Global Business and Economics Research Journal ISSN: 2302-4593 Vol.

2 (2): 1 - 11

Kondratiev wave: overview of world economic cycles

Toivo Tanning
Tallinn University of Technology, Tallinn, Estonia

Maksim Saat
Tallinn University of Technology, Tallinn, Estonia

Lembo Tanning
University of Applied Sciences, Tallinn, Estonia lembot@tktk.ee

Abstract With regard to the world economic and the euro area crisis has become actual problems of development of cyclic economy. The article is a historical overview of economic cycles, the theoretical basis and the last 41 years in the real world and the European Union (EU) economic development, which confirms the cyclical trends in the economy today. Changes from region to region is different, but they also have common characteristics. Theoretical generalizations are also given for the dynamics of mathematical models of economic development, trend lines. Regularities of change are complex, but it would be useful to know as well as politicians, business leaders and gather supplies for the bad times. Keywords: economic cycle, economic growth, Kondratiev waves, European Union.

Citation: Tanning, T., Saat, M. and Tanning, L. (2013). Kondratiev wave: overview of world economic cycles. Global Business and Economics Research Journal, 2(2): 1-11.

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1. INTRODUCTION The theoretical basis for the current discussion paper stems from the statements of recognized scholars in the field of economics, the analysis of economic cycle and economic growth conducted by international organizations, recently published academic works dealing with economies in Europe countries and the views expressed in the authors (Tanning, L. & Tanning, T., 2010; Tanning, T., Tanning, L. & Saat, M., 2012) recent publications.

2. ECONOMIC CYCLE The term economic cycle or business cycle refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth, and periods of relative stagnation or decline. (O'Sullivan, A. & Steven, M. S., 2003). These fluctuations are often measured using the growth rate of real GDP. Despite being termed cycles, most of these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern. 2. 1 History economic cycle theory Clement Juglar identified in 1860 the presence of economic cycles. He was one of the first to develop an economic theory of business cycles. (Juglar, C., 1862) He identified the 7-11 year fixed investment cycle that is now associated with his name. Within the Juglar cycle one can observe oscillations of investments into fixed capital and not just changes in the level of employment of the fixed capital (and respective changes in inventories), as is observed with respect to Kitchin cycles. The recent research employing spectral analysis has confirmed the presence of Juglar cycles in the world GDP dynamics up to the present time. (Korotayev, A. V. & Tsirel, S. V., 2010) Keynesian theory are the group of macroeconomic schools of thought based on the ideas of 20th-century British economist John Maynard Keynes. The theories forming the basis of Keynesian economics were first presented by Keynes in his book, The General Theory of Employment, Interest and Money (Keynes, J. M., 1936). Published in 1936 it sought to bring about a revolution, commonly referred to as the "Keynesian Revolution", in the way economists thought especially in relation to the proposition that a market economy tends naturally to restore itself to full employment after temporary shocks. Regarded widely as the cornerstone of Keynesian thought, the book challenged the established classical economics
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and introduced important concepts such as the consumption function, the multiplier, the marginal efficiency of capital, the principle of effective demand and liquidity preference.
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Keynes's influence waned in the 1970s, partly as a result of problems that began to afflict the Anglo-American economies from the start of the decade, and partly because of critiques from Milton Friedman and other economists who were pessimistic about the ability of governments to regulate the business cycle with fiscal policy. The interpretations of Keynes are contentious and several schools of thought claim his legacy. Austrian economist Joseph Schumpeter argued later, that a Juglar cycle has four stages: (i) expansion (increase in production and prices, low interests rates); (ii) crisis (stock exchanges crash and multiple bankruptcies of firms occur); (iii) recession (drops in prices and in output, high interests rates); (iv) recovery (stocks recover because of the fall in prices and incomes). In this model, recovery and prosperity are associated with increases in productivity, consumer confidence, aggregate demand, and prices. In the mid-20th century, Schumpeter and others proposed a typology of business cycles according to their periodicity, so that a number of particular cycles were named after their discoverers or proposers (Schumpeter, J. A., 1961): the Kitchin inventory cycle of 35 years; the Juglar fixed investment cycle of 711 years; the Kuznets infrastructural investment cycle of 1525 years; the Kondratiev wave or long technological cycle of 4560 years.

Interest in these different typologies of cycles has waned since the development of modern macroeconomics, which gives little support to the idea of regular periodic cycles. 2. 2 Kondratiev wave Nikolai Kondratiev (Kondratjew, N. D., 1926; Korotayev, A. V.; Tsirel, S. V., 2010; , ., 2002) was the first to bring these observations to international attention in his book The Major Economic Cycles (1925) alongside other works written in the same decade. Schumpeter's relationships with the ideas of other economists were quite complex in his most important contributions to economic analysis the theory of business cycles and development. Following neither Walras nor Keynes, Schumpeter starts in The Theory of Economic Development (Schumpeter, J. A., 1961) with a treatise of circular flow which, excluding any innovations and innovative activities, leads to a stationary state. The stationary
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state is, according to Schumpeter, described by Walrasian equilibrium. The hero of his story is the entrepreneur. The entrepreneur disturbs this equilibrium and is the prime cause of economic development, which proceeds in cyclic fashion along several time scales. In fashioning this theory connecting innovations, cycles, and development, Schumpeter kept alive the Russian Nikolai Kondratiev's ideas on 50-year cycles, Kondratiev waves. Schumpeter suggested a model in which the four main cycles, Kondratiev (54 years), Kuznets (18 years), Juglar (9 years) and Kitchin (about 4 years) can be added together to form a composite waveform. Actually there was considerable professional rivalry between Schumpeter and Kuznets. The wave form suggested here did not include the Kuznets Cycle simply because Schumpeter did not recognize it as a valid cycle. See "Business Cycle" for further information. A Kondratiev wave could consist of three lower degree Kuznets waves. (Korotayev, A. V.; Tsirel, S. V., 2010) Each Kuznets wave could, itself, be made up of two Juglar waves. Similarly two (or three) Kitchin waves could form a higher degree Juglar wave. If each of these were in phase, more importantly if the downward arc of each was simultaneous so that the nadir of each was coincident it would explain disastrous slumps and consequent depressions. As far as the segmentation of the Kondratiev Wave, Schumpeter never proposed such a fixed model. He saw these cycles varying in time although in a tight time frame by coincidence and for each to serve a specific purpose. Later, in Business Cycles (1939), Joseph Schumpeter suggested naming the cycles "Kondratieff waves", in honor of the economist who first noticed them. In the 1950s, French economist Franois Simiand proposed naming the ascendant period of the cycle "Phase A" and the downward period "Phase B". Some market commentators divide the Kondratiev wave into four 'seasons', namely, the Kondratiev Spring (improvement or plateau) and Summer (acceleration or prosperity) of the ascendant period and the Kondratiev Fall (recession or plateau) and Winter (acceleration or depression) of the downward period. The Late-2000s financial crisis has increased an interest in the theories of long economical cycles (including Kondratiev cycle) as a potential explanation of its cause. (Land, L., 2011) 2. 3 Characteristics of the cycle Kondratiev identified three phases in the cycle: expansion, stagnation, recession. More common today is the division into four periods with a turning point (collapse) between the first and second phases. Writing in the 1920s, Kondratiev proposed to apply the theory to the 17901849 with a turning point in 1815.
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19th century:

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18501896 with a turning point in 1873. Kondratiev supposed that in 1896, a new cycle had started. The saturation of major markets, such as agriculture during the transportation revolution, or infrastructures creates an economic stagnation. However, stagnation does not always mean that markets are mature. Markets were temporarily oversupplied during the high growth period from the 1870s-90s, during which time there was also a lot of creative destruction in industries like iron, which was displaced by steel, and labour, which was displaced by machinery, but re-employed because of growth. The stagnation phase is characterized by a lack of good investment opportunities that leads to low interest rates. In the past, investments offering exceptional returns or low interest rates, or a combination, led to lowered credit standards which, in turn, created a speculative boom and high debt levels, followed by a crash and financial crisis. Past speculative excesses included canals, railroads, farm land, real estate and the broader stock market. (Taylor, G. R., 1951; North, D. C., 1966) The last two long cycles can be better seen in international production data than in individual national economies. (Korotayev, A. V.; Tsirel, S. V., 2010) The pre-1870 cycles can only be seen in Western economies. The long cycle supposedly affects all sectors of an economy, and concerns mainly output rather than prices. According to Kondratiev, the ascendant phase is characterized by an increase in prices and low interest rates, while the other phase consists of a decrease in prices and high interest rates. Over time the number of innovations in each wave increased and the diffusion of innovations overlapped, thus complicating dating the waves. Also, it is hard to tell much about which industries are growing, stagnating or declining by looking at the aggregate economic statistics. With lack of major technological driving forces and high debt levels, as in developed economies today, we should expect economic stagnation. Also, changes to the patterns of now rapid growth in some developing economies could perhaps be forecast using logistic analysis of their major sectors. 2. 4 Real world economic development Having a base in the world and Europe economies and the dynamics of the major trade organizations the IMF, OECD and Eurostat estimates, we will see how in the world, the European Union (EU) economy developed, and what the future brings us. This allows countries to knowledge, as well as companies and individuals to plan their activities in an
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optimal way for a right decision. However, it could make predictions unexpected political decisions, natural disasters, etc. However, it is considered that the composition of the EU and
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Germany have since changed and the Baltic countries' economies will be from 1992. year. The actual development is cyclical and vary widely from region to region.

Figure 1. A rough schematic drawing showing the "World Economy" over time according to the Kondratiev theory Source: Korotayev & Tsirel (2010)
80000000

World Developed economies

70000000

Developing economies Polynom (World)

60000000

y = -0,5217x6 + 68,279x5 - 3331,1x4 + 75476x3 - 785460x2 + 4E+06x - 2E+06 R2 = 0,9915

50000000

40000000

30000000

20000000

10000000

19 70

19 72

19 74

19 76

19 78

19 80

19 82

19 84

19 86

19 88

19 90

19 92

19 94

19 96

19 98

20 00

20 02

20 04

20 06

20 08

Figure 2. Total world, developed and developing economies nominal GDP in millions USD Source: authors illustration The authors made to the drawings in the world and the EU analyzed in the economy (nominal GDP at current prices in U.S. Millions Dollars) 41 years of development during the UNSTADstat (Handbook, 2012) based on the input. Details are still separately developed and developing countries on economic development. As a rule, have their share in the global economy, about 1/3 and 2/3. Transition economy countries have been neglected, because their GDP is small (2011=3.7%). Theoretical generalization of the global dynamics of a mathematical model, which is a 6-degree
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polynomial, the coefficient of determination R2 = 0.9915 is very high, allowing to make generalizations about the world of economic. Since 1970. the global economic stagnation or minimal development in the 1980s, with the 1982nd there was even a decline, including both country groups. Next was a period of stagnation, 1990 in the second half, with the 1997 and 1998 GDP was lower than in 1996. GDP 2009 was 3.3 trillion USD less than last year. In 2011 GDP however, there were a record volume of GDP, nearly U.S. $ 69.7 trillion. For analysis to 41 years, the world economy has grown 3.3 trillion to 69.7 trillion dollars, or 21.1 times. The figure shows that growth has not been steady, but with different gains momentum. At the same time the developed countries (U.S., Japan, EU and others) and developing countries (China, India and others) economic development has been different, even in the last economic crisis.

20000000 European Union Polynom (European Union) 16000000 EU y = -0,3363x + 42,673x - 2045,1x + 45999x - 483447x + 2E+06x - 2E+06 R = 0,9745 12000000 EUR y = -0,2697x + 34,703x - 1687x4 + 38464x3 - 409332x2 + 2E+06x - 2E+06 R = 0,9711 8000000
2 6 5 2 6 5 4 3 2

Euro area Polynom (Euro area)

4000000

Figure 3. Total European Union and Euro area nominal GDP in millions USD Note: EU = European Union (27 states); EUR = Eurozone countries (17 states) Source: authors illustration Here we should also note that over the years, the EU has increased the number of countries. Outages years coincide with some accuracy the total global development trends. It is characterized by the high share of EU in the global economy. At the same time, the EU was also a way to go back to the period. Thus it appears here more strikingly cyclical evolution. Dynamics in the euro area trend line is almost parallel to the trend line of the EU. Thus, the development of the Euro area is determined mainly by the development of the EU. Also here
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is a theoretical generalization of the mathematical model of the dynamics of the EU

19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10

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economy. To this end, the 6-degree polynomial, which, again, a very high R2 = 0.9745 allows to generalize the development of the EU economy. (Code: tec00001, 2012)

Purchasing power parity (Country a) 2011 European Union 1. United States 2. China 3. Japan 4. India 5. Germany 6. Russia 7. Brazil 15. Indonesia 15.48 15.08 11.30 4.444 4.421 3.114 2.383 2.294 1.125 2010 15.25 14.81 10.34 4.478 4.138 3.020 2.285 2.233 1.056 2009 14.93 14.46 9.366 4.284 3.758 2.904 2.191 2.077 994.8

Official exchange rate (Country b) 2011 17,090 14,830 7,181 5,773 1,798 3,550 1,821 2,453 832.9

Table 1. World country comparison, GDP in trillions USD Source: Country Comparison: GDP (purchasing power parity and official exchange rate) Note: data are in 2011 US dollars
20

GDP, 2011

Trillion USD

15 10 5 0 European Union United States 15,08 14,83 China 11,3 7,181 Japan 4,444 5,773 India 4,421 1,798 Germany 3,114 3,55 Russia 2,383 1,821 Brazil 2,294 2,453

Purchasing power parity Of f icial exchange rate

15,48 17,09

Figure 4. GDP World country comparison, 2011 Source: authors illustration In 2011 there were 16 national GDP (PPP) over a trillion USD, including 4 EU and 5 countries in Asia. All the world's major economies (GDP) is after 2009 been increasing, with China and India nearly a third of trillion USD annually, others less than it. Since the development of their national economies and global economic level, we can say that after the economic crisis develops further, but at different rates in different regions.
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proportion of shrink, and the of Asian countries (China, India and others) share of will grow.
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During the following the years of Western countries (EU, USA, Japan) the economy the

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Thus, the focus of Western civilization need to focus on competition in Asia, especially China, India and other emerging developing countries. 3. CONCLUSIONS In summary, Kondratieva economic cycles and other generalized trend lines are thus highly simplified generalizations. Requires in-depth analysis of economic development as well as hundreds of other economic and social indicators for the treatment of these correlations examination, even by industry. Their decision-making should take into account both the politicians and business leaders in the economic development of a cyclical nature, the fact that after the economic boom slows down or even go back to it (the crisis), then to grow again after some time. Capitalism does not develop uniformly. This is confirmed by both the global and Estonian economic development in recent years. For analysis to 41 years (1970-2011), the world economy has grown 3.3 trillion to 69.7 trillion dollars, or 21.1 times. Politicians and business leaders are not making their decisions, need to know the exact complex mathematical models, one need only simplified the regularities of general knowledge. As the labour market development is also dependent on the overall economic development, then here are similar to the cycles of social economic cycles, labour cycles but are almost a year beyond the tips of the displaced. Unemployment is rising as fast as economic improvement. So many unemployed, who used to live in a relatively high unemployment compensation benefits, do not rush over to look for work so quickly. It also does not increase unemployment will immediately fall in GDP, but until some time after the unemployment rate will increase. Future economic growth is faster than the growth of employment. This means that after the recession has intensified the economic development of much greater intensity than before the crisis. In summary, the main indicator of economic development is considered in real GDP (PPP) changes over time, which is also used here. However, it can, however, to assess the accuracy of certain factors such as labour productivity, etc. development. The output produced per worker and GDP, and changes in GDP and unemployment among the correlation relationship. Kondratieva economic cycles and other generalized trend lines are thus highly simplified generalizations. Economic cycles are a lot of researchers in the world. Actuality of the topic of the latest
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world economy is heavily developed, especially in developing countries, and hopefully this
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economic crisis and the increased concern about the future. At the same time, however, the

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will continue, but the ups and downs of having a wide range of subjective and objective reasons. REFERENCE CIA. Country Comparison: GDP (purchasing power parity) Factbook. https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html CIA. Country Comparison: GDP (official exchange rate) Factbook. https://www.cia.gov/library/publications/the-world-factbook/fields/2195.html#76 Juglar, C. (1862). Des Crises commerciales et leur retour periodique en France, en Angleterre, et aux Etats-Unis. Paris: Guillaumin. Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan. Korotayev, A. V. & Tsirel, S. V. (2010). A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and the 20082009 Economic Crisis. Structure and Dynamics. 4(1): 3-57. Kondratjew, N. D. (1926). Die langen Wellen der Konjunktur. Archiv fr Sozialwissenschaft und Sozialpolitik. 56: 573609. Land, L. (2011). Kondratieff Waves Crashed Our Economy!

http://lewyland.blogspot.com/2011/10/kondratieff-waves-crashed-western.html North, D. C. (1966). The Economic Growth of the United States 1790-1860. London: W. W. Norton & Company. O'Sullivan, A. & Steven, M. S. (2003). Economics: Principles in action. Upper Saddle River: Pearson Prentice Hall. Schumpeter, J. A. (1961). The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle. New York: OUP. Tanning, L. & Tanning, T. (2010). Rahvusvaheline majandus II. Tallinn: Tallinn University of Technology. Tanning, T., Tanning, L. & Saat, M. (2012). Cycles Economy by the Example of Baltic States, Germany, Sweden and Finland. Journal of International Scientific Publications: Economy & Business, 6: 272-285. Taylor, G. R. (1951). The Transportation Revolution, 1815-1860. Toronto: Rinehart & Co. UNCTAD. Handbook of Statistics. http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx
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