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Unit 2 Topic 4 Chapter 12: Making a living Are Kondratiev’s ‘economic cycles’ real? In mid-2008 a world financial crisis began, at first affecting all developed countries and then the rest of the world. The speed of the worldwide collapse was due to the globalisation of the financial sector, with all the banks and stock markets interlinked throughout the world. The ‘Credit crunch’, which began the crisis, was a reflection of how consumer cultures in developed countries had changed – relying on borrowed money, from massive mortgages to credit cards. There have long been repeated periods of recession and economic boom, largely based on changing technologies within secondary industry. The Russian economist Nikolai Kondratiev (1892–1938) predicted these ‘economic cycles’. There have been four ‘waves’ since 1800 (see graph), with the last major depression starting in the 1930s and finishing at the end of the Second World War. There was then a recovery during the 1960s and 1970s, leading to an economic high, followed by the 1980s ‘minirecession’ and a brief ‘mini-boom’. The 1990s saw a massive increase in credit and borrowing at all levels, from personal to corporate. But this went too far and the twenty-first century’s first financial crisis should have been predictable, according to Kondratiev. By the end of the 2030s another economic peak should be reached after a recovery period – but will this happen quickly or slowly? Kondratiev suggested that there are four stages to an economic cycle, each with an average length of over a decade, giving a complete cycle of 45–60 years. But each cycle has numerous minor fluctuations and these can be misleading. There is always a period of readjustment between each economic cycle, as new technology establishes itself, but governments or organisations appear to have little effect on this adjustment. The globalisation of the world economy was responsible for the simultaneous problems and the severity of the new recession. As housing and housing-related industries have collapsed, people in developed countries have stopped spending money on houses, cars, electronic goods, etc. Restructuring by companies led to job losses, meaning that many people had less money – and spending reduced even further. Governments tried to encourage spending, and lending, with low interest rates and by putting money into the banking system. Low prices sound good for consumers but deflation can lead to salary cuts or more unemployment as profit margins are reduced. This especially affects outdated industries. Some analysts believe that East Asia, perhaps China, holds the key to recovery because the high dependence on the tertiary sector in Europe and the USA will probably mean that recovery in these regions will be slow. In 2009 GDP is predicted to fall between 1 and 2% in developed countries, with an investment decline of between 5 and 10%. The next economic growth phase may be based on IT industries, many of which are located in East Asia (although research and development is found in USA and Europe). East Asia is also an emerging market and so they will be able to sell to themselves in the future rather than exporting to Europe. Without such significant secondary industries, the role of the USA and Europe is uncertain in the next Kondratiev wave (see graph). Activity (1) Describe and explain the pattern of world economic change since 1800. (2) How may people be affected by an economic recession? (3) Draw a flow diagram to show the downward spiral that occurs during a recession. (4) Suggest how a country could try and maintain sustainable economic development over a long period of time. Can sustainability actually be achieved? © Pearson Education Ltd 2009 Edexcel GCSE Geography B Evolving Planet