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What Is Wrong with French Industrial Policy?

by | December 3rd, 2012 | 12:39 pm
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Industrial policy, in which governments seek to support certain industrial sectors, has made a comeback. It has attracted new respectability with the economic rise of China. Justin Lin, the recently departed World Bank chief economist, has made the intellectual and empirical case for industrial policy. The essence of his industrial policy is to identify comparative advantages in a country and facilitate growth in such sectors.

More recently, the new socialist government in France appears preoccupied with industrial policy, but it is not following any of Lin’s advice to make industrial policy intellectually or economically rational. What Lin recommends is a growth-oriented policy, while the French government opposes any changes that might achieve that goal.

Early on, the new government in Paris prohibited the private car company PSA Peugeot Citroën from closing its Aulnay factory near Paris, although the company suffered from great overcapacity. As a consequence, the corporation was effectively brought into bankruptcy, and the government was forced to bail out its bank with €7 billion ($9.1 billion). In the end, the Aulnay plant had to be closed in any case. Incidentally, Aulnay is located in Finance Minister Pierre Moscovici’s constituency.

The latest crisis in relations between the socialist French government and the private sector has erupted after the largest steel company in the world, ArcelorMittal, declared that it wanted to close two blast furnaces in Florange in Lorraine, the old steel district in north-eastern France.

In total, 629 jobs are threatened, while ArcelorMittal employs 20,000 people in France altogether. On November 26, France’s leftwing firebrand Industry Minister Arnaud Montebourg threatened ArcelorMittal with nationalization of their whole Florange plant.

The next day, President François Hollande came out in full support of Montebourg’s position. The Elysée Palace issued this remarkable statement: “The president reaffirmed his determination to guarantee permanently the employment at the site….” Everything is wrong with this position.

In an arbitrary fashion, the French state is commanding a private company to keep all its employees permanently at one specific site. Not even the Soviet Union pursued such industrial conservatism. If one private company can be ordered to behave like that without any legal basis, no firm in France can rely on its freedom.

With its high costs, steel in Europe is no growth industry. Rather it is a sun-set industry devoid of comparative advantages. The steel industry in Lorraine was the cradle of France’s industrialization in the mid-19th century. Its location far from any seaport makes it unsuitable for modern steel production. If the French government wanted to pursue an industrial policy for growth, it would facilitate the closure of such a plant. Shutting down operations would make sense particularly for the first stages of steel production, which ArcelorMittal wants to close down.

In addition, the technology in question, blast furnaces, is obsolete. Ideally, Europe should no longer have any blast furnaces. They are economically inefficient, energy inefficient, and environmentally detrimental. Therefore, their closure should be applauded.

Politically, this action can only be described as populist and xenophobic. Evidently, the French government considers it popular to nationalize a company dominated by a wealthy Indian.

Presumably, the actions of the current French government are illegal and would lose out in the European Court of Justice, but it is deeply disturbing that any government in Europe can act like this, revealing a complete disregard for private property rights, foreign investment, and economic growth.