France in the 1920s
Investment-led growth

After a fiscal stabilization in 1926, French economic growth significantly exceeded that elsewhere. The period 1926-31 has been characterized as the golden era of the 'franc Poincare', named after the Finance Minister of the time. Most accounts of this period emphasize the role of the exchange rate, relating the vigorous growth to the enhanced export competitiveness achieved through an undervalued franc. In this view, the expansion was a classic instance of export-led growth, in which monetary policy exercised the dominant influence on the French economy through the exchange rate.

In Discussion Paper No. 136, Research Fellows Barry Eichengreen and Charles Wyplosz argue for a more balanced view of the roles of French monetary and fiscal policies in this period. They find that the share of exports in GDP fell substantially after 1928, so that the impact of real depreciation on export demand cannot by itself account for the persistence of French economic growth until late 1930. Investment, not exports, emerges as the key to the French economy's resistance to the Great Depression, according to Eichengreen and Wyplosz, and fiscal policy appears as the major determinant of investment spending.

The authors decompose changes in GNP into shifts in consumption, investment, government spending, and the current account of the balance of payments. The current account in fact deteriorated slightly, from a surplus of 3% of GNP in 1926 to balance in 1930; this is inconsistent with the hypothesis that the growth of net exports provided the stimulus for expansion. The share of investment in GNP rose rapidly, from 14% in 1927 to 21% in 1930. The government budget moved from deficit in the early 1920s to balance by 1925-6 and then into a surplus which peaked in 1929.

Eichengreen and Wyplosz argue that the relative price of non- traded to traded goods increased after 1927, shifting resources out of the production of exportables and into the home goods sector. But this reallocation of resources was not a response to the Depression: the fall in the relative price of traded goods preceded by a year the decline in the export share of French GNP. This suggests that the French economy was able to accommodate the fall in export demand after 1928 because of a concurrent surge in domestic investment. But what caused this transfer of resources into the production of non-traded goods?

Eichengreen and Wyplosz analyse the effects of a fiscal contraction in a perfect-foresight model of an open economy, in which the government budget is linked to stocks of productive capital and foreign debt, investment spending is linked to expectations, and fiscal policy can have an impact on employment due to labour market inertia. Their analysis is the first to combine 'sticky' wages and prices, capital accumulation, and a public sector budget constraint in a dynamic model. The model suggests that the strong growth of domestic investment after 1926 can be attributed to the 'crowding-in' effects of French fiscal policy. Growing budget surpluses made an increasing proportion of domestic savings available to private investors. The consistent growth of the French economy in the 1920s was not export-led, but investment-led, and a vital stimulus to expansion was provided by fiscal policy. This analysis may have some relevance to present-day experiences of fiscal stabilization, the authors conclude.


The Economic Consequences of the Franc Poincare
Barry Eichengreen and Charles Wyplosz

Discussion Paper No. 136, October 1986 (IM)