Is Economic Interventionism Dead? Illustrate with the comparison of France and another European country

The last twenty years have seen a significant shift in the styles of French and UK economic interventionism. Since the Second World War their governments’ emphasis on ‘national champions’, public utilities and heavy control of credit gave them a strong influence on their society. However, global shocks in the 1970s and increasing levels of foreign trade put strains on their respective economic models. Their responses to these challenges differed, with the UK having a more ideologically lead shift in political and economic thought, whilst France had a more reserved and more practical acceptance or compromise to the economic problems posed. As a result both the UK and France have significantly less levels of interventionism, with independent central banks, privatised industries and a market led approach to the economy. This essay will document these shifts in policy and explain France’s and the UK’s reasons and also how economic interventionism is not dead but the tools of intervention have merely changed.

The Success and Decline of Domestic Direct Economic Interventionism

France

Since the 1940s France has been “inspired by a desire to modernise French industry in the wake of the Second World War,”[1] and developed a dirigiste economic model in which the state was responsible for modernising the economy for fears “that small businesses and antiquated firms would not be able to compete effectively against German and American firms as trade expanded in the post-war world, the French policy-makers of the 1940s and 1950s used the resources of the state to encourage French industry and agriculture to increase the scale of production through mergers and acquisitions, to shift capital and labour into high-technology sectors, and to eliminate less efficient producers in favour of firms that could prosper on international markets.”[2] President Charles de Gaulle, one of the architects of the plan described these firms as “national champions carrying the banner of France into world markets,”[3] with Hall asserting that he believed that “the geopolitical power of the nation would depend on its economic strength.”[4]

To implement the strategy, “the state established a planning system that set investment and production targets for major industrial sectors in consultation with leading firms, and successive governments used their influence over large, state-owned banks to channel resources to firms identified as most promising.”[5] There was a negative attitude toward foreign investment, with “discouragement, even opposition to the introduction of multinationals in France,”[6] with Godt describing it as the ‘American Challenge’. This was because numerous large American firms came to Europe to buy companies and set up their own commercial networks and factories, with the movement having “a determining influence on industrial restructuring in most of the European countries.”[7] This is because the French “for reasons of national independence, declared its hostility to these takeovers,”[8] such as Poclain-Tenneco and Bull-General Electric through “an unpleasant climate which often did turn American firms away from investing in France.”[9]

As Hall points out, the modernisation was highly successful for a prolonged period, as “the French economy grew faster than any other in Europe during the 1950s and 1960s,”[10] aided by the “highest rate of investment after Japan.” [11] As a result, France developed a “powerful presence in steel, armaments, aircraft, consumer goods and agricultural products.”[12]

However, from the 1970s cracks started to show in the dirigiste model. France’s policy of protecting its markets from global trade with protective barriers had left French firms lazy and uncompetitive. Agreements such as the 1957 Treaty of Rome forced France to “reduce its barriers to trade and face more intense foreign competition.”[13] This left France very vulnerable as France lost its domestic market share to imports and “the nation found itself saddled with huge coal, steel, shipbuilding and automobile companies that were absorbing public funds but which had substantial overcapacity and could not produce as cheaply overseas.”[14] This was a hangover from firms having been “orientated towards producing more rather than producing more competitively”[15] as a result of it being difficult for officials “to select the products and production processes which would be competitive on world markets.”[16]Also, as France put most of its resources in ‘national champions’ there was “an insufficient web of high-performance, high technology medium-sized firms, strongly orientated towards exports”[17] compared to Europe.

This was made worse by France’s use of devaluation and generous loans. Perez felt that the industries captured the banks as French officials were “continually under pressure to expand the exemptions granted to specific users under the encadrement du credit system”[18] because “of the manner in which financial dirigisme had been used to defuse social conflict through selective expansion of credit in the post-war period.”[19] This use of credit had allowed industries to make poor investments with little consequence. Flanagan expands on this idea, explaining how the use of the credit system coupled with devaluation to neutralize wage increases “resulted in a highly unstable labour market marked by heightened worker militancy and wage explosions (in 1962-63 and again in 1968) which simply outpaced the government’s attempts to restore profitability by allowing domestic prices to rise faster than world prices.”[20] Perez even felt that without the increasingly international context “the policies that interventionism had been created to serve were thus producing the domestic political conditions for its abandonment.”[21]

Perez felt that “the French economy has suffered from overinvestment or delayed adjustment in certain sectors benefiting from protective measures, monopoly situations, or state financial aid.”[22] Godt agrees with Perez’s assertion that France was investing enough “but that she invested badly,”[23] citing the over reliance of low-wage producers in textiles and that France “did not invest properly in response to the new conditions of the international environment that the problem of external constraint appeared.” Hall felt that planning had “been effective for building infrastructure in basic sectors”[24] and that economies of scale were achieved. However, the investment in high technology industry had underperformed, as “firms in semi-conductors and consumer electronics failed to build viable enterprises, as Japanese and Americans made better technological choices and began to set market standards.”[25]

France’s last attempt to maintain dirigisme was with the Socialist Mitterrand government, with a last attempt at redistributive Keynesianism in 1982-83 through increasing state aid to industry from 35 billion francs in 1981 to 86 billion francs in 1985 and increasing the minimum wage “hoping to stimulate enough economic demand to jump-start French growth.”[26] This was as a result of the policy makers struggling to come to terms with the aforementioned problems and discovering “that no matter how much they tried to reflate the economy, levels of private investment stagnated because the debt-loads of French firms had become too high and their profits too low to accommodate investment.”[27] For instance, productive investment collapsed from 14.5 per cent in 1974 to 12.4 per cent in 1980[28] and France was “marked by successive periods of decline (1974-76 and 1980-84) and periods of slowed recovery (1977-9 and 1985-87).”[29] This was exacerbated by the OPEC oil crises in the 1970s, where the cost of a barrel of oil increased from $1.80 to $11.60 a year in 1974.

It eventually became apparent to Mitterrand that “the post-war dirigiste policy program of state-led economic development was no longer doing what the Gaullist discourse of French economic prowess, growth, and grandeur had initially promised.”[30] And so in 1983 the Socialists accepted that “their policy was unsustainable economically, and jettisoned the discourse along with the policy program.” Schmidt argued that Mitterrand’s changes, unlike the changes brought about by Thatcher were “a matter of necessity, cognitively right but normatively difficult to legitimate, given its lack of fit with post-war socialist values.”[31]

The UK

With its guiding principles of Keynesian demand management providing both high employment and low inflation the UK economy had comparable economic successes to France until the 1970s. Similar interventionist policies were employed in the form of “an industrial strategy, state ownership, a policy of ‘picking winners’ and an extensive system of subsidies to firms, industries and regions.”[32]

However, by the 1960s chancellors had become too confident about their abilities to control the economy, using inaccurate forecasts to estimate how the economy would perform and using imprecise policy instruments to anticipate them. This created what became known as the ‘Stop-Go Cycle’, where the government would constantly make very minor alterations to the economy in order to create the desired results.

Up until the 1970s there was little criticism of Keynesianism policies despite concerns with the Stop-Go Cycle, as there was stable inflation and it was considerably lower than the rate of growth. However, from the 1970s this appeared to be breaking down as inflation was starting to spiral out of control, creating stagflation, where both unemployment and inflation were increasing. Like France this was partly as a result of trade unions capturing the government, their employer and being able to raise their wages too high in order to defuse social conflict. For example, the government was supporting ‘lame duck’ industries, such as Rolls-Royce and British Leyland, as the benefits of subsidising an industry were considered more important than the economic decline of areas dependent on a sole employer.

This spiral of inflation was worsened significantly by the oil crises and affected the UK more than France. Schmidt argued that the oil shock “had added major inflationary pressures to long-standing economic problems related to monetary instability and industrial decline, which in turn only exacerbated spiralling labour unrest that, after a brief hiatus from 1975 to 1977, culminated in the massive strikes and work stoppages of the ‘Winter of Discontent.’”[33] Unlike other countries which had operated restrictive policies in order to pull down inflation during the oil crisis of 1973 the UK inflated the economy to deal with its slower growth. This backfired, as the UK experienced one of the larger declines in GDP and higher levels of inflation, which also lasted longer than other countries. As a result Keynesianism was undermined and people were encouraged to consider other economic solutions.

Like France ending dirigisme the UK also dropped its Keynesian approach for practical reasons, such as the Labour Government of the mid 1970s accepting monetarist reform in exchange for a $3.9 billion loan from the International Monetary Fund. Callaghan’s speech to the Labour Party Conference in 1976 was described by Smith as sounding “the death knell for post-war Keynesian policies and ushered in the new era of monetarism.”[34]

However, it was not until Thatcher’s election in 1979 did monetarism gain ideological teeth, encouraged by the largest political swing since Clement Atlee’s Labour party in 1945. This gave the monetarist reformers the confidence to reduce the role of the state through a market based approach and so reduce the amount of economic interventionism. Infact, examining the far greater collapse in orthodox economics and the greater social friction occurring in the UK with the ‘Winter of Discontent’ that we may be able understand more clearly why the ideological shift in the UK was greater than in France.

Reform and Evolution of Domestic Economic Interventionism

France

The new imperatives of the French economy involved modernization and increased competition. There was a privatization of state banks and industrial enterprise and large deregulation. For example, there was virtually complete deregulation of prices, services, new rules on competition, reduced labour-market rigidities and the abolition of prior administrative approval for lay off and deregulation in the fields of transportation, telecommunication and energy. Hall suggested that the government moved away from macroeconomic interventionism to microeconomic policies, “aimed at the supply side of industry, to improve economic performance.”[35] However, Hall did emphasise that supply side policies were nothing new but the “nature of those policies has changed dramatically.”[36] There was also a shift from the larger ‘national champions’ to small enterprises which Hall felt were “much more effective creators of employment and often had a flexibility to weather macroeconomic storms that large firms lacked. As a result, an increasing share of the industrial budget has been earmarked for small enterprise.”[37]

These reforms resulted in a reduced burden on businesses, with a cut in corporate tax of nearly 20 billion francs[38] and the elimination of credit volume controls and an accelerated deregulation of the banking system. The transformation of banking was huge, with Godt finding it “none the less spectacular, given France’s deeply embedded traditions of administered financing.”[39] Previously the state had played a direct role in investment, and levels of credit. Now the French system is one in which markets have replaced government agencies and “for the most part French companies have to find capital on world markets.”[40]

Many French firms have experienced huge increases in productivity and are now the most profitable in continental Europe.[41] Despite these successes with the market France still feels the need to invest in some of its ‘national champions,’ spending as much on Credit Lyonnais as it had on the Channel Tunnel.[42] France is also “regularly criticised within the EU for its spending plans and interventionist policies which continue to rely heavily on public sector employment and public subsidies to private businesses.”[43]

The French model has successfully moved away from its dirigiste past, with heavy state intervention, and the market’s increased role. However, in order to sweeten such sweeping reforms successive governments provided “interest-based incentives for those affected by economic restructuring.”[44] As Schmidt points out, “the Socialists did not in any way address the seemingly logical contradiction between an emphasis on belt-tightening neo-liberal policies and expansive social policies. But neither did subsequent governments, including the right-wing neo-liberal government in power between 1986 and 1988 which, despite the Thatcherite discourse, continued high social spending while reiterating its commitment to social solidarity even as it claimed to seek to increase individual responsibility, innovativeness and independence while engineering a retreat of the state.”[45]

In correcting the mistakes of focusing on industries with low skilled labour France has made considerable investments in improving the skills of the labour force. Between 1988 and 1991 spending on education increased by 25 per cent. By 1994 more than 63 per cent at the relevant age took a baccalaureate compared to 28 per cent in 1980.[46] As Hall points out, “few nations have managed to increase the skills of their workforce to this extent in such a short period of time.”[47]

Despite the end of dirigisme the contradiction of reduced economic interventionism but increased welfare highlight the fact that France’s reforms have been of a more practical nature and not as ideologically driven as in the UK. The increased use of social welfare and investment in areas such as education show how the French government does still intervene considerably in the economy, but that the methods have changed.

UK

Thatcher’s reforms were an attempt to make the UK a more self-reliant society, “from a give-it-to-me to a do-it-yourself nation; to a get-up-and-go instead of a sit-back-and-wait-for-it Britain,’ and the recognition that inequalities were necessary to encourage the ‘spirit of entrepreneurship’”[48] There was going to be no pussyfooting from such an ideologically driven government, with large levels of privatization from the 1980s in order to increase competition and shake up the market. There was also a movement away from the welfare state to a more laissez faire approach, as there was an ideological movement from equality to incentive focused equity.

However, a consequence of the privatisations was an explosion in the amount of regulation, to combat fears of market inefficiency and firms abusing their monopoly status, especially the utilities where there were concerns that the operators would abuse their social responsibility. Despite the decline in direct economic interventionism and social provisions the increase in regulation was creating problems, with the OECD concluding that “the regulatory task of designing a pro-competitive system of regulation based on the separation of potentially competitive and natural monopoly sections of this type of sector was an unfamiliar one for governments and presented enormous technical and economic difficulties.”[49] For instance, as a result of huge mutual and overlapping interests between regulators there were between 14,000 and 20,000 regulators in 1997, with annual costs between £700m, and £1bn.[50]

However, this issue was not tackled until 1999 when the Labour Government merged departments, such as the electricity and gas regulators and unified fire safety. There was also a move from the more aggressive style of giving demands to firms and public organisations to the “light touch enforcement of regulation.”[51] Hood described it as an aspiration to combine “the iron fist of Draconian central interventionism with the velvet glove of self-regulation,”[52] As a result there was a transfer of the main thrust of legislative effort onto areas of higher risk and underperformance and areas of low risk or strong performance were given less stringent reviews. For example, in 1997 OFSTEAD (the regulator for education) allowed plans for less stringent inspection of the best performing schools. This streamlining of policy although resulting in less regulatory interventionism actually turned the threat of regulation into a policy tool and thus the government could use threat of regulation as a means to intervene in the economy.

Since the Major Government there have been experiments with Public Finance Initiatives, whereby the marketplace is used to provide public goods in refuse collection, hospitals, prisons and more recently the London Underground. Although this measure is intended as a withdrawal of the governments role in society the agreements, regulation and government aid result in more economic interventionism than even privatization. For example, the government is obliged to bail out companies with huge losses, such as the part privatised air traffic control system (NATS) which received £30m in 2002 as a result of reduced passenger numbers following the September 11^th terrorist attacks.

The first act of the Labour Government was to announce the independence of the Bank of England in order to wash its hands of errors such as the Lawson boom and leave control of monetary policy in the hands of the experts rather than interfering politicians. There has also been no intervening in the exchange rate as a result of the Major Government being burned in 1992, so now governments find it difficult to hide poor economic performance with devaluations.

New Labour was not concerned with reversing the monetarists’ economic shift significantly when they came to power in 1997, and was prepared to “junk Keynes wholesale and accept the new right consensus that budget deficit manipulation only disturbs the natural rhythms of the economy”[53] and also being “no longer committed to universal state ownership and the re-nationalisation of the privatized utilities, but rather stresses the importance of firms and industries which are recognised as world-class competitors in several sectors, characterised by high technology (R&D intensive) and high value-added processes and skills.”[54] The commitment from a left wing government to not directly intervening in the economy shows a clear signal that old style economic interventionism is dead, although the regulatory effects is its adept replacement, especially more so than France considering the more developed nuances in the UK.

However, there has been a shift towards welfare again, with the introduction of the minimum wage and the New Deal. Despite this the increases in welfare are not as significant as in France, as Labour have ignored wage demands from an ideological standpoint. However, like France there has been a significant investment in education, with Ruth Kelly, a Labour MP claiming that public investment was to be “larger and more sustained than at any time since the 1940s”[55]

Effects of the EU on Economic Interventionism

France

Since the 1990s the growth of European policy developments “began to conflict significantly with dominant perceptions of French state identity and ideological constructions,”[56] as European Competition policy clashed with the “dominant French perceptions of appropriate state intervention in the economy.”[57] The creation of the single continental market in 1992 removed 300 barriers to trade in France. It had effects on France’s subsidies to ‘national champions’, with the Rocard Government being obliged to make Renault pay back part of its subsidy, creating the “principle that the French Government had henceforth only a very limited freedom to support its public sector,”[58] Machin even felt that European integration ended the run of ‘national champions’, as it “ran against the entire logic of the Single Market.”[59]

However, Howarth disagrees, suggesting that “European integration and policy developments (for example, the creation of CAP) were acceptable to the extent that they served French economic and foreign policy objectives and reinforced – or at least did not undermine or fundamentally alter – traditional dominant perceptions of French state identity.”[60] The response of France has been to attempt to extend “state activism to the European level by calling for improved economic policy coordination, joint reflationary economic strategies, the creation of an interventionist European policy, the loosening of the EMU constraint, the reinforcement of EU social policy and fiscal policy harmonisation to prevent perceived tax competition by certain EU member states.”[61] Howarth goes on to explain how this was in order to reinforce domestic policies and “should be seen as an extension of ‘modernising’ interventionism, the motif of Jospin’s ‘Modern Socialism’.”[62] Levy extends on this point, asserting that “The expansion of state intervention is not merely a social imperative but a measure of France’s capacity to preserve its sovereignty and identity in an increasingly integrated, interdependent world.”[63] However, there are limits to the France’s influence, with Jospin unable to renegotiate the Stability Pact in the Amsterdam Treaty.

UK

Thatcher’s approach to Europe was very mixed, being committed to open markets and borders and a chance to “extend laissez-faire capitalism to the continent in the case of the Single Market.”[64] However, she also viewed Europe as a threat, fearing an “extension of continental-style state interventionism through the Maastricht Treaty, both with the Social Chapter, which would “introduce collectivism and corporatism at the European level.”[65]

Blair’s commitment to European integration was more evident with his granting the Bank of England independence and opting into the Social Chapter of the Maastricht Treaty. However, the legacy of euro scepticism following Black Wednesday has prevented Blair from making strong moves towards joining the euro or taking as strong a lead in Europe as France dies and assert its influence on economic policy.

The UK has made huge savings through pooling its research with other European countries on programmes such as Airbus, Concorde, the European Centre for Nuclear Research, ESPIRIT (an IT programme), the European Space Agency and a series of joint defence ventures. This has avoided huge duplicative costs and enabled the UK to invest in programmes which it otherwise may not be able to fund by itself.

This report was written by Jonathan McHugh in March 2005

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[1] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p171

[2] Ibid. p173

[3] Ibid. p174

[4] Ibid.

[5] Ibid.

[6] Godt Policy Making in France (Pinter Publishers London and New York) 1989. p109

[7] Godt Policy Making in France (Pinter Publishers London and New York) 1989. p109

[8] Godt Policy Making in France (Pinter Publishers London and New York) 1989. p109

[9] Godt Policy Making in France (Pinter Publishers London and New York) 1989. p109

[10] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p174

[11] Godt Policy Making in France (Pinter Publishers London and New York) 1989. p119

[12] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p174

[13] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p175

[14] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p175

[15] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p174

[16] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p174

[17] Godt Policy Making in France (Pinter Publishers London and New York) 1989. p120

[18] Perez S.A Systemic Explanations, Divergent Outcomes: The Politics of Financial Liberalization in France and Spain (International Studies Association) 1998. p776

[19] Perez S.A Systemic Explanations, Divergent Outcomes: The Politics of Financial Liberalization in France and Spain (International Studies Association) 1998. p776

[20] Flanagan R, Soskice DW and Ulman L Unionism, Economic Stabilization and Incomes Polices: European Experience.(Brookings Institution). p23

[21] Perez S.A Systemic Explanations, Divergent Outcomes: The Politics of Financial Liberalization in France and Spain (International Studies Association) 1998. p777

[22] Perez S.A Systemic Explanations, Divergent Outcomes: The Politics of Financial Liberalization in France and Spain (International Studies Association) 1998. p777

[23] Godt Policy Making in France (Pinter Publishers London and New York) 1989. p119

[24] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p175

[25] Zysman, J Governments, Markets and Growth (Cornell University Press) 1983

[26] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p175

[27] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p181

[28] cited from Godt Policy Making in France (Pinter Publishers London and New York) 1989. p119

[29] Godt Policy Making in France (Pinter Publishers London and New York) 1989. p119

[30] Schmidt VA From State to Market? The Transformation of French Business and Government (Cambridge University Press) 1996

[31] Schmidt VA The Politics of Economic Adjustment In France and Britain: When Does Discourse Matter? (Journal of European Public Policy) 2001. p253

[32] Curwen P, Hartley K, Hooper N and Marshall P Understanding the UK Economy Fourth Edition (MacMillan Press Ltd).1997 P446

[33] Schmidt VA The Politics of Economic Adjustment In France and Britain: When Does Discourse Matter? (Journal of European Public Policy) 2001. p258

[34] Smith D The Rise and Fall of Monetarism (Pelican). 1988. p65

[35] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p181

[36] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p181

[37] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p182

[38] Godt Policy Making in France (Pinter Publishers London and New York) 1989. p119

[39] Godt Policy Making in France (Pinter Publishers London and New York) 1989. p124

[40] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p178

[41] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p180

[42] Cited from Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p178

[43] Milner S Globalisation and Employment in France: Between Flexibility and Protection? (Modern Contemporary France) 2001. p335

[44] Schmidt VA The Politics of Economic Adjustment In France and Britain: When Does Discourse Matter? (Journal of European Public Policy) 2001. p254

[45] Schmidt VA The Politics of Economic Adjustment In France and Britain: When Does Discourse Matter? (Journal of European Public Policy) 2001. p254

[46] Cited from Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p179

[47] Peter Hall, Jack Hayward and Howard Machin Developments in French Politics (The Machmillan Press Ltd) 1994. p179

[48] Hedetoft, Ulf and Hiss, Hanne Taking Stock of Thatechism (Department of Languages and International Studies) 1991

[49] OECD Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance (Paris) 2002. p100

[50] Cited from OECD Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance (Paris) 2002. p22

[51] Regulatory Reform: The Government’s Action Plan Internet (www.cabinetoffice.gov.uk/regulation) 2003.

[52] Hood, James and Scott Regulation of Government: Has it Increased, is it Increasing, Should it be Diminished? (Blackwell Publishers Ltd) 2000. p283

[53] Arestis P and Sawyer M The Economic Analysis Underlining the ‘Third Way’ (New Political Economy) 2001. p257

[54] Curwen P, Hartley K, Hooper N and Marshall P Understanding the UK Economy Fourth Edition (MacMillan Press Ltd).1997 P447

[55] Kelly R Response to Will Hutton (Political Quarterly) 1998. p103

[56] Howarth D The European Policy of the Jospin Government: A New Twist to Old French Games (Modern and Contemporary France) 2002. p355

[57] Howarth D The European Policy of the Jospin Government: A New Twist to Old French Games (Modern and Contemporary France) 2002. p355

[58] Hall P, Hayward J, Machin H Developments In French Politics (The Machmillan Press Ltd) 1994. p314

[59] Hall P, Hayward J, Machin H Developments In French Politics (The Machmillan Press Ltd) 1994. p314

[60] Howarth D The European Policy of the Jospin Government: A New Twist to Old French Games (Modern and Contemporary France) 2002. p354

[61] Howarth D The European Policy of the Jospin Government: A New Twist to Old French Games (Modern and Contemporary France) 2002. p357

[62] Howarth D The European Policy of the Jospin Government: A New Twist to Old French Games (Modern and Contemporary France) 2002. p357

[63] Levy J. D. France: directing adjustment, in Scharof F. and V. Schmidt Welfare and

Work in the Open Economy. Volume II. Diverse Responses to Common Challenges (Oxford

University Press) 2000. p. 331

[64] Schmidt VA The Politics of Economic Adjustment In France and Britain: When Does Discourse Matter? (Journal of European Public Policy) 2001. p259

[65] Busch, Andreas Central bank independence and the Westminster model (West

European Politics). 1994. p53–72.

What Factors Account For The Pressure To Change Regulation From A “Command And Control” Approach To “Incentive-Based” Regulation?

In the UK the Conservative Government’s large levels of privatisation and its desire to introduce competition to many industries since the 1980s resulted in a wave of regulation in order to ensure competitiveness and welfare. Until recently there has been a slow but steady growth in regulation. However, there was a shift in Government opinion, following Labour’s publication of Modernising Government in 1999. Like many other countries the UK has now accepted that there may have been too much regulation in many areas and that a more relaxed system built upon strong incentives, rather than a more commanding and controlling approach would be optimum. This is because the cost of regulation was spiralling out of control, with very inefficient and uncoordinated policymaking, as a result of old and duplicative regulations. The recent shift has been a relief to many firms who have lobbied heavily to reduce the burdens put upon them in the hope of increased profits. Also, supra-national factors, such as institutions like the European Commission and the European Court of Justice and global competitiveness puts a further impetus for governments to search for alternatives to heavy handed regulation.

Despite the potential benefits of privatisation there has been the spectre of price fixing, lack of investment and the disenfranchising of the poor, as firms may reduce welfare in order to make higher profits. Consequentially the Government created regulators such as OFWAT (water) and OFGAS (gas) to monitor the privatised firms’ industries and place demands on them. Regulators had roles such as enacting price ceilings or investment requirements, encouraging competitiveness and preventing the socially disadvantaged from loosing their services. Regulation also extended to the public sector, with huge guidelines to inspect areas such as education and the NHS and the ability to make changes to correct faults.

However, there are many problems associated with such regulation. An OECD report concluded that “The regulatory task of designing a pro-competitive system of regulation based on the separation of potentially competitive and natural monopoly sections of this type of sector was an unfamiliar one for governments and presented enormous technical and economic difficulties.”[1] Regulation had grown too large, with regulators increasing their organisations excessively as a result of poorly thought out policies which often duplicated costs because of mutual and overlapping interests between regulators. In 1997 there were between 14,000 and 20,000 regulator organisations, with annual costs of between £750m and £1bn.[2] The costs of regulations can be so great that it reaches ten percent or more of GDP in some countries.[3]

An overburdened regulatory network can easily create incoherent and time-wasting policies as a result of complex and uncoordinated procedures. Over time it can get progressively worse. The OECD argued that regulation becomes more complex as “pressures to compete and to coordinate are imposed on regulators at the domestic level” and that it gets worse as governments don’t give enough “attention to reviewing, updating, and eliminating unnecessary or harmful regulation.” [4]

The most striking reform of regulation introduced by Labour was Modernising Government in 1999. In order to address the aforementioned concerns, which even Labour had been previously guilty of, there have been some streamlining of policies and a removal of many burdensome regulations to avoid duplication and enable more effective policy direction. This opinion is backed up by an OECD report in 1997 which found that “reducing red tape and government formalities can produce substantial payoffs in government efficiency and economic cost-savings.”[5] As a result there have been mergers of departments, such as the coordination of electricity and gas regulation and fire safety reforms have been unified so as to create one simple risk-based fire safety regime.

However, the move from the more aggressive style of giving demands to firms and public organisations to the “light touch enforcement of regulation”[6] is likely to be more effective. Described by Hood, James and Scott as an aspiration to combine “the iron fist of Draconian central interventionism with the velvet glove of self-regulation,”[7] it involves transferring the main thrust of legislative effort on areas of higher risk and underperformance and allowing areas of low risk or strong performance to have less stringent reviews. For example, in 1997 OFSTEAD (the regulator for education) allowed plans for less stringent inspection of the best performing schools. Also the savings from risk-based audit and inspection of local government by the Audit Commission was reported to save £24m in government expenditure each year.[8]

There has been stronger pressure from the business community than the Government for a relaxation of its heavy-handed approach to some industries, as they have a strong financial incentive for deregulation. For example, the Government suggested that licensing reforms alone could save businesses £1.9bn in costs in the first ten years and an annual saving of £6.5m in court costs dealing with business tenancy reforms.[9] In other countries it can be even more beneficial, such as Mexico where in the late 1990s it could take up to a year and a half to set up a business.[10] It is also believed that price regulation “can restrict competition, or in the case of a monopoly reduce the quality of service,”[11] which would affect levels of investment in the future. Galli and Pelkmans even went on to suggest that the gap in EU and US productivity was as a result of lack of enough incentives in regulation.[12]

There is a constant concern that some regulators get too heavily influenced by the firms they are in charge of. They fall into the regulatory trap, whereby the regulator ends up setting ineffective rules but protects the interests of some firms in the industry. Gabriel Kolko[13] even went on to suggest that US regulation originated in self interested demands by business groups for government action to stabilise market shares, prices and profits rather than in public spirited campaigns to curb those interests. The development of the capture idea may have helped to catalyse the deregulation movement, with captured regulators being described as weak enforcers, being self defeating bureaucrats failing to balance costs of compliance against regulatory benefits and often offering ineffective programme design.[14] For Hood it was surprising that such ideas had failed to strike a chord with the Government by 1994.

Growing economic and legal integration in markets such as the European Union as a result of the European Commission and the European Court of Justice have increased importance on governmental policy and as a result they have modified “the range of options that governments can realistically pursue.”[15] Recent initiatives to improve the regulatory environment in the European Union and creation of a more unified market include the Commission’s White Paper on European Governance in 2001, which outlined an initiative to establish a new, coherent regulatory impact analysis. The European Court of Justice’s ruling in the Cassis de Dijon case in 1979 meant that one Member State’s goods could not be prevented from entering another in the absence of compelling national policy grounds (such as consumer safety). Consequentially there is less heavy regulation over quality standards in some states compared to others as firms have the financial incentive to comply with European standards in order to avoid the possibility of being refused import of goods.

There is a claim that economic interdependence as a result of globalisation and economic integration in the EU would result in countries having to lower their regulatory standards in order to attract (and maintain) capital and highly skilled labour in what is described as a race to the bottom. Using the prisoners dilemma, whereby two governments would end up with the worst outcomes through attempting to counter each other Radaelli cites how “the jurisdictional competition creates a position where everybody is worse off.”[16]

However, this is only a small factor explaining why there may be a desire to deregulate and create more incentives for firms. Radaelli highlights how welfare does not wither away, nor get distorted (by regulatory competition) to the point of the welfare system collapsing. This is backed up by Garret[17] and Swank[18] who also concluded that regulatory competition does not create such a bidding war. Heriter[19] even claimed that in order to assist their own industries governments would attempt to raise European standards to their own level in order to raise the cost of foreign producers so that domestic firms would be more competitive.

Business has been highly influential and the most eager in pressurising the UK Government to reduce its interventionist regulatory style in favour of a more incentive based system which offers leeway to efficient and competitive firms and public authorities. However, for a long time much of this pressure had fallen on deaf ears and was seen by the Government as a simple desire to extract extra revenue or an attempt to capture its regulator. It was a while before the Government came to realise that although regulation is highly important and is probably its strongest tool it had gone too far and that it was affecting its ability to make coherent and effective policy and at a large cost, as well as creating hugely unnecessary costs on business. Supranational institutions such as the EU are creating a more level playing field and have encouraged the reforms further. However, the effect of the race to the bottom for competitive regulatory standards is quite limited.

This report was written by Jonathan McHugh in March 2005

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[1] OECD Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance, (Paris) 2002. p100

[2] Quoted from Hood et al. Regulation Inside Government (Oxford University Press) 1999

[3] Quoted from OECD Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance, (Paris) 2002. p22

[4] Ibid. p109

[5] OECD Report on Regulatory Reform, Vol 2, (Paris) 1997

[6] Regulatory Reform: The Government’s Action Plan Internet (www.cabinetoffice.gov.uk/regulation) 2003.

[7] Hood, James and Scott, Regulation of Government: Has it Increased, is it Increasing, Should It Be Diminished? (Blackwell Publishers Ltd) 2000. p283

[8] Quoted from Regulatory Reform: The Government’s Action Plan Internet (www.cabinetoffice.gov.uk/regulation) 2003.

[9] Ibid

[10] OECD Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance, (Paris) 2002.

[11] Baldwin and Cave Understanding Regulation: Theory Strategy and Practice (Oxford University Press) 1999. p189

[12] Pelkmans and Galli Regulatory Reform and Competitiveness in Europe, Vol. 1. (Horizontal Issues, Cheltenham) 2000:

[13] Kolko The Triumph of Conservatism (Free Press) 1977

[14] Hood Explaining Policy Reversals (Open University Press) 1994

[15] Radaelli The Puzzle of Regulatory Competition (Journal of Public Policy, Col 23, No 1) 2003. p5

[16] Radaelli The Puzzle of Regulatory Competition (Journal of Public Policy, Col 23, No 1) 2003. p5

[17] Garrett, G Partisan Politics in the Global Economy (Cambridge University Press) 1998

[18] Swank Global Capital, Political Institutions and Policy Change In Developed Welfare States (Cambridge University Press) 2002

[19] Baldwin and Cave Understanding Regulation: Theory Strategy and Practice (Oxford University Press) 1999. p151