Getting globalization right sustainability and inclusive growth in the post brexit age luigi paganet

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Getting Globalization Right

Sustainability and Inclusive Growth in the Post Brexit Age

GettingGlobalizationRight

Rome,Italy

ISBN978-3-319-97691-4ISBN978-3-319-97692-1(eBook) https://doi.org/10.1007/978-3-319-97692-1

LibraryofCongressControlNumber:2018951203

© SpringerNatureSwitzerlandAG2018

Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpart ofthematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseofillustrations, recitation,broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmission orinformationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar methodologynowknownorhereafterdeveloped.

Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthis publicationdoesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfrom therelevantprotectivelawsandregulationsandthereforefreeforgeneraluse.

Thepublisher,theauthorsandtheeditorsaresafetoassumethattheadviceandinformationinthis bookarebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernorthe authorsortheeditorsgiveawarranty,expressorimplied,withrespecttothematerialcontainedhereinor foranyerrorsoromissionsthatmayhavebeenmade.Thepublisherremainsneutralwithregardto jurisdictionalclaimsinpublishedmapsandinstitutionalaffiliations.

ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSwitzerlandAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland

GlobalImplicationsofU.S.TradePoliciesforReducing StructuralTradeImbalances 1 D.SalvatoreandF.Campano

TheDutchDiseaseinReverse:Iceland’sNaturalExperiment 13 ThorvaldurGylfasonandGylfi Zoega

SkillPolarizationandInequality:AreTheyReal andInevitable? ............................................

LuigiPaganettoandPasqualeLucioScandizzo

GlobalMacroeconomicEffectsofExitingfromUnconventional MonetaryPolicy

P.Cova,P.PaganoandM.Pisani

OntheSourcesofPoliticalDiscontentinEurope

DavidFreyrBjornssonandGyl fi Zoega

Land,Housing,GrowthandInequality

LuigiBonatti

GlobalizationandNationalIncomeInequality:Observations andLessonsfromtheU.S.Experience 159 DannyM.Leipziger

SustainableEconomicGrowthintheEuroArea:TheNeed fora

EttoreDorrucci

DoesAccesstoFinanceImproveProductivity?TheCase ofItalianManufacturing ....................................

AdeleGalasso,FrancescoGerotto,GiancarloInfantino,FrancescoNucci andOttavioRicchi

IsItalyonthePathwayforAchievingSustainableDevelopment Goals?

LorenzaCampagnoloandDavideCiferri

IncomingLabor-ProductSocietyandEURegionalPolicy 241 MartinoLoCascioandMassimoBagarani

GlobalizationandInclusiveGrowth:CanTheyGoHand inHandinDevelopingCountries? .............................

RupaDuttagupta,SandraLizarazoRuiz,AngelicaMartinezLeyva andMarinaMendesTavares

GlobalImplicationsofU.S.TradePolicies forReducingStructuralTrade Imbalances

Abstract Theaimofthisresearchistoassesstheinternationaltransmissionoftrade policiesoriginatingintheUnitedStatestoitsmajortradingpartners,mostofwhom aremembersoftheG20.Webeganbyestimatingtwenty-onemacroeconomicmodels oftheG20basedonthenationalaccounts(byexpenditure)fromtheUnitedNations StatisticalDepartment.ThebaselinescenarioisbaseduponaHarrod-Domarmodel onthesupplysideanddemandequationsforhouseholdconsumption,government andimports.A21by21worldtradematrixwasconstructedfromthebilateralexport dataalsoproducedbytheUNstatisticaldepartment.Thisprovidedamechanism toestimatetheexportsofthenationalandregionalmodelsfromthetradeshares. Basedonthenewexports,GDPisre-summedandthedemandsideoftheeconomy isre-estimated.Thisiscontinueduntilthesystemconvergences.Thefinalestimates andthebaselineestimatesarecomparedtogiveanestimateoftheimpactofthe changeresultingfromtheassumptionscorrespondingtotheimportpolicy.

Keywords Harrod-Domarmodel · Tradematrix · Basicscenario · U.S.import policy · Internationaltransmissionoftradepolicies

1Introduction

IntheUnitedStates,theshareofimportsinGDPhasbeenannuallyhigherthan thecorrespondingshareofexportsinGDPfordecades(Fig. 1).Overtheperiod 2000–2015,theaveragetradedeficitwas3.87%ofGDP,withnosignofimprovement.Onewaytoreducethenationaldebt,istoreducetheexternaldeficitandthat canbedoneeitherbyreducingimportsorincreasingexports(orsomecombination ofboth).MostdevelopingAsiancountrieshavebeensuccessfulinnarrowingtheir

D.Salvatore(B) F.Campano DepartmentofEconomics,FordhamUniversity,Bronx,NewYork,USA e-mail:salvatore@fordham.edu

F.Campano

e-mail:campano@fordham.edu

©SpringerNatureSwitzerlandAG2018

L.Paganetto(ed.), GettingGlobalizationRight, https://doi.org/10.1007/978-3-319-97692-1_1

U.S.tradesharesinGDP,2000–2015

externaldeficitbyfollowingthepost-warJapanesemodelofexportpromotion,while developingcountrieselsewheredidnotdoaswellwithimportsubstitutionpolicies. However,partofthereasonwhyimportsubstitutionpolicieshavenotworkedinthe pastindevelopingcountriesisthedelayittakestodevelopacomparativeadvantagewhenthecountrylacksthetechnologiesofthemoreadvancedcountries.So, thequestionariseswhathappensiftheUnitedStates(whichhasthemostadvanced technologyatitsdisposal)practicesimportsubstitution?

Inthispaper,wewillsimulatesomeoftheresultsfortheUnitedStatesanditsmajor tradingpartnersintheG20,iftheUnitedStatesreduceditsimports.Tothisend,four scenariosareestimated,namely:(1)abaselinescenariowhichisacontinuationof the2000–2015trendswithoutanyinterventiononimports;(2)anon-discrimination scenariowheretheUSreducesitstotalimportdemandby30%;(3)adiscrimination scenariowheretheUSreducesitsimportsby30%onlyfromChina,Germanyand Mexico(thenationswithwhichtheUnitedStateshasthelargesttradedeficit),and (4)thesamediscriminationscenarioasabove,butinwhichChina,Germanyand MexicoretaliatebyreducingtheirimportsfromtheUnitedStatesby30%.

Fig.1

2TheMethodology

ForeachofthecountriesoftheG20amodeltoprojectthenationalaccountsexpendituretabletotheyear2018isestimated.ThisincludestherestoftheEuropean Union(thosemembersoftheEUnotincludedintheG20)asagroupandtherest oftheworldinanotheraggregategroup.Therestoftheworldisanaggregationof 166countries,butwhichonlyaccountsfor15.4%oftheUSimports.Canadaalone accountsfor15.1%ofUSimports,Chinafor19.8%,Mexico14.9%andGermany 6.1%.TherestoftheEUaccountsfor6.6%.Theremaining22.0%comesfromthe othermembersoftheG20.Thesefiguresarebaseduponthebilateraltradedatafor 2015suppliedbytheUnitedNationsStatisticalDivision.Wealsousedthebilateral exportdatatoconstructa21by21tradesharematrixinwhichthecolumnsare thetradesharesintheimportsofthe21countriesandgroups.Whenthematrixis multipliedbythevectoroftotalimportdemandofthe21countries(andgroups),the vectorofexportsallocatedtoeachcountry(orgroup)isobtained.

TheexpendituremodelsconsistofaHarrod-Domarproductionfunctionandthree demandequationsdrivenbytheprojectedGDPforeachcountry(VandenBerg 2013; Ganaetal. 2013).Theseareusedtoobtainhouseholdconsumption,government expenditureandimports.Asmentionedabove,exportsaredeterminedbythetrade matrixshares.InvestmentsharesinGDPareexogenousandbasedontheaverage sharesfrom2000to2015.Theestimatedparametersforeachcountry(andgroup) areshownintheappendix.

3TheBaselineProjection

GDPisprojectedusingtheHarrod-Domarmodel.Noassumptionismadeofany changeintradepolicyintheUnitedStatesoranywhereelse.Table 1 showsthe projectionsfortheUnitedStatesinlevels(in2005U.S.dollars)andeachexpenditure componentasashareofGDP.Theprojectedgrowthratewhichisbasedonthe estimatedHarrod-Domarparametersis1.65%perannum.Theshareofnetexports inGDPshowsatendencytodeclineslightlyfromanegative3.6%in2016tonegative 3.3%in2018.Asummaryoftherestofthecountries(andgroups)forthebaseline isshowninTable 2.Oneofthegoalsofthenewadministrationistoraisethegrowth ratefrom1.65%toabove3%.Wewillseeintheotherscenarioshowmuchthe growthratewillchangewhentheassumptionsofeachscenarioaresimulated.

4Scenario1:30%ReductioninImports—No Discrimination

Inthisscenario,weassumethattheUnitedStatescansuccessfullyreduceitsimports by30%.Itmanagestodothisbyimportsubstitutionandbyincreasingdomestic

Table1 Baselinescenario—historicalandprojectedU.S.expenditurevariables(levelsinmillions of2005U.S.dollars)

Table2 Baselineexpenditureprojectionsfor2018(inmillionsof2005U.S.dollars)

investmentinsomeoftheindustries,suchastheshoeindustryortheautomobile industry,whereatonetimetheUSwasself-sufficientbuthassincelostagood shareofthedomesticmarkettoglobalization.Therevivaloftheseindustriesisdone withouttheintentionoftargetinganyothernationsexportstotheUnitedStates—it issimplyareductionofthetotalimportstotheUnitedStatesbymodernizingthe selectedindustries.Insuchacase,wewillassumeallothercountrieswillhavethe sameshareoftotalUSimportsasinthebaseline,butthetotalimportswillbelower. Whenweiteratethisscenariotoconvergence,wegettheresultasshowninTable 3 FortheUnitedState,GDPrisesto$16,806,629millionascomparedwith $15,843,353millioninthebaseline.Thisisabout6.1%higherforGDP,householdconsumptionandinvestment.ThelargerGDPimpliesmoregovernmentspending(bothfederalandstate).However,theconvergencelevelsonlyreduceimportsby 23.5%,notthefull30%astargeted.Furthermore,exportsarealsoreducedby27.4%.

Table3 Scenario1:30%reductioninU.S.importsin2018,withnodiscrimination(inmillionsof 2005U.S.$)

Overall,thetradegapisreducedfrom $524,525to–$488,084million.Hencethe foreigndeficitisreducedfrom3.3to2.9%.Hence,thisoutcomewouldbebeneficial fortheUnitedStates.

Sinceweareassumingthattradesharesdonotchange,thosecountrieswhich sendalargeproportionoftheirtotalexportstotheUnitedStateswillbeaffectedthe mostbythereductionintotalU.S.imports.TheseincludeCanadawhoseproportion ofexportstotheUSis76.8%andMexicowhoseexportstotheUSis81.2%of itstotal.China’sexportstotheUnitedStatesareonly18%ofitstotalandGermany exportsonly9.6%ofitstotalexportstotheUnitedStates.Asaresultofthisscenario, Canada’sGDPdecreasesby12.6%ascomparedtothebaselineandMexico’sGDP decreasesby2.3%.Ontheotherhand,bothChina’sandGermany’sGDPincrease overthebaselineby10.3%and6.5%,respectively.TheUnitedKingdom,which sends16.6%ofitsexportstoNAFTA,facesa21.3%declineinitsGDPrelative

tothebaseline.TheloweringoftheU.K.’sGDPcausesaloweringofitsimport demand,sothatcountriessuchasAustraliaandIndiawhichdependontheU.K.’s importsareaffectednegatively.Italy,whichsends8.7%ofitsexportstotheUnited Statesand12.3%ofitsexportstoGermany,experiencesaGDPgrowthof14.4% overthebaseline.France’sGDP,ontheotherhand,decreases6.3%relativetothe baseline.

5Scenario2:TheUnitedStatesReducesItsImportShare fromChina,MexicoandGermany,andTheseCountries DoNotRetaliate

Inthisscenario(Table 4),wesimulatetheresultiftheUnitedStatesreducesitsimport sharefromChina,MexicoandGermanyby30%andthesecountriesdonotretaliate. SuchanactioncausestheGDPoftheUnitedStatestoincreasebyabout0.7%and, asaresult,itstotalimportswillnotbelower,butincreasebyabout1%.However,the amountsimportedfromChina,GermanyandMexicodecreaseby30%.Netexports asapercentageofGDPremainsabove3%,whichisslightlylowerthanthebaseline. TheresultingchangeinGDPrelativetothebaselineforChinawouldbe 2.7%,for Germany 0.1%andforMexico 13.7%.Canadawouldbenefitwithanincrease ofexportstotheUnitedStatesof16.6%.

6Scenario3:TheUnitedStatesLowersImports fromChina,MexicoandGermanyby30%,andThese CountriesRetaliate

Thisscenarioissimilartoscenario2above,butinthiscaseChina,Germanyand MexicoretaliatebyalsoreducingtheirimportsharefromtheUnitedStatesby30%. Inthiscase,thetotalexportsoftheUnitedStatesdecreasefrom$2,219,551to $2,054,775million,orby7.4%.ThiscausesalowerGDPandlowertotalimports fortheUnitedStates.NownetU.S.exportsasapercentageofGDPremainabove3% ofGDP.Furthermore,thelevelofGDPis2.8%lowerthanthebaselineprojection fortheUnitedStates,1.7%lowerthanthebaselineforChina,and15.4%lowerthan thebaselineforMexico.Ontheotherhand,Germany’sGDPis0.5%higherthan underthebaselineprojectionandCanada’s8.7%higher(Table 5).

7Conclusions

OurmodelindicatesthattheUnitedStatescanreduceitstradeimbalance,butit shouldnottrytoreduceitbyusingprotectionistpolicies.Targetingmajortrading

Table4 Scenario2:theUnitedStateslowersimportsfromChina,MexicoandGermanyby30%, withnoretaliation(inmillionsof2005U.S.dollars)

partnerswithquotascanleadtonegativeresultsforallpartiesconcerned.Thisis especiallytrueforcountrieslikeCanadaandMexicowhoseexportstotheUnited Statesarethebulkoftheirexports.ChinaandGermanyspreadtheirexportsmore globally,andarenotasdependentontheirexportstotheUnitedStates,asCanada andMexicodo.Consequently,importsanctionsagainstthemdonotdisrupttheir economiesasmuchassanctionsagainsttheNAFTApartners.Nevertheless,sanctions againstChinaandGermanydonothelptheU.S.situationbecauseitisunlikelythat thesenationswouldnotretaliate,andthiscouldhurttheUnitedStatesmorethan hurtthem.AbetterapproachforclosingtheU.S.tradegapistorevitalizethose industriesthatithasgivenupdecadesago.Todothis,itwouldbenecessaryto producetheproductsthattheUnitedStatesnowimportsmoreefficientlythanthe countriesthatareexportingthemtotheUnitedStates.Thisimpliesatechnological updatewhichlowersdomesticcostsforproductsthataremoreinlinewithtastesof

Table5 Scenario3:theUnitedStateslowersimportsfromChina,MexicoandGermanyby30%, andtheyretaliate(inmillionsof2005U.S.dollars)

U.S.consumers.Thiscanbedoneforconsumergoods,investmentgoodsaswellas forenergyproducts(i.e.solarpanels,windturbinesandshaleoil).Likewise,more exportpromotionofU.S.servicesandlessdependenceonforeignsupplierswould help.Oncethedomesticindustriesbecomelower-costandmoreefficientproducers, theywouldbeabletocompeteintheglobalmarketplaceandtheU.S.tradeimbalance willnaturallyimproveandcorrectitself.

SeeTables 6 and 7.

Table6 Productionfunctionparameters

a R-squaresandtstatisticsfurnisheduponrequest

References

Gana,J.L.,Hickman,B.G.,Lau,L.J.,&Jacobson,L.R.(1979).Alternativeapproachestolinkage ofnationaleconometricmodels.InJ.A.Sawyer(Ed.), Modelingtheinternationaltransmission mechanism.North-Holland,NewYork. VandenBerg,H.(2013).GrowththeoryafterKeynes,partI:Theunfortunatesuppressionofthe Harrod-Domarmodel. TheJournalofPhilosophicalEconomicsVII:1.

TheDutchDiseaseinReverse:Iceland’s NaturalExperiment

Abstract Foralongtime,abundantnaturalresourcesbroughtIcelandahighand volatilerealexchangeratewithadverseeffectsonmanufacturingandservices.During2003–2008,anothernationaltreasure,thesovereign’sAAArating,wasusedby privatizedbankstoattractforeigncapital,elevatingtherealexchangerateevenfurther.Thefinancialcollapseandtheassociatedcollapseofthecurrencyin2008left thecountrywithalargeforeigndebtwhichoffsetsomeoftheeffectofthenatural resourcesontherealexchangerate.Ineffect,thiswastheDutchdiseaseinreverse aswitnessed,inparticular,byamassiveincreaseinthenumberoftouristsfollowing thefinancialcollapse.Thispaperdiscussesthebehavioroftheexchangerateofthe Icelandickrónabeforeandafter2008aswellasitsrelationshiptonaturalresources, capitalflows,output,exportsandimports,includingtourism.

Keywords Naturalresourcecurse · Dutchdisease · Financialcrisis

JELClassification

GylfiZoega—MemberoftheMonetaryPolicyCommitteeoftheCentralBankofIceland.Wethank BenediktGoderis,GylfiMagnússon,FredrickVanderPloeg,HamidRaza,RonSmithandRagnar TorvikforhelpfulcommentsonearlierversionsofthispaperandalsoYu-FuChenforhiscomments aswellasresearchassistance.Theviewsexpressedareourownanddonotnecessarilyreflectthe viewsoftheCentralBankofIceland.AnearlierversionofthepaperappearedasOxCarreResearch Paper138,OxfordCentrefortheAnalysisofResourceRichEconomies,OxfordUniversity,May 2014.

T.Gylfason G.Zoega(B) DepartmentofEconomics,UniversityofIceland,Saemundargata2,Reykjavik,Iceland e-mail:gz@hi.is

T.Gylfason e-mail:gylfason@hi.is

T.Gylfason CESifo,Munich,Germany

G.Zoega

BirkbeckCollege,UniversityofLondon,Maletstreet,Londonwc2e7hx,UK

©SpringerNatureSwitzerlandAG2018

L.Paganetto(ed.), GettingGlobalizationRight, https://doi.org/10.1007/978-3-319-97692-1_2

Rarelydoestheopportunityariseforeconomiststorevisittheirtheoriesusingdata fromnaturalexperiments.TherecenteconomichistoryofIcelandofferssuchan opportunity.Werefertotheliterature,relaunchedbySachsandWarner(1995), onvariousaspectsofthepotentiallyadverseeffectsofnaturalresourcediscoveriesonemploymentandinvestmentaswellasoneconomicgrowth.Theinverse cross-countryrelationshipbetweennaturalresourcesandgrowthhasbeenbroadly confirmedinseveralstudies1 whilequestionedbyothers.2

Theliteratureonthemacroeconomicconsequencesofnaturalresourceshighlights severalchannelsthroughwhicheconomicgrowthcanberetarded.Theseincluderent seeking,3 theDutchdisease,4 poorgovernance,5 politicalorethnicconflict,6 corruption,7 autocracy,8 excessiveborrowing9 andlowlevelsofeducation.10 Ross(2011), vanderPloeg(2011),Frankel(2014)andVenables(2016)surveytheliterature. Iflearning-by-doingoccursmostlyinthesecondary(i.e.,manufacturingandservices)exportsectorandnotintheprimary(i.e.,natural-resource-based)sector,alarge andvolatileprimarysectorwilladverselyaffecttheproductionoftradablegoodsby increasingrealwagesandtherealexchangerate,loweringtherelativepriceoftradablegoods(i.e.,exportsandimport-competinggoods)andhamperingemployment, investmentandgrowth.11 Insofarasthetroublewithabundantnaturalresourceshas todowiththerealappreciationofthecurrency,thedepreciationresultingfromthe suddenstopofacapitalinflowandafinancialcrashcanbeviewedasaboutofthe Dutchdiseaseinreverse.

Recenteventsofferusanopportunitytoreassessthevalidityofthisthesis.Ithas forsometimebeenwellunderstoodthatforeignaidsharesanimportantpropertywith naturalresourcediscoveriesinthataidconstitutesanunrequitedtransferemerging likemannafromheaven.12 Inthepast,aid-receivingcountriessuchasZambiahave seentheircurrenciesappreciateasaresultofaidinflows.Further,likeresource windfalls,aidinflowshaveaboutthemanauraof‘otherpeople’smoney’which,

1 See,e.g.,SachsandWarner(2001),GylfasonandZoega(2006),CollierandGoderis(2012)and Sala-i-MartinandSubramanian(2013).

2 SeeBrunnschweilerandBulte(2008),LedermanandMaloney(2008),AlexeevandConrad(2009) andJames(2015).

3 SeePaldam(1997),TornellandLane(1999),Auty(2001),Mehlumetal.(2006a, b)andRobinson etal.(2006).

4 SeeCorden(1984),CordenandNeary(1982),VanWijnbergen(1984)andHerbertssonetal. (2000).

5 SeeBalandandFrancois(2000),TornellandLane(1999),Torvik(2002),andBoschinietal. (2007).

6 SeeEasterlyandLevine(1997)andHodler(2006).

7 SeeArezkiandBrückner(2011)andArezkiandGylfason(2013).

8 SeeRoss(2001),CollierandHoeffler(2009)andTsui(2011).

9 SeeMansurian(1991)andManzanoandRigobon(2007).

10 SeeGylfason(2001).

11 SeeGylfasonandZoega(1999).

12 SeeYounger(1992),BurnsideandDollar(2000),Svensson(2000)andDjankovetal.(2008)and alsoDeaton(2013,Chap.7).

TheDutchDiseaseinReverse:Iceland’sNaturalExperiment15

likelotterywinnings,aswellasduetotheirtransitoryandoftenvolatilenature,may seemeasiertofritterawaythanone’sownhard-earnedincomes.Thismayexplain whynaturalresourceabundancedoeslessharmtogrowthindemocracieswithgood policiesthanelsewhere(BurnsideandDollar 2000).13

ReputationminingasdescribedbyAkerlofandShiller(2015)canbeviewed thesamewayasotherformsofresourcedepletion.Duringexuberantcreditbooms inflowsofforeigncreditcanexertasimilarmanna-from-heaveneffectonitsrecipientsasresourcewindfallsandforeignaid.14 AdmatiandHellwig(2013,Chap.9) describetheconsiderablehiddensubsidiesthatbanksdeemedtoobigtofailextract fromtaxpayersthroughimplicitorexplicitgovernmentguarantees.Withitsgross foreigndebtrisingfrom100%ofGDPin2002tonearly700%inmid-2008,Icelandicbanks,aidedandabettedbythegovernment,usedthesovereign’sAAArating toattracthugeprivatecapitalinflowsduring2003–2008inthewakeoftheirprivatizationof1998–2003followedbyasuddenstopandasubsequentcapitaloutflow.15 , 16 Theinflows,mostlyintheformofshort-termbankcredits,wereaccompaniedand, indeed,spurredbyapersistent,policy-inducedappreciationofthecurrencyintended tokeepalidondomesticinflationthroughahigh-interest-ratepolicyaimingalsoto attractforeignfunds.Whileearlierworkshowedhowabundantnaturalresources(or, specifically,aheavyrelianceonnaturalresources)hadtheeffectofslowingdown investmentandgrowth(GylfasonandZoega 2006),recenteventsofferanopportunity toanalyzetheeffectsofacapitaloutflowthatoffsettheeffectsoftheprimarysector ontherealexchangerateaswellasonsecondaryoutputandgrowthbyreversingthe earlierappreciationofthecurrency.

Figure 1 showstheevolutionofthenominal(trade-weighted)exchangerate, definedasthedomesticcurrencypriceofforeigncurrencysothatanincreaseinthe indexindicatesdepreciation.ThegradualappreciationoftheIcelandickrónauntil 2008wasinterruptedinthespringof2006whenthecapitalinflowstoppedbriefly, andwasreversedinthespringof2008whenthecapitalinflowsuddenlyturnedinto anoutflow,followedbyacollapseinOctober2008.Thesuddenstopwastriggeredby theworldfinancialcrisis,inparticularthecollapseofLehmanBrothers.Thecollapse wipedouttheforeigncurrencymarketbybankruptingallmarketparticipants;hence theexchangerateseriesinFig. 1 terminatesinOctober2008.Beforeandafterthe crash,theburdenofthelargeforeigndebtloweredtheexchangeratebyahalfin

13 GylfasonandZoega(2003)andGoderisandMalon(2011)considertherelationshipbetween naturalresourcesandinequality.

14 BenignoandFornaro(2014)usetheterm‘financialresourcecurse’todescribeepisodesof abundantaccesstoforeigncapitalcoupledwithweakproductivitygrowth.

15 SeeGylfasonetal.(2010),Benediktsdottiretal.(2011),Johnsen(2014)andGylfason(2015, 2016).

16 SeeCalvo(1998)andCalvoetal.(2004)onhowasuddenstopininternationalcreditflowsmay causefinancialandbalance-of-paymentscrises.CalvoandReinhart(2000)recommenddollarization asawaytoeliminatetheproblemscausedbythesuddenreversalofcapitalinflows.Calvo(2007) arguesthatemergingeconomiesshouldinterveneinthecreditmarketratherthanrelyingsolelyon interestratesasapolicytooltoreducethelikelihoodofasuddenstop.LaneandMilesi-Ferretti (2008)discusstheimpactofcapitalinflowsondomesticvariables.

Source: Central Bank of Iceland.

Fig.1 Evolutionofthenominalexchangerate2003–2008 nominaltermsandathirdinrealterms,17 offsettingsomeoftheadverseeffectsof theprimarysectoronemployment,investmentandoutputinthesecondary(i.e., non-primary)sector.

OurmainaimhereistouseIceland’srecentexperiencetoillustratethestrong relationshipbetweentherealexchangerateandthecurrentaccountofthebalance ofpayments,arelationshipthat‘elasticitypessimists’haveoftenquestioned.Asubsidiaryaimistoshowhowvolatilityinprimary(i.e.,natural-resource-based)exports aswellasinforeigncapitalflowsmakesexchangeratesvolatileandtherebyalso othermacroeconomicvariablesthatdependonexchangerates.Wedothisbydrawing aparallelbetweenthewayinwhichtheexploitationofnaturalresourcesaswellas ofIceland’shighcreditratingbeforethe2008collapseincreasedtherecordedvalue oftheIcelandickrónaandthewayinwhichthecollapseofthecreditratingin2008 (asiffishstockshadcollapsed!)ledtoasuddencollapsealsoofthekróna,whichin turnfacilitatedarecoveryofemployment,investmentandoutput.By2016,output wasatlastrestoredtoits2007levelintermsofpurchasing-power-parity-adjusted USdollarspercapita.18

Meanwhile,thekrónagraduallyregainedlostground.In2015,theIMFconsidered therealexchangeofthekrónatoberoughlyinequilibrium(IMF 2016,Box2,

17 Specifically,from2007to2009therealexchangeratefellby35%basedonrelativeconsumer pricesathomeandabroadandby50%basedonrelativeunitlaborcosts.Source:CentralBankof Iceland,see http://hagtolur.sedlabanki.is/data/set/1wui/#!display=table&ds=1wui!1z9x=1.3

18 Source:WorldBank, WorldDevelopmentIndicators

p.11).Frommid-2015untilearly2017,thekrónaappreciatedinrealtermsby25% basedonrelativeconsumerpricesandby21%basedonrelativeunitlaborcosts (source:CentralBankofIceland),restoringtherealexchangeratetoits2007extent ofovervaluationorthereabouts.

InthenextsectionwebrieflyreviewtherecenteconomichistoryofIceland. Wethenpresentasimplestochasticmodelintendedtocapturerelevantelementsof theDutchdiseasebyshowinghowthevolatilityofprimaryoutputaffectsthereal exchangerateandhencealsototal(i.e.,primaryplussecondary)output.Themodel setsthestagefor—or,ifyouprefer,aimstoilluminate—ourempiricalaccountof theencouragingeffectsofthecollapseoftherealexchangeratesurroundingthe financialcrashof2008onsecondaryoutput,especiallyviaforeigntourismwhich hasexpandedbyleapsandbounds.Thenumberofforeigntouristarrivalsin2016 was1.8million,morethanfivetimesIceland’spopulation,upfrom0.3millionin 2000whenthenumberoftouristsbypassedthenumberofinhabitants.

1Background

IcelandisuniqueamongOECDcountriesinthattheratioofIceland’sexportsof goodsandservicestoGDPwasstuckataboutathirdfrom1870(thisisnotamisprint) until2008whenitsthreemainbankscollapsed.WhydidIceland’sexportsremain stagnantforsolongatsuchalowlevelrelativetoGDP?AllotherOECDcountriessaw theirexportsgrowmorerapidlythanGDP,especiallyafter1960whenliberalization oftradeingoodsandservicesgainedmomentum.Forexample,Denmark’sexport ratiorosefrom32%in1960to52%in2007whileIceland’sexportratioremained stuckataboutathird(Fig. 2a).Withapopulationthatisjustone-sixteenthofthat ofDenmark,Iceland,likeotherverysmallopeneconomies,wouldneedamuch higherexportratiothanDenmarktofinancetheimportationofthingsthatIceland istoosmalltoproduce.Denmarkisasignificanthigh-techproducer,Icelandisnot. Moreover,Icelandismarredbyoligopoliesunencumberedbyforeigncompetition. Forexample,thecombinedmarketshareofthethreelargestbanksisstillwellabove 90%andthesameappliestothethreelargestinsurancecompanies,oilretailers,and sellersofbuildingmaterials.

Icelandwasuntil2008ahigh-real-exchange-ratecountry,itsovervaluedcurrency holdingbackexportsandtherebyalsoimportsexceptinsofarasimportswerefinanced byforeignborrowing.In2007,ayearbeforethecrash,theIMFconsideredthekróna overvaluedby15–25%inrealterms(IMF 2007).Evenso,twomonthsbeforethe crashinSeptember2008,theIMFreported(IMF 2008):“[t]helong-termeconomic prospectsfortheIcelandiceconomyremainenviable.”TheIMFoverlookedthe dangerposedbytheovervaluationofthekrónaaswellasbythehugeinflowsof short-termcapitalbeforetheeruptionofthe2008crisis.Lookingback,theIMF’s IndependentEvaluationOffice(2011,Box4,p.15)wasnotamused.

Source: World Bank, World Development Indicators

Thesystemicallyhighrealexchangerate,aconditionweassociatewiththeDutch disease,canbetracedtoseveralcauses,includinghighinflation19 andanabundance ofnaturalresources,mainlyfertilefishinggroundsbutalsoenergy.Exportsubsidies tothefishingindustry,directatfirstthroughthegovernmentbudget,thenindirect throughgratisallocationofhighlyvaluableandmacroeconomicallyconsequential common-propertyfishingrightstoselectvesselowners,increasedthesupplyof foreignexchange,loweringitspriceandincreasingtherealexchangerate.Other factorsreinforcedtheeffectoftheprimarysectorontherealexchangerate,including theprotectionofagricultureagainstimportedfarmproducts,anarrangementthat reducedthedemandforforeignexchange,loweringitspriceandtherebyexerting upwardpressureontherealexchangerate.Further,thehighrealexchangerateskewed thecompositionofexportsbyhamperingthedevelopmentof,forexample,high-tech exportindustrieslikethosethatemergedinScotland,IrelandandNorwaynextdoor. Mostly,Iceland’sexportswere,andremain,resource-based(fishandaluminum) andthusmostlylow-tech,acommonsymptomoftheDutchdisease(Fig. 2b).20 A currencycanremainovervaluedforlongperiodsjustasapendulumcontinuestotilt thesamewayaslongasthewindblowsfromthesamedirection.

19 Since1960,IcelandhashadtheOECDregion’ssecondhighestaveragerateofinflation,second onlytoTurkey.Highinflationhasoftenbeenseentogoalongwithhighrealexchangeratesbecause thegovernmenthesitatestodevaluethecurrencyasexpectationsofinflationarenotanchoredand devaluationislikelytoencourageinflation.Asaresultthegovernmentresortstoforeignborrowing instead,acommonscenarioinAfricaandLatinAmerica,forexample.

20 In2012,fishproductsaccountedfor27%oftotalexportearningsinIceland,aluminumfor22%and foreigntourism,24%(source:StatisticsIceland).Kristjansdottir(2012)describesthedeterminants ofthegeographicalpatternofIceland’sexporttrade.

Fig.2 Exportsofgoodsandservicesandmanufactures

Import volume 2000-2015 (2000 = 100)

credit provided by the banking sector 1960-2015(% of GDP)

Source: World Bank, World Development Indicators.

Importsanddomesticcredit

Recenteventsofferanopportunitytoassesstheeffectsofthecollapseofthereal exchangerate.Surroundingthefinancialcrashof2008thecollapseoftheIcelandic krónamadeexportsjumpfromathirdofGDPto60%ofGDP(Fig. 2a),andcaused importstoplunge(Fig. 3a)inkeepingwiththeelasticityapproachtothebalance ofpayments(GoldsteinandKhan 1985).ThefactthatGDPfellby8%afterthe crashshowsthatthehikeintheexportratiostemsmostlyfromasharpincreasein exportearnings.Likewise,thefactthatimportvolumecontractedby44%suggests astrongeffectofthecurrencydepreciationonimportsontopofamuchsmaller incomeeffect.Evenso,thebehavioroftherealexchangerateofthekrónabefore andafterthecrashaccordswellwiththeassetmarketapproachtoexchangerates (Branson 1977)whichpredictsthatincreasedforeignborrowingtofinanceimports ofgoodsandservicescausesthecurrency,onimpact,toappreciateinrealterms.

ThereactionofIcelandicexportsandimportstothelargedepreciationofthe krónain2008resemblestheresponseofexportsandimportsinSouth-EastAsian countriestothecollapseoftheircurrenciesin1997.Figure 4 showstheevolution ofexportearningsandimportvolumesduringaperiodspanningfiveyearsbefore andafterthefinancialcrisisinSouth-EastAsia(t 1997)aswellasinIceland(t 2008).

ThefinancialcrashinIcelandwasprecededbytheprivatizationofthecountry’s bankingsystemandasubsequentcapitalinflowfrom2003to2008thatpropelled therealexchangeratetonewheightsandfueledthestockmarketandthehousing marketaswellasaboominconsumptionandinvestmentthroughacurrentaccount deficitaveraging14%ofGDP.Realequitypricesincreasedby35%peryearduring thisperiod,arecordsurpassedonlybyCyprus,andrealestatepricesroseby12%

Fig.3

Exports before and after currency collapse (% of GDP)

Import volume before and after currency collapse(2000 = 100)

Note: For Iceland, t = 2008, whereas for Indonesia, Korea and Thailand we set t = 1997.

Source: World Bank, World Development Indicators

peryear.21

Thecurrentaccountdeficitrosefrom5%ofGDPin2003to16%in2007. ThegrowthofpercapitaGDPwentfrom1.8%in2003to6.6%in2004,6.0%in 2005,1.8%in2006and3.6%in2007beforeturningnegativethreeyearsinarow, 2008–2010.Unemploymentdroppedto2.3%ofthelaborforce2007.Grossforeign debtgrewfromastablelevelofabout60%ofGDPinthe1990stonearly700%before thecollapseinmid-2008.Becausetheinflowofcapitalwasunsustainable,andalso becausetheCentralBank’sforeignexchangereserves,inaviolationoftheGiudottiGreenspanrule,hadfallento7%oftheshort-termforeignliabilitiesofthebanking system,theexpansionwasboundtoendinasuddenstop.Thereversalofcapital flowsin2008causedthecurrencytotank,consumptionandGDPtofall,investment toplummetfrom27%ofGDPto19%ofalowerGDP,22 realimportsofgoodsand servicestocontractbymorethan60%from2006to2009(recallFig. 3ashowingthe volumeofmerchandiseimports),banklendingrelativetoGDPtocontractby54% from2007to2012(Fig. 3b)andequitypricestoplungeby,yes,95%frompeakto

21 TheOMX15coveringthe15largestcorporationsincreasedbyafactorofsixoverthesameperiod andnearlybyafactorofninefromitsbottomin2001toitspeakvaluein2007.SeeAliber(2011) andHalldorssonandZoega(2010).

22 Netinvestment,i.e.,grossinvestmentminusdepreciation,wasnegativefrom2009to2012.

Korea, Rep.
Fig.4 ExportsandimportsinIcelandandSouth-EastAsia

World Bank, World Development Indicators.

Investmentandadjustednetsaving

trough.23 , 24 By2011,realestatepricesintheReykjavíkareahadrecededbackto their2004levelinrealterms.25

Theboombeforethecrashof2008maskedanunderlyingstructuralweakness illustratedbyacomparisonbetweengrossinvestmentandadjustednetsaving(Fig. 5). AsdefinedbytheWorldBank(2006),adjustednetsavingaimstomeasurethereal differencebetweenproductionandconsumptionbyadjustingnetsavingforchanges inhumancapital(measuredbyspendingoneducationandinnovation)anddepreciationordepletionofnaturalresources(e.g.,throughenergyormineraldepletion).A comparisonofthetwopanelsofFig. 5 showsthat,beforethecrash,despiteIceland’s investmentboom,adjustednetsavinginIcelandwasfarbelowthatofDenmarkeven withoutincludingestimatesofnaturalresourcedepletion,acontroversialsubject. ThisfindingreflectsIceland’slong-standingaversiontosavingandcorrespondingly strongpropensitytoborrow,acommoncharacteristicofhigh-inflationcountries.

Insum,Iceland’sexperiencebeforeandafterthefallmirrorsthethree-stage experienceofmanyothercountriesinsimilarcircumstances(ReinhartandRogoff 2009).First,largecapitalinflows,mostlybankcredits,elevatedthevalueofthe currencywellbeyonditshistoricalstateofstructuralovervaluation.Second,the suddenreversalofcapitalflowsandtheassociateddebtoverhangmadethecurrency

23 Sources: StatisticsIceland (hagstofa.is),CentralBankofIceland(sedlabanki.is),WorldBank, WorldDevelopmentIndicators,andTradingEconomics(tradingeconomics.com/iceland/stock-ma rket).SeealsoHalldorssonandZoega(2010).

24 Gylfasonetal.(2010)andGylfason(2015)compareeconomicconditionsintheNordiccountries duringtheseyears.

25 Source:RegistersIceland(skra.is/Markadurinn/Talnaefni).

Fig.5

collapse.Third,thedepreciationofthecurrencyinrealtermsmadeimportsplunge whileprovidingastrongboosttoexports,botholdandnew.Thedramaticreversal ofcapitalflowsin2008offersusanopportunitytogaugetheeffectsofalowerreal exchangerateonthesecondarysector.WerevisitourstochasticmodeloftheDutch diseaseinSect. 2 todescribethefirsttwostagesoftheprocessandtoprepareforthe empiricalaccountoftheeffectsoftheexchangerateonexportsandoutputinSect. 3

2APrototypeModel

Tradableoutputisproducedinboththeprimarysectorandthesecondarysector.The primarysectorutilizesanaturalresourceandissubjecttofluctuations.InIceland,the naturalresourceismainlyfishstocksthatyieldanannualoutputthatfluctuatesfrom yeartoyear,basedmostlyonnaturalfactors.Further,therearecapitalinflowsand outflows.Bothfluctuationsinprimaryoutputandincapitalflowsaffectthesecondary tradablesector,i.e.,manufacturingandservices.Thevolatilityoftheprimarysector andcapitalflowsmakestherealexchangeratefluctuate,whichaffectstherelative priceofthesecondary-sectortradableoutput,orsecondaryoutputinshort,aswewill show.Moreover,anabundanceofnaturalresourcesaffectssecondaryemployment, outputandinvestmentthroughwages.26 Thestockofexternaldebtalsohasaneffect onthesevariablesthroughtherealexchangerate.Inaway,naturalresourcerents haveanimpactsimilartotheinflowofforeigncapitalwhileexternaldebtworksin theoppositedirectionduetotheoutflowofinterestandamortizationpayments.Our mainaimhereistoshowhowthevolatilityofprimaryproductioncausesexchange ratevolatilitywhichinturnmakessecondaryoutputandhencealsototaloutput volatileaswell.Thismattersbecauseoutput,especiallyincountriesthatdepend significantlyonvolatilenaturalresources,needs,likeassets,tobeassessedintwo dimensions:levelandvolatility.

2.1OutputandEmploymentintheSecondarySector

Profitsinthetradablesectormeasuredintermsofnontradablesare

where K isthestockofcapital, N isemployment, R denotesafixedfactorsuchas landandinfrastructure, e isthelevelofindustry-wideproductivityand α <1and β

26 ThemodelofthissectiondiffersfromthatinGylfasonetal.(1999)byhavingtwofactors ofproductionratherthanonlylabor.Here,however,wedonotderivethegrowtheffectofthe abundanceofnaturalresourcesbutonlytheeffectonthelevelofprimaryandsecondaryoutput.

<1.27 Therealexchangerate λ = pT /pN isdefinedasthepriceoftradablegoodsin termsofnontradables.Anincreasein λ denotesarealdepreciationofthecurrency. Wagesintheprimarysectoraffectsecondary-sectorwages.The(strictlyconcave) function e (wt /wt ) measuresworkereffortasafunctionoftheratioofsecondarysectorwagestowagespaidintheprimarysector, w ,whichwetakeasgiven.We assumethefollowingfunctionalformfor e,invokingSolow’selasticitycondition (Solow 1979)

where b isameasureoftheattractivenessofjobsinthatsector; b <1suggeststhat jobsinthesecondarysectorarepreferabletojobsintheprimarysector.

Therepresentativefirmhastodeterminetheoptimallevelofwagesandemploymentateachpointintime, w and N ,andcancostlesslyhireorfireworkers.The first-orderconditionforwagesgeneratesthefollowingsolutionforsecondary-sector wages

sothatahigherprimary-sectorwage,alowerdisutilityofworkinginthatsector andgreaterresponsivenessofefforttorelativewagesasmeasuredby κ allmake secondary-sectorwagesgoup.Thefirst-orderconditionforemploymentfollows

with Z

.Theequationdeterminesoptimalemploymentforagiven stockofcapital,therealexchangerateandrealwages,inadditiontoland,capital andproductivity.28

Equation(4)andtheproductionfunction(1)giveshort-runoutputsupplyas afunctionoftherealexchangerateandprimary-sectorwagesholdingthestock ofcapitalfixed.Ifprimaryandsecondary-sectorwagesareinitiallyequalized,the supplyfunctionis

. Itfollowsthatsecondaryoutputdependsonthereal exchangerate,which,aswenowwillshow,dependsontheoutputoftheprimary sectoraswellastherealwageintheprimarysector.

27 Depreciationofcapitalisassumedaway.

28 Paldam(1997)describestheimpactoftheDutchdiseaseinGreenlandthroughwages.

2.2PrimaryOutputandCapitalFlows

Primaryoutput,includingtheinflowofforeigncurrency,isstochasticandfollowsa BrownianmotionsubjecttorandomproductivityshocksdescribedbyEq.(6),and isindependentoftherealexchangerate;

Here dW representstheincrementofaWienerprocess εt √dt , ε havingazero meanandaunitstandarddeviation,i.e., E (dW ) 0and V (dW ) dt .Thedrift term η dt reflectsthegrowthofprimaryoutputorarisinglevelofcapitalinflows whilethestochasticterm σ dW representsthevicissitudesofcommoditypricesthat makeprimaryoutputriseorfallatrandomandofinternationalcapitalmarketsthat canmakeacapitalinflowquicklyreverseitselfduringasuddenstop,thuscreating uncertaintyaboutoutputintheprimarysector.

2.3TheIntertemporalBudgetConstraintandtheReal ExchangeRate

Theexternalbudgetconstraintequatesthesumofthepresentdiscountedvalueof thedifferencebetweenfutureoutputofprimarygoods Y p andtradablegoodsfrom thesecondarysector Y S ,ontheonehand,andoftradablegoodsconsumption C T , ontheotherhand,tothecurrentstockofnetforeigndebt D.Acapitalinflowrelaxes theconstraintintheshortrunbyenablingacountrytoserviceitsshort-termdebt withasmallercurrentaccountsurplus.

Thereisaninfinitenumberofpathssatisfyingtheintertemporalbudgetconstraint. Insteadofsolvingfortheoptimalpath,wepositasimplerulethatsatisfiesthe constraint,makingsaving r afunctionofthesumoftheoutputandforeignexchange earningsoftheprimarysector Y P includingnetcapitalinflow(i.e.,inflowsofforeign currency)andoutputfromthesecondarysector Y S lessconsumption c:

where yP log(Y P ), yS log(Y s ), c log(C T )and r isanexogenousparameterthat dependsonthelevelofnetforeigndebt.Wethenchoosethevalueofsaving r sothat theexternalbudgetconstraintissatisfied.Thus,thehigherthelevelofexternaldebt D,thegreateristheexternalsurplus r requiredtoservicethedebt.29 Thechoiceof thissavingrulesimplifiesthederivationstofollowwhilemakingtherealexchange

29 Equation(7)impliesthatthesumofthegrowthratesofprimaryandsecondary(tradable)output alwaysequalstherateofgrowthof(tradable)consumption.

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Title: French life in town and country

Author: Hannah Lynch

Editor: William Harbutt Dawson

Release date: July 7, 2022 [eBook #68469]

Language: English

Original publication: United States: G. P. Putnam's Sons, 1901

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*** START OF THE PROJECT GUTENBERG EBOOK FRENCH LIFE IN TOWN AND COUNTRY ***

OUR EUROPEAN NEIGHBOURS

Edited by W H D. 12ᵒ. Illustrated. Each, net $1.20. By mail, $1.30

NOW READY

French Life in Town and Country. B H L.

German Life in Town and Country. B W. H. D, author of “Germany and the Germans,” etc.

Russian Life in Town and Country. By F H. E. P, sometime Secretary to H. M. Prince Droutskop-Loubetsky (Equerry to H. M. the Emperor of Russia).

Dutch Life in Town and Country. By P. M. H.

Swiss Life in Town and Country. By A T. S.

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Spanish Life in Town and Country. By L. H.

Italian Life in Town and Country. By L V.

G. P. PUTNAM’S SONS, N Y L

OUR EUROPEAN NEIGHBOURS

BY

FRENCH LIFE IN TOWN AND COUNTRY

THE PEASANT AT HOME THE CANDIDATE

FRENCH LIFE IN TOWN AND COUNTRY

LYNCH ILLUSTRATED

Michelena

G. P. PUTNAM’S

SONS

NEW YORK AND LONDON

The Knickerbocker Press 1902

C, 1901

SONS

Set up and electrotyped March, 1901

Reprinted August, 1901; January, 1902

The Knickerbocker Press, New York

GLEANERS

FRENCH LIFE IN TOWN AND COUNTRY

CHAPTER I

FRENCH RURAL AND PROVINCIAL LIFE

Among the nations of the earth there exists no more striking contrast than that between the people of Paris and the people of France. While the capital is a political furnace, where all sorts of conflicting ideas and opinions are continually boiling with such a rage of effervescence that the inhabitants, unaccustomed to the sense of calm and security, work, dance, and rest on the brink of an evermenacing revolution; in the provinces town life drags through its monotonous days, absorbed in dull provincial interests, and rural life knows no other changes or menaces than those of the seasons. We distribute to each race certain broad characteristics, and trace out for them in all circumstances an ideal of conduct from which, if they will be true to their blood, they must not deviate. And so we are all decided upon the general French characteristic, excitability, forgetting the immense provincial differences that are to be found in the people of France as well as elsewhere. The heavy Flemish natives of Picardy, large eaters, deep drinkers, hard workers, slow of speech, somewhat coarse and unperverted, are as French as the natives of Latin Provence, garrulous, sober, alert, and exuberant. They are not less French than the wily, hard-bargaining Norman, who eats and drinks as much, but brings a clearer brain into business, and may always be relied upon to get the better of his neighbour in all transactions; or the dreamy Celt of the Breton coast, the thriftless slave of superstition, with brains to spare as well as prejudices, but not intended by nature as a pillar of the Temple of Wisdom. Not less French the rich green midlands than the white and sunburnt south, the champagne vineyards eastward, and the rocky Cévennes rolling southward. Could anybody differ, more from the morose and inhospitable Lyonese, in whose eyes every outsider is the enemy against whom he sedulously barricades his doors, in whose esteem the pick of humanity is the prosperous silk-merchant,

than the pushing, loud-mannered Marseillais, with what he would fain have us take for his heart so aggressively upon his sleeve, emotion so transparently transient ever on the surface, subtly disguising self-interest and calculation?

For every diversity of character equal diversity of scenery—from the Alpine grandeur of the Dauphiny land to the beautiful lagoons of the Marais; the Vendean plain washed by the long blue roll of the Atlantic; Provence, land of salt lagoons and dead old cities of Greece and Rome; the central provinces, with their lovely rivers and chestnut woods; Celtic Brittany, half English; Normandy, with its glorious capital, one of the fairest of France; the radiant cities of the Loire, French river of romance; the bright and witching little kingdom of Béarn, exquisite Roussillon, with its old hum of wars and troubadour songs, its delicate sweetness of herb and leaf and bloom, its quaint old towns breathing of Spain, and its high air of legend; the east, with its mountains and dense pine forests, up to sunnier Ardennes. And the patois of these so different districts are not less distinct than the scenery, the note of town and province, and the characteristics of each race. Shelley most seriously wrote that there was nothing worth seeing in France. Even the tourist will find more to delight his eye in going from one department to another than he will find place to record in the most voluminous note-book. Let him only content himself with such a province as Touraine, with its rich and pleasant landscape, its castles of undying interest, its river of thrilling associations. Or let him wander in summer amid the cherry orchards of the Jura country, with the rampart of mountains above the pinetops and the touch of Swiss beauty around; or dream away the present in musing upon forgotten Mediterranean glories among the ruins of dead Provençal cities between the grey-green silver of the olive and the sapphire waters beyond the broad grey river bends.

It is true that the townsman all over the land is largely governed by a need for excitement, and having, as a rule, no personal initiative to enable him to minister to it, he contents himself with looking toward the capital with envy, and devours the newspapers from Paris in eager expectation of the “something” he is in daily hope of happening. But whatever does happen in Paris rarely makes itself

felt in the intellectually sleepy, industrious provinces; thanks to which wide-spread spirit of commercial and bucolic denseness to the inflammatory influences of the capital, France thrives now as she throve before the war, when at a word she could produce funds to pay off an enormous indemnity, without flinching or hesitating.

When you travel in the country or through small French towns, you are struck with the gaiety, intelligence, and good-will of the people and of the little shopkeepers, and with a certain unintelligent stiffness, pretension, and moroseness of the middle class, whose ambition it is to pass for the aristocracy, or at least for des gens de bonne famille. As these pretensions are rarely in keeping with their actual fortunes, these ambitious provincials, the victims of the political follies born of hostility to the Third Republic, think fit to garb themselves in the unbecoming vices of ill-humour, rancour, and idle pride. These they conceive to be the adjuncts of noble birth. If the fathers have refrained, the sons are certain to announce themselves, sooner or later, by titles of their own choosing. The general preference runs to count and viscount, though baron is not despised. I have known of a respectable middle-class family in the provinces, where the eldest son, a lawyer, is content to remain a republican, and the second son, an officer, a gentleman of aristocratic instincts, eager to profit by the present enthusiasm for the army in antigovernmental circles, calls himself a count. The humorous part of the situation lies in the fact that the wife of the plain Monsieur is not satisfied with her lot, since destiny, ruled by her brother-in-law’s will, has given the latter a title; and so at the recent marriage of that military worthy, the newspapers spoke of M. le Comte giving his arm to his sister-in-law, Madame la Comtesse, while the disgusted republican elder brother stayed in the country, indifferent to the selfappointed glories of his relatives.

Within late years, tennis parties are beginning to introduce a little stir in certain select circles of small provincial towns, where these entertainments are still regarded as novel; but, speaking generally, the dulness of such centres in France cannot be surpassed anywhere. Social life is at as low a level as intellectual life. Few books are read, fewer still are discussed. The very aspect of the

streets—with their sealed doors, shut persiennes, sullen absence of neighbourly trust and geniality, high-walled gardens—is morose and incommunicative. They wear, however, as compensation, a look of distinction, not infrequently accompanied by a picturesque charm. Should a river roll in view, or a little street slope down to a busy quay, where the washerwomen kneel and lend mirth and colour to the scene, while above, an old historic castle, high against the sky, on a dusty square, or the grey of Gothic stone and delicate spire add a hieratic note to the quaint picture you forget the unfriendly reserve of those barred and blinded houses, you forget the somewhat aggressive coldness and inhospitality of their front, in recognition of the tempered brilliance, the graceful and distinguished effects around you. Mingle then with the market-folk, and listen to their speech—pleasant vocables, rendered pleasanter still by vivacity of gesture and vividness of gaze; neat peasant women, in spotless caps and sabots, who look all the merrier because they are so hardworked; tanned, wrinkled faces, that smile as they did in youth, hardset, but not unkindly, in the rapacity of commerce; responsive to a joke, unflinching in the teeth of trouble, not destitute of a promise of comfort in life’s softer hours—though softness is the very last quality they betray. A genial hardness is, perhaps, the dominating character of the French peasant woman’s expression: it would never be safe to trust in the hope of finding her head napping and her heart too wide awake. But if she is not soft to others, she is implacably hard to herself. Her industry is amazing, and only less amazing is her resourcefulness. A more competent woman does not exist anywhere. Nothing of a dreamer, she is contented with her lot, provided only there is neither thriftlessness, waste, nor idleness about her. She will willingly work for four, if the men will honestly work for one. And while the men loiter and squander substance and health in the wineshops, this gallant creature continues to labour and save and scold, to deprive herself of small comforts in favour of others—a son, a daughter, as the case may be; and, thanks to her, the country ever prospers.

Country life is, of course, far less dull than provincial town life; less unneighbourly, and less destitute of all the charities of existence. For one thing, nature is the eternal friend, benefactor, and instructor of

man. The thousand vulgarities of towns are forgotten in the midst of her bounties. A man who lives in bucolic silence, watching the seasons and counting new-born things, dreaming of oats, of crops, of fruit, is essentially the superior of his fellows who dwell amid the sordid details of small towns, commerce, and rivalries, the gossip and drivel which make a spurious animation in the circles of the provinces. There are diversities among the type hobereau (a kind of French squire), as among all other types in France and elsewhere. Many years ago I travelled through a charming south-western province, furnished amply with letters of introduction. I well remember the extraordinary contrast between two families of hobereaux I once visited. A relative of the small squire, who lived in a dull, quaint little town, drove me out to see her bucolic son-in-law and his bucolic parents. The family was described to me as “exceedingly rich.” We entered a brilliant bit of park and avenue on a hot afternoon in July, drenched with the dews of heat, athirst from the dust of the broad, long white road. On the perron stood the young couple and their parents to receive us. The bride was gaudily and hideously attired in yellow and brown satin and silk; the groom in grey, with straw hat and leggings, more appropriately adorned the landscape. He was a heavy-eyed, high-complexioned, silent youth, who seemed at ease and happy only in the society of his most beautiful dogs. To them alone did he sometimes discourse in heavy undertones, while he surveyed me furtively under his lashes in unmistakable awe, but addressed me no word. His father-in-law looked like a farmer or a yeoman, and cracked small jokes. He quizzed his son, who blushed the hues of fire, and his son’s motherin-law, who ingeniously strove to make me believe that she did not understand him, and he nudged his daughter-in-law in a way she must have resented. Without exaggeration, I have never met a more peasant type of country gentleman in my life. His wife was a simple, ill-mannered person, who talked chiefly about the weather. The grounds were lovely, the orchard a splendid dream, but the floors of the “château,” as every country-house in France is pretentiously called, were mere unvarnished planks; not a rug anywhere, not a hint of beeswax, and even the drawing-room was disfigured with ugly presses. When liquid refreshment was called for—chartreuse and

iced water—we were served in coarse glasses, and the iced water was brought in in a kitchen jug. There was not even a flower in a vase, not a pretty window curtain, and the drawing-room chairs were of horsehair. Whatever occult advantages their wealth may have procured them, it cannot be said that beauty, comfort, the joy of living, were amongst them, for a more undecorated interior and duller persons I have never met, and yet, with so much comfortlessness, there was not a touch of vulgarity. The squireen was a rough son of the soil, but you accepted him as the animals of the field; you felt he belonged to the land, and, as such, claimed indulgence. You would not elect to pass your days in his society, any more than you would care to have a bear prancing about your drawing-room, but you instinctively felt his superiority to the town fop, who thinks himself a very fine fellow, with a little tailoring and a vast amount of pretension.

The second hobereau dwelt in the same department, but I visited him with very different results. I was invited to lunch, and my host drove me seven miles in a pony-cart. Here, also, were an imposing park and avenue, and an immense manor, which seemed all windows. There was among the guests a magistrate from Poictiers, who was witty as only a Frenchman can be witty. Our host was a charming, bright-eyed, lean little old man, full of vivacity, of charm, and intellectual alertness. He was voluble, and avid for information, and walked me up and down a delightful berceau to obtain my views of the woman’s question and the relative positions of the young French and English girl. He even pressed me to contrast the French and English novel, and said he greatly preferred Scott to Zola—an opinion I endorsed with fervour. People drove over from neighbouring places, and we were quite a large party at lunch. The talk was capital—local, but interesting; no cheap gossip, but plenty of genial wit, anecdote, and repartee. The women were dowdily dressed, as provincial Frenchwomen frequently are. I judged them as dense, impervious to ideas, utterly uncultivated, never, in all probability, having read anything except the thin religious literature on which the virtuous ladies of France nourish their minds; but they could well hold their own in conversation, could cap a phrase with elegant neatness, and the hostess deserved well of her kind for the

evidence she furnished of a perfectly ordered household. It would, however, be a mistake to credit them with grace because they are Frenchwomen. Nothing comes with such a shock upon the traveller in France, used to the feminine grace and charm and witchery of dress in Paris, as the dowdiness and want of ease, the total lack of taste in dress, the heavy figures and unexpressive faces of many of the women of the provinces. They dress shabbily, will even wear cotton gloves and badly cut boots when they consider themselves extremely exclusive, and carry off these defects of costume with a singular and unmistakable air of distinction. The commoner kind prefer to shine in fashions and colours unfamiliar to the eye of Paris; and, as a rule, look clumsy and obtrusive in their fine feathers. The same applies to the men. These, when they prefer to be shabby and roughly arrayed, look far better than the pretentious gallants who, by means of obvious tailoring, offer destruction to the susceptible dames around them. There can be no doubt that an elegant male costume is out of place and a vulgar blot along a sleepy little street where men in blouses pass and bonneted girls and women wheel barrows before them.

The farmer’s life has undoubtedly a larger share of natural interests than that of the hobereau. It is more purely animal, without any attachments to a world unconnected with the land. Ask a farmer what he thinks of politics, and he will tell you that he has nothing on earth to do with idiots or tricksters. He who must warily watch the humours of the seasons cannot trouble himself with the humours of electors and the ravings of voluble deputies. He walks his dewwashed meadows at dawn in wide-leafed felt; and, as he surveys the produce of his labour, his long hours of sweating travail, can he feel other than contempt of the highly remunerative and windy profession of the politician? The superiority of the lord of the soil to whom he pays tribute, he will readily acknowledge, but none other. In the west he will speak of his family as “my sons and the creatures,” meaning his daughters. In the land of the Cévennes, his children are les drôles, and the same unquestioning obedience is expected from both sexes by this rough and silent tyrant of the soil. Outside his farm he has little esteem to waste upon his fellows; within, is far from prodigal of tenderness to his women-folk. These he expects to stand

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