In France, An Economy Ripped In Two

As the split between rich and poor widens, unrest swells

Overnight, France's silent masses of unemployed have become a powerful political force. Rallying outside public offices by day and setting bonfires in front of benefits offices by night, they are riveting international attention on the growing gap between France's rich and poor. The stark reality of 1 million long-term jobless getting a paltry $350 a month in benefits has jolted a nation that prides itself on compassion. "While the country is getting richer and richer, insecurity is growing wider and wider," says Ahcen Meharga, a 29-year-old social worker in Paris who was laid off last October.

The escalating protests forced Prime Minister Lionel Jospin's government on Jan. 9 to meet with associations representing the jobless and to pledge $166 million in emergency aid for the most desperate cases. It was a painful moment of truth for the French, whose vaunted mixed economic model looks increasingly dysfunctional. For decades, the combination of free-market capitalism and state-directed socialism produced widespread prosperity. Now, with the ranks of the disenfranchised growing, pressure is mounting to reform the system.

In contrast to the strikes and roadblocks of 1996, which focused on wage increases and earlier retirement, the latest wave of protests arises from a broad sense of betrayal. Evidence of rents in France's social fabric is broadcast daily into living rooms on the evening news. The country's poorest neighborhoods are becoming hotbeds for violent youth, prompting curfews and higher police budgets. And mayhem erupted on New Year's Eve in Strasbourg, a traditional flash point, where delinquents torched 522 cars.

Indeed, France's economy has been ripped in two. On one side is a private sector that is mainly lean, profitable, and competitive in world markets. On the other is an inefficient public sector that saps economic growth and wastes vital resources. Take France's steel industry, which has downsized from 163,000 workers to 40,000 since the late 1970s. Its largest company, $12 billion Usinor, has become one of Europe's most competitive steelmakers, generating $1.2 billion in profits since its privatization in 1995. By contrast, troubled public-sector companies have soaked the government for more than $50 billion in bailouts over the past five years.

France's workforce mirrors its two halves. Many of the country's 14.2 million private-sector employees have adapted to flexible work rules and boosted productivity. Increasingly, young people enter the labor market via temporary jobs--a practice traditionally disdained. Middle managers at private companies often skip the sacred two-hour lunch and work evenings. Meanwhile, most of the 5.3 million workers in the heavily unionized public sector, from hospitals to utilities, cling to the socialist myth of entitlement. They vociferously support a 10% cut in their workweek with no reduction in pay.

THE BEST FLEE. To finance the bloated public sector, social charges for employers are among the highest in the world, and corporate taxes are on the rise. That, plus a suffocating level of state regulation, has French entrepreneurs fleeing to Britain and the U.S. As a result, France is deficient in new, fast-growth industries such as biotechnology. "The best people are leaving at an incredible rate," says economist Christian Saint Etienne, a professor at the University of Paris.

One obstacle to change is France's addiction to a paternalistic government. Many French workers are demanding even more largesse from the state, leaving Jospin's Socialists little room to maneuver. Government officials hint they will use external pressure stemming from European monetary union to carry out public-sector reforms, including overhauls of the tax and social security systems. But if Jospin waits for European Union pressure to rethink the French public sector, France's core of outcasts is sure to grow.

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