François Villeroy de Galhau: Productivity - a collective enigma?
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Bank of
France - France Stratégie Conference, Paris, 1 February 2017.
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Welcome to all of you. It gives me great pleasure to be able to open this conference on French
productivity, organised in conjunction with France Stratégie. The subject is one that is both
topical and of great importance to central banks: productivity is one of the principal drivers of
growth, and its dynamics are a strong determinant of potential growth, that which is compatible
with price stability. As you can see [slide], after the major wave of expansion witnessed
during Les Trente Glorieuses, which was particularly marked in the case of France, productivity
growth in advanced countries has slowed in successive stages since the 1970s. Today, it has
fallen back to a pace that is historically weak. What are the common factors behind this
slowdown in productivity? And is there anything specific to France? I don't believe so: if there is
one thing that is specific to France, it is the high level of hourly productivity - one of the highest in
the world, alongside that of the United States and Germany. So, rather than being a French
enigma, the enigma we are looking at this morning seems to me to be more of a collective
phenomenon. By way of introduction, I would just like to go back over the three collective
hypotheses at the heart of today's debate, before nonetheless going on to examine a few factors
that are indeed specific to France.
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1. Does the problem lie in the measurement of growth?
The first theory is that there is in fact no slowdown, as we are not measuring growth properly due
to the rise of the digital economy. On 16 January this year, the Banque de France held a
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conference that notably discussed this issue in relation to the US economy. The main sources
of measurement errors were: first, the estimation of quality-adjusted prices for new technology,
as falls in prices tend to be underestimated in US national accounts; and second, product entry
and exit, which makes it difficult to estimate changes in prices over time. This could lead to a
significant upward revision to US productivity since 1983: by 1.1 percentage points per year at
the top end of estimates, according to Philippe Aghion and his co-authors. Nevertheless, even
allowing for these corrections, there has still been a slowdown since the mid-2000s. Indeed, the
measurement errors were just as significant before this period. That said, this work does provide
some grounds for optimism. First, growth in hi-tech sectors, and therefore technological
progress, is stronger than we previously thought. Second, some of the gains in well-being linked
to new technologies fall outside the scope of the market economy and, as a result, are not
recognised in national accounts. The digital economy has delivered huge gains in leisure time,
for example, by simplifying certain administrative tasks, and led to the development of free
services, without any of these benefits appearing in conventional measures of output. It has also
prompted the rise of the informal economy (C to C services), which is particularly tricky to
recognise in the accounts. Our conference today will provide an opportunity to look specifically at
the case of France, thanks to a presentation by INSEE.
1. Are we witnessing a permanent slowdown in the contribution of technical progress to
productivity growth?
Assuming that there has been a slowdown in productivity, the second hypothesis is that it stems
from a slowdown in innovation and in its contribution to productivity. The great wave of
productivity growth during Les Trente Glorieuses in France was fuelled by advances in a large
number of domains: technical progress with electricity, the combustion engine, chemicals and
telecommunications, but also the emergence of new methods of labour organisation and new
management practices. Today, what potential contribution can information and communication
technologies (ICTs) make to growth? The first ICT wave has been limited in duration and in
scale, and has only been felt to a small extent in many countries, including France. This has
prompted some economists, such as Robert Gordon, to doubt that technology can make a
significant contribution in the future. But in a country such as France, which already enjoys a high
productivity level, there is still plenty of room for progress in the diffusion of ICTs, both in terms of
the speed and quantity [slide]. The share of ICT capital stock in GDP is markedly lower in France
than in the United States and the United Kingdom. Getting rid of this lag would deliver substantial
gains in growth for France.
1. Third hypothesis, a dearth of
investment?
Catching up to the technological frontier will require investment in ICTs as well as in research
and development. This investment is vital in order to incorporate innovation into production
processes. Yet it is also a lot riskier than other types of investment, for example in construction.
Indeed, it notably combines a low or non-existent resale value with uncertain future revenue
flows. Like the rest of the innovation economy, therefore, it needs an appropriate form of
financing - one that relies more on equity as opposed to debt. However, the cost of capital
remains high despite the sharp drop in interest rates over the past 20 years. According to
Banque de France calculations, the nominal cost of capital for France's major listed companies
is still between 8% and 9%, whereas the risk-free rate is currently around 0%. This particularly
high cost places a drag on investment, and hence on innovation and productivity growth.
1. Are there any factors that are specific to France?
There are nonetheless a number of French specificities that could be playing a part in slowing
productivity. Let me just cite three:
First, failings in our system of initial and lifelong training, as highlighted by the OECD's PISA
and PIAAC surveys [slide]. France stands out as scoring only average overall among OECD
countries, and, most importantly, as having high levels of inequality linked to parents' social
background.
Second, corporate investment tends to be weighted more towards construction at the
expense of equipment machinery and intangible assets. And while we're on that subject, it is
essential that French banks finance intangible assets better than they do today.
Lastly, the specific features of the French labour market and the associated policies. A
number of studies have highlighted factors such as the shortening of the duration of
temporary contracts. Questions have also been raised as to the impact of labour policies.
How can we strike the right balance between supporting productivity and supporting jobs?
Policies aimed at reducing the cost of low-skilled labour - be they targeted cuts in
employers' social charges or the CICE - all have a positive effect on GDP per capita via an
increase in the employment rate; but they can also have a detrimental effect on productivity,
especially when targeted at sectors with low productivity. Put another way, these policies
make it all the more necessary that we improve our system of initial and lifelong learning -
failing this, we risk fuelling a downwards spiral in labour skills and productivity.
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These questions aside, one thing is clear in the case of France - and 2016's too-feeble growth of
1.1%, as published yesterday, confirms it: estimates from national and international institutions
all point to low levels of potential growth, at around 1.2%, and relatively high levels of structural
unemployment (the equivalent of the NAIRU in English-speaking countries), at around 9%.
Clearly, we cannot be content with these levels. All of which brings us back, overwhelmingly, to
our four key focuses for reform: Enterprise, Education, Employment and Expenditure reduction
(public sector). Our northern European neighbours have shown by example that these reforms
are not incompatible with our shared European social model. Studies by the Banque de France
show in particular that reforms to the goods and services market could boost the productivity of
the French economy by between 3% and 5% in the long-term. Without further ado then, let me
pass the floor to Fabrice Lenglart, and I wish you all a fruitful and enjoyable conference.
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