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Varieties of Capitalism in France: Interests, Institutions, and Finance Richard Carney 2625 Wynonah Drive, Auburn, PA 17922, USA

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Varieties of Capitalism in France: Interests, Institutions, and Finance Richard Carney 2625 Wynonah Drive, Auburn, PA 17922, USA French Politics, 2006, 4, (1–30) r 2006 Palgrave Macmillan Ltd 1476-3419/06 $30.00 www.palgrave-journals.com/fp Articles Varieties of Capitalism in France: Interests, Institutions, and Finance Richard Carney 2625 Wynonah Drive, Auburn, PA 17922, USA. E-mail: [email protected] Can capitalist systems rapidly change from type to another? According to the varieties of capitalism literature, a broad set of complementary institutional practices make it very difficult for extensive changes to occur quickly. So how did France make a secular change from the market-dominated finance character- istic of liberal market economies prior to WWII to banking-dominated finance characteristic of coordinated market economies immediately following the war? I argue that the newfound political power of labor and farmers caused the switch to banking-dominance following the war, with political institutions enabling and cementing these new practices. Accordingly, this paper documents that capitalist systems can rapidly change from one type to another, and illustrates how it can occur. French Politics (2006) 4, 1–30. doi:10.1057/palgrave.fp.8200090 Keywords: varieties of capitalism; finance; history; labor; farmers Introduction Can capitalist systems rapidly change from one type to another? According to the varieties of capitalism(VoC) literature (Hall and Soskice, 2001), capitalist systems can be arrayed along a spectrum, with coordinated market economies CMEs at one end and liberal market economies (LMEs) at the other. In CMEs, relationship-based interactions predominate over the more market-based forms of coordination found among actors in LMEs. VoC analysis views a broad set of institutional practices as complementary to one another, including the financial system, wage determination, job security, welfare systems, education and training, product–market competition, and monetary and fiscal policy. They argue that these elements need to be treated as a whole, not in isolation. I am sympathetic to that interest in institutional complementarity, but I narrow the research focus to the financial systemin order to emphasize and measure it. When firms seek to raise financing, they can turn either to external sources — bank loans or securities markets — or to retained earnings. The main Richard Carney Varieties of Capitalismin France 2 distinction between the financial systems of CMEs and LMEs regards their choice of external financing.1 Financial systems in which firms depend primarily on bank lending are found among CMEs, while those in with a heavy reliance on capital markets are found among LMEs. Bank lending is more common among CMEs because it allows firms to focus more on the long-term, which is consistent with what Hall and Soskice describe as CMEs’ institutional emphasis on developing and utilizing specific assets. While national regulatory authorities have recently found ways to foster a long-termfocus within the context of securities markets (since the 1980s), bank lending has traditionally served this purpose. In this regard, examining how the post-war banking-oriented French financial systemwas created can offer insight into how the broader set of capitalist institutions may have likewise emerged. According to the analyses in Hall and Soskice’s volume, institutional complementarities frequently vary according to labor’s power, both politically and through unions. This offers a useful starting point. However, in developed democracies, and in France in particular, farmers have also been politically influential. Moreover, political institutions can magnify or limit the influence of these groups. Changes among these variables (labor, farmers, and political institutions) will therefore be examined to understand how France’s post-war financial system emerged. Prior to World War II (WWII), the French financial systemlooked very similar to that found in the United States and Great Britain. Securities markets were well-developed and large corporations frequently turned to themfor their external financing needs. Indeed, France had all the characteristics of a LME. With the Great Depression and WWII, securities markets declined and banks became more important in all countries, including the US and UK. After WWII, however, France remained dependent on bank lending while the US and UK reverted to their pre-war reliance on markets. Why did France make a secular change to banking-oriented finance? In contrast to arguments based on legal institutions (La Porta et al., 1998), and international trade and capital flows (Rajan and Zingales, 2003), and building on work that emphasizes the importance of labor (Fehn and Meier, 2001; Pagano and Volpin, 2001; Roe, 2002), I argue that labor and farmers caused France’s post-war reliance on banks, with political institutions enhancing and cementing their post-war initiatives. Thus, this paper seeks to document that capitalist systems can rapidly change fromone type to another, and to illustrate how this can occur. The paper is divided into the following sections: (1) an overview of France’s financial systemacross the 20th century; (2) the argument; (3) evidence; and (4) conclusions. French Politics 2006 4 Richard Carney Varieties of Capitalismin France 3 The French Financial System Prior to the 1930 s, France relied heavily on capital markets as the conduit by which money flowed from savers to borrowers, as described by Gueslin (1992): The crisis of the 1880s brought to an end the preliminary phase of banking development in France: it consolidated the position of the great credit institutions and generated a policy of management rationalization which was coupled in due course with an ‘industrial disengagement’. It inaugurated the ‘golden age’ of a finance-market economy. The crisis of the 1930s marked the end of this period. Using modern economic concepts with care, I mean by this that, throughout the period, banking credit remained more or less limited and the financing of the economy came about through the accumulation of savings: primarily as companies directly used parts of their cash flow, but also by the transfer of domestic savings via the financial market.2 Figure 1 illustrates the change fromthe pre to the post-war period. The breaks in the data correspond to the two world wars, when the stock market shut down. It would be preferable to have a measure of total banking assets; using a deposit measure is a reasonable indicator of banking reliance, however, since there is generally a strong correlation between it and a bank’s total assets. For the time period 1865 to 1913, Freedeman (1993) illustrates with several detailed industry-level case studies that ‘the issue of securities indicates a relatively efficient French capital market.’ Other sources corroborate this (e.g., Rajan and Zingales, 2003). During the 1920s securities markets became increasingly important, while self-finance became more common during the 1930s.3 Table 1 shows the decline in stock and bond issues for corporations beginning in the 1930s. Note the dramatic change from 1930 to 1938, and its persistence to the end of the sample in 1964. As these data indicate, France radically transformed the financial system after the war so that the government would stand between depositors and lenders, using bank lending as a key policy tool (Zysman, 1983). Why did France make a secular change from markets to banks? The Argument I argue that labor and farmers played the critical role in transforming France’s financial systeminto a banking-oriented one. Each actor favored bank lending over capital markets, and each attempted to bend France’s financial system to its specific needs. Success depended on their political power in government. In this section, I discuss why they preferred bank lending. French Politics 2006 4 Richard Carney Varieties of Capitalismin France 4 Bank Deposits over Stock & Bond Market Cap. Deposit Bank Assets over 6 Stock Market Cap. 16 5 14 4 12 10 3 8 2 6 4 1 2 0 0 1976 1979 1982 1985 1988 1890 1893 1896 1899 1902 1905 1908 1911 1914 1917 1920 1923 1926 1929 1932 1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 Figure 1 (a and b) The evolution of France’s bank–market orientation, 1890–1990. Data source: Miche` le Saint Marc (1983, pp. 56–57; 1974, p. 334). Data are originally fromannual publications of the INSEE. Data source for Figure 4.2: Beck, Demirguc-Kunt, and Levine, 1999. ‘A new database on Financial Development and Structure,’ Policy Research Working Paper Series 2146, The World Bank. Table 1 French Corporations’ Stock and Bond Issues, 1896–1964 (percent of gross domestic product) Year Stocks Bonds Total 1896 0.9 1.1 2 1900 2.0 1.8 3.8 1913 2.6 2.9 5.5 1924 3.3 1.2 4.5 1929 5.7 2.6 8.3 1930 3.4 4.4 7.8 1938 0.6 0.3 0.9 1949 0.6 0.3 0.9 1954 0.6 0.8 1.4 1959 1.7 1.4 3.1 1962 1.4 1.2 2.6 1964 1.2 1.0 2.2 Source: Carre´ et al (1975, 334). Labor: Labor seeks high and stable employment rates, along with reasonably high and stable wages, and a generous supply of social welfare services (including guaranteed health care, unemployment insurance, disability insurance, free public education, etc.). Left-wing political parties also consider these among their highest priorities, generally acting on behalf of labor’s interests; thus, I discuss these preferences with regard to labor, but left-wing political parties also seek to fulfill these objectives. French Politics 2006 4 Richard Carney Varieties of Capitalismin France 5 One way for labor to achieve its social welfare goals is to own the means of production; that is, to nationalize the most important, if not all, corporations. Of course, owning and efficiently operating all corporations through the government can be an extremely complex task, likely doomed to failure.
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