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Economy Nov 30, 2012

France’s threat to Mittal is proof that socialism doesn’t work

By Venky Vembu

Former US President Ronald Reagan used to say in jest that socialism really worked in only two places: In heaven, where they didn't need it, and in hell, where they already had it. Governments in faraway France and, nearer home, in India evidently haven't heard that joke, seeing how earnestly they are going about chasing a socialist utopian world - and are effectively running their respective economies to the ground.

In France, Francois Hollande, the Socialist President, has been engaged in an extraordinary burst of public bickering with Indian-born steel magnate Lakshmi Mittal with threats to nationalise Arcelor Mittal's plant in Florange after Mittal shut down two blast furnaces there in order to cut his losses following a global slump in the demand for steel.

Francois Hollande, the Socialist President, has been engaged in an extraordinary burst of public bickering with Indian-born steel magnate Lakshmi Mittal

With an eye on saving the 630 jobs lost, and to shore up his socialist political base, Hollande is pressing Mittal to sell the entire plant, including the profitable side of the business - or face the prospect of nationalisation, perhaps as early as on Saturday.

Mittal has said he would like to keep his company's operations in France running, but only if he is allowed to close the sick units - and has the flexibility to hire and fire and cut back on salaries. But that kind of talk is heresy for Hollande, who is committed to protecting unions (including their laid-back 35-hour workweek), higher taxes across the board (including a 75 percent 'supertax' on the rich), and yet more spending to shore up an economy on a downward spiral.

Such an acute attack of tax-and-spend-itis is potentially ruinous for the French economy, particularly given the effect of the contagion from the other Eurozone economies. It is also enormously counterproductive. In response to the super tax, for instance, the super rich are looking to take their money and run - to other jurisdictions, like the UK, where they are being welcomed with a red-carpet-and-brass-band routine.

The lesson that such redistributionist policies, and the kind of grandstanding that we're seeing over Mittal's steel plants, don't work is evidently lost on Hollande.

Mittal's was a commercial decision taken in response to a cyclical downturn in the fortunes of the global steel industry, and forcing him to sell under duress and - or face nationalisation - sends out an ominous message to businesses as they contemplate their future in France. That future has already been clouded over by the high-tax regime under Hollande's France, where government spending accounts for more than 55 per cent GDP, thereby shrinking the space for the private sector to operate.

Hollande's hubris reflects a common affliction across much of the developed economies of the West, where the message that they've probably been living way beyond their means - and pampered unions excessively - hasn't yet dawned on leaders.

Last year, the iconic Ratan Tata made some searing observations on the absence of a "work ethic" even among senior management in the developed economies of the West, particularly the UK and the US.

Tata noted, in an interview to The Times of London, that at both Corus and Jaguar, which his Tata empire had acquired, there was a laidback attitude to work, particularly if it stretched beyond regular workhours. "It's a work ethic issue," he said. "In my experience, in both Corus and (Jaguar), nobody is willing to go the extra mile, nobody. I feel if you have come from Bombay to have a meeting and the meeting goes till 6 pm, I would expect that you won't, at 5 o'clock, say, 'Sorry, I have my train to catch. I have to go home.' Friday, from 3.30pm, you can't find anybody in their office."

Tata contrasted that with the situation in India, where "if you are in a crisis, if it means working to midnight, you would do it."

The situation back home in India isn't, of course, as rosy as Ratan Tata made it sound.

Even two decades after India first embraced reforms, governments haven't even begun to address the entitlement superstructure that has bloated subsidies, fed inefficiencies and have been a drag on productivity.

It shows up in the giant, dysfunctional public sector undertakings, including loss-making national carriers - and even the occasional private airline - which are kept on artificial life support, sucking up good money after bad.

The message from the decline of developed economies in the West, which are groaning under the weight of the irreversible build-up of an entitlement society (where concessions, once offered, are very hard to take away) has also been manifestly lost on the Indian government.

In some ways, it is even worse in India because the ongoing attempt is to build a First World social welfare superstructure on an economy whose foundations are decidedly in the Third World category, and where the polity is less attuned to honesty in the economic discourse.

If there's one lesson that emerges from Hollande's experience of fanning class warfare in France, as evidenced by his nationalisation threats to Mittal, and India's own failure to dismantle labour market rigidities and the other superstructures of the welfare state, it is that socialism doesn't work.

by Venky Vembu

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