The grappling hook

I write this poem for survival,
flinging upwards the grappling hook
as the ground gives under me: I still hope
for a spectacular, minute-to-midnight arrival
at the gates of bliss. Calm detachment is vital,
I've heard, if you want to get through intact.
That's why my reasoning floats in a white tunic
above my shoulder; for luck I've named him Virgil.
The ferocity of our attackers frightened me
as we both peered back at the hellhounds below us.
"I think it's the optimism they found offensive,"
laughs Virgil with the pastoral charm of a wise peasant—
his look assuring me we'd once again be stretching our toes
on the pleasant shorelines of enlightenment.

The lady with a dog

As part of my Russian course, we've been translating one of Chekhov's short stories, The lady with a dog. Below is my loosish translation of the first part. The picture to the side is of Chekhov with his wife, Olga. They look, I must say, surprisingly cheery and wry.

I

It was said that someone new had appeared on the promenade: a lady with a dog. Dmitry Dmitrych Gurov, who had already been in Yalta two weeks and who was settling in there, also took an interest in the new arrivals. Sitting in Vernet's Pavilion, he saw as a young lady, a diminutive blond in a beret, passed along the promenade; behind her ran a white Pomeranian dog.

And then he would meet her in the municipal park and the urban gardens several times a day. She would stroll alone—always, however, in that beret, with the white Pomeranian; no-one knew who she was, and they would call her simply “the lady with a dog”.

“If she is here without her husband and without friends,” mused Gurov, “then there wouldn’t be any harm in making her acquaintance.”

He was not yet 40, but had a daughter aged 12 and two boys in grammar school. He had married early, when he was still an undergraduate, in the second year, and now his wife seemed to be half as old as him again. A tall woman with dark eyebrows, she was upright, important, solid and—as she herself put it—intellectual. She read a great deal, in letters did not use the hard sign, and articulated her husband’s name “Di-mi-try” rather than “Dmitry”—while he secretly considered her shallow, limited, graceless, was afraid of her, and loathed to stay home. Long ago he had started to cheat on her; he cheated often, which is probably the reason that he almost always spoke about women derisively, and when they came up in conversation in his presence, he referred to them thusly:

“ A low race!”

It seemed to him that he had learned enough from bitter experience to name them as he pleased, but all the same, without the “low race” he would have been unable to survive even two days. In the company of men, he was bored, not himself; with them he was taciturn, cold, but when he found himself among women, then he felt free, and he knew what to talk about—with them, it was even easy to be silent. In his appearance, character, in his whole nature there was something attractive, indefinable, which predisposed women to him, lured them; he knew of this, and he was also drawn to them by some sort of power.

Repeated experience, in fact bitter experience, had taught him long ago that any attachment, which initially so pleasantly relieves the monotony of life and appears to be a precious and carefree adventure, for respectable people—especially for Muscovites, who are sluggish and irresolute—inevitably turns into the whole problem, extraordinarily complex, and in the end the situation becomes burdensome.

At any new meeting with an interesting woman, however, this experience somehow slipped his mind—he wanted to live, and everything seemed so simple and amusing.

And so one day, towards evening, he was dining in the garden when the lady in the beret, without rushing, approached to take the adjacent table. Her appearance, gait, dress and hairstyle told him that she was from respectable society, married, in Yalta for the first time and alone, that she was bored here…

In the tales of the immorality of local mores, much was untrue: he hated them and knew that such tales in the main are invented by people who themselves would willingly have sinned, if they could; but when the lady sat down at the next table, no more than three steps from him, he recalled these stories of easy victory, of trips to the mountains, and the tempting notion of a quick and fleeting liaison, of an affair with an anonymous woman whom you did not know by first or family name, suddenly gripped him.

Softly, he beckoned the dog to him, and when it came he wagged a finger at it. The dog began to growl. Gurov wagged again.

The lady glanced at him and instantly lowered her eyes.
"He doesn't bite," she said, and blushed.
"Can he have a bone?" And when she nodded in assent, he asked politely:
"May I ask if you've been in Yalta long?"
"About five days."
"And I've been here two weeks already."

They remained silent for a while.

"Time flies, and yet it is so boring here," she said, not looking at him.
"That's just what people say, that it is boring here. Your average fellow lives in his anywhere in Belyov or Zhizdra—and he is not bored, but arrives here, and it's: 'O, it is boring! O, the dust!' You'd think that he'd come from Grenada."

She burst into laughter. Then they both continued to eat in silence, like strangers; but after dinner they walked side-by-side—and began the playful, easy conversation of people who are free, happy, with whom it is all the same where they go and what they talk about. They strolled and talked about how strangely lit the sea was; the water was of such a soft, warm lilac colour, and along it from the moon ran a golden strip. They talked about how stuffy it was after a hot day. Gurov said that he was a Muscovite, a philologist by education, although he worked in a bank; that he had once trained as a singer in a private opera, but had given up, that he had two houses in Moscow…And from her he found out that she grew up in St Petersburg, but left to marry in Saratov, where she had already lived for two years; that she was to stay in Yalta another month, and that possibly her husband, who was also in need of a rest, would come for her. She couldn't for the life of her explain where her husband worked—in the provincial government or in the provincial district council, and this was comical to her. Gurov found out further that her name was Anna Sergeievna.

If you want things to stay the same, everything has to change

In her recent book, Central Asia’s Second Chance, Martha Brill Olcott attempts to address an apparent contradiction at the heart of contemporary US foreign policy in the Central Asian region. This contradiction is that the failure of the current Bush administration to encourage democratic development more actively—instead relying on partnerships with authoritarian regimes out of short-term expediency linked to the prosecution of the so-called war on terror—risks reproducing long-term security threats to the West because of the potential for ongoing political, social and economic discontent to catalyse anti-Western terrorism.

She argues that the attention and resources of the US administration have been diverted from vital long-term democracy-promotion projects by the war on terror itself, and that this is shown by the low and declining level of US regional funding, which was just US$210m in 2004 (compared with US$1.9bn and US$2.7bn for the more significant US allies, Egypt and Israel, in the same year).

A second important theme of the book is that the nation-building approach adopted by international bodies may have been counterproductive for the region—in particular, in view of the interdependent histories, transport infrastructure, and energy and water resources of the countries involved, the country-specific approach may have encouraged rivalry and protectionism, hindering the development of a regional market.

In some ways, this is a frustrating book, since the author seems to share uncritically the terms and perspectives of the US policy establishment, so that the reader has the feeling of wading through quite a lot of policy-wonk material before getting to a discussion of the details of what has happened regarding the political systems of the Central Asian states themselves (the book might thus more accurately have been called America’s Missed Second Chance in Central Asia).

However, in relation to these political systems, the author makes the points that the countries' leaders were all products of Soviet political structures, and that their emergence, practically intact, from the wreckage of the Soviet Union following the failed Moscow coup of 1991 meant that they lacked the legitimacy that might have been conferred upon them had they risen to power as leaders of independence struggles. Although none of the region’s citizens enjoy as full a range of political rights and civic freedoms as those of the formerly communist countries of central and eastern Europe, there is some variety in the types of political systems that have obtained in Central Asia in the independence period, running along a line from “semi-democratic” to fully authoritarian, with the Kyrgyz Republic usually conceived of as the most democratic and Turkmenistan as the least.

The thesis that US funding was insufficient to allow it to influence positively the political outcomes in the region (in particular, to minimise the chances of political instability by helping to pave the way for the smooth, democratic handover of power) is illustrated by the case of the Kyrgyz Republic. Here, the author argues, such a policy had the best chance of success in the early years of the present decade, because of the country's experience of rapid democratic development in the early 1990s, and because the desire of the then president, Askar Akayev, to compete for prestige with other Central Asian leaders would have predisposed him to accept a high degree of conditionality in return for grant assistance for political reforms already under way, such as of local government, electoral mechanics and anti-corruption programmes. However, the sums involved were too small to yield any decisive influence (funds from the Freedom Support Act for democracy-building were just US$1.16 per head for the Kyrgyz Republic in 2002, although this was the highest per-head level of funding from the US for any country in the region). Instead, therefore, Akayev’s increasing authoritarianism went unchecked, and the chain of events leading up to the Aksy killings of 2002 and resulting in the president’s ouster in the Tulip Revolution of March 2005, while illustrating the greater political influence of public protest in the Kyrgyz Republic relative to its Central Asian neighbours, also began a curious phase of political instability and constitutional struggle that is probably not yet over. Indeed, the regime of Kurmanbek Bakiyev, which replaced Akayev’s, appears to have reproduced many of the features of its predecessor, re-employing many of its personnel, and adopting many of its operation and control techniques.

Oh moon of Alabama

The girl at the front who mid-song turned to discuss
the more compelling nuances of that day's soap instalment,
was it her or the players' plummeting conviction, kerplonk,
in the sincerity of their venture that began the wave
of indifference that soon engulfed the entire audience
who, tight-scarfed and back-packed, started in groups
to abandon the performance by way of the corkscrew stair?
The bass is holed below the waterline
and the band are blow-up lifebuoys rapidly leaking air.

When the singer looks round, he's lost at sea;
as if to the valve of some last-hope dinghy, he blows
with desperation into an unresponsive mic.
But his voice cracks like glass and the sharp notes jag,
deflating expectation, piercing the dinghy's skin
so that the hissing punctures now are legion
and the penetrating melodies buckle or lose their point.
The thump from the toms is that of a doomed galley.
All non-essential personnel make gratefully for the alley,

although stalwarts in the remaindered audience hold tight
to meet the end-set silence with relieved applause.
The cellar drains. Songs twitch like fishes on the floor
and the weary writer, thankful of the darkness,
slumps on his amplifier, wondering what went wrong.
He hardly recalls his earlier buoyant spirits
and it's only the face of his loved one—
brought to his remembrance ideally bright and shining—
keeps him afloat as he too skulks quietly to the door.

(Summer 1999)

A sea of troubles

Economic transition in Central Asia
Richard Pomfret’s book, The Central Asian Economies Since Independence, is a clear and reasonably up-to-date account of the economic developments in the first 15 or so years since the collapse of the Soviet Union thrust independence upon the five former Soviet republics—Kazakhstan, the Kyrgyz Republic, Uzbekistan, Turkmenistan and Tajikistan—that comprise the Central Asian region. Taking into account both the similarities and differences in their starting positions, Pomfret outlines the distinctive policies adopted by each of the new countries in response to common political and economic disruptions, and tries to relate these policies to the subsequent economic performance and prospects of each.

The broad picture
At the start of transition in 1991, the Central Asian countries inherited a number of shared features. They:

• began with very similar economic and political systems, based, respectively, on central planning and the constitutionally enshrined leading role of the Communist Party;
• were among the poorest republics in the Soviet Union, with around 30-50% of households living below the poverty line in 1989 (defined as a monthly income of less than Rb75), compared with a figure of 5% for the Russian republic;
• had relatively high levels of human capital for their income levels;
• had functioned as suppliers of primary products and minerals; and
• had a low indigenous capacity for economic management.

In addition, they faced a number of common deficiencies, disruptions and shocks, including:

• a lack of experience of independent nationhood, so that attempts at nation-building had to go hand in hand with attempts at economic reform, complicating reform;
• economic disorganisation, which was brought on by the shift from central planning and the split of the single Soviet economic unit;
• disruption of inter-republican trade links by new national borders; and
• the stoking of hyperinflation by the attempt to maintain the rouble zone, with prices in all five countries exceeding 50% per month in 1992.

These were the main factors behind the very steep output falls across the region at the start of the transition process, although other factors may be expected to have exaggerated or ameliorated the impact on living standards. First, there are valuation problems linked to the nature of the transition itself that make measurement difficult. For example, it is hard to value products for which demand dried up following the introduction of market mechanisms, or to account for changes in product quality or the introduction of new kinds of products. Second, the impact of output falls on living standards was likely to have been exacerbated by the cessation of transfers from the central Soviet authorities, as well as by the widening of income inequality. Third, in the Soviet economy energy products were undervalued and manufactures overvalued, so that a change in the terms of trade brought about by a shift to world market prices might have been expected to favour energy producers such as Kazakhstan and Turkmenistan. Fourth, in Tajikistan, the exceptionally steep falls in output were the result of the destruction of the centrally planned economy by two bursts of civil war, which only came to an end in 1997.

In tandem with these steep falls in output, all of the new central Asian states suffered a loss in budgetary revenue, not only absolutely, but also relative to declining GDP, creating dilemmas of how to achieve both macroeconomic stability at the same time as maintaining social programmes (in most cases, this was not possible).

Bearing in mind that the region suffers from a number of common international trade data deficiencies, in 1994-97 the foreign trade of the Central Asian economies began to recover from the initial transitional shocks and disruptions, and, with high trade to GDP ratios, all may be said to have quickly developed into open economies.

A closer view
The Kyrgyz Republic. Policy choices: The Kyrgyz Republic embraced the standard Western advice concerning stabilisation and reform (often referred to as the "Washington consensus"), for which it received extensive multilateral support. Price liberalisation and enterprise reform took place rapidly. Later on, in 1998, the country was rewarded for its choice by becoming the first of the former Soviet countries to be allowed to join the Word Trade Organisation (WTO).

Stabilisation: The Kyrgyz Republic introduced a national currency, the som, in 1993 as a prerequisite to asserting macroeconomic control, and it was the first country to curb hyperinflation, bringing the average rate of monthly price increases below 50% in 1995.

Output performance: Description. As a result of the economic disruptions and shocks that affected the whole region in the early phases of transition, output in the Kyrgyz Republic fell by a cumulative 45% in 1991-95. Manufacturing output also dropped sharply, and the increase in the contribution of agriculture to GDP in these years is probably explained by the migration of the newly unemployed from the cities to the countryside to look for work. Following the years of recovery from the low base so created—that is, in 1996-97—economic growth has been moderate and subject to wide fluctuations.

Explanation. The radical reform and stabilisation policies probably contributed to the steepness of the fall in output in the Kyrgyz Republic in the early transition era. The failure of the expected gains of its radical policy choices to materialise is perhaps explained the republic’s paucity of readily tradable resources, in contrast to some of its neighbours. Also, low levels of initial income and human capital, exacerbated by emigration of skilled (often Russian) staff, perhaps hindered the establishment of well-functioning market institutions. The fluctuations in GDP output are linked to an overreliance on gold production of the Kumtor mine.

Budget and debt: Anxious to maintain its social programmes, in the 1990s the Kyrgyz government did not allow expenditure to fall as far as revenue, keeping the government deficit fairly wide, at about 4% of GDP at least, until the early 2000s. To avoid inflationary financing, the authorities plugged the gap by borrowing from international financial institutions, building up a large external debt, which rose from zero at the start of transition to the equivalent of 139% of GDP in 1999, according to the World Bank. This was a negative development for at least two reasons: first, the borrowing was not used to invest in productive ventures that could later generate earnings from which government revenue could accrue and the original borrowing be repaid; second, debt repayments on the accumulated sum have acted as an ongoing drain on scarce public funds ever since.

Foreign trade: After a recovery, total trade turnover fell in 1997-2002.

Illuminati

A couple of years ago, I read a two-volume work by Peter Gay on the Enlightenment, which is itself a model of undogmatic humanist scholarship and prose. But it got me thinking about a few other Big Topics that seem to be relevant to the political questions of the day, and since then I've been thinking of composing a series of What Is...? studies--such as What is the Enlightenment? What is fascism? What socialism? Capitalism? What is imperialism?

Well, given the scarcity of time, you've got to start somewhere. Therefore, as a kind of a memo to myself and a spur, I've typed up a page from my notes on the chapter on the Enlightenment, the period and the broad philosophical-social movement, in Norman's Davies's workmanlike Europe: A History.

Enlightenment and absolutism: 1650-1789

• The age of absolutism is characterised by a much wider variety of political systems than just absolutism.


• The colonies and colonialism form a backdrop to the period.


• The Enlightenment outlook is distinguished by its emphasis on rational thinking, and an appeal to evidence. It aims to be undogmatic and tolerant. “The light of reason” shines particularly strongly in the fields of science, epistemology and moral philosophy. Rules and patterns in the arts: classicism. The mania for encyclopedias. In religious thought, it is epitomised by deism. In economics, mercantilism and the physiocrats. In political theory, Locke and Montesquieu. The question of historiography: How should history be written? Key figures include Voltaire and the transitional figure of Rousseau.


• Reacting against Enlightenment rigidity and reductionism, Romanticism emphasises the spiritual, the supernatural, the spontaneous; imagination and emotion. Vico, Kant, Haman , Herder.


• This is the period of French supremacy, primarily under the reign of Louis XIV, the sun king (r 1643-1715) in the seventeenth century, whose religious policy turned against the Huguenots and the Jansenists, and who conducted four major wars (the war of devolution; the Franco-Dutch war; nine-years’ war; the war of Spanish succession). In the eighteenth century: stagnation and hunting under Louis the XV; Louis the XVI: before the deluge.


• In the British Isles, it is the time of the Restoration, the Glorious Revolution, the Act of Union with Scotland (1707)—the basis of modern British identity. The Glorious Revolution enshrines parliamentary sovereignty, as against monarchical or popular sovereignty. Charles II lives it up. James II is seen as too soft on the Catholics. William and Mary are invited in. The reign of the Hanoverians: George I, II, III, IV (1714-1830). The American Revolution (1776-83).


• In rest of western Europe in the eighteenth century: the Bourbon kings in Spain and the auto-de-fe; in Portugal, John the priest king and the Lisbon earthquake; in Italy, rivalry between the House of Savoy in Turin, the Habsburgs in Milan and the Duchy of Tuscany: enlightened despotism.


• In central and eastern Europe: the last surge of the Ottomans and the siege of Vienna, along with a revival of Hapsburg fortunes: Maria Theresa and Joseph II, the “crowned revolutionary”; “Josephism” and education of the state elite; the incorporation of Hungary (1687) and the Rakoczy rebellion (1704-11); the rise of Prussia under the Frederiks, especially Frederick the Great (r 1740-86), said to be—nor least by himself—one of the wonders of the age. The expansion and consolidation of Russia (eg down to the Black Sea), especially under Peter I (r 1682-1725), who killed his son and initiated thoroughgoing Westernisation, and Catherine II (1762-96), who was German and killed her husband; succession by palace revolution; the war with Sweden; the construction of St Petersburg; the subjugation of Ukraine and the Hetman State. The decline of Poland-Lithuania.


• The deleterious role of Orthodoxy in the Balkans, as conservative, anti-Western: “none of the great civilising movements that shook the Western world…could effectively penetrate…Political traditions owed little to rationalism, absolutism or constitutionalism; kinship politics dominated at all levels; nepotism lubricated by bribery was a way of life.”


• Mozart.

Of butterflies and bees

I stood to one side of a supermarket car park
and sat for a smoke on an abandoned rust-brown girder
enmeshed in vigorous wild-grown grasses, hardy shoots,
as the melancholy shoppers in red shorts/ saris/ sandals
wheeled to each vehicle a high-stacked silver cage.
The sun unEnglishly vital, I remember, the clean smell of tar
as I watched fat bumblebees excellently hovering/
pollen shopping/ in and out of the grey-haired perfect thistles,
and my mind unfocused, an orange butterfly fluttering
in thorn-to-cabbage-bloom unbroken movement, aptly random,
until drawn in by a single plant leaf, lustrous, waxy,
on a single irrelevant plant stem—as in the fizz of some
wondrous relaxing tonic I sensed my guilts dissolve
so that a puff of animated pollen held in suspension there
and the butterfly stopped still in the motionless air.
And visioning all about me as desolate-peaceful—
the suburbs rubbled, the twin towers of Tesco's now decrepit—
I sat in a greeny Eden raised like a hill above time,
and I thought I saw below me, down the hill, souls in torment
circling, monsters in the trashcans refining anguish,
survivors in the ashes suffering the same; mine too
was down there in the thick of it as the Spanish horseman
galloped by on his way to fantasies impregnable to mere reality—
but how could I hope to help or intervene, as only
in the ad hoc haven I'd invented, in the greenness of it,
could I stub out anguish as easily as the embers of a cigarette
to watch both ash and filtertip nourish in the soil
the tawny bushes as an ideal home for butterflies and bees?

(1999)

Tell me, what is real?

Chapter nine of the WinEcon program, the first of the macroeconomic sections, turns immediately to some of the basic issues and indicators—interest rates, GDP growth, inflation and the balance of payments—with which macroeconomics deals, as well as some of the tools used to manipulate, describe and analyse them. This is used as a way of introducing some important definitions and distinctions concretely.

Kinds of variables
The first such distinction is between variables that show a pattern of increase or decrease over time (trended variables) and those that show no consistent long-term pattern (non-trended variables). The former include GDP and its components, inflation and the money supply; the latter include ratios such as unemployment rates, interest rates and exchange rates. A second basic distinction is between nominal variables, which measure changes in value, and real variables, which measure changes in volume or physical quantities. Ratios constitute a third category of variable.

Calculating real interest rates
This distinction between nominal and real is investigated in relation to interest rates, which indicate the scale of return on lending, or the cost of borrowing. A nominal interest rate is a ratio of asset yield to asset value (the asset could be a loan, for example), whereas the real interest rate—which takes into account movements in the price of goods and services—is a measure of the extra quantity of goods and services that can be bought from the loan plus the return. An approximate measure for calculating real interest rates is therefore the nominal interest rate minus the rate of inflation; the formula for a more accurate calculation is as follows:

Real interest rate (RR) = (1 + nominal interest rate/1 + inflation rate) -1

Therefore, if the annual nominal interest rate is 10% and the annual inflation rate is 6%, the crude measure gives a real interest rate of:

RR= 10 - 6 = 4%

Using the more accurate measure, the calculation is as follows:

RR = (1 + 0.1/ 1 + 0.06) -1 RR = 0.0377358—ie 3.77%

That is, rather than getting 10% more goods and services for the 10% return on your loan, with an inflation rate of 6%, you only get 3.77% more goods and services.

High inflation rates can turn real interest rates negative, with potentially profound economic consequences—helping to explain fluctuation in investment across time, for example. The pattern of interest rate developments in a selection of developed Western countries over three decades shows, broadly, that real interest rates were:

• low but positive in the 1960s;
• negligible to negative in the 1970s; but
• relatively highly positive in the 1980

Detrending GDP
Next, the program looks at three ways for analysing the patterns of economic growth, introducing the idea of detrending—a method by which any cyclical changes in trended variables can be separated out from the trend itself (this is useful when looking at short-term fluctuations in aggregate data).

Deviation of GDP from the linear trend. One method for detrending is to fit to observations of the level of GDP a line that minimises the sum of the squared deviations. The pattern of deviations from this line, when graphed, brings out the periods in which growth is above or below trend. (The formula for calculating the percentage deviation from trend level GDP is as follows: [real GDP - trend GDP/ trend GDP] x 100.) Looking in this way at the components of GDP by expenditure for the UK for 1955-2004, we can see that:

• household consumption grew at a rate below trend between 1975 and the late 1980s, but above trend since the late 1990s;
• government consumption was below trend for most of the 1990s, but above trend since the coming to power of the Labour Party in 1997;
• the growth of exports has been above trend throughout the 1990s; and
• the pattern of investment growth has been more erratic.

Deviation of natural log of GDP from the log-linear trend. If a variable grows at a constant rate, however, a second method can be used to get an accurate picture of patterns of change separate from the broad trend, which is to log the trend to produce an analysable linear graph, and then calculate the deviation of the logged GDP data from it. (We calculate the percentage deviation from a log-linear trend as follows: [natural log of GDP - log of trend] x 100.)

Period GDP growth rates. A third, more widely used, approach for separating out patterns of change in trended variables from the trend itself is to use growth rates of GDP in each period, with periods of high positive growth indicating a boom, and periods of contraction (typically, three quarters in succession) indicating a recession.

Constructing a price index
Inflation is the rate of change of the average price level (whereas hyperinflation is defined as persistently high rates of inflation, typically stemming from the inability of the authorities to tax and borrow amid generalised societal breakdown, often as a result of war, civil war or revolution). To get a realistic picture of inflationary patterns, it is important that the weighting of the goods and services in the price index reflects their relative importance in current patterns of spending, since these change over time. The first method, a base-weighted index, asks the question: How much do you have to spend, measured in the prices prevailing in each subsequent period, to buy the same quantity of goods as in the original, base period? A second method, a current-weighted index, asks: What would spending be if prices had stayed the same? The important GDP deflator is a ratio of the sum of the current values of all goods and services that make up GDP to the sum of the value of the same output in constant (base-period) prices, and it is used to work out real rates of economic growth.

The impact of devaluation on the balance of payments
The balance-of-payments records an economy’s transactions with the outside world, and may be used, among other things, to produce a picture of the geographical distribution of a country’s most important markets and suppliers. The balance-of-payments accounting framework may also be used to analyse the likely impact of using a devaluation of a fixed-exchange rate to address persistent external deficits—which should make exports cheaper and imports more expensive, stimulating and discouraging them, respectively, in order to close the external gap. Looking at the empirical results of just such a devaluation in the UK in the late 60s, we see that the external position temporarily worsened before it improved (the so-called J-curve), because both foreign and domestic demand takes time to adjust. In the short run, export quantities and prices in local-currency terms are unaltered; import quantities too are fixed, but local-currency prices for foreign goods and services rise straight away, so that the external imbalance is initially exacerbated. In the long run, however, export quantities increase and those of imports fall, as expected, reducing the external deficit.

Co-movements
A final section touches on the interesting and important topic of the interaction between macroeconomic variables, both within the domestic economy and between national economies. Plotting a scatter point diagram of GDP growth against a number of other domestic economic variables, the degree of correlation between them is indicated by the closeness of the co-ordinates to the best-fit line through the scatter points.

• A best-fit line with a positive slope indicates a pro-cyclical relationship—that is, one in which both variables move in the same direction. Those variables with the strongest pro-cyclical relationship with economic growth empirically include consumption, investment and imports.
• A negative slope indicates a countercyclical relationship, which means that a rise or fall in GDP growth is associated with a fall or rise, respectively, in the other variable. Empirically, changes in the rate of unemployment and inflation exhibit just such a relationship.
• When the best-fit line is horizontal, the relationship is described as acyclical, and no systematic relationship is discerned.

Correlations are scored between +1 and -1; the closer the correlation is to +1, the closer the scatter points to the positively sloping best-fit line, with a score of +1 indicating a perfectly positive correlation, in which all of the scatter points coincide with the best-fit line.

However, the linked movements of one macroeconomic variable and another are not always simultaneous. Sometimes a change in a variable occurs before a change in economic growth, and leads it; sometimes the change happens after a change in GDP, lagging it. Making an allowance for possible leads and lags in this way helps to untangle evidence regarding the difficult question of cause and effect.

GDP growth and interest rates. The relationship between economic growth and the Treasury-bill rate shows a strongish countercyclical lead movement, suggesting that an increase in the interest rate is associated with reduced output growth in the later period. The contemporaneous relationship is weakly pro-cyclical, but this strengthens when the variables are lagged, yielding some evidence that increased output growth pushes up interest rates, although with a delay.

GDP growth and changes in the unemployment rate. There is strongish countercyclical relationship when the variables are contemporaneous, which strengthens when the variables are lagged—that is, the rate of unemployment falls with rising economic growth, and this effect becomes more powerful over time.

GDP growth and inflation. An empirical investigation between output and inflation in the UK in 1951-93 reveals the interaction of the two to be slightly more complex than expected—specifically, there is a positive short-run connection between output growth and lagged inflation, but with periodic shifts, so that increases in output growth in the sub-period 1975-82 are associated with much larger increases in lagged inflation than for either 1951-74 or 1983-92.

Money supply and inflation. The strongest positive correlation between the rate of growth of the money supply is seen when plotted against data for the rate of inflation lagged for two years.

GDP growth and growth in other economies. Here, the question is: To what extent are booms and recessions transmitted? This depends on the degree of openness of a national economy to world trade and who its main trading partners are, which is often linked to geographical proximity. Thus, the GDP growth of the UK is most strongly positively correlated to economic growth developments in the US, Japan and France; for the US, GDP growth is most strongly linked to economic growth in Canada; for France, Italy; for Japan, Germany.