.2 37.3 30.4 37.7 37.1 48.9 34 Precision instruments 32.9 37.1 40.1 27.8 35.2 37.6 43 Artificial and synthetic fibers and threads 30.5 38.1 52.3 32.4 36.6 50.8 441 Finished natural textiles, threads, spun yarn 7.9 12.7 14.5 20.7 22.2 23.8 442 Hosiery products 18.5 23.3 30.5 20.8 24.9 25.4 443 Thread 18.6 28.2 37.3 24.5 27.0 31.9 451 Leather and skins 24.0 28.7 36.1 33.4 33.8 30.7 452 Leather articles 7.0 11.2 20.4 13.2 13.9 16.8 46 Footwear 11.4 16.3 24.4 20.6 23.1 19.6 47 Wearing apparel 6.2 9.8 13.4 11.2 17.6 17.4 48 Wood and wood products 11.4 15.4 16.0 7.1 10.1 12.9 49 Furniture 12.7 13.8 17.5 4.0 5.0 7.2 50 Paper and paperboard 19.6 22.6 23.3 9.7 12.4 13.9 51 Printing, publishing and allied industries 7.7 8.5 7.9 6.7 8.0 7.9 52 Tires and other rubber products 16.4 19.4 22.5 25.8 31.5 33.4 53 Plastic products 16.4 20.1 21.5 14.0 17.9 18.2 54 Miscellaneous manufactured products 23.4 27.8 33.0 27.5 27.2 28.2 a/ Imports - Production + imports - exports. T/ Exports - Production. Source: Input/output tables, National Institute of Statistics and Economic Studies (INSEE [Institut National de la Statistique et des Etudes Economiques]).  III SUBSIDIES TO INDUSTRIES A thorough analysis of subsidies requires detailed statistical information on each sector in order to compute the sectoral rates of assistance..& So far, such detailed information has not been available for France because of a long tradition of secrecy. However, as background to further analysis, it is useful to describe the system of public subsidies to industries. (The subsidies given via government procurement, fiscal exemptions2/ and transactions of nationalized companies have not yet been covered.) This section begins with a description of some institutional aspects of the subsidization program, followed by an evaluation of the subsidies, and concludes with some brief international comparisons. Institutional Aspects The present system of assistance to industry is characterized by institutional complexity. As is well-known in the French bureaucracy 1/ On this matter, see Industries Assistance Commission, "Assistance to Australian Manufacturing Industries, 1974-75 to 1977-1978," Canberra, 1980; and K. H. Juttemeier and K. Lammers, "Subventionen in der Bundesrepublik Deutschland" [Subsidies in the Federal Republic of Germany], Institut fUr Weltwirtschaft, Discussion Paper 63-64, Kiel, November 1979. 2/ The effects of tax exemptions on international competition could be analyzed only by taking into account the full effects of a fiscal system on external trade, something that has never been carried out fully. Little attention has been given to this topic, except by J. Maurice and P. Villa "Fiscalit& et Choix de la Tecnique de Production Vus I Travers une Reforme de l'Assiette des Charges Sociales [Fiscal Policy and Choice in Production Techniques Viewed Through Reform of the Basis for Social Payments], Annales de l'INSEE 38-39 (September 1980).  - 10 - (and as is probably true in other countries as well), a new "institution" is created whenever a problem has to be solved. This institution is very often inter-ministerial because several ministries are usually involved. However, all important decisions are made by the Ministry of Economics and Finance (Ministere de l'Economie et de Finances) and, more particularly, by the Treasury (Direction du Tresor). The main institutions and means for administering public assistance to industry are: (1) The Fonds de D6veloppement Economique et Social (FDES) (the Fund for Economic and Social Development). Created in 1955, the FDES receives budgetary appropriations, and its principal function is to provide low-interest loans.L/ Its Direction Committee is chaired by the Ministry of Economics and Finance. (2) The Comite Interministeriel pour l'Amenagement des Structures Industrielles (CIASI) (Inter-Ministerial Committee for - Industrial Structural Adjustment). Created in 1974 and chaired by the Ministry of Economics, the CIASI is responsible for finding solutions for firms in trouble. Very often it recommends loans from the FDES or other financial institutions, and budgetary subsidies from the Fonds d'Intervention pour l'Amenagement du Territoire (FIAT) (Fund for Assistance in Territorial Management) and from 1/ Sometimes the loans will never be reimbursed, as in the case of the steel industry.  the Ministry of Industry (Minist're de l'Industrie) via its "industrial policy assistance loans" or "regional development premia. '/ (3) The Fonds Special d'Adaptation Industrielle (FSAI) (Special Fund for Industrial Adjustment). It is chaired by the Treasury. Created in 1978, the FSAI helps French industry adapt to international competition. It is authorized to: * Gather financial means for investment in competitive industries creating long-term jobs. * Allocate investments to areas where there is a shortage of jobs, in particular to the northern and eastern parts of France (in the iron and steel and textiles industries), and in the western and southern areas in the shipbuilding industry. Its coverage is therefore extremely broad, an illustration of how difficult it is politically to give assistance selectively. The goal of the FSAI is to assist investment projects which create 50 or more jobs lasting at least three It is claimed that the CIASI is very efficient for a bureaucratic agency. For each franc of public funds, 8 francs come from other sources (Le Nouvel Economiste, January 29, 1979). Decision-making in the CIASI is decentralized to the Comites Departementaux d'Examen des Problemes de Financement des Entreprises (CODEFI) (Departmental Committees for the Review of Business Financial Problems). The CODEFIs allocate loans from the FDES in amounts of less than 500,000 francs per firm. According to official sources, the CIASI has helped 504 firms and created 230,000 jobs in four years (this does not mean that 230,000 jobs have been saved); loans from the FDES represent 4,500 francs per job.  - 12 - years in developing sectors, irrespective of the capital intensity, by means of: * Subsidies of up to 25 percent of investment, and * Long-term loans with low interest rates and delayed reimbursement. Investment projects have been mainly in such sectors as mechanical engineering, motor vehicles and electronics. It is felt that FSAI assistance has a leverage effect on private financing. Up to now, however, this type of assistance seems to have been very costly in terms of the capital expended per capital job created. (4) The Institut de Developpement Industriel (IDI) (the Institute for Industrial Development). Its goal is to increase the capital equity of middle-sized firms. The IDI buys shares, lends funds and plays the role of "partner" with some leading firms in their specialized markets 1/ (5) Various institutions such as the Cr6dit National (National Institute for Credit to Industry), the Caisse Nationale des March&s de l'Etat (National Agency for Because of its small size, the IDI's activities are rather limited. From its creation under President Pompidou in 1970 to January 1, 1978, it had invested 723.5 million francs in 106 enterprises.  - 13 - Public Procurement), the Societes de Developpement Regional (Societies for Regional Development), etc. (6) Various means such as