2009 Index of Economic Freedom

Quick Facts

Population:

• 61.4 million

GDP (PPP):

• $2.0 trillion
• 2.0% growth
• 1.7% 5-year compound annual growth
• $31992 per capita

Unemployment:

• 8.3%

Inflation (CPI):

• 1.6%

FDI Inflow:

• $81.1 billion

France's economic freedom score is 63.3, making its economy the 64th freest in the 2009 Index. Its overall score fell 1.4 points due to decreases in six of the 10 components of economic freedom. France is ranked 28th out of 43 countries in the Europe region, and its overall score is higher than the world average.

France scores above the world average in six of 10 economic freedoms and is especially strong in business freedom, property rights, and freedom from corruption. As a member of the European Union, it has a standardized monetary policy that yields relatively low inflation despite agricultural distortions. In general, contracts are strong, and property is protected by the transparent rule of law.

France's fiscal freedom and government size scores remain weak. Its welfare state is sustained by high taxes and government expenditures, as in many other European social democracies. Government spending equals almost 50 percent of GDP. The labor market operates under multiple restrictions. The financial sector is being deregulated, but the state remains actively involved in many aspects of the economy.

Background Back to the top

In 2008, France celebrated the 50th anniversary of its fifth attempt at democratic republican government since the French Revolution. France was a founding member of the European Union, and French leaders across the political spectrum have championed European integration. The presence of a sizable and largely unassimilated Muslim minority has led to ethnic tension and violence. France has a diversified, modern industrial economy and fertile agricultural land, but economic decision-making is highly centralized. France is also a major recipient of agricultural subsidies under the EU's Common Agricultural Policy. The government failed to enact serious market reforms in the 1990s, and the economy has suffered significantly. With France facing chronic unemployment, lack of growth, and escalating social disorder, conservative Nicolas Sarkozy was elected president in 2007 on the promise of pro-market reforms.

Business Freedom 87.4 Back to the top

France's regulatory environment allows relative freedom to conduct business. Starting a business takes an average of seven days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures and 225 days. Closing a business is relatively easy.

Trade Freedom 80.8 Back to the top

France's trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some service sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Lack of transparency in standards and regulations, barriers to service market access, and pharmaceutical restrictions exceed EU policy benchmarks. Fifteen points were deducted from France's trade freedom score to account for these factors.

Fiscal Freedom 50.9 Back to the top

France has high tax rates. The top personal income tax rate is 40 percent. The top corporate tax rate is 34.4 percent (33.3 percent plus a 3.3 percent surcharge, up from 1.5 percent as of 2008). This surcharge is applicable only to companies with turnover exceeding a certain threshold. Other taxes include a value-added tax (VAT) and a household wealth tax. In the most recent year, overall tax revenue as a percentage of GDP was 46.1 percent.

Government Size 14.5 Back to the top

Total government expenditures, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 53.4 percent of GDP. State-owned or state-controlled enterprises dominate such industries as postal services, electricity, and rail. Semi-public companies in which the state holds shares employ almost 4 percent of the labor force.

Monetary Freedom71.7 Back to the top

France is a member of the euro zone. Between 2005 and 2007, France's weighted average annual rate of inflation was 1.7 percent. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. Prices of pharmaceuticals, books, electricity, gas, and rail transportation are regulated. Ten points were deducted from France's monetary policy score to adjust for measures that distort domestic prices.

Investment Freedom60.0 Back to the top

While there is no generalized screening of foreign investment, legislation requires prior approval for acquisitions or investments in a variety of sensitive or strategic sectors, including public health, defense, or casinos. Foreign investment is restricted in sectors like agriculture, aircraft production, air transport, audiovisuals, insurance, and maritime transport. The process of deregulation is far from complete, and the state remains very involved in the economy. Foreign firms need government approval on a variety of regulatory issues, but regulations are fairly transparent. Residents and non-residents may hold foreign exchange accounts. There are no restrictions or controls on payments, transfers, or repatriation of profits, and non-residents may purchase real estate.

Financial Freedom70.0 Back to the top

France's financial, regulatory, and accounting systems are somewhat burdensome but consistent with international norms. Overall, the modern banking system provides a full range of financial services. Most loans are provided on market terms. The government has sold its majority stakes in most financial institutions but still owns the Caisse des Depots et Consignations and holds minority stakes elsewhere. In 2007, foreign credit institutions accounted for about 11 percent of total bank assets. France is the world's fourth-largest insurance market, and foreign companies held 21.5 percent of the market in 2004. The government owns stakes in several insurance companies. Capital markets are well developed, and foreign investors participate freely. There are no foreign exchange controls.

Property Rights70.0 Back to the top

Contractual agreements are secure, and the judiciary and civil service are professional, though bureaucratic entanglements are common. Any company defined as a national public service or natural monopoly must pass into state ownership. Protection of intellectual property rights is strong.

Freedom From Corruption73.0 Back to the top

Corruption is perceived as minimal. France ranks 19th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. France enforces the OECD Anti-Bribery Convention domestically through amendments to its criminal code.

Labor Freedom54.5 Back to the top

Burdensome labor market regulations hamper employment opportunities and productivity growth. The non-salary cost of employing a worker is very high, and dismissing a redundant employee can be relatively costly. Restrictions on the number of work hours remain rigid.