Economic Policy in France and Italy since the War: Different Stances, Different Outcomes?

By Boltho, Andrea | Journal of Economic Issues, September 2001 | Go to article overview

Economic Policy in France and Italy since the War: Different Stances, Different Outcomes?


Boltho, Andrea, Journal of Economic Issues


Fifty years ago, France and Italy had two very different economies. Though agriculture still loomed large in both, its weight in total employment was much higher in Italy (45 versus 28 percent in 1950). French income per capita (at purchasing power parity) was at the time some 50 percent above the Italian level, [1] and its territorial distribution was much less unequal than in Italy, where pre-existing wide regional income gaps between North and South had further opened in the inter-war years. Italy suffered from massive unemployment and underemployment. France, in contrast, was at virtual full employment; its industry enjoyed productivity levels a quarter higher than Italy's (Broadberry 1996); its exports of manufactures accounted for some 8 1/2 percent of world trade as against Italy's 3 1/2 percent, and so on. Today, many of these differences have either disappeared or greatly diminished--per capita incomes are close and so are levels of productivity, overall unemployment is similar (if at a very high lev el), and the value of manufactured exports is almost identical. Similarly, consumption standards and ways of life are much more uniform compared with the pronounced differences that prevailed at the end of World War II.

This movement from initial diversity to eventual convergence in major economic (and social) indicators is paralleled by a broadly similar movement from diversity to convergence in the nature and stance of economic policies. In the 1950s, for instance, France intervened massively in the workings of the economy. While interventionism was hardly absent in Italy, market forces were, almost certainly, given a freer rein. From the early 1960s to the early 1990s, Italian interventionism, if in fits and starts, tended to increase. French interference began, instead, a gradual retreat, cautious at first but more rapid from the middle of the 1980s onward. By now, both countries hold fairly similar views on policy making and have, of course, relinquished a number of important instruments to the supra-national authorities of Brussels and Frankfurt.

This paper's aim is to survey the course of the two countries' macroeconomic policies over this half century. The first section provides a bird's eye view of the main changes that have occurred during the period. The second section advances some explanation for why two broadly successful economies, which have faced similar problems and have increasingly come together in the framework of European unification, have, nonetheless, often framed their policy responses in different ways. The last section asks whether such different responses have resulted in different outcomes and puts forward a tentative assessment of the comparative record. A few concluding paragraphs summarize the main arguments.

From Divergence to Convergence--Five Decades of Contrasting Policies

While both France and Italy suffered occupation and destruction during the war, their immediate post-war responses differed. Both countries, of course, targeted reconstruction, but while France put the emphasis on the need for "modernization," Italy aimed at "industrialization," a choice of words that well reflected the two economies' levels of development. More importantly, France, from the very beginning, stressed the leading role of the state in this process through, in particular, a massive program of nationalizations and the launching of its first indicative plan (1947-52). Italy, in contrast, left a much greater degree of initiative to its industry, whose pre-war organization (into major private and public groups) was barely touched by post-war reforms.

These contrasting responses were largely a function of inter-war experience. France in the 1930s had been seen as the "sick man of Europe," a country afflicted by virtual stagnation, [2] or, as put in the French literature, malthusianisme, in which the broadly liberal order of the time seemed incapable of giving a guiding impulse to a conservative, or even outright retrograde, private sector. State interventionism was seen as the only way to kick-start the economy. And a kick-start required, in turn, control of the leading sectors--hence the nationalization of as much as 36 percent of the country's 1938 equity capital in public utilities, banking, automobile, steel, and other key branches (Bonin 1987). These nationalizations were accompanied by the setting of ambitious production targets, while price stability (in stop-go fashion) was either ignored, in order not to break the initial growth momentum, or else enforced via wage and price controls.

Italy, on the other hand, was much more favorably inclined to a freeing of the economy in reaction to the interference and regulations of the fascist period, hence its early choice of a free-trading regime (Rossi and Toniolo 1996) and abandonment of price controls. Nor did Italy have the same need for new forms of government intervention since large sectors of the economy were already in public hands--some 21 percent of the country's pre-war equity capital had de facto been nationalized in 1933, and the early 1950s creation of a major state oil corporation (ENI) had further added to the public sector's presence (Barca et al. 1999). In contrast to France, however, the politicians gave the managers of these public groups a virtually free rein to pursue their development aims (Barca 1997). And Italian macroeconomic policy was also a good deal more orthodox. The two countries' different stances are best exemplified by their contrasting uses of Marshall aid funds--France devoted these to productive investment (Caz es 1991); Italy, "more to increase foreign reserves than to import Marshall Aid goods" (De Cecco and Giavazzi 1993, 75).

Despite these differences, however, both countries experienced successful reconstruction and rapid growth in the 1950s, as, of course, did the whole of Western Europe. In Italy growth was led by the infrastructure investment of the state-owned enterprises (which often acted as almost independent empires) [3] and by the equipment investment of the private sector, whose profits were swollen by the presence of excess labor supplies. In France, too, investment was the leading demand component, but the process was much less spontaneous than in Italy. The public sector stimulated capital accumulation both directly (through state-owned enterprises that were closely supervised by the central government) and indirectly, via an elaborate system of preferential credit allocation to what were viewed as strategic sectors. Italy continued to suffer from unemployment, largely because of its regional split. France, instead, recorded well above average inflation, partly because of endemic political instability, partly as a co nsequence of two colonial wars and one colonial expedition.

The 1960s brought some changes to the two countries' stances. In France, the belated opening of the economy at the end of the previous decade inevitably diminished the role of long-run planning and enhanced that of short-run demand management. Keynesianism, broadly ignored until then, appeared on the scene and gave rise to a French version of fine tuning (pilotage a vue), much practiced by de Gaulle's finance minister of the time (Giscard d'Estaing). More detailed interventionism, however, was hardly jettisoned, be this in credit allocation or in price controls. [4] In addition, the country pursued and strengthened the IVth Republic's active industrial policies (Delorme and Andre 1983). For the next twenty-five years, France tried to create winning firms, winning sectors, winning creneaux, or winning filieres, convinced that the imperatives of international competition forced it to be present in the strategic and high-tech branches that seemed dominated by, in turn, American, German, or Japanese industry. De Gaulle's foreign policy ambitions played some role in these attempts to promote "national champions," but there was, in addition, a firm conviction that the state can and must pick leading players and help them overcome what were seen as being the unfair advantages enjoyed by other countries' rivals.

Italy also experienced a conversion to demand management, but this occurred more in terms of official pronouncements than it did in deeds. The public finance machine was far too cumbersome and inefficient to allow for the fine-tuning recommended by the literature of the time (Izzo et al. 1970). In addition, Italy gave birth in the 1960s to a much more ambitious set of policies, partly in reaction to political changes (the coming to power of a broad coalition that included the Socialist party), partly in reaction to demonstration effects coming from France. Planning was now put forward as an indispensable instrument for achieving not only balanced macroeconomic developments but also a number of socio-economic objectives which had been neglected in the buoyant years of the so-called "economic miracle" (Valli 1979). For lack of instruments and political backing, however, it dismally failed in achieving either set of aims. Yet the launching of the planning process had some unintended consequences. The politicians became more active participants in the economic policy debate and realized that both fiscal policies and state enterprises could be used for electoral purposes. It was in the mid 1960s, for instance, that public sector employment began to rise rapidly, that the basis was laid for Italy's ruinous public pension system (Basevi and Onofri 1997), and that the budget, until then broadly in equilibrium, shifted into rapidly growing deficits. And it was at roughly the same time that the politicians began to see that state enterprises could be a rich source of funds, jobs, and votes and now started to use their power to set incompatible aims to their erstwhile almost independent managers (Barca and Trento 1997).

The 1960s also witnessed a major switch in political fortunes. France moved from the turmoil of the IVth Republic to the stability of the Vth, while Italy moved in the opposite direction, with government changes becoming more frequent and coalitions more fragile. Partly as a consequence, France, when faced with shocks, managed to pursue policies that appear broadly coherent. Italy, by contrast, in the absence of sensible responses by divided cabinets, was forced to rely inordinately on the Central Bank, virtually the only institution capable of rapid macroeconomic intervention.

Two episodes well illustrate these divergences. Both countries faced two sudden increases in inflationary pressures between the late 1950s and the late 1960s--France in 1957-58 and again in 1968; Italy, in 1963 and in 1969. On both occasions, France's concerns with price stability were tempered by its concerns for employment. Hence, on both occasions, France followed the textbook prescription of combining expenditure reduction with expenditure switching. Macroeconomic rigor accompanied currency depreciations that improved external competitiveness and successfully maintained the growth tempo (Mistral 1975). Italy, on the other hand, saw only deflations, since Bank of Italy opposition stood in the way of devaluations. Growth slowed sharply in both episodes, in contrast to France, without this generating a much more favorable inflation performance (table 1). Interestingly, while France managed, via productivity growth, to successfully defuse the wage pressures of the May 1968 events, Italy not only accepted a la rge shift in factorial income distribution during the "Hot Autumn" of 1969 [5] but also legislated for a radical change in industrial relations (through the 1970 Workers' Statute) which introduced an unparalleled degree of rigidity on the labor market and gave unions exorbitant power at the company level.

The relatively moderate stop-go policies of the 1960s became endemic in the 1970s as much bigger shocks of various kinds buffeted the two countries. Both responded in confused fashion to the first oil shock, allowing inflation to accelerate and budget deficits to increase, yet also intermittently imposing monetary squeezes. Italy's resort to inflation and depreciation was, however, greater than France's. (Between 1973 and 1976, for instance, the lira's effective value declined by nearly 30 percent, while that of the French franc remained stable). Even more important was fiscal permissiveness--state subsidies often took the place of policies in an attempt to maintain a fragile consensus. Italy's stance reflected greater political instability but also the presence of a more powerful union movement that managed to strengthen, in 1975, an already existing and fairly rigid system of wage indexation. And Italy's accommodating stance continued in the early 1980s, at a time when the rest of the Western world had swit ched to significant policy tightening. While elsewhere inflation fell quite abruptly, it decelerated only gradually in Italy as the lira's real exchange rate rose within the European Monetary System.

In France, by contrast, the reaction to the permissiveness of the mid 1970s set in quite early. First under the Barre plan of 1976, later under Delors from 1983 (and bar the short dash for growth of 1981-82), the policy makers tried to formulate a coherent response. This took the form of greater macroeconomic rigor and of a gradual rejection of earlier all-pervasive interventionism and preference for a weak currency. Price and credit controls were slowly removed, industrial policy activism was scaled down, state industries were privatized, and even competition policy was given some power in the course of the 1980s. The shift toward a more orthodox, German-influenced stance was completed by the turn of the decade with the adoption of a "strong franc" policy, the full liberalization of capital movements, and, ultimately, the acceptance of European monetary union.

In Italy, the same conversion occurred much later. The 1980s were still a decade in which the politicians felt that the budget could be used to preserve growth, employment, and votes, with ultimately disastrous consequences for the state of the country's public finances. And detailed interventionism, which had earlier been avoided, became gradually more pervasive, particularly in credit allocation (Arcelli and Micossi 1997). It was only because of the various commitments imposed by the Maastricht Treaty that Italy got to grips with its fiscal and other problems from 1992 onward. A succession of left-of-center governments (bar a disastrous center-right administration in 1994-95) finally managed to bring the country's budget deficit level closer to the European average. And, as in France a decade earlier, microeconomic deregulation and privatizations illustrated the state's gradual retreat from excessive interference in the economy. While still different in many areas, France and Italy are now clearly much clos er in their attitudes toward both micro- and macroeconomic control than they have ever been over the last half century.

Two Ways of Seeing an Economy

The preceding section has argued that the French state has, since the war, played a much larger role than the Italian one. While the weight of the public sector in the economy (e.g., in terms of public expenditure, employment, or state ownership) has not been that different, the degree of intervention and regulation in economic affairs has. Thus, through most of the period, the allocation of credit was subject to detailed sectoral scrutiny in France, while in Italy (bar the 1980s) it was only overall ceilings that were applied. Price controls were continuous and pervasive in France but little used in Italy. Wage formation has almost always been strongly influenced by the French, but not by the Italian, authorities; the same has been true for the location of investment, and so on. More importantly, perhaps, French governments clearly felt for a long time that they had to lead the private sector into certain directions (witness the importance given to industrial policies and, at least in words if not always in deeds, to planning). Italian governments were hardly imbued with the same sense of mission.

History must clearly play a part in any explanation for these contrasting attitudes. France's early centralization of power, as against Italy's much later unification, and the long dominant role of Paris as against the much weaker position of Rome, have made for a more powerful state. This was strengthened by the Napoleonic tradition of strong government interference which, even if diluted under the IIIrd Republic, was, and still is, very pervasive in France. Italy, upon unification, had copied some aspects of this tradition, but they never took the same roots, in good measure because of deep standing regional differences. Partly, perhaps, as a consequence, the French civil service was seen as a prestigious organization, capable of attracting the best in the land; the Italian one, by contrast, has traditionally suffered from a (largely justified) much poorer image--slow, inefficient, and primarily directed by Southerners equipped with law degrees rather than by engineers educated in the grandes ecoles. Given these different starting points, there was clearly a much greater potential for public sector intervention in one case than in the other.

That these differing potentials led to differences in policies may also have owed something to the positions of the respective private sectors. Inter-war stagnation had seriously affected entrepreneurial confidence in France. The malthusianisme, so often quoted by the early post-war literature, did refer to a widespread sense of, at best, excessive caution and, at worst, outright pessimism. The typical reaction of French firms, when faced by the first plan's ambitious sectoral targets, was to worry about the dangers of overproduction (Bonin 1987). Similarly, the INSEE's business surveys of the 1950s show a constant underestimation of own-firm and market growth potentials (Ehrmann 1959). Italian attitudes were different. The early post-war years were seen as a period of opportunity, in contrast not only to the slow growth of, but also to the fetters imposed by, the fascist period. There is no better testimony to such views than the supreme confidence shown at the time by Vittorio Valletta, general manager of F IAT, Italy's largest private corporation, who, in 1946, for what was still a poor country with an underdeveloped road network, showed "great confidence in the future" and predicted "a doubling or trebling of [car] production" (quoted in Graziani 1979, 154). [6]

A second, and more important, difference put forward in the first section referred to the economic logic with which interventionism was pursued. France appeared to operate with a greater coherence and understanding of basic macroeconomic relationships and constraints than did Italy, at least through the bulk of the period under examination. Table 2, which shows data on budget deficits and inflation, illustrates these different styles. In the 1950s, the French IVth Republic (partly because of its colonial wars) presided over a period of what (by the standards of the time) were rapid inflation and large deficits, in contrast to the then orthodoxy of Italy. Thereafter, however, trends in the two countries diverged sharply. While few would attribute every budget deficit and all inflation to the sole action of governments, policy does play an important role in the determination of these two variables over longer periods.

Mainstream economics would argue that such differences in outcome would have been dictated by the different incentive mechanisms facing the decision makers and that these, in turn, may have been a function of the different institutional set-ups in the two countries. Two in particular spring to mind, one linked to the political system, the other to the administrative one. At the political level, France, after experiencing coalition governments during the IVth Republic, moved much closer to a single-party system under the Vth. Italy, on the other hand, has lived perennially with coalitions. The latter tend to have a greater propensity to spend (and a lesser propensity to tax) than single-party governments since each coalition member has distinct objectives, usually enjoys veto powers, and is seldom able to enter into binding commitments with his partners (Roubini and Sachs 1989). Italy's large budget deficits, in other words, could have been the inevitable consequence of proportional representation (as were Fra nce's in the 1950s), while France's relative fiscal moderation since 1959 reflected the presence of strong executives. There is, no doubt, something in this. Yet Italy's experience of the 1950s, when coalitions presided over financial orthodoxy, suggests that more is at work. The political composition of coalitions (and, for that matter, of single-party governments, too) is probably at least as important a determinant of fiscal policy stances than the pure arithmetic of parliamentary control.

At the institutional level, while both countries began the period as very (or fairly) centralized states, Italy moved toward decentralization sooner and much more radically than France. A heavily criticized consequence of the country's early 1970s administrative reforms was the separation of expenditure and tax decisions for lower levels of government. Regional and communal authorities were given spending powers without these being linked to corresponding tax-levying responsibilities. The stage was set for irresponsible behavior at the local level that would have to be financed by transfers from the centre. This feature played a role in the rapid growth of Italy's deficits in the 1970s, for which there is no parallel in France. [7] Yet here, too, more is at play. Italian fiscal profligacy predates administrative decentralization. As mentioned earlier, it was in the mid 1960s that the basis was laid for the country's extravagantly generous pension system (Basevi and Onofri 1997) and other forms of assistenzial ismo. Indeed, by 1970-71, well before the outbreak of the oil shocks, estimates of the country's structural budget deficit put this at 6 percent of GDP (France, at the time, was in small surplus) (Price and Muller 1984).

Nor can differing institutional features throw much light on the two differing inflation experiences. In this area mainstream economics emphasizes the presence or absence of an independent central bank whose control (or lack thereof) of the money supply will be the main determinant of price trends (at least in a floating exchange rate regime). One need not be a monetarist to recognize that, in the longer run, accommodating monetary policies do facilitate inflation and that independent central banks are more likely to eschew such policies than banks that can easily be influenced by the politicians. Yet neither country had until very recently an independent central bank. On the contrary, the available research suggests that both central banks were among the least independent of such institutions in the OECD area (Alesina and Summers 1993). Yet the rate of inflation in Italy was some 60 percent above that of France in the three decades since 1970.

There would seem to be a broader reason for the differing policy experiences of the two countries, one that in addition to stressing the interactions between institutions and the policy makers' "rational choices" looks also at the role of pressure groups and ideologies. Italian economic policy, as mentioned earlier, changed in the course of the 1960s, a time at which the country's landscape was altered by two major shifts. At the political level, the Socialist party joined the Christian Democrats in government; at the economic level, the attainment of full employment, at least in the northern half of the country, greatly strengthened the power of (rather dogmatic) trade unions.

This new political and union configuration, which remained basically in power until the early 1990s, attempted to introduce a number of major reforms. Two, in particular, stand out--the creation of a welfare state at the macroeconomic level and the democratization of labor relations at the micro one. While, per se, both aims were eminently commendable, their practical implementation often forgot economic realities. The welfare system that was created was far too generous (especially in its invalidity and old-age pension components); the employment and social (and political party financing) goals that state enterprises were made to fulfil were often incompatible with their solvency; the subsidies paid to the South, rather than invigorating the Mezzogiorno's economy, probably debilitated it further (Trigilia 1992), and so on. And unions were in rivalry with each other in trying to reduce enterprise profitability and in limiting flexibility on the factory or office floor. Ultimately, the system degenerated in th e 1980s into innumerable forms of micro-interventionism (Arcelli and Micossi 1997), as widespread, probably, as their French equivalents at the time, but oblivious of any coherent project. Politicians, often influenced by Catholicism, and trade unionists, under the spell of a narrow understanding of Marxism, seem to have mutually reinforced each other in denying the existence of some of the most basic economic relationships.

There were Catholics and Marxists aplenty in France, too, but their power remained circumscribed. The equivalent of the Christian Democrats, the MRP party, lost virtually all influence after 1958, and trade unions never attained the size, let alone the militancy, that they reached in Italy, particularly so in the economy's private sector (table 3). Economic policy remained, instead, in the hands of a relatively small elite, largely composed of top civil servants with a grande ecole background, reinforced by representatives of large firms. Most French politicians were probably as ignorant of economics as were their Italian counterparts, but this was much less the case in the higher spheres of the bureaucracy (because of a different educational background) and in parts of the private sector (because of a different enterprise structure). Italy was rich in small firms but lacked larger ones. These, on the other hand, were relatively numerous in France [8] and played an important role in framing policy by, for ins tance, intervening in the discussions of the Plan's committees and by exchanging personnel with the administration. [9] realities were, on the whole, better understood by this relatively small group of people. They shared none of the antagonism between the private and the public sectors characteristic of Italy (Shonfield 1969), hence the greater attention to the state of public finance, the lesser recourse to indiscriminate subsidies, and the earlier realization that in the post-oil shocks world low inflation would become a universal target.

This is not to say that French policies were error-free. There were virtually no public sector efforts at modernizing the state of industrial relations or democratizing the French firm (the May 1968 explosion may, arguably, have owed something to this neglect). Macroeconomic mistakes were made on numerous occasions, though some of these (e.g., the inflation of 1957-58 or the reflation of 1981) can be imputed to the politicians. More importantly, this all-powerful elite made microeconomic mistakes by clinging for too long to outdated intervention and regulation and by, on the whole, unsuccessfully trying to create national industrial champions (Adams 1989). Yet, looking at the comparative history of the two countries, one still remains struck by the greater rationality of French policy making compared to that of Italy.

This overall judgment is mitigated, however, by one final set of considerations. France's macroeconomic policy may win applause when compared with Italy's because of its greater recognition of economic realities, but there is one area, external relations, in which France has, arguably, followed a mistaken approach. Influenced, no doubt, by List, French policy makers have strived to "create" comparative advantage in certain areas, often, though not solely, by clinging longer than others in Europe to various forms of protectionism. The country did, of course, join the freer trade bandwagon of the post-war era. However, it was (and still is) reluctant to accept full trade liberalization, it constantly espoused the need for "national champions," and it obsessively pursued the goal of a "favorable" trade balance (or high taux de couverture), sometimes even in a country by country or product by product context ! [10] Italy has also stressed the need for international competitiveness to overcome real (or not so real ) external constraints, but it has, overall, interfered a good deal less with foreign trade than has France.

The contrasts in this area have persisted through the whole period. Though both countries had relatively high tariffs in the 1950s, [11] Italy had deliberately chosen the free trade option already in the late 1940s. It was thus one of the fastest liberalizers of its quantitative restrictions within the OEEC. [12] France, by contrast, stood in opposition to much of the free-trading zeal of the Marshall Aid administrators and was one of the slowest European economies in dismantling its quota barriers. Once external policy making switched to Brussels, it is common knowledge that most of the objections to further EC (or EU) opening have come from France, as did many of the restrictive measures applied to European imports (Messerlin 1985). France, in contrast to Italy, also long opposed foreign (and in particular American) direct investment (Stoffaes 1991). The fashionable early 1980s idea of "reconquering the domestic market," which culminated in the ridiculous decision to force Japanese exporters of videos to sh ip all their wares through the inland city of Poitiers, is yet a further testimony to France's protectionist tendencies to which there is little counterpart in Italy. [13]

Why this should have been so is not easy to determine. The legacy of Colbert, often invoked, is not fully convincing--after all, Napoleon III had joined England in free trade in the 1860s and government intervention in the economy was relatively limited between then and the late 1930s (Lesure 1991). Nor is de Gaulle's attempt to restore France's greatness a sufficient explanation since, as just argued, protectionism had been rampant in the 1950s as well. And it is, similarly, not easy to find explanations for Italy's conversion to free trade after a long period of protectionism begun in the 1880s and reinforced during the fascist period of autarky. Indeed, De Gasperi's acceptance of the Common Market, at a time when Italian industry was convinced that, if deprived of protection, it would be decimated by German competition, is difficult to understand in terms of the domestic political economy of the time. France, whose industry shared some of the same fears (Bonin 1987), was, at least, going to benefit from th e EEC's agricultural policies. Ultimately, what probably mattered most was international political economy--Italy's foreign policy from the end of the war to the early 1990s was largely dictated by the United States; France's retained a much greater degree of independence and, in the economic sphere, used this independence to pursue policies that may well have retarded rather than promoted its welfare.

In summary, two major features would seem to be responsible for the two countries' differing policies over the period--history and ideology. The former made centralization and intervention both more likely and more feasible in France than in Italy; the latter colored the macroeconomic choices of Italian policy makers in a populist direction and the microeconomic choices of French policy makers in an interventionist one.

Did It Matter?

Policy assessments are never easy, the more so when they are comparative and longer run, given the absence, in such instances, of the major technical tools that, in theory at least, allow some quantification of short-run policy effects--fully specified and internationally comparable macroeconometric models. Hence, what follows is limited to purely qualitative comments.

Taking first cyclical stability (arguably the main aim of demand management), policies appear to have had very different outcomes in the two countries (table 4). Both before and after 1973, output (and employment) fluctuations have been much more pronounced in Italy than in France even though both economies were subject to very similar shocks. Between the early 1960s and the early 1970s, in particular, French output fluctuations were virtually non-existent (fig. 1). While luck may have played some part in this, the differences are just too large and persistent for them not to reflect some policy input. And this is tentatively confirmed for both the instruments of demand management. Thus, rough estimates of the cyclical smoothing effect of fiscal policies over the period 1955--71 suggest a much higher degree of achievement than they do for Italy (Bispham and Boltho 1982). Similarly, monetary activism may also have contributed to the dampening of France's business cycles (Sicsic and Wyplosz 1996). Despite the u ps and downs of activity during the IVth Republic and despite the stop-go policies that followed the oil shocks, overall demand management in France appears to have been more successful than in Italy. And this is bound to reflect, at least in part, both the better understanding of economic mechanisms and the greater efficiency of the French bureaucracy that have been discussed above.

Since cyclical fluctuations have clear welfare costs, French policies in this area must be deemed to have been superior to those of Italy. When it comes to longer-run performance, however, no such clear-cut judgement can be ventured. Overall macroeconomic trends in Italy and France since 1950 are summarized in table 5. There are differences between the two countries, to be sure, but these do not seem very striking. Italy grew somewhat faster over the period, but then it had the benefit of a lower starting point. Inflation has also been somewhat higher in Italy than in France, but, except for the 1970s and 1980s, the differences were not all that marked. Unemployment is now virtually the same (and the earlier relatively high levels of Italian joblessness largely reflected Italy's skewed regional structure rather than reasons that could be directly imputed to faulty policies).

In other words, performance in the two countries has been a good deal more similar than the brief account of macroeconomic policy differences given above might have led one to expect. Perhaps, after all, such policies do not matter much over the longer run. Detailed interventionism, ambitious industrial measures, and an elaborate planning machine in one case, as against their near absence (or more confused application) in the other, do not seem to have generated growth rates that were markedly different from those one would have expected on the basis of the simplest of "catch-up" models. [14] Even in their absence, Italy and France might well have performed very much as they did, given on one hand their respective levels of development and, on the other, the buoyancy of the world economy in the Golden Age and its deceleration thereafter.

And a similar disparaging conclusion can be reached if one looks at the achievements of regional policy (a form of intervention hardly mentioned so far). In France attempts have been made to restrain the growth of the Paris region since the mid 1950s. In Italy an ambitious aid program has tried to stimulate the growth of the Mezzogiorno since the early 1950s. Just looking at per capita income differentials between regions at the beginning and at the end of the period (table 6) suggests that success has been, at best, elusive--the gap between Paris and the provinces has grown; that between north-central and southern Italy has changed little despite the massive funds poured into the depressed areas. It is, of course, true that this judgment forgets the issue of the appropriate "counterfactual." Had policies been absent, outcomes might have been very different. Yet numerous studies of the southern Italian question have come to the conclusion that aid policies were, indeed, ineffectual or even counterproductive, while qualitative judgements on France's experience are no more positive (Eck 1996).

Policies, in other words, had clear effects in the short to medium term. Over the longer run, on the other hand, their direct impact may have been muted. External developments and starting points were probably more important determinants of performance than monetary or fiscal stances. Even policy mistakes, arguably, may have had only small longer-run consequences. The search for "national champions" in France has, paradoxically, resulted in an industrial structure that is less differentiated than that of the other major European economies, suggesting that markets probably went their own way. [15] Indeed, at times, they may have undone what policies were trying to achieve. Thus, faced with the imposition of the Workers' Statute in Italy, private enterprise reacted to the new constraints by changing its own rules of operation. The country's very successful "industrial districts" experience reflects, no doubt, changing tastes and technologies, but the birth of many of the small firms that make up these districts was also strongly encouraged by the rigidities which unions and governments had imposed on large-scale establishments at the turn of the 1960s (Brusco and Paba 1997). A good deal of the buoyancy of Italy's private sector over the last two decades may thus, in part at least, have been caused by legislation that aimed to curb the "animal spirits" of that private sector in the first place!

Conclusions

This brief paper has looked at some aspects of policy making in France and Italy over the last 50 years, a period during which the two countries' policy styles have come closer together. In the initial post-war years, policies were strongly colored by inter-war experience. France intervened in great detail; Italy was somewhat more liberal. As time went by, Italy's (fairly chaotic) interventionism increased, while France's (fairly orderly) interventionism diminished. More recently, both countries have moved toward the prevailing orthodoxy and, by now, share a large number of similar features, including, from January 1, 1999, a common monetary policy. Within this picture of ebbing and flowing intervention, a notable characteristic seems to have been the greater conformity to economic forces of French policy making. Italian governments (and unions) have fallen prey to demagogy and populism more often than their French counterparts. This may owe something to a more Catholic- and Marxist-inclined culture than Fran ce's; it is also likely to reflect the greater role played by an efficient administration and a powerful sector of large-scale private firms in framing policy decisions in France as compared with Italy.

In France, growth was led by an alliance of "big bureaucracy" and "big business" in a broadly market-conforming framework, little disturbed by interference from relatively disciplined politicians or weak trade unions. In Italy, instead, it was led more by individual entrepreneurs, first in state-owned enterprises, later in small- and medium-sized firms, often in opposition to coalition governments that framed policies so as to buy social consensus and to a trade union movement that, at times, acted in almost Luddite fashion. There was some coherence behind France's macroeconomic policies; there was very little such coherence behind Italian policies, which reacted to, more than they ever initiated, events. Indeed, two of the most important and broadly successful economic choices made by Italy in this period--the decision to opt for free trade and fixed exchange rates in the late 1940s and the needed shift to a rigorous strategy of budgetary control from the early 1990s--were both taken because of foreign rathe r than domestic pressures.

Different policies led to different cyclical outcomes. France's performance in this area seems clearly superior to that of Italy's. Over the longer run, however, the two countries evolved along lines that almost certainly owed more to different starting points (in particular Italy's legacy of greater underdevelopment) and to external events (the general buoyancy of the western world until the oil shocks; its more subdued trends since then) than to policy choices, even when these were framed within a medium-term perspective (e.g., France's industrial policies or Italy's regional policies). Despite the heated arguments that the setting of macroeconomic policies generate everywhere, the tentative conclusion of this paper is that, taking a time horizon that stretches over half a century, their direct impact on welfare, in this instance at least, may well have been fairly small.

The author is a Fellow of Magdalen College, University of Oxford, UK. He is grateful to Michele Salvati and to two anonymous referees for perceptive comments (the usual disclaimers apply). This paper was first presented at an International Workshop on Economic Reforms in France and Italy at the Istituto Italiano di culture, Paris, in December 1998.

Notes

(1.) The available estimates of per capita incomes in purchasing power parity do not fully agree on 1950 values. The Penn project data show France's level as being some 60 percent above that of Italy (Summers and Heston 1984); A. Maddison (1995), on the other hand, put the gap at 52 percent. The text has used the most recent OECD estimates for 1970 and extrapolated these backward with the help of the Maddison figures.

(2.) France's GDP declined by 0.4 percent per annum between 1929 and 1938, the worst performance in Western Europe over this period, bar Spain, which was involved in civil war.

(3.) The best example of the independence of state-owned firms from the government is probably provided by the late 1940s experience of AGIP (the petrol distribution agency, later incorporated into ENI). While the authorities had ordered that the enterprise sell its mineral interests in northern Italy, its chairman, Enrico Mattei, ignored the government's instructions, carried on regardless, and successfully laid the basis for one of the world's largest oil companies.

(4.) It has been estimated that in the early 1960s, for instance, as much as 80 percent of credit to the private sector was being extended at subsidized interest rates (Shonfield 1969); by the late 1960s, this share was still close to 50 percent (Guillaumont Jeanneney 1991).

(5.) The economy's adjusted profit share fell by as much as 4 1/2 percentage points of GDP between 1969 and 1971, while it actually rose marginally between 1968 and 1970 in France (European Commission 1997).

(6.) In fact, car production rose a good deal more rapidly in the 1950s than even Valletta had hoped for, but at the time the projection must have looked outlandish--the Italy of the late 1940s was a country in which, for the bulk of the population, the most desirable durable good was hardly a car but rather a bicycle (as indirectly suggested by one of the most famous films of the time--and of all time).

(7.) Italy's GDP share of local government expenditure on goods, services, and transfers rose moderately between 1951-52 and 1971-72 (from some 5 to 7 percent of GDP) but then almost doubled to roughly 13 percent of GDP between 1971-72 and 1991-92.

(8.) Census data show that large firms are a significantly more important component of the French economy than of the Italian one. In 1961, for instance, there were 387 establishments with more than 1,000 employees in Italy, as against 572 in France in 1962. Comparable enterprise data, which are more appropriate, exist only from 1971--at the time, France had 885 such enterprises, Italy only 509 (and the Italian census figures cover a larger proportion of the economy than do the French ones). Turning to Fortune's list of the world's largest enterprises, over the 40 years to 1997, French firms account for nearly 10 percent of the sample as against an Italian presence of less than 3 percent.

(9.) Some of the more important examples of migration between the two sectors are provided by Monnet and Hirsch, the first two General Secretaries of the Planning Commission, and Pompidou, a Prime Minister under de Gaulle and subsequently President, all of whom began their careers in private firms.

(10.) As an example, a book written by an otherwise perceptive observer deplored France's very low taux de couverture in the mid 1960s in sectors as diverse as non-ferrous metals (50 percent), refrigerators (25 percent), or machine tools (56 percent); indeed, for the latter branch, dismay was expressed at the "ridiculous level of 6 percent" of this taux vis-a-vis Germany alone (Stoleru 1969, 124).

(11.) In 1958, at the beginning of the Common Market, these averaged 17 and 19 percent on manufactures for France and Italy respectively as against a level for Germany of only 6 1/2 per cent) (Resnick and Truman 1975).

(12.) Even the notoriously small quota of Japanese cars that was allowed into Italy until recently emerged originally not as a protectionist initiative by Italy but as a reciprocal quota demanded by the Japanese in the mid 1950s in their attempt at the time to protect their domestic market from Italian imports (oral communication from Franco Bernabe, formerly head of FIAT's research unit).

(13.) Interestingly, however, both countries have shared a similar preoccupation with the protection of their public and non-tradable sectors--employment guarantees in the former, the restriction of competition in the latter have been, and often still are, more widespread than in many other countries of western Europe.

(14.) A simple equation, relating average annual percentage per capita GDP growth in purchasing power parities over the period 1950-2000 ([delta]([y.sub.i]/[pop.sub.i])) for sixteen western European countries to starting points, in the form of each country's 1950 per capita income (([y.sub.i]/[[pop.sub.i]).sub.1950]), explains as much as 95 percent of the variance in growth rates over the period (data from Maddison 1995), updated with the help of OECD, National Accounts):

[delta]([y.sub.i]/[pop.sub.i]) = 4.5 - 3.2 [([y.sub.i]/[[pop.sub.i]).sub.1950] [R.sup.2] = 0.95

(17.1) SE = 0.14

The equation correctly predicts Italian average growth over the period while overestimating French growth by less than 0.1 percent per annum.

(15.) Thus, it turns Out that, among the major European economies, France is least specialized industrially (Commissariat general du Plan 1986), lacks "poles of competitiveness" (Lawrence 1987), and has a manufacturing structure closest not to that of Germany but to that of Britain (Adams 1989).

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[Graph omitted]

Table 1.
Reactions to Two Crises (Average
Annual Percentage Changes)
         France                       Italy
         Growth  Inflation           Growth  Inflation
1955-58   4.5       5.6     1960-63    7.8      4.7
1958-61   5.1       4.1     1963-66    3.8      4.2
1965-68   4.7       3.3     1966-69    7.1      2.4
1968-71   5.8       5.7     1969-72    2.2      5.2
Sources: Maddison 1991 and 1995.
Table 2.
Budget Deficits and Inflation
                              1950-59  1960-69  1970-79  1980-89
General Government Financial
Balance [a]
France                         -1.2      0.4     -0.4     -2.1
Italy                          -0.2     -2.0     -7.1     -11.0
Consumer Price Inflation [b]
France                          5.7      4.0      9.6      6.3
Italy                           3.1      3.9     13.9      9.6
                              1990-99
General Government Financial
Balance [a]
France                         -3.6
Italy                          -7.2
Consumer Price Inflation [b]
France                          1.8
Italy                           3.8
(a)Annual averages; in percentage
of current price GDP.
(b)Average annual percentage
changes.
Sources: EU Commission, European
Economy (various issues); Maddison
1991; OECD, National Accounts of
OECD Countries, 1950-1968 and
Economic Outlook, June 1999.
Table 3.
Trade Union Membership and Strike
Activity
                            France        Italy
Trade Union Membership [a]
1960                        (10-12) [b]  (10-15) [b]
1970                          22            36
1980                          17            49
1995                           9            38
Strike Activity [c]
1960-69                       270 [d]     1,100 [e]
1970-79                       211         1,348
1980-89                        74           625
1990-96                        85           199
(a)In percentage of total employees.
(b)Tentative estimates for 1959-61
and the 1960s respectively from
Flanagan et al. 1983.
(c)Working days lost per 1,000
employees.
(d)Excluding 1968.
(e)Excluding 1969.
Sources: NIESR, Economic Review,
September 1997; UK Department of
Employment, Gazette and Office of
National Statistics, Labour Market
Trends (Various issues).
Table 4.
Size of Cyclical Fluctuations in GDP
                                France  Italy
Standard Deviation [a]
1950-2000                        1.9     2.6
1950-73                          1.3     2.0
1973-2000                        1.3     2.2
Deviation from "Potential" [b]
1950-79                          1.2     1.8
(a)Standard deviation of
annual percentage changes.
(b)Average percentage shortfall
of GDP from potential level, proxied
by a "trend through penks" line.
Sources: Boltho 1989; Maddison 1995;
OECD, Economic Outlook, June 1999.
Table 5.
Longer-Run Trends (Annual
Trend Rates of Change)
                          France  Italy
GDP Growth
1950-2000                  3.4     3.7
1950-73                    5.0     5.5
1973-2000                  2.1     2.2
Employment Growth
1950-2000                  0.4     0.2
1950-73                    0.4     0.1
1973-2000                  0.3     0.2
Consumer Price Inflation
1950-2000                  6.0     7.8
1950-73                    4.4     3.4
1973-2000                  5.4     8.6
Unemployment [a]
1950-2000                  5.5     6.5
1950-73                    1.8     4.3
1974-2000                  8.7     8.6
(a)In percentage of the labor
force; annual averages.
Sources: Maddison 1991 and 1995;
OECD, Economic Outlook, June 1999.
Table 6.
Regional GDP per Capita
Differentials
      Rest of France in Percentage of  Southern Italy in percentage of
           Greater Paris Region                 Centre-North
1950               72.8                             54.6 [a]
1990               70.5                             57.5
(a)1951.
Sources: Eurostat, Regional
Statistics, 1972, and Regions,
1997; Molle 1980; SVIMEZ, Data
Bank.

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