1 October, 2020

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Long Waves In Global Business Cycles Versus Sri Lanka’s Disastrous Short Waves

By W. A Wijewardena

Dr. W.A Wijewardena

Nikolai Kondratieff on business cycles

The business cycle theory presented by the Russian economist of the early 20th century, Nikolai Kondratieff (in Russian Kondratiev) has received attention of the mainstream economists in the West only recently. Till about early 1990s, he had been relatively unknown, though his theory had had a profound impact on the understanding of business cycles. There was a reason for it. Except a few articles published in leading economics journals in the West, all his writings, done in Russian, had been translated into English fairly recently. That was because, despite his Marxist leanings, he was considered a traitor by the Soviet establishment. On this charge, he was arrested in 1930, kept in prison for 8 years and executed by a firing squad in 1938 at the prime age of 46 years. 

His crime? He had discovered through empirical research that capitalist societies had repeatedly undergone ups and downs in their economies – known as business cycles – but had managed to recover to a new position every time they had suffered from an economic downturn. Such business cycles had typically been experienced by Western economies for long periods of about 50 to 60 years which he designated ‘long-waves’. 

This was against the worldview presented by the Soviet leadership at that time. Their worldview simply said that capitalist societies are inherently defective and would see their eventual downfall whereas communist societies are permanent and progressing continuously. The fate which Kondratieff received at the hands of the Soviet leadership at that time was typical of any authoritarian rule. The authoritarian rulers throughout history have shown that if you express any view opposed to theirs, you have to pay for it dearly. 

That dear payment in the Soviet Union took the form of trading your life for intellectual subservience. Kondratieff did not agree to this trade-off and preferred to be executed. He was in oblivion for five decades and was resurrected among the mainstream of Russian academia only after the Soviet Union collapsed in 1990.

Birth of Kondratieff Waves

Before his arrest and incarceration in prison, he was a leading member of the Soviet establishment. He helped Vladimir Lenin to prepare his New Economic Policy to make a turnaround of the fast decaying Russian economy immediately after the October Revolution of 1917. He prepared the agricultural policy in which small farmers could produce food products for the market. 

Kondratieff’s main research interest was business cycles and in furtherance of this interest, in 1920, he set up The Institute of Conjuncture in Moscow. This led to the publication of a series of papers and books on business cycles starting from the 1922 publication, ‘The World Economy and its Conjunctures after the War’ and culminating, in 1925, in his main work on the subject, ‘The Major Economic Cycles’. 

Before this major work, he published a paper in 1924 distinguishing between a selected point in the economy – known as making a static view – and the movement from that point to a forward point in the future, called the dynamic progression of the economy. All that matters to an economic planner is not this convenient static view but how the economy would progress over time as presented by its dynamic developments. It enables the planner to grow along with the growth of the economy and gauge for himself its strong features as well as weak points. 

This is similar to a mother living with her son or daughter. She would personally experience how he or she is growing and what are his or her strengths and weaknesses. Any intelligent mother would know that his or her growth is only in the forward direction and she could not rewind the clock to an earlier point in his or her life to try out a new beginning, even if she would have loved to do it. Noting this forward direction of economies and inability to move back to an earlier point in history, Kondratieff observed that all economies were subject to a series of repetitive ups and downs in long waves each spanning over 50 to 60 years. 

Out of respect for the discoverer of these long waves, the Austrian-American economist Joseph Schumpeter designated them as Kondratieff Waves or simply K-Waves. The subsequent economists have found that these long waves are in fact a reality and discovered seven such waves pertaining to Western economies as presented in figure 1.

Figure 1 – Source: Google

Presently, the world is going through this last wave that had started in 1970. At the tail end of the seventh wave, the global economy has been hit by an unexpected event in the form of COVID-19 pandemic pushing it further down in the downswing, probably in to the negative area, and postponing the progression into the eighth wave.

Frenchman Clément Juglar on commercial crises   

Of course, before Kondratieff, the French physician and statistician, Clément Juglar had identified in two publications, first in 1880 and the other in 1889, long commercial crises akin to modern day business cycles. He identified three phases of a commercial crises, prosperity, crisis and liquidation.

When an economy starts doing better in the prosperity period, people become overexcited and begin to spend more than what they earn, funded by borrowing. Hence, the banks too experience an expansion of credit and ride the upswing freely exploiting new profit-earning opportunities. But soon, system applies its own brakes and make the overconsumption, not supported by real production, unviable. Crisis hits and most of the less profitable businesses are liquidated, followed by more solid ones. Banks which have liberally expanded credit also go under along with the commercial businesses. This is the danger of bubble building in an economy which economists talk today. 

Recovery from the crisis, according to Juglar, comes from the reawakening of the spirit among investors through an oversupply of savings and the consequential reduction in interest rates. Thus, the recovery from the crisis is basically a monetary phenomenon: Lower interest rates, make even the less profitable investments profitable and encourage businesses to make a re-start. Hence, the economy continues with the same tempo and same production techniques. It is like a human body that makes a series of readjustments when hit by a disease. The sick man recovers but continues with the same body until another disease hits him. 

Departure of Kondratieff from Juglar

This is the point of departure by Kondratieff. According to him, it is by deliberate human action which brings about a new technique of production that helps an economy to move from one wave to another. There are four stages in each long wave: prosperity, recession, depression and improvement. In the prosperity, everyone rides on the bandwagon of new good life offered to him. But soon, like the analysis made by Juglar, they overdo it causing the economy to be overstretched beyond its capacity. That causes to recession to set in making it doubtful to continue with the same tempo of consumption.

It is then followed by depression marking the downswing of the wave. During this period, the necessity is felt to come out of the depression through the invention of new techniques. The commercial application of these inventions begins paving way for an upswing in a new wave. Without these commercial applications, scientific inventions become purposeless. This is how Kondratieff had presented it in his 1935 article to Review of Economic Statistics.

Kondratieff: Inventions alone are not sufficient

Says Kondratieff: ‘Scientific-technical inventions in themselves, however, are insufficient to bring about a real change in the technique of production. They can remain ineffective so long as economic conditions favorable to their application are absent. This is shown by the example of the scientific-technical inventions of the seventeenth and eighteenth centuries which were used on a large scale only during the industrial revolution at the close of the eighteenth century. If this be true, then the assumption that changes in technique are of a random character and do not in fact spring from economic necessities loses much of its weight. We have seen before that the development of technique itself is part of the rhythm of the long waves’

Further elaboration by Joseph Schumpeter

The Austrian-American economist, Joseph Schumpeter, who coined the term Kondratieff Waves further developed this idea by distinguishing innovations from inventions. Inventions are new creations by scientists and engineers. But they have to be commercially developed by a process known as innovations. Hence, as Kondratieff too had presented, inventions are nothing but mere paper-works.

A good example is that Stephen Wozniak, the engineer, invented the first Apple Mackintosh Desktop computer. It would not have seen the light of the day, if there was no an entrepreneur called Steve Jobs who found ways of funding, mass production, marketing and after-sale service provision for the new invention. Similarly, the US company, Corning Incorporated, had invented the scratch-free gorilla glass in 1960s for the US Air Force. Since it was not used by the Air Force, it remained only as a prototype in the labs of Corning Incorporated until 2004 when Steve Jobs used it for his first iPhone model. 

Schumpeter has presented two further requirements for a capitalist economy to sustain and progress. One is the diffusion of knowledge among a large number of people about the new innovation. The other is the imitation of same by prospective entrepreneurs. Schumpeter has thus further elaborated on what Kondratieff had categorised as the existence of favourable economic conditions.

Every long wave is followed by adoption of new technologies

What this means is that business cycles are common occurrences, they take the form of long waves spanning over 50 to 60 years and every wave leads to a new cycle which is based on new technologies. Thus, it is technology which keeps the capitalist system moving forward in a continuing evolutionary process. 

This evolution is halted only if it fails to come up with a new technology to address the existing problems. Given the current ever-expanding research base in advanced economies, it is unlikely that the world would reach a stage in which it is no longer capable of coming up with a technology that could not be commercially applied.

Sri Lanka’s short waves in post-independence history

This gives an opportunity for us to examine Sri Lanka’s growth cycles since independence in 1948. In terms of Kondratieff waves, Sri Lanka should have completed one single wave and moved into the initial upswing phase of the second wave. But as shown in Figure 2, Sri Lanka’s growth cycles since independence have been fairly short spanning over 3 years at the shortest and 15 years at the longest. What this means is that the country has failed to sustain its growth momentum for a sufficiently long period to ensure continued economic advancement.

Figure 2

What have been the causes for this unhealthy development? Many. First, the overexpansion of the public sector by successive governments has diverted the resources that would have been used for developing its ‘research, development and application base’ to current consumption. Every general or Presidential election is preceded by a generous offer to provide employment to the unemployed, especially the graduates passing out from universities, in the government service. 

Second, this consumption-orientation has created unsustainable budget deficits leading to many macroeconomic issues: expansion of debt, money printing, inflation and pressure for the exchange rate to depreciate. 

Third, the economy-wide inefficiency as demonstrated by low ranking in the ease of doing business indexes has taken the incentives away from entrepreneurs to invest in newly innovated products. To eliminate these inefficiencies, it is necessary to undertake structural reforms in both the real economy and the public sector. However, every successive government has paid only lip service to this requirement. 

Fourth, Sri Lanka has failed to attract new technologies from those who have developed them in the initial period and develop its own research capability in later periods. This requires a complete overhaul of its education system. 

Students are throughputs and once they go through the education mechanism, what should come out should be individuals who are capable of thinking independently. Human society has progressed not by ideas that are accepted unquestioningly but by ideas which are created in independent minds. For this purpose, the ability and capability to question the existing order is a must. The biggest enemy of progress in this sense is subservience. 

SL should act now to avoid further disasters

Sri Lanka’s business cycles have been short making it a country of the poor. It is poor because it is poor of ideas, creative thinking and a critical pool of capable entrepreneurs. Hence, every time it has completed a business cycle, it has moved to the same old production system. This has trapped the country in an unwarranted state of poverty.

Its last business cycle, started in 2010, has now completed 10 years. There was reasonable expectation that it would jump quickly to its next short wave within the coming two to three-year period. But the disastrous COVID-19 pandemic has pushed the country to negative region thereby prolonging the economic recovery process. 

But it gives an opportunity, driven by necessity, to move for the needed structural reforms to push the country to a series of new waves marked by advanced production techniques.

*The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com   

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Latest comments

  • 3
    1

    Sri Lanka’s Business and economic waves are closely linked to the waves of race riots as you can see from the graph
    Dr. W.A Wijewardena – would you please do a more detail analysis,

  • 0
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    The reason the Soviets shot him was because he was comparing Russia with the former Colonial countries who were rolling their wealth on capitalistic innovations. Russia did not have the equivalent of colonies, and hence trying to be like the West was a dud. Even now, Russia and China trying to keep up with the West is causing a lot of global tensions.
    *
    As for Sri Lanka, trying to keep up to the West has only created the Masses of Lankan going to places like the Middle East to work for an ever-inflating Western model. Now it is even worse as they are doing the same but via China. Best it is for Motherland to go into a more traditional system with a percentage contributing to the Western innovative model….which btw can hardly be called evolution; it will come to a dead stop unless other planets can be colonized within the next 100 years.

    • 1
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      Ramona,
      “Soviets shot him was because he was comparing Russia with the former Colonial countries”
      At the time he was shot, there were no “former colonial countries”. They were still colonies.

      • 0
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        old codger,……places like America, Australia, NZ, were all former British colonies at the time. And with Britain’s other colonies still existing at the time, British consolidated all of its wealth within its former and still existing Commonwealth countries. Innovation and capitalism went very easily hand-in-hand.

  • 2
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    With due respect for the author I would like to add few things he should have included.
    .
    1. Nikolay Kondratev was cleared of all charges against him posthumously almost fifty years later, on July 16, 1987.
    .
    2. Some economists argue that Kondratiev wave is not valid for the post-World War II economy.
    .
    3. Most interesting thing is that the “Mayans” were known for tracking same kind of cycles such as this one. It is said that they treated the inevitability of the cycle not as a destiny but as a tendency.

  • 1
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    Dear Dr. Wijewardena,
    I’ve a few queries. I raise these NOT for the purpose of criticism but as an opening thread for a meaningful dialog, which in turn would be a learning curve for me.

    1. You do think that the K-wave theory is best-fit model to analyze our economic progression? The long wave theory is based on analyzing mainly capitalist economies, whereas in SL, progressive governments since independence have adopted several political ideologies to nurture the economy?

    2. Even today, many ecomistss do not endorse the long wave theory due to its vague definition of the start, transition betwen phases and ending of the cycles.

    3. Shouldn’t other pivoting factors both natural and man-initiated be considered to hev an impact on the long and short wave (in the case of SL) be factored into the model, at least to create several if-then scenarios.

    4. Extending from 3. can a model developed over the data for the past 100 years of history, be used to extrapolate the weltanschauung of the future.

    p.s. I am not an Economist, but merely a person with a of science and systems orientation.

  • 3
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    WAW,

    The context is the key factor.

    The national economy should synchronize with the Global economy.

    This is the challenge facing economics planners in the developing world.

    However much we may disagree with the western world, presently the international trade is controlled by them.

    The ups and down in world trade affects us immensely.

    Referring your graphs, If you could super impose Sri Lanka’s trade cycle upon the international trade cycle we could observe vital factors that could help Sri Lankan planners.

    Global context is most important in national economic planning and concentrate areas where we have the comparative advantage,

    To ignore this reality and making our plans is suicidal and invite national calamity

  • 2
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    Usual lenghthy stuff not addressing the issue correctly. That is typical to Dr Wijewardhana.
    :
    All these are just redherrings protecting real goons of bond scam.
    .
    Not Mahendran but MR et al should be responsible for the entire mess. They did not handle it prior to 2015. Now the very same idiots make every effort to pass the entire blame on previous govt.
    At least thanks to Previous govt, Bond scam was just identified. The billions of losses made from 2008 -2015 confirmed no body else but former President – most stupid man in srilanken politics who has fooled the readers again about his 20 000 times of putting his signature in order to extradite former CBG from Singapore. The kind of pattapal boru (false statements of high degree) can only come out of stupid Sirisena only. NOw being close to Mafia boss, the bugger makes every effort to win the hearts and minds of the very same people.. how devious these buggers are upto. ?
    .
    http://www.sundaytimes.lk/200607/columns/mahendran-extradition-cynosure-on-sirisenas-21000-signatures-405384.html
    .
    But Arjun Mahendran has expressed his innocience in his recent article and a second part of it is pending.

    • 1
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      leelagemalli: Usual lenghthy stuff not addressing the issue correctly. That is typical to Dr Wijewardhana.

      Malii – I have stopped reading this guy only just a quick scan

      • 1
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        Rajash,
        .
        my question is Dr Wijewardhana was one executive officer in CB during the period of 2005-2015. Why he and other men to beat around the bush not revealing whole lot of INSIDE stories fo the CB in the high days of BP Ajith Kabral ?

        ( i may be no right about the time…. you guys could correct it… he was surely one of the INSIDER of CB.. but he should be well aware of the facts about the LOSSEs that SIRISENA made it very clear about ).
        .

    • 0
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      Mr. leela ge …..,
      .
      It’s funny how you IDIOTS are running out of things to say.
      .
      Pretty soon you will end up in the road wearing only JANGIYA.

      • 3
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        Ms PASQUAL,
        .
        you will never get it.
        :
        Go back to your cage and wait for bones as usual.
        https://www.youtube.com/watch?v=YSZZJ2Fkqzo

        See how this gentleman makes every effort to improve the behaviour of you the kind of teenies.
        :
        If you would remain as it is now, how would our society become in the near future ?

    • 1
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      Dear leelagemalli: and Rajash,
      .
      I agree that reading serious stuff on Economics is not easy, but Dr Wijewardena does give you his email address, and one can write to him.
      .
      I did that about three years ago, and can you believe this? It ended up in his actually looking me up in my Maharagama home. He gave me a number of books that he has written. Since then, we’ve e-mailed occasionally and talked, but he hasn’t taxed me in any way.
      .
      He’s a decent and sincere man – with so many interests that he has follwed up in depth. I must confess that I don’t read everything that he writes, but this I did. Perhaps, our being the same age helps – butthere the comparison ends! He’s doing so much more – successfully! – and I know that he will patiently help, if he can. He’s from a humble background, but has worked hard – consisitently!

      • 0
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        Nice story Sinhala_Man.
        in his writings he does come across as a decent man.
        But he does have this tendency to wonder around in his writings to unrelated areas … May be he should be bit more punchy.

        pass on the message would you ?

  • 1
    2

    I expect the readers to read Part A and Part B of my comments together.

    Part A

    I am not familiar with Nikoli Kondratieff and his business cycles,

    However, according to Marxist economists, capitalist economy will not move in a linear manner, it will move in cycles-with frequent up and downs reflecting economic booms and depressions.

    During depression or recession, the aggregate demand will be at the lowest and therefore the supply also will be low and production of goods and services will cease creating massive unemployment resulting in social unrest.

    To escape from this calamity capitalist switched their idle productive capacity to armament industry and promote conflict between nations to find a market for armaments produced. As a result, war breaks out and sale to both parties flourish resulting in full employment.

    The armament industry acts as a catalyst and promotes trade in other areas as well and the cycle moves towards the top.

    The need for war is longer necessary this way he Marxist explained the trade cycle and he inevitability of war. This is foreseeable in a capitalist economy.

  • 1
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    Part B

    The Marxist claim that the panacea is for the masses to overthrow the capitalism system and replace it with a workers state where production is to meet the needs of the people and not to promote profit thereby a workers’ paradise will be established.

    Conventional wisdom in capitalist societies, advocate that in times of recession, the capitalists cut down on expenditures to escape from recession and promote savings as is being done frequently in Sri Lanka.

    But John Maynard Keynes, British economist, whose ideas fundamentally changed the theory and practice of macroeconomics had during the great depression of 1930s advocated massive public spending to promote aggregate demand. UK and other western countries followed this Keynesian model and trade moved towards full employment and prosperity and capitalism survived.

    Presently, the recession aggravated by covid-19 crisis is the challenge facing the international trade.The world needs another Keynes to get over this calamity and Sri Lanka needs economists like WAW to interpret in Sri lanka’s context.

    • 2
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      “The Marxist claim that the panacea is for the masses to overthrow the capitalism system and replace it with a workers state where production is to meet the needs of the people and not to promote profit thereby a workers’ paradise will be established. “
      Singapore, Korea, Germany, Japan, Switzerland, Norway, Netherland, Denmark, Finland…. they don’t go for war. World largest diesel engine manufacturer is Finland. Other than atomic reactor using ships, all other including some fighting vessels uses their engines.
      Workers’ paradise is outdated. Now Robots’ paradise has started. No more for China or America, no more cheap labor, but for master robot designers & master engines who manages them. “Worker” is an outdated word. The other day I was walking on Broadway, downtown. There were drums, pipes, noises…..When went near, somebody gave me a notice. The notice said that Building Janitorial Engineers are fired and Building was hiring engineers from another agency, which was specialsing in building maintenance. It is in India & Lankawe Thoddy works are there. These high rise buildings have janitorial engineers. Sad part is Lankawe Chinese Communists or Moscow communists always talked about technical class workers’ paradise. But they are jealous of white collar workers’ paradise. Then they always left behind the Thoddy worker class in hell.

  • 1
    0

    Great analysis.

    Justice4SriLanka
    A better world, A better life

  • 1
    1

    “SL should act now to avoid further disasters”
    My understanding was short cycle is present in all capital economies and they don’t disturb the long term prospective of the economy. Short term cycles are response to government intervention (manmade) to more or less like natural norm of the country-i.e. like Singapore’s norm growth, Lankawe’s norm decline. Government’s short term tools are monetary and fiscal interventions. Long term tools are policies engineered for the path country moving as a whole, like education, economic policies, health policies, international relation and the similar ones. These decide whether country is more comfortable with decline or growth, the natural path for the country. When American economy showed almost 7 -8 years growth in Clinton’s time, it was said the cycle had stayed too long so the decline would be long too. Bush’s economy was big drag until Obama changed the policies.

  • 1
    1

    Whatever it is, the call ” SL should act now to avoid further disasters” is a call too late.” I don’t see any free development path like Singapore practiced to Lankawe under which Lankawe keeps its sovereign ascendency while economically progressing. Only way available for Lankawe, now, is to take an umbrella. Waiting too long will force Lankawe parts go auctioned to various countries. Israel stayed under US umbrella. Cuba stayed under USSR umbrella. Cubans studied hard; no result, but Israel thrived.
    Lankawe has three umbrellas (these are not including Tamil Eelam): 1. ETCA or even more serious than that. Lankawe cannot hold on to Sinhala Buddhism. But Sinhala Intellectual politicians still can thrive. Country would grow with Indian phase or better. 2. Allowing America to operate inside, including leasing ports and bases for America. Sinhala Intellectual may keep their upper hand. But they will have to respect international norms, eventually. Comparable to Israel or even can be called Israel of Indian Ocean. 3. Chinese Bridge and Road. This is not comparable to Cuba. USSR kept Cuba as pet child; but they both faced economic stagnation. Cuba didn’t progress but Cuba was still intact. China will become more and more aggressive in forcing its new white elephants like Homagama Stadium, hacking computers and stealing land and resources in addition to what is has already plucked out. Thus pick your choice Lankawe.

  • 2
    0

    “The subsequent economists have found that these long waves are in fact a reality and discovered seven such waves pertaining to Western economies as presented in figure 1.”
    Without super-imposing the K-Waves on the data IO would have seen eight waves rather than the six suggested by the economists. The first six would appear be of more even frequency than in the K-Waves for 1819-1939. But the waves will not match technological advances the way the K-waves are made to. Why four significant waves are compressed into one in Fig. 1 is a mystery.
    Also it would seem to me that the waves of anti-colonial and anti-imperialist struggles of the 20th Century correlate with the data better than the technology related fits.
    *
    A socialist state will not have these waves if the socialist state is sufficiently buffered from the vagaries of capitalism. Protectionist policies helped many countries from the impact of global financial crises.
    Third World economics are not fully assimilated to the global capitalist economies I suspect. Thus the so-called smaller waves are linked to local phenomena including major political events, natural disasters, wars, foreign intervention and external pressures etc.
    *
    Would it not help to consider the impact of war spending on the cycles in Sri Lanka between 1983 and 2009.

  • 0
    0

    Dear Sir

    Thank you for the critical topic and the analysis.

    1. Over and above the Capitalism and Marxism theories the fact most of the so called third world countries remained on the “developing state” is because of the Colonial masters & mindset/Cold War/now the new Cold War………..meanwhile Russians and Chinese adopted all the capitalist policies to fit into the development indexes/including some developing countries have moved into this segment too for their survival be it reluctantly…..however the Economic theories/market cycles dictated to nation of People recolonising them through other means??

    2. We in Sri Lanka spent our life time analysing past 20 000 years of Sri Lankan history ..Sinhalese/Tamil/Muslim/Christian revolutions ever since the Independence…very primitive people. did not know how to organise ourselves for the Long and the Short cycles to come and dominate our life…this we continue to date.

    3. Five security Council Nations who are the biggest Armes exporters in the world = Drug Barrons running rehab centres??…….all our revolutions have this behind the scene including our neighbours playing dirty….how to geo plotically manage the mentally disabled who will happy kill each other using the Armes given to them by the same…..this we did from 1948 to 2009 thinking we are fighting for some causes.

  • 0
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    Continued

    4. We have proven we never had the ability to be futuristic/scientific/technology driven to have the “home grown selection of economic plans fit for purpose” and inline with lessons learned/sustainable in nature/environmentally sound etc.
    5. We are a Non Aligned? Socialist nation/mixed economy based. If we do selective “mixed” Long and Short cycles may be just fine too if we remain “united and soverign” as a Nation even after all the debacles/killing fields…..is possible..otherwise we will be sodomized forever by everyone….the moral nature of the business world today does not matter what the economic model we wish to have…..the bubble is only getting bigger in each cycle and each bubble burst/recessions had made the poor more poorer than before and the percentage of the have nots rising in the world too with the resource limitations/irreversible environmental damage too?? should we be thinking of new models? are we allowed to think of new economic models?? the investments in the military yield most of the technology that get used in the civilian life too?? are we in the right track to save humanity let alone the unfortunate Nation of people like ourselves picking up someone else’s blunders forever??

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