Sunday, August 12, 2007

A Hidden Tax

I wrote the other day about the Galland Law, which prohibited French retail distributors from passing various supplier discounts on to their customers, thus keeping prices artificially high (along with excess profits for distributors), all in the name of protecting small stores from "unfair" competition. Economist Eloi Laurent has called my attention to an important CEPREMAP report, which indicts not only the Galland Law but a companion measure, the Raffarin Law, which dates from the same era.

The Raffarin Law requires retailers wishing to open stores of more than 300 square meters in surface area to obtain authorization from a regional zoning board. The report's authors, Philippe Askenazy and Katia Weidenfeld, detail the ways in which this regulation was used to limit competition from so-called "hard discounters," who offered even lower prices than existing French hypermarchés. The perverse consequences of this barrier to market entry were numerous: the authors estimate the cost to French consumers (in higher prices) as more than 8 billion euros annually; new jobs, many of which would have been filled by the young, unskilled workers among whom unemployment is so high in France, were not created; "mom and pop" retailers were not protected; and profits of the large distributors who dominate the French retail market were artificially inflated owing to lack of competition from foreign retailers with equivalent market power.

The CEPREMAP report was challenged by the French government (click on link here for the authors' responses to the criticisms). If you don't have the stomach for a long and dry though extremely interesting technical document, you can read a brief summary by MIT economist Esther Duflo here. Finally, the CEPREMAP report is based in part on earlier work by two other economists:
M. Bertrand et F. Kramarz, "Does entry regulation hinder job creation ? Evidence from the French retail industry," Quarterly Journal of Economics, CXVII, 2002, pp. 1369-1414.

This is another well-documented study, which shows in particular that the barrier to entry in the retail market was particularly effective in regions dominated by the right.

To put the conclusion in the starkest of terms: the Raffarin and Galland Laws, both sponsored by the right and implemented most strenuously in right-wing-dominated regions, deprived French households of 8 billion euros of purchasing power annually, or more than half the amount that the Sarkozy tax cuts now propose to return to those same households in order to stimulate the economy and reduce unemployment. These laws were in effect for more than a decade during which unemployment was abnormally high.

On the hypermarché phenomenon as seen from a businessman's point of view, see this article from Les Echos.