In France, An Economy Torn 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 to dramatize night vigils in front of benefits offices, 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 and a comprehensive social net. "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 new 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. While Jospin's government struggles to buffer the impact of global market forces, France's vaunted mixed economic model looks increasingly dysfunctional. For decades, the combination of free-market capitalism and state-directed socialism in a protected market 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 broad disillusion and a 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 increasingly violent youth, prompting curfews and higher police budgets. Bus drivers went on strike in November after a series of random attacks by hostile youths. And mayhem erupted on New Year's Eve in Strasbourg, a traditional flash point, where delinquents torched 522 automobiles.

NEAR BANKRUPT. 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 a lumbering, inefficient public sector that continues to sap economic growth and waste 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. Reeling under a $56.1 billion deficit, the state social security system is all but bankrupt.

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 the demands of the global economy, boosting France Inc.'s productivity. Increasingly, qualified young people enter the labor market via temporary jobs--a practice traditionally disdained. Mid-level managers on the way up the career ladder at private French companies often skip the sacred two-hour lunch, work nights and weekends, and are always reachable by cellular phone.

Meanwhile, most of the 5.3 million workers in the heavily unionized public sector, from hospitals to post offices to utilities, cling to the socialist myth of entitlement. They vociferously support a 10% cut in their workweek with no reduction in pay.

Even as corporate profits reached new highs in 1997, some 3.5 million unemployed are castaways in a society ill-adapted to the global economy. True, the state's safety net still covers minimal needs. But the widening economic disparity inflames Gallic passion, since French workers regard a job and a decent salary as their birthright. Seeing others prosper as economic recovery takes hold is doubly vexing. "We live sadly. We survive," says Didier Giraud, a 34-year-old industrial technician who lost his job 18 months ago and can't afford the Nike tennis shoes and toys his 8-year-old son wants. Says Morgan Stanley, Dean Witter, Discover & Co. senior economist Eric Chaney: "The paradox is, the protests have erupted as consumption is rising--that exacerbates the contrast."

France's state-dominated economy is taking a costly toll on the overall standard of living. The most obvious drains are the bailouts, running into tens of billions of dollars a year, for mismanaged state companies such as Credit Lyonnais, Thomson, and insurer GAN. Net public spending, at 54.5% of GNP in 1996, is far higher than the average 39.5% for the other industrialized nations that made up the former Group of Seven.

NO HOT SPOTS. 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 sent a wave of French entrepreneurs fleeing to Britain and the U.S. As a result, France is deficient in new, fast-growth industries such as biotechnology, while mature industries such as automobiles and steel rationalize and downsize. "The best people are leaving at an incredible rate," says economist Christian Saint Etienne, a professor at the University of Paris.

Without 21st-century industries to kick-start job creation, as Silicon Valley and other technology hot spots do in the U.S., French governments are left praying for cyclical economic upturns to whittle the unemployment rolls. Instead, the economic crisis in Asia could trim projections for 3% growth in France's gross domestic product this year and crush government expectations for a drop in unemployment.

One obstacle to change is France's addiction to a paternalistic government. Most French workers still view the global economy--not the French state--as the culprit. Many are demanding even more largesse from state coffers, leaving Jospin's Socialists little room to maneuver. Government officials hint they will use external pressure stemming from European monetary union to carry out unpopular public-sector reforms, including overhauls of the tax and social security systems. "All the reforms of the last 15 years in France have been driven by EU requirements," says Elie Cohen, director at Paris' National Center for Scientific Research. But if Jospin waits for EU pressure to rethink the French public sector, France's volatile core of outcasts is sure to grow.

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