Download GCSE Making a Living extension case study

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