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Contributions to Economics

Antonio Pesce

Economic Cycles
in Emerging
and Advanced
Countries
Synchronization, International Spillovers
and the Decoupling Hypothesis
Contributions to Economics
More information about this series at
http://www.springer.com/series/1262
Antonio Pesce

Economic Cycles in
Emerging and Advanced
Countries
Synchronization, International Spillovers
and the Decoupling Hypothesis
Antonio Pesce
Milan, Italy

ISSN 1431-1933 ISSN 2197-7178 (electronic)

Contributions to Economics
ISBN 978-3-319-17084-8 ISBN 978-3-319-17085-5 (eBook)
DOI 10.1007/978-3-319-17085-5

Library of Congress Control Number: 2015938465

Springer Cham Heidelberg New York Dordrecht London

© Springer International Publishing Switzerland 2015
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To my parents and
Precious Ann
ThiS is a FM Blank Page
Preface

This monograph emerged from 4 years of doctoral studies at the Catholic Univer-
sity of Milan. Many people have helped me in various ways while I was working on
the thesis. Greatest thanks are due to Laura Barbieri, my supervisor, for her
comments, helpful advice, guidance, and continuous support. I am also grateful to
comments and discussions of seminar’s participants and professors at the Catholic
University of Milan (IT), in particular Gianluca Femminis, Domenico Delli Gatti,
Marco Lossani, Maurizio Motolese, and Lorenzo Cappellari. I would also like to
thank professors at International Center of Econometrics (CIdE), summer school
“Bayesian Methods in Economics and Finance” Bertinoro (IT), 2012. I also greatly
benefited from comments and discussions of participants at Ph.D. Conference
“International Development 2013”, University of East Anglia, Norwich (UK),
and participants at 53rd Congress of European Regional Science Association
(ERSA) at the University of Palermo (IT).
On a personal level, I owe gratitude to my relatives and a very special person,
Precious Ann, for their steady and kind encouragement.

Milan, Italy Antonio Pesce

vii
ThiS is a FM Blank Page
About the Book

This book, by using a new empirical investigation approach, contributes to the

debate on “decoupling of Emerging Economies (EEs) from the Advanced Econo-
mies (AEs)” by addressing the following main questions: “Has the EEs’ vulnera-
bility to external shocks (both real and credit shocks) coming from AEs changed
over time? If so, has it grown or decreased, as the decoupling hypothesis claims?”
Up until now, decoupling theory has been empirically investigated by looking
for some kind of structural break in the model’s coefficients identifiable at some
point in the time (usually in the late 1980s). Such an approach is appropriate and
effective if the object of study evolves discretely over time, namely as a break at
certain point of time. However, if a gradual evolution over time is plausible, as may
well be true in the case of decoupling, then it would be more appropriate to utilize
an approach (as in this work) allowing for a gradual change in coefficients over time
rather than for an abrupt break.
Through counterfactual experiments performed using a Time Varying Panel
VAR model, the book shows that over the last 30 years the EEs have become less
vulnerable to shocks spreading from the AEs. However, the EEs’ resilience to
external shocks has changed in a nonprogressive manner over time with phases of
greater resilience followed by others of lower resilience and vice versa; this outlines
a “wavelike” path, a new evidence which had not yet been analyzed in the economic
literature.

ix
ThiS is a FM Blank Page
List of Abbreviations

AEs Advanced Economies

BRICS Brazil, India, Russia. China, South Africa
CAs Counterfactual Analyses
DEs Developing Economies
EEs Emerging Economies
G7 USA, Japan, Germany, France, UK, Italy, Canada
GDP Gross Domestic Product
HP Hodrick–Prescott Filter
IMF International Monetary Fund
MENA Middle East and North Africa
PPP Purchasing Power Parity
RBC Real Business Cycle
SOE Small Open Economy
SSA Sub-Saharan Africa
St.D. Standard Deviation
VAR Vector Autoregression
WDI World Development Indicators
WEO World Economic outlook

xi
ThiS is a FM Blank Page
Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Context, Rational and Objective of the Monograph . . . . . . . . . . . 1
1.2 Summary of the Chapters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2 The Decoupling of Emerging Economies, A Long-Debated Issue
but Still an Open Question: A Survey . . . . . . . . . . . . . . . . . . . . . . . . 9
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Different Interpretations and Measures of Decoupling . . . . . . . . . 12
2.2.1 Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2.2 Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.3 Decoupling and Globalization: Can They Coexist? . . . . . . . . . . . . 15
2.3.1 Increasing International Trade Linkages . . . . . . . . . . . . . . 15
2.3.2 Increasing International Financial Linkages . . . . . . . . . . . 18
2.3.3 Decoupling and Increasing International Linkages:
What Does Theory Say? . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.4 The Long-Debated Issue: A Brief Historical Excursus . . . . . . . . . 21
2.5 Synchronization of Economic Cycles Between AEs and EEs . . . . 23
2.5.1 First Critique: Problem in Identifying Structural Breaks
Using Correlation Coefficients Over Rolling
Sub-samples of Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.5.2 Second Critique: The Correlation Coefficient
May Be Counter-Intuitive in Its Treatment of Data . . . . . . 27
2.5.3 Third Critique: Distortion Due to Heteroskedasticity . . . . . 29
2.6 Breakdown of Advanced and Emerging Countries’ Economic
Fluctuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.7 Regression Analysis and VAR Estimations of Spillover from
AEs to EEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

xiii
xiv Contents

2.8 Analysis of Macroeconomic Spillovers from AEs to EEs

Using Micro-funded Economic Models . . . . . . . . . . . . . . . . . . . . 36
2.8.1 Micro-funded Economic Models: A Brief Excursus . . . . . . 37
2.8.2 Micro-funded Models’ Contribution to the Debate
About the Decoupling . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2.9 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3 Is Decoupling in Action? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.2 Empirical Analysis of the Decoupling Hypothesis . . . . . . . . . . . . 55
3.2.1 Countries and Dataset . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.2.2 Synchronicity of National Economic Cycles . . . . . . . . . . . 57
3.2.3 Responses of EEs to Adverse Scenarios in AEs:
Have They Changed Over Time? . . . . . . . . . . . . . . . . . . . 62
3.3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Appendix 1: Set of Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Appendix 2: Main Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . 78
Appendix 3: Euclidean Distance Computed on the Economic
“Deviation Cycles” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Appendix 4: Priors, Posteriors Distributions and the Computational
Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Appendix 5: Historical Decomposition of GDP Fluctuations . . . . . . . . . 101
Appendix 6: Additional Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
4 International (Spillovers in) Macroeconomic-Credit Linkages
and the Decoupling Phenomenon . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
4.2 Empirical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
4.2.1 Countries and Dataset . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
4.2.2 The Approach used to Investigate the Decoupling
Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
4.2.3 Results: Time Path of the Resilience of EEs . . . . . . . . . . . 122
4.3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Appendix 1: Set of Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Appendix 2: Main Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . 131
Appendix 3: Historical Decomposition of GDP Growth Rate and Credit
Growth Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Appendix 4: Additional Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
List of Figures

Fig. 2.1 Economic Dynamic in AEs and EEs . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . . .. 12

Fig. 2.2 Trade openness .. . .. . . .. . .. . . .. . .. . .. . . .. . .. . . .. . .. . . .. . .. . . .. . .. . . .. . .. . 16
Fig. 2.3 World trade . . . . . .. . . . .. . . . . .. . . . .. . . . .. . . . . .. . . . .. . . . . .. . . . .. . . . .. . . . . .. . 17
Fig. 2.4 Composition % of international trade . .. . .. . .. . . .. . .. . .. . . .. . .. . .. . .. . 18
Fig. 2.5 Financial openness . . . .. . .. . . .. . . .. . .. . . .. . . .. . . .. . .. . . .. . . .. . .. . . .. . . .. . 19
Fig. 2.6 Euclidean distance computed on deviation cycles . . . . . . . . . . . . . . . . . . . 27
Fig. 3.1 Main stylized facts of GDP growth rate (%) along the regional
dimension .. . . .. . . .. . .. . . .. . . .. . . .. . . .. . . .. . .. . . .. . . .. . . .. . . .. . . .. . . .. . .. . 56
Fig. 3.2 Main stylized facts of GDP growth rate (%) along the economic
type dimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Fig. 3.3 Euclidean distance indicator: (1) EEs plus DEs vs. AEs, (2) EEs
vs. AEs . .. . .. . . .. . .. . . .. . .. . . .. . .. . . .. . .. . . .. . .. . . .. . .. . . .. . .. . . .. . .. . . .. . 60
Fig. 3.4 Euclidean distance indicator: EEs regional groups vs. AEs. (1)
Latin America EEs vs. AEs, (2) MENA EEs vs. AEs, (3) SSA
EEs vs. AEs, (4) Asia EEs vs. AEs, (5) Europe EEs vs. AEs . . . . . . 61
Fig. 3.5 Global and regional indicators .. . .. . .. .. . .. . .. .. . .. . .. . .. .. . .. . .. . .. .. . 69
Fig. 3.6 Impact (median, 16th and 84th percentiles) on EEs of shocks
spreading from the AEs; 10 year time windows . . . . . . . . . . . . . . . . . . . . . 73
Fig. 3.7 Cumulated impact (median, 16th and 84th percentiles) on EEs
(grouped by regions) of shocks spreading from the AEs . . . . . . . . . . . 74
Fig. 3.8 Impact (median, 16th and 84th percentiles) on EEs of shocks
spreading from the AEs; 5 year time windows . . . . . . . . . . . . . . . . . . . . . . 76
Fig. 3.9 Euclidean distance computed on deviation cycles: EEs plus
DEs vs. AEs and EEs vs. AEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Fig. 3.10 Euclidean distance indicator computed on deviation cycles:
EEs regional groups vs. all AEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Fig. 3.11 Historical decomposition of GDP fluctuations . . . . . . . . . . . . . . . . . . . . . . . 102
Fig. 3.12 Impact (median, 16th–84th percentiles) on EEs of shocks
spreading from the AEs; additional results . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

xv
xvi List of Figures

Fig. 3.13 Impact (median, 16th–84th percentiles) on EEs of shocks

spreading from the AEs; additional results . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Fig. 4.1 Main stylized facts of GDP growth rate (%) along the regional
dimension .. . . .. . . .. . .. . . .. . . .. . . .. . . .. . . .. . .. . . .. . . .. . . .. . . .. . . .. . . .. . .. . 115
Fig. 4.2 Main stylized facts of GDP growth rate (%) along the
economic type dimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Fig. 4.3 Main stylized facts of growth rate (%) of domestic credit
provided by the bank sector along the regional dimension . . . . . . . . . 118
Fig. 4.4 Main stylized facts of growth rate (%) of domestic credit
provided by the bank sector along the economic type
dimension .. . . .. . . .. . .. . . .. . . .. . . .. . . .. . . .. . .. . . .. . . .. . . .. . . .. . . .. . . .. . .. . 119
Fig. 4.5 Cumulated (median, 16th and the 84th percentiles) impact
of the credit shock spreading from AEs to EEs . .. . . . . . . . . . . . . . .. . . . . 125
Fig. 4.6 Cumulated (median, 16th and 84th percentiles) impact of the
credit shock spreading from AEs to EEs grouped by regions . . . . . . 127
Fig. 4.7 Cumulated (median, 16th and the 84th percentiles) impact
of the real shock spreading from AEs to EEs . . . . . . . . . . . . . . . . . . . . . . . . 129
Fig. 4.8 Cumulated (median, 16th and the 84th percentiles) impact of
the real shock spreading from AEs to EEs grouped by regions . . . . 129
Fig. 4.9 Ratio of the cumulated impact of credit shock to the
cumulated impact of real shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Fig. 4.10 Ratio of the immediate impact of credit shock to the
immediate impact of real shock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Fig. 4.11 Historical decomposition of fluctuations of GDP . . . . .. . . . . .. . . . . . .. . 158
Fig. 4.12 Historical decomposition of fluctuations of the credit . . . . . . . . . . . . . . 162
Fig. 4.13 Cumulated (median, 16th and 84th percentiles) impact of
the credit shock spreading from AEs to EEs; additional results . . . 168
Fig. 4.14 Cumulated (median, 16th and 84th percentiles) impact of
the real shock spreading from AE to EEs; additional results . . . . . . . 168
List of Tables

Table 2.1 GDP growth rate correlations: Asia-Pacific with

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Table 3.1 Main stylized facts of the GDP growth rate (%) in sub-groups
of countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . 58
Table 3.2 Estimated log marginal likelihood of the models . . . .. . . . . . . . . .. . . . 68
Table 3.3 Dynamic impact of the adverse scenario in the AEs on
all the emerging economies . . .. . . . . .. . . . . .. . . . . .. . . . . .. . . . . .. . . . . .. . . 72
Table 3.4 Dynamic impact of the adverse scenario in the AEs on the
EEs grouped by regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Table 3.5 Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Table 3.6 Descriptive statistics of GDP growth rate (%) data for each
country . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . 79
Table 3.7 Dynamic impact of the adverse scenario in the AEs on the
EEs; additional results . . .. . . .. . .. . .. . .. . . .. . .. . .. . . .. . .. . .. . .. . . .. . .. . 108
Table 4.1 Main stylized facts of GDP in sub-groups of countries . . . . . . . . . . . 117
Table 4.2 Main stylized facts of domestic credit provided by the
banking sector in sub-groups of countries . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Table 4.3 Estimated log marginal likelihood of the models . . . .. . . . . . . . . .. . . . 122
Table 4.4 Dynamic impact of the credit shock spreading from the
AEs to the emerging economies . . . . .. . . .. . . .. . . . .. . . .. . . .. . . . .. . . .. . 124
Table 4.5 Dynamic impact of the credit shock spreading from the
AEs to the emerging economy regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Table 4.6 Dynamic impact of the real shock spreading from the
AEs to the EEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Table 4.7 Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Table 4.8 Descriptive statistics of GDP growth rate (%) data for each
country . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . 132
Table 4.9 Descriptive statistics of credit growth rate (%) data for each
country . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . 145

xvii
xviii List of Tables

Table 4.10 Dynamic impact of the credit shock spreading from the
AEs to the EEs; additional results .. .. . .. . .. . .. .. . .. . .. . .. .. . .. . .. .. . 167
Table 4.11 Dynamic impact of the real shock spreading from the
AEs to the EEs; additional results .. .. . .. . .. . .. .. . .. . .. . .. .. . .. . .. .. . 169
Chapter 1
Introduction

1.1 Context, Rational and Objective of the Monograph

Emerging markets countries also known as Emerging Economies (EEs) play an

increasingly important role in the international economic scenario, with their
contribution (together with Developing Economies [DEs]) to the global economic
production currently standing at 50.9 % (compared with just 30 % in the 1980s).1
From the economic point of view, their importance has grown in several respects:
for example, they have become much more important in terms of direct foreign
investment and portfolio investment, the quantity of monetary reserves held, and in
terms of their shares in international trade and financial transactions (Lane and
Milesi-Ferretti 2007). EEs’ ratio of foreign trade to GDP—one of the most impor-
tant indicators of a country’s level of internationalization—rose from 30 % in the
1980s to almost 80 % by 2005; in particular, there was a significant increase in the
share of intra-group trade for the EEs, that is between the emerging economies
themselves, which rose from 9 % of total foreign trade in 1960 to more than 40 % in
2005 (Kose and Prasad 2010).
Despite the relatively modest economic growth of Advanced Economies (AEs)
between 2004 and 2007, the growth of EEs remained strong during that same
period. This reinforced the idea known as the “decoupling hypothesis”, whereby
EEs have become less dependent on the economic trends of AEs. Advocates of this
theory claim that its validity is based on the belief that together with the strength-
ening of the EEs’ economic bases, the substantial development of real and financial
connections between EEs may have reinforced intra-group economic ties, and in
this way made such economies less vulnerable than before to the “fate” of AEs.
Nevertheless, following the recent financial crisis, the decoupling debate has
partially changed direction: the emphasis has now partially shifted towards the idea
that, as a result of globalization, all economies have become interconnected to a

1
International Monetary Fund, World Economic Outlook Database, April 2013.

© Springer International Publishing Switzerland 2015 1

A. Pesce, Economic Cycles in Emerging and Advanced Countries, Contributions to
Economics, DOI 10.1007/978-3-319-17085-5_1
2 1 Introduction

greater degree, which has inevitably caused stronger interdependency between the
economic cycles of EEs and AEs.
Since the question has yet to be resolved (see Kose and Prasad 2010, or Willett
et al. 2011), either in terms of economic theory, where there is no univocal
assessment on the decoupling hypothesis, or in empirical terms, I have tried to
contribute towards the ongoing debate with this essay, also in view of the consid-
erations set out below.
The question of decoupling is not only interesting from a strictly academic point
of view, but is also one that interests policymakers and economic operators owing
to the important practical/operative implications that the phenomenon may have
both when establishing national and international economic policy, and when
defining corporate strategies concerning investment diversification and risk
management.
It comes as no surprise to hear Christine Lagarde, Director of the International
Monetary Fund, underline the importance of taking both national and global
dimensions into account when establishing economic policy. In a recent speech
(23 August 2013)2 she stated that: “We need to work better together to understand
more fully the impact of these unconventional policies [the quantitative easing
adopted by the Federal Reserve Bank to manage the recent financial crisis]—local
and global. . .”.
Neither it is surprising to see major investment banks, such as Goldman Sachs
and Morgan Stanley, among the major players popularizing the idea of decoupling.
Jim O’Neill, head economist at Goldman Sachs, was one of the main advocates of
the decoupling hypothesis, in fact the subject has been debated at length outside of
academic circles as well.
Empirical analyses of decoupling have recently been performed by a number of
scholars, many of whom have focused on the development over time of the degree
of synchronization (correlation) between the economic cycles of EEs and AEs.
Writers such as Wälti (2012) and Yetman (2011a, b), for example, have focused on
the time path of the correlation between the main macroeconomic variables in EEs
and AEs. Other writers, such as Kose et al. (2008, 2012) or Flood and Rose (2010),
have firstly broken down each country’s economic fluctuations into different
components, namely the global component (common to all countries), the regional
component (common to countries located in the same geographical area), the
national component (country-specific), and what could be defined as the group
component (common to countries with the same development level); then they have
evaluated the decoupling phenomenon on the basis of the manner in which the
global and the group components has varied over time. Let me note that basically,
as Helbling et al. (2007) stated, the breakdown of national economic cycles into the
aforementioned components can be viewed as an equivalent approach to the
correlation analysis because, for example, the global component is a measure of

2
Speech on “The Global Calculus of Unconventional Monetary Policies”. Downloaded from:
http://www.imf.org/external/np/speeches/2013/082313.htm on August 25, 2013.
1.1 Context, Rational and Objective of the Monograph 3

the extent of co-movement across national economic cycles of all countries. So, in
the end, the above mentioned authors investigated the decoupling hypothesis
through the correlation analysis.
As Forbes and Rigobon (2002) have pointed out, the changes witnessed in the
degree of synchronization of the economic cycles of different countries may be the
result of two different forces. On the one hand, there are the structural elements
which affect economic ties between different nations over the course of time; on the
other hand there are changes in the nature of the shocks that may impact economies
at different periods in history. This observation is extremely important since
decoupling pertains to the way in which economic ties between advanced and
emerging economies have changed over the course of time. It is a concept of
structural importance regardless of the nature of the shocks that may affect an
economy at various different stages in its history. The analysis of correlation,
although useful, doesn’t enable to distinguish the effects of the two forces on the
degree of synchronization of the economic cycles of different countries (Willett
et al. 2011). So despite their complexity and sophisticated methodologies, the
aforementioned approaches may not be particularly suited to an analysis of
decoupling. This is why I believe that the more appropriate approach is the one
adopted by authors such as Guimarães-Filho et al. (2008) as well as Dées and
Vansteenkiste (2007), who have tried to measure the impact of the USA’s economic
performance on the economies of given emerging countries. In particular, they have
studied decoupling by comparing the repercussions that a shock in the USA would
have had before, and after, the globalization era on the Asian emerging countries
(first paper), and on the emerging economies of Asia and Latin America (second
paper).
This essay aims to contribute towards the debate on decoupling, by addressing
the following questions.
Has the EEs’ vulnerability to external shocks (that is, shocks outside of the EEs
themselves) propagated by the AEs changed over the course of time? If so, has it
grown, or has it indeed decreased as decoupling hypothesis claims? Are EEs more
vulnerable to the real or credit shocks spreading from AEs?
With regard to the aforementioned literature, the spirit of the present study is
best reflected in the approach adopted by Guimarães-Filho et al. (2008) or by Dées
and Vansteenkiste (2007), and it aims to extend the empirical analysis of
decoupling in various different directions.
First of all, it takes into consideration the “bank lending” variable too. The
majority of empirical studies of decoupling focus on the Gross Domestic Product
(GDP), as one of the principal indices of the country’s economic performance, or
they consider, for example, some real indices such as industrial production, con-
sumption and investment, and some financial indices such as the stock-market
values. Bank lending has not been duly considered yet, despite the fact that it is
widely believed (Kose and Prasad 2010; Helbling et al. 2011) that lending can play
a fundamental role both for the economic dynamics of any country and in the
propagation of economic shocks from one country to another.
4 1 Introduction

Secondly, unlike the prevailing literature, the present study does not consider the
resilience of a small group of EEs to shocks spreading from the USA, but analyzes
the sensitivity of a large number of EEs to the dynamics of a large number of AEs.
Considering the multiplicity of economic relations between a large number of
countries is of vital importance to any analysis of the decoupling phenomenon
because one of the arguments submitted by the advocates of this hypothesis is that
the gradual strengthening of economic relations among EEs could have helped
reinforced economic ties among such economies over the course of time, thus
rendering them less vulnerable to shocks from the AEs than has been the case in
the past.
Thirdly, unlike the aforementioned studies, the present work does not evaluate
the time evolution of the EEs’ vulnerability to external shocks by comparing two
sub-periods chosen in a rather arbitrary fashion, in order to test for the existence of a
“pre-decoupling” period and a “post-decoupling” period; instead, as it will be clear
soon, this work assesses the EEs’ vulnerability in a more flexible manner. Up until
now decoupling theory has been empirically investigated by looking for some form
of structural watershed, that is, a break in the coefficients of the econometric model
identifiable at some point in the time (usually in the late 1980s, when according to
many scholars, globalization3 has become particularly evident). Such an approach
is appropriate and effective if the object of study evolves discretely over time,
namely as a break at certain point of time. However if a gradual evolution over time
is plausible, as may well be true in the case of decoupling, then it would be more
appropriate to utilize an approach (as in this work) allowing for a gradual change in
coefficients over time rather than for an abrupt break.
In order to deal with the above said three points, a Time Varying PANEL VAR
with the factorization of the coefficients (Canova and Ciccarelli 2004, 2009) has
been utilized. This econometric instrument is particularly well suited to the pursuit
of this study’s objectives, for a number of different reasons.
The first reason is that the factorization of coefficients offers two immediate
advantages: the first is that it significantly reduces the number of parameters that
have to be estimated; this reduction is extremely important when handling a large-
size PANEL model, as is the case in the present study. The second reason is that,
depending on the factorization employed, the dynamics of the dependent variables
may be interpreted as the result of various different components [as is the case in the
work by Kose et al. (2008)].
Secondly, the model used is particularly useful when investigating the interna-
tional transmission of shocks from AEs to EEs since it duly takes account of the
interdependency among countries; in other words, it allows for dynamic feedbacks
across countries and variables. This feature renders analyses more realistic for the
purposes of the evaluation of the EEs’ responses to negative scenarios in the AEs.

3
Globalization is the process by which businesses or other organizations develop international
influence or start operating on an international scale (Oxford Dictionary).
1.1 Context, Rational and Objective of the Monograph 5

Thirdly, as already said, decoupling may be a phenomenon that gradually

evolves over time, rather than a structural break occurring at a given moment in
time. Hence it could be more appropriate using a model with time varying coeffi-
cients, namely a model whose coefficients may change at each point in time, rather
than remaining constant for a certain period and then changing, before remaining
stable once again for a further period.
The empirical investigative approach adopted here consisted in two successive
phases. Initially, some different model specifications were implemented, that is
different factorizations of coefficients. For example, one comprised the global
factor (i.e., the factor common to all countries) and the country-specific factor;
another specification of the model added the group factor (the factor common to all
the countries with the same level of economic development, that is the factor
common to all emerging countries, the factor common to all developing countries,
and the factor common to all advanced countries); a third specification extended the
first by adding the regional factor [the one common to those countries belonging to
the same geographical area, that is, North and Central America, Latin America,
Asia, Europe, the Middle East and North Africa (MENA), Sub-Saharan Africa
(SSA), and Oceania].
The specification best supported by the data, according to estimated marginal
likelihood, was then used to perform experiments of counterfactual analyses (CAs);
in particular, the experiments performed are the differences between two condi-
tional expectations. In one case, the conditional expectation is the one the model
would have obtained for the GDP of each country based on the hypothesis that the
GDP growth rates of each advanced economy in the year of the simulated “shock”
were lower than the actual GDP growth rates (namely the data observed at the time
in which the shock is simulated). In the other case, the conditional expectation of
GDP is the one the model would have obtained based on the actual GDP growth
rates of each advanced economy. Note that these are one type of conditional
forecasting exercises that, for example, Central Banks usually conduct in the
assessment of current and future economic conditions.
These counterfactual experiments are designed to measure the impact a shock
spreading from the AEs would have on the EEs’ GDP. The intensity of the impact is
an indicator of the vulnerability of the EEs to such external shock, and can thus be
interpreted as an “indicator of the vulnerability” of the EEs. A lower impact
suggests a lower vulnerability. These experiments were conducted for each year
of the sample period, and so the “indicator of vulnerability” was calculated for each
year in question. The results were then compared with one another in order to
determine whether the EEs display a tendency towards lesser (or greater) vulner-
ability to negative scenarios in the AEs.
One of the main conclusions of this study is that the median results obtained
from the simulations show that over the last 30 years, despite remaining sensitive to
the effects of the shocks spreading from the AEs, the EEs have nevertheless become
less vulnerable to such external shocks, whether of a real or credit nature. One can
say that the EEs are less vulnerable to external shocks from the AEs now than they
were 30 years ago, however it is important to point out that their resilience to such
6 1 Introduction

shocks has changed in a non-progressive manner over the course of time, with
phases of greater vulnerability being followed by phases of lower vulnerability, and
vice versa. This “wave-like” dynamic, whose evidence has yet to be fully analyzed,
may “upset” supporters of decoupling hypothesis, who on the contrary would have
expected the economic strengthening of the EEs to have followed a progressive,
and in a certain sense “monotonic increasing” pattern.
Another interesting finding is that during almost the entire period under exam-
ination, the EEs proved more relative vulnerability to external shocks of credit
nature than to those of real nature. This greater relative vulnerability reached its
peak in the latter years of the sample period, that is during the 5 years between 2006
and 2010.

1.2 Summary of the Chapters

The rest of this essay is organized as follows.

The second chapter is entitled “The decoupling of Emerging Economies, a long-
debated issue but still an open question. A survey”. It aims to trace the debate on the
decoupling hypothesis by presenting: (1) the various interpretations of the phenom-
enon given in the literature; (2) details of how the prevailing opinion among
academics and leading international observers has changed over the course of
time; (3) the approaches followed in the empirical investigation, as well as their
respective results and “strengths and weaknesses”.
The third chapter is entitled “Is decoupling in action?”. An attempt has been
made here to utilize a broad selection of countries (112 in total). To this end, the
focus has necessarily been placed on just one of the most important economic
variables, that is the rate of growth of the real GDP (at purchasing power parity per
capita). Attention has thus been focused exclusively on the real economy. In this
chapter, the empirical investigation strategy described above has been used to
measure the evolution over time of the EEs’ vulnerability to the adverse scenarios
affecting the real economies of the advanced nations; moreover, following most of
relative economic literature, I have also measured the degree of synchronization
between the economic cycles of the advanced countries and those of the emerging
countries, and between the advanced countries and the emerging countries divided
into sub-groups on the basis of their respective geographical location.
The fourth chapter of the essay is entitled “International (spillovers in)
macroeconomic-credit linkages and the decoupling phenomenon”. This section
offers an important addition to the empirical model by considering also one of
the most important financial variables, namely the bank lending. The limited figures
available for this variable has meant that the set of countries in question has had to
be reduced in number, compared to that used in the Chap. 3 (from 112 countries to
73). Nevertheless, in addition to the real shocks (namely GDP shocks), this section
also provides an evaluation of the EEs’ resilience to financial shocks (namely credit
shocks) originating from the AEs. The addition of the bank lending variable has
References 7

also enabled us to ascertain whether the emerging economies are more vulnerable
to real shocks or to credit shocks.
Chapter 5 concludes.

References

Canova F, Ciccarelli M (2004) Forecasting and turning point prediction in a Bayesian panel VAR
model. J Econ 120:327–359
Canova F, Ciccarelli M (2009) Estimating multicountry VAR models. Int Econ Rev 50
(3):929–959
Dées S, Vansteenkiste I (2007) The transmission of US cyclical developments to the rest of the
world. European Central Bank, working paper series no. 798
Flood R, Rose A (2010) Inflation targeting and business cycle synchronization. J Int Money Financ
29(2010):704–727
Forbes KJ, Rigobon R (2002) No contagion, only interdependence: measuring stock market
comovements. J Financ 57(5):2223–2261
Guimarães-Filho R, Hori M, Miniane J, N’Diaye P (2008) Can Asia decouple? Investigating
spillovers from the United States to Asia. In: Regional economic outlook. IMF, Washington
Helbling T, Berezin P, Kose MA, Kumbof M, Laxton D, Spatafore N (2007) Decoupling the train?
Spillovers and cycles in the global economy. In: Word economic outlook. International
Monetary Fund, Washington
Helbling T, Huidrom R, Kose MA, Otrok C (2011) Do credit shocks matter? A global perspective.
Eur Econ Rev 55(3):340–353
Kose AM, Prasad ES (2010) Emerging markets—resilience and growth amid global turmoil.
Brooking Institution Press, Washington, DC
Kose AM, Otrok C, Whiterman CH (2008) Understanding the evolution of world business cycles. J
Int Econ 75:110–130
Kose AM, Otrok C, Prasad ES (2012) Global business cycles: converging or decoupling? Int Econ
Rev 53(2):511–538
Lane PR, Milesi-Ferretti GM (2007) The external wealth of nations mark II. J Int Econ 73:223–250
Wälti S (2012) The myth of decoupling. Appl Econ 44(26):3407–3419
Willett TD, Liang P, Zhang N (2011) Global contagion and the decoupling debate. In: Cheung
Y-W, Kakkar V, Ma G (eds) Frontiers of economics and globalization. Emerald Group
Publishing, Bingley
Yetman J (2011a) The decoupling of Asia-Pacific? In: Cheung Y-W, Kakkar V, Ma G (eds)
Frontiers of economics and globalization. Emerald Group Publishing, Bingley
Yetman J (2011b) Exporting recessions: international links and the business cycle. Econ Lett 110
(1):12–14
Chapter 2
The Decoupling of Emerging Economies,
A Long-Debated Issue but Still an Open
Question: A Survey

2.1 Introduction

Emerging economies (EEs) have progressively increased their role in the interna-
tional economic scenario, to the point that the share in the global economy of EEs
[together with Developing Economies (DEs)] has now reached 50.9 % in 2013
(it was 30.9 % in 1980).1 From an economic point of view, their importance has
grown along different dimensional paths, as mirrored by foreign direct investments
and portfolio investments, total currency reserves and, in more general terms, their
shares in international commercial and financial trade. Technological innovation
(e.g., more efficient means of transport or information communication technology),
on the one hand, and policies encouraging commercial and financial trade (reduced
customs duties or the setup of free trade areas), on the other, have lent significant
support to integrating individual countries at global level (globalization). During
the globalization period, for the EEs the trade openness ratio2 rose from 30 % to
around 80 % and more interestingly for the EEs the increase in international trade
was accompanied by a significant rise in intragroup trading, which grew from 9 %
of total foreign trade in 1960 to over 40 % in 2005 (Kose and Prasad 2010).
With this growing importance of EEs, a fierce debate has begun as to whether the
national economic cycles are converging or whether the cycles of EEs and
advanced economies (AEs) are becoming disconnected, the so-called “decoupling
of EEs from the AEs”. The convergence argument is based on the idea that all
economies have become more intertwined through trade and finance, which should
make the national economic cycles more connected. In contrast, the decoupling
argument is based on the idea that, together with the strengthening of the EEs’

1
Data refer to Gross domestic product based on Purchasing-Power-Parity (PPP) share of world
total. The source is the International Monetary Fund, World Economic Outlook Database,
April 2013.
2
Trade openness is the ratio of total trade (export plus import) to GDP.

© Springer International Publishing Switzerland 2015 9

A. Pesce, Economic Cycles in Emerging and Advanced Countries, Contributions to
Economics, DOI 10.1007/978-3-319-17085-5_2
10 2 The Decoupling of Emerging Economies, A Long-Debated Issue but Still an. . .

economic bases, the recent and prominent development of real and financial
linkages among EEs may have reinforced the link between the emerging countries
to the detriment of their relationships with the AEs, which instead may have
relatively weakened.
These two opposing perspectives reflect the fact that theoretical models often
make different predictions about the effects of trade and financial integration on the
interrelationships among national economic cycles.
Trade theories imply that an increase in trade linkages leads to an increase in
intra-industry or inter-industry product specialization.3 The way in which the
increased specialization affects the degree of synchronization (comovement)
between the national economic cycles is thought to depend on the nature of
specialization (Frankel and Rose 1998). More precisely, if the industry shocks
(namely the shocks affecting a specific industrial sector) are important in driving
economic cycles, then the comovement of the economic cycles is expected to
increase when the trade linkages associated with the intra-industry specialization
increase, whereas the comovement is expected to decrease when the trade linkages
are mainly associated with inter-industry specialization. The two types of industrial
specialization are not mutually exclusive, namely in some production sectors there
may be inter-industry specialization and in some others there may be intra-industry
specialization: comparative advantages encourage inter-industry specialization,
and scale economies sustain intra-industry specialization (Krugman 1981). Thus,
in theory, the effect of the production specialization on the degree of comovement
and linkages in economic cycles is not univocal but depends on which type of
production specialization prevails.
There is not univocal theoretical predictions about the effects of financial
integration on the linkages of national economic cycles. As explained in depth by
Kose and Prasad (2010), financial integration could decrease the synchronicity of
economic cycles facilitating inter-industry production specialization through the
easy reallocation of capital, given the comparative advantage of each country. On
the other side, contagion effects, transmitted through financial linkages, could
increase synchronicity via cross-country spillovers of macroeconomic fluctuations.
The comovement of economic cycles could also be increased through demand-side
effects, as long as the financial integration determines a similar dynamic of wealth
across countries.
Many scholars investigated empirically the decoupling hypothesis, and in some
cases provided different interpretations of this phenomenon. The decoupling
implies a break in a relationship that was previously more coupled and closely
linked. The concept is not precisely defined so it allows for different readings. The
basic idea is that the economic growth of one area becomes progressively less
dependent on growth in another area (Rossi 2009). This concept has been translated

3
Inter-industry trade is the exchange of totally different products between countries. Intra-industry
trade is the two-way trade of products in the same industry classification. See Krugman (1981) for
more details.
2.1 Introduction 11

in two main different ways. Firstly, many authors speak on decoupling in terms of
decreasing comovement of economic cycles and investigate it by computing cor-
relation patterns between the economic cycles of economic variables of AEs and
EEs looking for eventual decreasing correlation path (e.g., Wälti 2012), or inves-
tigate it by dividing the sources of a country’s economic fluctuations into global,
group (namely advanced and emerging economies groups) and national factors
looking for eventual increasing importance of group factors in explaining the
economic fluctuations (e.g., Kose et al. 2008). Secondly, discussions on decoupling
frequently proceed in terms of the extent of spillover of shocks from AEs to EEs
(e.g., IMF, World Economic Outlook 2007).
From the empirical point of view, the investigation of the decoupling has been
performed with different tools, namely different statistical and econometric instru-
ments such as the correlation analysis or the VAR estimation, and with different set
of data such a synthetic indicator like the gross domestic product (GDP) or a richer
set of data like the industrial production, the export index and the unemployment
rate for example.
Despite the different investigation techniques adopted to study it and the various
way explored, the empirical literature has not yet reached a broadly accepted
conclusion. Also in the empirical economic literature, as in the economic theory,
there is still no prevalent opinion about the potential effects of the international
integration on the convergence or decoupling of EEs and AEs. The subject is still
open to debate in the academic and it kindles not only the interest of academics.
Also policymakers and practitioners are interested in the issue given the important
practical implications that decoupling could have, for example, on the definition of
national and international economic policies and on the business strategies aimed at
investment diversification and risk management.
Given the wide range of parties interested in this issue, its important implications
and the absence of a broadly accepted conclusion, it is no wonder that the
decoupling issue has been long debated. This survey aims to retrace the steps of
this debate. In particular, it intends to present the different interpretations of the
phenomenon discussed in the literature (Sect. 2.2); the different predictions of
economic theory on the issue of decoupling in the globalization era (Sect. 2.3);
how prevalent opinion among academics and leading international observers has
changed historically, with the alternating prevalence of views in support and against
decoupling (Sect. 2.4); the approaches adopted in the empiric investigation with
their respective “strengths and weaknesses” and results (Sects. 2.5–2.8). Finally,
Sect. 2.9 presents the conclusions of this chapter.
Another random document with
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 This manner of asceticism is not particularly common nowadays,
and we need not fear that it will be too generally practiced. I am
calling attention to it in order to show that selfishness may take on
the mask of purity or of respectability, a selfishness that springs from
pure moral motives and a longing for the elevation of character.
But there is another type of respectable selfishness that is far
more common, possibly more common in America than in any other
country. It is not usually recognised as selfishness, but regarded as
one of the greatest—perhaps the greatest—of the virtues. It is seen
chiefly among earnest and ambitious young men, who assume that
life is not a holiday, but a serious affair, a struggle, a strictly
competitive race, where if you stop a moment, even for reflexion, you
are left behind.
We are bound to respect these men. They have at all events
found out half the secret of life. They have set before themselves
some goal, in politics, in business, in literature, and they are
determined to reach it. They are equally determined to gain the prize
by no dishonourable means. Their minds are full of the lessons
learned from their predecessors, men who by the sacrifice of
temporary pleasures, by the refusal to indulge in recreation or
relaxation, have surpassed their competitors and reached the top.
We are constantly told that it is only by intense concentration, by
terrific efforts day and night, and by keeping the end constantly in
view that one can attain success. Surely these young men are to be
admired, surely they are models, examples worthy of emulation?
Well, they are better than criminals, they are better than
parasites, they are better than drones. But their driving motive is
selfishness. Tennyson wrote The Palace of Art, Browning wrote
Paracelsus, because each of these poets knew that his individual
danger was not what is usually known as “temptation.” They knew
that they would never go to hell by the crowded highway of
dissipation, for they were above the mere call of the blood. Their
danger lay in a high and noble ambition, which has wrecked many
first-rate minds.
 Modern life tends to encourage this respectable selfishness. The
central law of the so-called science of Economics is selfishness. A
whole science is built on one foundation—that every man in the
world will get all he can for himself. The subject is naturally studied
not from an ethical, but from a scientific standpoint. Life is a race.
Now I believe that Efficiency—mere practical success in the
world—is as false an ideal as asceticism. If the morality of
withdrawal is not good enough, neither is the morality of success.
Those deserve the highest admiration and the most profound
respect who have actually aided their human brethren, who have left
the world better than they found it.
This is by no means a hopeless ideal of character. It is not
necessary to crush a tyrant or to organise a revolution or to
reconstruct society or to be a professional reformer. There are plenty
of professional reformers who have tremendous enthusiasm for
humanity and who have never helped an individual. Those who by
unselfish lives and consideration for others elevate the tone of the
community in which they live and who by their presence make others
happier, these are the salt of the earth. Their daily existence is more
eloquent than a sermon.
American young men and women in our High Schools and
universities are not often face to face with the mystery of life. They
have no conception of the amount of suffering in the world. Their
own lives are comparatively free from it, in many cases free even
from anxiety. These boys and girls are for the most part sensible,
alert, quick-witted, and practical; what I should like to see would be a
change in their ideals from mere Success to something nobler. I
should like to see them devoting their intelligence and energy to the
alleviation of suffering and to the elevation of human thought and life.
If one still believes that the highest happiness and satisfaction
come from the attainment of any selfish ambition, no matter how
worthy in itself, it is well to remember the significance of the fact that
Goethe, acknowledged to be one of the wisest of men, made Faust
happy only when he was unselfishly interested in the welfare of
others; and to remember that Benjamin Franklin, perhaps the
shrewdest of all shrewd Americans, found the greatest pleasure of
his long life in two things—public service and individual acts of
kindness.
 XX
BIRDS AND STATESMEN

When, in the Spring of 1910, Theodore Roosevelt was on his

way to England from his African explorations, he wrote a strange
letter to the British Foreign Office in London. I call it a strange letter,
because it is the kind of epistle one would not expect to be sent by
an ex-executive of one country to the Foreign Office of another. He
wrote that during his stay in England he would like to make an
excursion into the woods, hear the English songbirds and learn their
names; in order that he might do this satisfactorily and intelligently,
would the Foreign Office please select some naturalist who knew the
note of every bird in England and request him to accompany Mr.
Roosevelt on this expedition?
Well, the head of the British Foreign Office was Sir Edward Grey
and he himself knew the note of every singing bird in England—a
remarkable accomplishment for one of the busiest statesmen in the
world. He therefore appointed himself as bird-guide for the ex-
President of the United States.
The two distinguished men stood on a railway platform one day
in May and were surrounded by reporters, who supposed that a new
world-problem of the first magnitude was on the carpet. But the two
men told the reporters that they were going away into the country for
two days, did not wish to be disturbed, and asked the journalists to
leave them alone. Accordingly, it was generally believed that
Roosevelt and Grey were absorbed in the discussion of international
affairs, and as the great war broke out a few years later, some went
so far as to believe then that it had its origin in this sinister interview.
 Now, as a matter of fact, the two men did not mention either war
or politics; they went a-walking in the New Forest and every time
they heard the voice of a bird, Grey told Roosevelt the singer’s
name. They both agreed (and so do I) that the English blackbird is
the best soloist in Great Britain.
It is a curious fact that the four most famous birds in English
literature are none of them native in America. The Big Four are the
Nightingale, the Skylark, the Blackbird and the Cuckoo. From
Chaucer to Kipling the British poets have chanted the praise of the
Nightingale. And of all the verses in his honour, it is perhaps the
tribute by Keats that is most worthy of the theme.

Thou was not born for death, immortal Bird!

No hungry generations tread thee down;
The voice I hear this passing night was heard
In ancient days by emperor and clown:
Perhaps the self-same song that found a path
Through the sad heart of Ruth, when, sick for home,
She stood in tears amid the alien corn;
The same that oftimes hath
Charmed magic casements, opening on the foam
Of perilous seas, in faery lands forlorn.

We never had nightingales in the United States until Edward W.

Bok imported them into his Bird Paradise in Florida. Previous
attempts to bring them over had failed; the birds invariably died.
Some investigators declared that this tragedy was owing to the
change of diet; but of course the real reason for their death was
American poetry. After the nightingales had listened for centuries to
Chaucer, Shakespeare, Milton, Wordsworth, Keats, etc., the change
to the level of American verse was too much for them, and they died
of shock.
The English skylark leaves the grass and soars aloft, singing his
heart out, so that after he has disappeared in the sky, we hear his
voice coming down out of the blue, like a revelation. One of the
poets calls it a “sightless song.”
Shakespeare sends the skylark to the gate of heaven.
And Shelley’s poem on the skylark expresses the ethereal nature
of the soaring voice of this bird:

Higher still and higher

From the earth thou springest,
Like a cloud of fire;
The blue deep thou wingest,
And singing still dost soar, and
Soaring ever singest.

American blackbirds do not sing well; the so-called crow-

blackbird, so common in flocks in autumn, makes a noise like
tonsillitis, or as if he had a boy’s voice in process of changing, or as
if he were a hinge that needed oiling. Our redwing blackbird, with his
scarlet epaulets, has a good-natured and perky wheeze, which can
hardly be called singing. But the English and Continental blackbird
pours out of his throat the most heavenly melody. One Winter day in
Munich, in the midst of a snowstorm, I saw a blackbird perched on a
tree directly in front of the University building. He was “hove to,” that
is, he had his beak turned directly into the wind, and as the
snowflakes beat against his little face, he sent straight into the gale
the loveliest music. Tennyson has observed how the voice of the
blackbird loses its beauty in the hot Summer days.

A golden bill! the silver tongue,

Cold February loved, is dry:
Plenty corrupts the melody
That made thee famous once, when young;
 And in the sultry garden-squares,
Now thy flute-notes are changed to coarse,
I hear thee not at all, or hoarse
As when a hawker hawks his wares.

The nearest we Americans can get to the English cuckoo is the

abominable cuckoo clock. The voice of the English cuckoo sounds
exactly like the clock, only of course you can’t train him to strike
right. In addition to his regular accomplishment, he is a ventriloquist
and can throw his voice a tremendous distance. One day, crossing a
field in Sussex, I heard the loud double note of the cuckoo,
apparently directly behind me. He was in reality a furlong away.
Wordsworth says:

O blithe New-comer! I have heard,

I hear thee and rejoice.
O Cuckoo! shall I call thee Bird,
Or but a wandering Voice?

While I am lying on the grass

Thy twofold shout I hear,
From hill to hill it seems to pass,
At once far off and near.

Concerning the all too common crimes of shooting, snaring, and

eating little singing birds, the English poet, Ralph Hodgson, has
expressed himself in words that ought to be everywhere read:

I saw with open eyes

Singing birds sweet
Sold in the shops
For the people to eat,
Sold in the shops of
Stupidity Street.

I saw in a vision
The worm in the wheat
And in the shops nothing
For people to eat:
Nothing for sale in
Stupidity Street.
 XXI
RUSSIA BEFORE THE REVOLUTION

The best way to invade Russia is by sea; and I advise those who
plan to visit the Soviet Republic to go via Stockholm. Copenhagen,
Christiania, Stockholm are three interesting cities and should be
seen in that order. Stockholm, the “Venice of the North,” is one of the
most beautiful, most picturesque, and most attractive places in the
world.
It is surprising that the short sea voyage from Stockholm to Saint
Petersburg (now Leningrad) is not better known; it is enchantingly
beautiful. We left Stockholm at six o’clock in the evening of a fine
September day, and as our tiny steamer drew away, the sunset light
over the fair city hung a new picture on the walls of my mind. It took
some five hours to reach the Baltic, five hours of constantly changing
scenery, one view melting into another like a succession of
dissolving panoramas. Hundreds of miniature islands dotted with
châteaux and country houses; winking lighthouse towers; “the grey
sea and the long black land.”
An impossible half-moon lent the last touch of glory to the scene.
We stood on the top deck and beheld the spacious firmament on
high, thick inlaid with patines of bright gold; while the long level light
of the crazy moon fell across the darkening water and the myriad
islands.
In the middle of the night we crossed the Baltic, and in the
whitening dawn entered the gulf of Finland. The air was nipping and
eager, but the sun rose in a cloudless sky. All day long the steamer
nosed her way through the blue sea, twisting and turning among the
countless points of the earth’s surface that were just able to keep
their heads above water. A few of these were covered with green
grass, and supported white farm buildings where laughing children
accompanied by dignified dogs ran out to see our transit; but for the
most part these elevations were bald, with a tall lighthouse as sole
decoration.
At five in the afternoon we reached Helsingfors (still my farthest
north) and stepped ashore to spend six hours in seeing the town, the
boat not proceeding toward Russia until late in the night. The
clouded sky was low and harsh the next morning, and the sea was
surly. Toward noon it cleared, and early in the afternoon we saw the
gilded domes and spires of Holy Russia. After a long delay with
passports, we drove across one of the bridges over the Neva to our
hotel at a corner of the Nevski Prospekt. Although it was only
September, the temperature was under fifty, and seemed colder.
I had a severe cold, which had its origin in a chill I had caught in
rashly touching a piece of toast that a waiter brought me in a London
hotel. But I was right in style. Accustomed as I was to see on the
streets of any American city the healthy, cheerful, well-clad and well-
shod men and women, I was appalled by the faces and the clothes
of the Russians. What they look like today I know not, but a more
unhappy looking crowd than I saw every day on the streets of
Russian cities I have never seen outside of pictures of Hell. Many of
the people had their ears and mouths bandaged and on their feet
were (if they could afford it) enormous knee-boots. All seemed to be
suffering from the foot and mouth disease.
Never shall I forget the boots and overcoats and uniforms on the
Nevski Prospekt. The question of leg-clothes would have interested
the author of Sartor Resartus. In Edinburgh all the men and some of
the women wore knickers, with stockings that seemed an inch thick.
Compared with Europeans, Americans are tropically clad. In order to
avoid the glare of publicity, I bought in Scotland a homespun golf
suit.
I tried these abbreviated trousers just once on the Nevski
Prospekt. Everybody stopped to stare. Had I worn a flowing purple
robe, I should not have attracted such attention. Military officers
gazed at me in cold amazement, as though I had leprosy; while the
more naïve passers made audible comment, which fortunately I
could not translate. Then I tried the experiment of conventional
clothing, but wore low shoes. Everyone gazed at my feet, some in
wonder, some in admiration, some in terror. I felt as I did many years
ago when I wore a striped cap in Brussels. A stranger looked at me
earnestly and then said in an almost reverent tone, and he said it
three times: Nom de Dieu!
In America our citizens show much the same interest in strange
clothing. Professor E. B. Wilson, a distinguished mathematician,
bought a suit of clothes in Paris. He wore it only once in America. A
citizen gazed at him steadfastly, and said “J——!”
The faces of the common people in Russian cities were sad to
behold, whether one saw them on the street or in church. Not only
was there no hilarity, such as one sees everywhere in American
towns; those faces indicated a total lack of illuminating intelligence.
They were blank, dull, apathetic, helpless. Gorki said that the people
in Russia had so little to look forward to that they were glad when
their own houses burned down, as it made a break in the dull routine
of life.
One afternoon I walked the entire length of the Nevski Prospekt,
no mean achievement in a heavy overcoat. I began at the banks of
the restless, blustering Neva, passed the extraordinary statue of
Peter the Great, came through the garden by the statue of Gogol,
and with the thin gold spire of the Admiralty at my back, entered the
long avenue.
I followed the immense extension of the Nevski, clear to the
cemetery, and stood reverently before the tomb of Dostoevski. Here
in January, 1881, the body of the great novelist was laid in the grave,
in the presence of forty thousand mourners.
In a corner of the enclosure I found the tomb of the composer
Chaikovski; I gazed on the last resting-place of Glinka, father of
Russian music. On account of the marshy soil, the graves are built
above instead of below the surface of the ground, exactly as they are
in New Orleans. It is in reality a city of the dead, the only place
where a Russian finds peace. I passed out on the other side of the
cemetery, walked through the grounds of the convent, and found
myself abruptly clear from the city, on the edge of a vast plain.
 XXII
THE DEVIL

It is rather a pity that the Devil has vanished with Santa Claus
and other delectable myths; the universe is more theatrical with a
“personal devil” roaming at large, seeking whom he may devour. In
the book of Job the Devil played the part of the return of the native,
coming along in the best society in the cosmos to appear before the
Presence. And when he was asked where he came from, he replied
in a devilishly debonair manner, “From going to and fro in the earth,
and from walking up and down in it.”
There are so many things in this world that seem to be the
Devil’s handiwork, and there are so many people who look like the
devil, that it seems as if he could not be extinct. His chief service to
the universal scene was to keep virtue from becoming monotonous;
to warn even saints that they must mind their step; to prove that
eternal vigilance is the price of safety. The Enemy of Mankind never
took a holiday. Homer might nod, but not he. In fact, on human
holidays he was, if possible, unusually efficient. The idleness of man
was the opportunity of Satan.
The principle of evil is so active, so tireless, so penetrating that
the simplest way to account for it is to suppose that men and things
receive constantly the personal attention of the Devil. Weeds, and
not vegetables, grow naturally; illness, not health, is contagious;
children and day-labourers are not instinctively industrious;
champagne tastes better than cocoa.
Throughout the Middle Ages, although every one believed
steadfastly in the reality of the Devil and that he was the most
unscrupulous of all foes, there was a certain friendliness with him,
born, I suppose, of daily intimacy. It was like the way in which hostile
sentries will hobnob with one another, swap tobacco, etc., in the less
tense moments of war. The Devil was always just around the corner
and would be glad of an invitation to drop in.
Thus in the mediæval mystery plays, the forerunners of our
modern theatres, the Devil was always the Clown. He supplied
“comic relief” and was usually the most popular personage in the
performance. He appeared in the conventional makeup, a horrible
mask, horns, cloven hoofs and prehensile tail, with smoke issuing
from mouth, ears and posterior. He did all kinds of acrobatic feats,
and his appearance was greeted with shouts of joy. In front of that
part of the stage representing Hellmouth he was sometimes
accompanied with “damned souls,” persons wearing black tights with
yellow stripes. On an examination at Yale I set the question,
“Describe the costume of the characters in the mystery plays.” One
of the students wrote: “The damned souls wore Princeton colours.”
The modern circus clown comes straight from the Devil. When
you see him stumble and fall all over himself, whirl his cap aloft and
catch it on his head, distract the attention of the spectators away
from the gymnasts to his own antics, he is doing exactly what his
ancestor the Devil did in the mediæval plays.
It is at first thought singular that those audiences, who believed
implicitly in a literal hell of burning flame, should have taken the Devil
as the chief comic character. I suppose the only way to account for
this is to remember how essential a feature of romantic art is the
element of the grotesque, which is a mingling of horror and humour,
like our modern spook plays. If you pretend that you are a hobgoblin
and chase a child, the child will flee in real terror, but the moment
you stop, the child will say, “Do that again.”
There are many legends of compacts with the Devil, where some
individual has sold his soul to gain the whole world. The most
famous of these stories is, of course, Faust, but there are
innumerable others. Here is a story I read in an American magazine
some fifty years ago.
 A man, threatened with financial ruin, was sitting in his library
when the maid brought in a visiting card and announced that a
gentleman would like to be admitted. On the card was engraved
Mr. Apollo Lyon.
As the man looked at it his eyes blurred, the two words ran
together, so they seemed to form the one word
Apollyon.
The gentleman was shown in; he was exquisitely dressed and
was evidently a suave man of the world. He proposed that the one
receiving him should have prosperity and happiness for twenty
years. Then Mr. Lyon would call again and be asked three questions.
If he failed to answer any of the three the man should keep his
wealth and prosperity. If all three were correctly answered the man
must accompany Mr. Lyon.
The terms were accepted; all went well for twenty years. At the
appointed time appeared Mr. Lyon, who had not aged in the least; he
was the same smiling, polished gentleman. He was asked a question
that had floored all the theologians. Mr. Lyon answered it without
hesitation. The second question had stumped all the philosophers,
but it had no difficulties for Mr. Lyon.
Then there was a pause, and the sweat stood out on the
questioner’s face. At that moment his wife came in from shopping.
She was rosy and cheerful. After being introduced to Mr. Lyon she
noticed her husband was nervous. He denied this, but said that he
and Mr. Lyon were playing a little game of three questions and he did
not want to lose. She asked permission to put the third question and
in desperation her husband consented. She held out her new hat
and asked: “Mr. Lyon, which is the front end of this hat?” Mr. Lyon
turned it around and around, and then with a strange exclamation
went straight through the ceiling, leaving behind him a strong smell
of sulphur.
 XXIII
THE FORSYTE SAGA

It is impossible to say what books of our time will be read at the

close of this century; it is probable that many of the poems and tales
of Kipling, the lyrics of Housman, dramatic narratives by Masefield,
some plays by Shaw and Barrie, will for a long time survive their
authors.
Among the novels, I do not know of any that has or ought to
have a better chance for the future than the books written about the
family of the Forsytes by John Galsworthy. They at present hold
about the same place in contemporary English literature as is held in
France by Romain Rolland’s Jean Christophe. Both are works of
great length which reflect with remarkable accuracy the political,
social, commercial, artistic life and activity of the twentieth century,
the one in England, the other on the Continent.
Entirely apart from their appeal as good novels, that is to say,
apart from one’s natural interest in the plot and in the characters,
both are social documents of great value. If the future historian
wishes to know English and Continental society in the first quarter of
the twentieth century, he will do well to give attention and reflexion to
these two works of “fiction.”
John Galsworthy was just under forty when in 1906 he published
a novel called The Man of Property. He had produced very little
before this, but it took no especial critical penetration to discover that
the new book was a masterpiece. The family of the Forsytes bore a
striking resemblance to one another in basic traits and ways of
thinking, yet each was sharply individualised. A new group of
persons had been added to British fiction. The word “Property,” as in
Tennyson’s Northern Farmer, was the keynote, and before long it
began to appear that one of the most dramatic of contrasts was to be
used as the subject. This is the struggle between the idea of
Property and the idea of Beauty—between the commercial,
acquisitive temperament and the more detached, but equally
passionate artistic temperament.
Even in the pursuit of beauty Mr. Soames Forsyte never forgot
the idea of property. He was a first-class business man in the city,
but he was also an expert judge of paintings, which he added to his
collection. Oil and canvas do not completely satisfy any healthy
business man; so Soames added to his collection, as the
masterpiece in his gallery, an exquisitely beautiful woman whom he
made his wife.
The philosophy of love comes in here. What is love? Is it
exclusively the idea of possession, which often is no more dignified
than the predatory instinct or is it the unalloyed wish that the object
of one’s love should be as happy and secure as possible? No one
can truly and sincerely love Beauty either in the abstract or in the
concrete if one’s eyes are clouded by predatory desire. One must
look at beauty without the wish to possess it if one is really to
appreciate beauty. A first-class French chef would look into the big
front window of a confectioner’s shop and fully appreciate the art and
taste that created those delectable edibles; but a hungry boy who
looked at the same objects would not appreciate them critically at all.
The wife of Soames finds him odious, so odious that we cannot
altogether acquit her of guilt in marrying him; and Soames, who as a
Man of Property expected her to fulfill her contract, did not make
himself more physically attractive by insisting on his rights. She left
him for a man of exactly the opposite temperament.
When Mr. Galsworthy finished this fine novel, he had no intention
of going on with the history of the family. He wrote many other novels
and some remarkable plays, but nothing made the impression on
readers that had been produced by the Forsyte family. Nearly twenty
years later he returned to the theme, and at once his power as a
novelist seemed to rise; there is something in this family that calls
out his highest powers. When he discovered that he had written five
works of fiction on the Forsytes, three long novels and two short
stories, of which the brief interlude called Indian Summer of a
Forsyte is an impeccable and I hope imperishable work of art, he hit
upon the happy idea of assembling them into one prose epic, and
calling the whole thing by the ironical title of The Forsyte Saga. It is
my belief that for many years to come the name of John Galsworthy
will be associated with this work, in what I fervently hope will be its
expanded form.
For since the assembling of the five pieces Mr. Galsworthy has
published several other novels dealing with the family—The White
Monkey, The Silver Spoon and in 1928 he wrote FINIS with Swan
Song. Here he kills Soames, and while he probably does not feel
quite so sad as Thackeray felt when he killed Colonel Newcome, I
venture to say that he does not gaze on the corpse of Soames with
indifferent eyes. For to my mind the most interesting single feature of
this whole mighty epic is the development of the character of this
man.
Clyde Fitch used to say something that is no doubt true of many
works of the imagination; he said that he would carefully plan a play,
write his first act, and definitely decide what the leading characters
should say and do in the subsequent portions of the work. Then
these provokingly independent characters seemed to acquire, not
only an independent existence, but a power of will so strong that
they insisted on doing and saying all kinds of things which he tried in
vain to prevent.
In The Man of Property Soames Forsyte is a repulsive character;
he is hated by his wife, by the reader, and by the author. But in these
later books Soames becomes almost an admirable person, and we
may say of him at the end in reviewing his life, that nothing became
him like the leaving of it—for he died nobly. Long before this
catastrophe, however, we have learned to admire, respect, and
almost to love Soames. Is it possible that Mr. Galsworthy had any
notion of this spiritual progress when he wrote The Man of Property,
or is it that in living so long with Soames he began to see his good
points?
 Dickens was a master in this kind of development. When we first
meet Mr. Pickwick, he seems like the president of a service club as
conceived by Sinclair Lewis; he is the butt of the whole company.
Later Mr. Pickwick develops into a noble and magnanimous
gentleman, whom every right-minded person loves. Look at Dick
Swiveller—when we first see him, he is no more than a guttersnipe.
He develops into a true knight.
 XXIV
PROFESSION AND PRACTICE

Beautiful lines which show that the man who wrote them had a
clear conception of true religion are these:

Thus to relieve the wretched was his pride,

And even his failings leaned to virtue’s side;
But in his duty prompt at every call,
He watched and wept, he prayed and felt for all;
And, as a bird each fond endearment tries
To tempt its new-fledged offspring to the skies,
He tried each art, reproved each dull delay,
Allured to brighter worlds, and led the way.

The man who wrote them is thus described by James Boswell:

“Those who were in any way distinguished excited envy in him to so
ridiculous an excess that the instances of it are hardly credible.
When accompanying two beautiful young ladies with their mother on
a tour of France, he was seriously angry that more attention was
paid to them than to him.” Goldsmith wrote of virtue, modesty, sweet
unselfishness in the most convincing manner; his words were more
convincing than his behaviour. He allured to brighter worlds, but did
not lead the way.
Schopenhauer, the great philosopher of pessimism, taught that
absolute asceticism was the only true religion and method of escape
from the ills of life; but he never practiced it, and told his disciples to
mind his precepts and not his example. Unfortunately, whenever any
one gives advice in the field of morality or religion, the first person on