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Cycles that shape the world

Attila Marjan

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Megatrends are shaping the world and of course geopolitics as well and we are most of the time unaware of this. Demography, migration, sustainability (environmental and budgetary) are key issues for Europe and the world from a long term perspective. It is lesser known that megatrends often develop by cycles of different types and lengths.

Nikolai Kondratiev was exiled to the Russian Gulag and executed in 1938 because Stalin did not like his views on the Soviet economy and his theory of economic cycles. How accurate and powerful Kondratiev’s theory was is demonstrated not so much by Stalin’s rage as by the fact that history is cyclical: war followed by peacetime, economic boom by recession, political tranquility by political crisis.

Academics probe into past cycles because they want to be able to predict the future. Why are there cycles in the first place? Why is expansion followed by stagnation and then recession? Simply because production or human output is not constant, but there is a mysterious equilibrium, a certain level which production should not fall short of or exceed. The economy is unaware of this tipping point and when it deviates from the equilibrium, markets crash and an overproduction or overvaluation crisis breaks out. Long periods of economic boom are inevitably followed by a bust and recession. The problem is we never know when and how hard the next crisis will hit. At the height of the crisis in late 2008, the Queen of England asked a simple but pertinent question of her country’s brightest minds. Visiting the London School of Economics, she wondered out loud: “Gentlemen! Why did no one foresee this awful recession?” Of course no one could give a straight answer; the eminent economists just stared at their shoes. A lot of people are convinced that the cycles and crises of the past could provide some guidance. Economists started to investigate economic cycles in the middle of the 19th century, discovering medium-term cycles first and then long-term cycles in the early 20th century. The four main types of economic cycles are known as the Kitchin wave, the Juglar wave, the Kondratiev wave and the Braudel wave. There are innumerous other types — every economist studying cyclical fluctuations was keen to have one named after themselves — but the others do not really deserve attention.

The Kitchin inventory cycle, is a short business cycle of about 40 months. Inventories fluctuate as the short-term approach of businesses influences their stocking and destocking policy. The cycle named after Joseph Kitchin, which is not a proper macroeconomic cycle, is followed by the Juglar cycle, often identified as ”the” business cycle. In 1860, French economist Clement Juglar identified the presence of economic cycles 7 to 13 years long. The low point of such a cycle is marked by an overproduction or financial crisis.

The Juglar cycle is the only one that politics can respond to, simply because this is the longest timeframe that successive governments can comprehend. When we talk about anticyclical policy, economic stimulus plans and recovery packages, we talk about the vicious side of this wave.

The third cycle on our list is called the Kondratiev or long technological wave. The Kondratiev wave spans a period of 50 to 60 years and is divided into a phase of high-growth expansion and a phase of recession. How did Kondratiev discover these waves? He observed prices, wages, interest rates, industrial production and the use of raw materials in the USA, England and France. A thorough analysis of these data revealed a sinusoid running through 150 years. Kondratiev noted that turning points in the wave coincided with revolutions and wars. Some divide the Kondratiev wave into four ”seasons”. The Kondratiev Spring is a time of rapid growth, falling unemployment, improving productivity and relatively stable prices. The economy is in its youth. The Kondratiev Summer sees growth level off as the economy reaches its limits in output and resources, and with it a brief recession as a warning of things to come. The brief recession in the Indian summer shakes up the economy as the Kondratiev Autumn arrives. Stability and normalcy is restored in society, which becomes consumption-oriented and prices begin to soar. With the Kondratiev Winter comes a collapse of the system and brumal depression sets in. A major three to four-year crisis is followed by a decade of deflationary stagnation.

There are several explanations for the Kondratiev wave. Some say that it exists because every generation spends 25 to 30 years of its life in active work, which roughly corresponds to half of the cycle. Others suggest that these waves arise from important innovations that launch technological revolutions (the railway) or investments that bring major improvements in a sector (education), which take roughly a Kondratiev cycle to trickle down to the economy. There are those who think that the next Kondratiev wave will build on the revolution in nanotechnology. Previous cycles have all had a key innovation that opened a new chapter in history. The first cycle (1790-1842) the steam engine, the second one (1843-1897) the railway, the third one (1898-1949) electricity and the car, the fourth one (1950-2000) the airplane and nuclear energy.

The longest cycle is named after the great French economic historian Fernand Braudel. The Braudel wave or secular cycle encompasses the changes of the deepest structures, which are only discernible over long periods of 100 to 200 years. As the pace of change in the world around us accelerates, the cycle’s span is shortened from 200 years to around a century. This fourth wave follows the evolution of comprehensive systems such as the interrelation between agriculture and industry or services and the industry.

Believers in the wave theory claim that these four superimposed heaving waves determine the rhythm of the economy and of history. When the crests or troughs of two waves coincide it has disastrous consequences for humanity. In the decades following the Napoleonic War, in a period of extreme uncertainty, a Braudel and a Kondratiev wave peaked synchronously. The stock market crash and crisis of 1873 was set off by an overlap of a Kondratiev and a Juglar cycle. The Great Depression of 1929 occurred at the low-point of a Kondratiev wave. Nikolai Dmitriyevich Kondratiev timed the publication of his book to perfection. The Major Economic Cycles came out in 1926, when the West’s economic growth looked unbreakable. Three years later people were rushing to the library for a copy of the Soviet economist’s book. The oil crisis of the 1970s was a tumult of waves. A Juglar, Kondratiev and Braudel apex at the same time. Some economists consider the whole theory nothing more than pseudoscience. On the other extreme those who could not give their name to a cycle search for and claim to have found mathematical (read: mystical) correlations between the waves, such as the formula 1 Kondratiev = 3 Kuznets = 6 Juglar = 12 Kitchin. As crises demonstrate, people will take anything to the extreme, be it the economy, science, economics or quantum physics. There is one discipline where exuberance is almost a prerequisite: futurology, whose key drive is to predict the future, which is in fact an important incentive to examine the past. The good Reverend Thomas Malthus is widely considered the first pioneer of futurology. He predicted over 200 years ago that food production would not be able to keep up with population growth, which would lead to famines worldwide. His theory did have one fault, though: he could not possibly foresee the technological developments that gave us modern farm machinery, fertilizers and GMO crops. Although there are many people starving in the world today, the global trend is just the opposite: despite the exponential population growth there is an abundance (if not oversupply) of food on Earth. Starvation in the third (developing) world is the result of political and financial anomalies and war rather than a problem of production capacity.

Jared Diamond, an evolutionary biologist, professor of geography at UCLA and critically acclaimed author of numerous popular science books, believes that there is no need for computerized risk analysis, research of trends and complex climate models to know what the future holds for mankind. Various groups of the human race, civilizations, have always outgrown their natural environment, which led to their decline or extinction. One of his favorite examples is that of the indigenous people of Easter Island. When Polynesians populated the island about 1,500 years ago, it was covered by lush vegetation. When discovered by a Dutch explorer in 1722, the island was barren with nothing but hundreds of monumental statues and a few locals wandering around. The islanders were so primitive that it was hard to believe that their forefathers had had the technological prowess to erect the huge moai. The natives cleared the forests to replace them with arable crops and to use the timber to erect the statues and to build canoes. After centuries of irresponsible logging, the islanders ran out of trees to cut down while the population exploded. Deforestation led to soil erosion, which in turn reduced crop yields and, with the forests gone, they had no canoes for fishing. The island became overpopulated, the food supply dwindled, the ecosystem collapsed, and the natives began killing each other, even resorting to cannibalism. For many this might be a worrying reminder no matter if they believe in waves or not.

Hungarian economist, PhD in international relations. Based in Brussels for fourteen years as diplomat and member of EU commissioners’ cabinets. Two times visiting fellow of Wilson Center in Washington DC. University professor and author of books on EU affairs and geopolitics. Head of department, National University of Public Administration, Budapest.

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The CIIE: A gorgeous chorus of integrated world economy

Chang Hua

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The 2nd China International Import Expo (CIIE) will be held in Shanghai, China from November 5th to 10th. Iran will participate in Country Exhibition, Business Exhibition and Hongqiao International Economic Forum (HIEF). Here, I would like to introduce the CIIE to Iranian friends.

The 1st CIIE achieved great success. On November 5th to 10th, 2018, the first CIIE was successfully held in Shanghai, China, with a profound influence around the world. First, the scale of the exhibition was large. Covering a total area of 300,000 square meters, 172 countries and international organizations participated, and 3,617 overseas companies took part in the exhibition, fully reflecting the strong appeal of the Chinese market. Second, the level of the exhibition was high. More than 220 of the world’s top 500 companies participated in the exhibition, and more than 300 new products and technologies were first released. Third, the result of the exhibition was rewarding. More than 800,000 exhibitors and purchasers attended the conference, concluding contracts over  US$57.8 billion.

During the 1st HIEF, Chinese President Xi Jinping attended the opening ceremony and delivered a keynote speech. More than 30 foreign heads of states and international organizations delivered speeches and more than 4,500 delegates attended the forum. The Country Exhibition covered all five continents, including developed countries, developing countries and least developed countries. The Country Exhibition pavilions had different styles, highlighting their own characteristics, and making full use of high-tech means and diverse forms to display their unique regional culture and distinct advantageous industries, including goods trade, service trade, industrial development, investment, tourism and specialty.

The second CIIE is quite worth expecting. Namely, its scale will be even larger. The exhibition area has increased from 300,000 to 330,000 square meters. More than 170 countries, international organizations, over 3,000 exhibitors and 400,000 purchasers have signed up for the exhibition. There will be more than 200 supporting and facilitating activities, such as interpretation of economy policies, release of research reports, international cultural exchange, corporate promotion, as well as sellers and buyers’ matching negotiations. Its quality will be further upgraded. The exhibitors are more diversified. The number of companies in the world’s top 500 and leading industrial enterprises exceeds that of the first CIIE, and there will be even more visitors and international purchasers. Professional, high-quality, cutting-edge and featured exhibits will be more concentrated and the quality will be further improved. Its innovation will be much stronger. This year, for the first time, the CIIE news release platform will be set up. The Chinese ministries and local governments will jointly interpret important policies. International organizations and research institutions will release annual reports and industrial reports respectively. The CIIE will continue to be chosen as an ideal platform by participating companies to launch their products and technologies, the number of which is expected to overpass last year’s. Innovative exhibition forms such as quality life, technology life, and artificial intelligence will give participants a first-class experience.

As a major feature and highlight of the CIIE this year, there will be more than 60 countries participating in the Country Exhibition, covering an area of about 30,000 square meters. The theme of HIEF this year is “Openness, Innovation, Cooperation, and Win-win”. More than 50 important speakers from political, business and academic fields including WTO Director-general, UNCTAD Secretary-general, Nobel laureate in economics and leaders of global top 500 enterprises, will jointly explore the new trend of global economic development, share their views and insights on meeting new challenges, overcoming difficulties, and finding ways for further developing globe economy in the new era.

The open and cooperative CIIE will never end. The CIIE was first initiated, planned, deployed, and promoted by President Xi Jinping in person. As an event to be held on an annual basis, the CIIE will feature good performance, good results and continued success in the years to come. Adhering to the global governance concept of extensive consultation, joint contribution and shared benefits, the CIIE welcomes countries to share China’s development dividends. It provides new opportunities for countries to expand exports to China, but also develop trade relations with third countries. It builds a new platform for countries to demonstrate national development achievements and to explore global economic and trade issues. It injects new impetus to global trade and world economic growth. Upholding the spirit of openness and cooperation, the CIIE is not a China’s solo show, but rather a chorus of countries of all over the world. Working together with the international community, China is willing to develop the CIIE into an effective channel for the goods, technologies and services from the world to enter the Chinese market, an open and cooperative platform for countries around the world to strengthen cooperation and exchanges and conduct international trade, an international public product to promote economic globalization. China is willing to make joint efforts with the world to construct an open world economy, build a community with a shared future for mankind, and facilitate better development of global trade and world economy.

I believe that Iranian companies participating in this year’s CIIE will be warmly welcomed with the world-famous Persian carpets, saffron, handicrafts and etc…The Iran Country Exhibition High-Tech Pavilion will open a new window for China and other countries as well to perceive and further understand Iran’s technological strength and advanced products with its featured products in the fields of IT, energy, environment, nano, biology and health. As an important hub along the Silk Road , Iran’s voice and view will be heard at HIEF and spread to the rest of the world.

Here, I wish CIIE a gorgeous chorus of the integrated world economy and having a long-lasting profound impact of the world.

From our partner Tehran Times

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Modi’s India a flawed partner for post-Brexit Britain

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With just two weeks to go until Britain is scheduled to exit the European Union, Boris Johnson and his ministers are understandably focused on the last-minute dash to formulate a workable Brexit deal with the EU. Once this moment has passed, however, either Johnson or whoever replaces him as PM will come under intense pressure to deliver the trade deals Brexit side supporters have so talked up since 2016.

One such envisaged deal is with India. Seven decades after securing independence from Britain’s colonial empire, New Delhi has the world’s seventh-largest economy and one of its fastest growth rates. The prospect of deeper trade ties with Asia’s third-largest economy has been a major feature of the pitch for a “Global Britain” that extends the UK’s reach beyond the continent, and Johnson himself made a big thing of expanding economic ties with India while campaigning to become PM.

Unfortunately, any plans to kickstart trade agreements with India will run into problems, and not just over immigration and visa issues. India is on the verge of a serious economic downturn, hit by job losses and decreasing levels of foreign investment. With growth slowing down, Indian PM Narendra Modi has fallen back on his aggressive brand of Hindu nationalism to galvanise public support, a gambit that has most recently resulted in his government’s controversial move to strip automony from Kashmir.

Bad time for a UK-India trade deal

Whereas only a few years ago India was held up as one of the world’s fastest growing economies and an enticing prospect for global trade and investment, Moody’s new projection of a 5.8% growth rate represents a danger to Narendra Modi’s promise of a $5 trillion economy. Recently released figures show India’s GDP growth falling for the fifth successive quarter, to a six-year low of 5.2%.

India’s economic woes are reflected in patterns of foreign investment. Around $45 billion has been invested in India from abroad over the last 6 years. The downturn in the country’s economic fortunes has seen a record $4.5 billion of shares sold by foreign investors since June this year. These economic problems are linked to Modi’s failure to carry through on economic reforms promised when he came to power in 2014, when a number of structural problems were seen as inhibiting external trade relationships.

India currently has over 1,000 business regulations and more than 3,000 filing requirements, as well as differing standards for social, environmental and human rights. These have been sticking points in the moribund trade deal negotiations between India and the EU, and Brexit advocates have not explained how they plan to overcome these hurdles.

Hostility to foreign companies

Structural issues are only part of the problem. Another key concern is the Indian government’s adversarial attitude towards foreign investors. Despite Modi’s promises to make India an attractive place to do business, his government has continued protectionist policies that throttle the country’s ability to attract outside capital.

One issue is retrospective taxation. Under Modi’s predecessor, Manmohan Singh, several British and international firms were hit with sizeable, legally dubious tax bills by the Indian government. Modi came to power on a promise of ending retrospective tax bills being imposed on overseas companies, and yet British firms such as Vodafone and Cairn Energy still find themselves pursued through the courts for back-dated tax bills, despite the protections they should enjoy under the bilateral investment treaty between India and the UK.

Vodafone’s case involved its 2007 acquisition of a stake in cellular carrier Hutchinson Essar. While the deal did not take place in India, New Delhi determined Vodafone still owed $5 billion in taxes on the overseas transaction. After the Indian Supreme Court dismissed the claim in 2012, India’s previous government introduced a new law to tax transactions of this nature that retroactively applied to cases going back to 1962. Modi attacked this “tax terrorism” at the time, but his government has continued its dogged pursuit of Vodafone in the courts.

Cairn Energy has faced an equally arduous struggle with the Indian Ministry of Finance, which in 2014 blocked the British firm from selling its 10% stake in Cairn India and subsequently demanded $1.6 billion in taxes. Indian officials used the 2012 law to justify their actions, violating the bilateral investment treaty and breaking one of Modi’s own campaign promises in the process.

Immigration laws a further sticking point

This recent history should already give British businesses pause, but the most obvious obstacle in any trade negotiations between UK and India will be the issue of immigration. The Centre For European Reform has argued post-Brexit trade will be closely linked to opening up UK borders to workers from partner countries, but a UK Commons Foreign Affairs Select Committee report in June highlighted how Britain’s immigration restrictions on Indian workers, students and tourists has already impacted bilateral trade relations. The report noted how the UK has slipped from being India’s 2nd largest trade partner in 1999 to 17th in 2019, adding that skilled workers, students and tourists are deterred from coming to the UK by the complicated, expensive and unwelcoming British migration system.

It is unlikely the Modi government will agree to any UK-India trade deal that doesn’t guarantee a relaxing of immigration rules that will allow a free flow of people as well as goods and capital between the two countries. The question is whether the British government, which has veered ever more closely towards a Brexit-fuelled populism at odds with relaxed border controls, will be flexible enough to sign up to this.

Given these issues, are Britain’s hopes for a post-Brexit dividend in Indian trade dead on arrival? Unless Modi’s government starts living up to international standards and honouring his country’s investment agreements with British companies, “Global Britain” may not get much further with India than it has with the US.

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A more effective labour market approach to fighting poverty

Cynthia Samuel-Olonjuwon

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Gainful employment is still the most reliable way of escaping poverty. However, access to both jobs and decent working conditions remains a challenge. Sixty-six per cent of employed people in developing economies and 22 per cent in emerging economies are in either extreme or moderate working poverty, and the problem becomes even more striking when the dependents of these “working poor” are considered.

Thus, it is not just unemployment or inactivity that traps people in poverty, they are also held back by a lack of decent work opportunities, including underemployment or informal employment.

Appropriate labour market policies can play an important role in the fight to eradicate poverty, by increasing access to job opportunities and improving the quality of working conditions. In particular, labour market policies that combine income support for jobless people with active labour market policies (ALMPs).

The new ILO report What works: Promoting pathways to decent work  shows that combining income support with active labour market support allows countries to tackle multiple barriers to decent work. These barriers can be structural, (e.g. lack of education and skills, presence of inequalities) or temporary (e.g. climate-related shocks, economic crises). This policy combination is particularly relevant today, at a time when the world of work is being reshaped by global forces such as international trade, technological progress, demographic shifts and environmental transformations.

Policies that combine income support with ALMPs can help people to adjust to the changes these forces create in the labour market. Income support ensures that people do not fall into poverty during joblessness and that they are not forced to accept any work, irrespective of its quality. At the same time, ALMPs endow people with the skills they need to find quality employment, improving their employability over the medium- to long-term.

New evidence gathered for this report shows that this combination of income support and active support is indeed effective in improving labour market conditions: impact evaluations of selected policies indicate how people who have benefited from this type of integrated approach have higher employment chances and better working conditions.

One example of how this combined approach can produce results is the innovative unemployment benefit scheme unrolled in Mauritius, the “Workfare Programme”. This provides workers with access to income support and three different types of activation measures; training (discontinued in 2016), job placement and start-up support. The programme was also open to those unemployed people who were previously working in an informal job. By extending coverage to the most vulnerable workers, the scheme has helped reduce inequalities and unlock the informality trap.

Another success came through a public works scheme implemented in Uruguay as part of a larger conditional cash transfer programme, the National Social Emergency Plan (PANES). The programme was implemented during a deep economic recession and carefully targeted the poorest and most vulnerable.

Beneficiaries of PANES were given the opportunity to take part in public works. In exchange for full-time work for up to five months, they received a higher level of income support as well as additional job placement help. This approach reached a large share of the population at risk of extreme poverty and who lacked social protection. The report indicates that providing both measures together was critical to the project’s success.

The effects of these policies on poverty eradication cannot be overestimated. By tackling unemployment, underemployment and informality, policies combining income support with ALMPs can directly affect some of the roots of poverty, while enhancing the working conditions and labour market opportunities for millions of women and men in emerging and developing countries.

ILO

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