The slowing of growth in France: an interpretation based on Thirlwall’s law

Abstract

In this paper, we evaluate the French balance-of-payments constrained growth rate and we compare it with the effective growth rate. Empirically, we show that France is experiencing, simultaneously to its European integration, a substantial increase in the income elasticity of demand for imports and a collapse in the growth rate of its exports. Within the balance-of-payments constrained growth approach, this twofold negative effect is a major obstacle to true economic recovery and full employment.

Keywords:

• Balance-of-payments constrained growth
• income elasticities of external trade
• structural break

Notes

1 The reader interested in understanding the evolution and the various extensions of Thirlwall’s law can refer to Soukiazis and Cerqueira (2012).

2 Kalecki’s profit equation assesses that the level of macroeconomic profit is equal to the addition of public deficits, trade surplus, investment and capitalists’ consumption but minus workers’ savings (see, for example, Chapter 7 in Kalecki, 1971). The drop in macroeconomic profit may be an incentive for firms to reduce their national production or to invest and produce more and more abroad… which could increase the initial trade deficits.

3 The ratio under study therefore refers to the real exchange rate: domestic prices expressed in domestic currency over foreign prices also expressed in domestic currency, which means that the denominator is equal to foreign prices in foreign currency times the nominal exchange rate.

4 Several reasons may be invoked for relative prices remaining constant in the long run. According to Thirlwall (1986, 1260), the existence of highly competitive markets is such that a price reduction in a country will be matched by foreign competitors for some goods. For other goods, prices are fixed in oligopolistic markets and competition occurs mainly through product and quality differentiation.

5 Though Thirlwall (2011) recognizes that incorporating capital flows may marginally improve the power of the law in some cases, it also explains that “export growth, not capital flows, is by far the most important variable governing growth performance” and that “exports dominate”.

6 In the rest of the paper, we keep the OLS approach only for comparison with the results obtained by the 2SLS methodology.

7 It should be noted that the decrease regarding the growth rate of foreign real income only concerns OECD countries from which China is excluded. Nevertheless, French exports towards China represents less than 5% of its total exports.

8 Another (positive) solution would be to implement expansionary fiscal policies in countries running chronic trade surpluses. However, there is no reason to believe that a country will give up its surplus in order to improve the situation of its competitor.

9 See Appendix 5 for the gap between the actual growth rate and the predicted growth rates.

10 See the Gallois report (November 2012), the “Pacte de Responsabilité” (December 2013) or the transformation of the “Crédit d’Impôt Compétitivité Emploi (CICE)” due in 2019.

11 We are well aware of the numerous difficulties linked to the measure of the output gap but, for the sake of simplicity, we choose here to refer to the European Commission output gap. See Charles, Dallery, and Marie (2019) for a discussion of this concept.

12 Obviously, our comments depend on the measure of the output gap by the European Commission which estimates a positive output gap at the beginning of the 1970s (years of high inflation) and during the 2000s before the 2008 crisis (growth supposed bigger than its potential).

13 The deterioration of the trade balance would be that much greater when the economy has undergone an increase in the income elasticity for the demand of imports, which means that imports would react strongly to an increase in national income.

Additional information

Notes on contributors

Sebastien Charles

Sebastien Charles is an Assistant Professor of Economics in the Department of Economics and Management, LED, Université Paris 8, Saint-Denis, France.

Thomas Dallery

Thomas Dallery is an Assistant Professor of Economics in the Department of Economics and Management, Clersé, Université du Littoral Côte d’Opale, Boulogne, France.

Jonathan Marie

Jonathan Marie is an Assistant Professor of Economics in the Department of Economics and Management, CEPN, Université Sorbonne Paris Nord, Villetaneuse, France.