Friday, 1 September 2006

Au Revoir, Les Entrepreneurs


European media reported earlier this month that the French economy had grown by 1.1 percent in the second quarter of 2006, the biggest quarterly jump in five years for the country. Could this mean that France has become more attractive for entrepreneurs?

Perhaps. But on the other hand, there are signs that the country’s traditional obstacles for growth and innovation are still in place. Recently, the Washington Post ran a story about how wealthy citizens choose to leave France due to its punishingly high taxes on the successful. The article cites a government study which concluded that on average at least one millionaire leaves France every day to settle in a more wealth-friendly country.

Denis Payre is an example of this. He built a successful high-tech company from scratch and decided to quit at the age of 34 to spend time with his family. Instead Payre was forced to leave France as the government sent him a tax bill of nearly $2.5 million on paper assets he couldn’t cash in. Payre, who is now 43 years old, has started a new company in Brussels and tells the Post that he did nearly $32 million in business this year. He has little sympathy for the French system which penalizes success. “The loss in income for the government is the smallest part,” he said. “The big issue is the loss of all that creative energy this country is dying for.”

That high-earners and entrepreneurs choose to leave is yet another indication that France’s welfare system is broken. The French economy is stagnating. Even though France, like other European welfare states, hides some of its true unemployment in various government programs, joblessness stands at around 10 percent. In 2004 only 13 percent of unemployed workers in the US could not find work within 12 months – in France the same number was 42 percent.

In 2002 the French lost more than twice as many weeks per worker due to sick leave compared to the US and a recent study by US and European researchers found that the wage and benefits returns to long-term employees in France has since 1976 been consistently lower than in the US. According to the “Global Entrepreneurship Report 2000″ the percentage of those who were starting new businesses was five times higher in the US compared to France.

The problem is not only that the French economy punishes the very rich, discouraging them from working and creating businesses – but that it does the same for those with low incomes. The French welfare state creates a high “unemployment trap” for low-wage earners.

An unemployment trap is a measure of the percentage of gross earnings which is “taxed away”, through social security contributions, higher tax and withdrawal of government benefits, when a person returns to employment. The calculations are based on a single person without child who earns 67 percent of the average earning of a full-time productions worker in the manufacturing industry. In France the unemployment trap corresponds to around 82 percent – creating a very small economic incentive for low income workers to actually go to work.

The French economy showed impressive growth in the second quarter of 2006, but this has not been the long term trend in the last few years, as the French economy has stagnated and fallen more and more behind more market-oriented economies such as the US and Ireland.

The long term consequence of an economic policy that punishes entrepreneurship and hard work regulates the job market while creating ample options to live off government remains the same: stagnation, high unemployment and gifted people fleeing the country.

That the French economy has its fair share of problems is no mystery for anybody with a slight understanding of economics, or just plain common since. What is more puzzling is why the American left is so eager to reform their own nations economy towards the more socialist and clearly failed model of France.

By Nima Sanandaji
The author is the president of the Swedish free market think tank Captus (http://www.captus.nu). He is also a PhD student in biochemistry at the University of Cambridge.
This article first appeared on http://www.tcsdaily.com