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Barriers to economic growth and/or economic development Paper 2

IBDP Economics  HL – The global economy – Barriers to economic growth and/or economic development -Paper 2 Exam Style Practice Questions

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Barriers to economic growth and/or economic development Paper 2? 

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Exam Style Question for IBDP Economics HL- Barriers to economic growth and/or economic development -Paper 2

Solar power in Kenya

  1. Kenyan shopkeepers are able to use mobile phones and a small deposit to buy solar panels. This gives them 24-hour access to electricity and also lowers their fuel bills. Before this, the shopkeepers struggled to get a connection to electricity. M-Kopa is the company that provides these solar panels.

  2. M-Kopa estimates that 80 % of its customers live on less than US\($\)2 a day, and without access to credit, are caught in a poverty trap (poverty cycle). Many of them rely on subsistence farming or run a small business as their source of income. Energy accounts for a significant amount of their spending.

  3. Kopa means “to borrow” in Swahili, and each panel the company sells is in effect a loan of about US\($\)165. M-Kopa’s solar panels cost US\($\)200. Clients pay US\($\)35 upfront and agree to make a daily payment of 45¢ for a year, after which the solar panel is theirs.

  4. When M-Kopa’s customers are reaching the end of their loan terms, an M-Kopa representative calls to offer another product, in exchange for reopening the account and making payments for another few months. M-Kopa has sold around 325 000 solar panels so far and 50 000 of their buyers, who have already paid off their loans, have extended their credit to buy other products offered by M-Kopa. Ideally, these new products will also save customers money over time. They include fuel efficient stoves that save charcoal, a bicycle that cuts transportation costs and water tanks to store rainwater. M-Kopa also sells Samsung smartphones and offers loans to pay for school fees.

  5. M-Kopa is replacing kerosene lamps with solar power technology. Kerosene lamps emit a dangerous smoke that burns the eyes, irritates the throat and slowly turns walls and ceilings black. They are also expensive. According to a 2014 survey, an average household in Kenya, without access to electricity, spends about US\($\)164 a year on kerosene. M-Kopa estimates that a customer saves about US\($\)750 over the first four years by switching to solar panels. Given Kenya’s climate, solar power is an obvious source of energy.

  6. Since its commercial launch in October 2012, the company’s total revenue has risen rapidly, from US\($\)15 million in 2014 to US\($\)30 million in 2015, and the company says it will double this in 2016. Every day, about 600 new customers are purchasing solar panels, meaning that the company is extending loans of almost US\($\)100 000 a day to people who might otherwise not have access to credit.

  7. According to a company representative, “If you take the long-term view and if you treat low-income people as customers, not charity cases, you can change the world. In our view, it is one of the advantages that foreign direct investment can bring to a country. Our customers’ lives are improved as our lives are improved”.

Question

Define the term poverty trap indicated in bold in the text (paragraph [2]).

▶️Answer/Explanation
An explanation that it is any one of the following:
  •  any linked combination of factors which causes poverty to be self-perpetuating with low income as the cause
  •  low incomes lead to low saving which leads to low investment which leads to low growth which leads to low income
  • low incomes lead to low levels of human capital that leads to low productivity that leads to low incomes.

Text D — Overview of Malawi

  1. Malawi is a landlocked country in southern Africa. Its development plans contain 169 targets, based on the Sustainable Development Goals. Ineffective institutions and inequalities, however, make it difficult to reach every target. Although poverty in urban areas has declined, the level of absolute poverty has been increasing in rural areas where 85 % of the population lives. Causes of poverty include land degradation (80 % of the land is eroded or lacks nutrients), poor healthcare and rapid population growth. There is also a lack of human capital, which is often due to the difficulties that households have in obtaining loans for education or training. Approximately 75 % of households do not have access to formal banking services.

  2. Aid agencies are providing assistance. The World Bank’s Human Capital Project will increase investment and encourage reforms, such as promoting the education of teenage girls. In 2020, the World Bank also approved US$157 million (50 % as a loan and 50 % as a grant) for a government project. This project aims to increase sustainable land management practices and build water-related infrastructure, such as small dams and irrigation schemes.

  3. The government has encouraged the establishment of microfinance groups that act as rural banks. They provide some finance and guidance for programmes that introduce new types of crops and techniques in order to improve agricultural efficiency.

  4. Although 2019 was a difficult year due to drought, insect infestations, and a tropical cyclone, Malawi’s real gross domestic product (GDP) grew by 4.5 %. There is a large budget deficit and the amount of government debt (at approximately 60 % of GDP) is considered to be too high. Therefore, the government has announced plans to reduce its spending. Inflation had been forecast to increase to 14 % in 2020. Due to the planned contractionary fiscal policies, however, inflation may fall below 10 % from 2021 onwards.

  5. Export revenues account for over 30 % of GDP. Malawi aims to increase its exports of cotton, nuts, tea and sugar. Rising exports and lower fuel import prices could reduce the current account deficit. Despite the persistent trade deficit, Malawi is resisting calls for further trade protection. It has signed bilateral trade agreements with both South Africa and Zimbabwe. Tariffs are gradually being reduced, while other indirect and direct taxes are being raised.

Text E — Agricultural Production

  1. Approximately 80 % of the labour force is employed in agriculture, with few job opportunities available in manufacturing and services. Agricultural productivity is low for many reasons. The government promotes manufacturing industries and cultivation of crops for export by large-scale farms. However, small-scale and subsistence farmers have received little support in the past. Farmers use less fertilizer and irrigation than is typical in other countries. Only 3 % of cultivated land is irrigated, compared to the global average of 21 %. Other challenges are the inadequate road and rail links to markets and the limited availability of electricity and fuel.

  2. Maize is the most important staple food in Malawi. The government uses price controls when trying to ensure that maize is available at affordable prices for low-income households. However, the maximum price set by the government is often too low to persuade farmers to supply the maize or to provide them with sufficient revenue. In 2020, the maximum price was raised from 250 to 310 kwacha per kilogram. Even at the higher price, shortages remain.

  3. The government is planning to invest in commercial agriculture to improve productivity and promote diversification. The 2020 budget includes subsidies on fertilizer for 4.3 million small-scale farmers, which could possibly double maize output but may also pollute waterways. The support given to farmers will improve the nutrition of Malawians and stimulate the rural economy.

Text F — Tobacco Exports

Tobacco is Malawi’s major export, providing over 50 % of foreign currency earnings. Due to lower global demand and the purchasing policies of multinational tobacco firms, prices paid to farmers in Malawi are low and falling. To reduce costs, farmers resort to using child labour. Following allegations of labour exploitation, the United States has restricted tobacco imports from Malawi. There is concern that other importing countries might also impose restrictions.

 

Question

Using a poverty cycle diagram, explain how an increase in funds for the education of teenage girls could break the poverty cycle (Text D, paragraph [2]).

▶️Answer/Explanation
For a poverty cycle diagram, with the low education causing low productivity (output per unit of input) and low incomes AND for an explanation that education will improve human capital / will raise productivity (output per person) [1] and therefore raise incomes/reduce poverty [1] (which will break the cycle). Or any other valid response.

Text A — Overview of Tanzania

  1. Tanzania is one of Africa’s fastest growing economies with an average of 7% annual economic growth since 2000. It is a politically stable country, rich in wildlife and natural resources. However, the growth has been concentrated in urban manufacturing, using capital intensive production. The benefits from this growth have not reached all people and significant inequalities exist between urban and rural areas. Although the relative poverty rate has fallen over the last 15 years, the number of people living in absolute poverty has increased.

  2. Most people are employed in the slow-growing agricultural sector that relies on unskilled labour. Although incomes increased from 2008 to 2018, the demand for agricultural goods only increased by 21% during this time period. Over 70% of Tanzania’s population lives in rural areas, relying on subsistence farming with limited tradable crops. Only 30% of land is being used for agricultural production. With investment, the remaining unused land could be developed and generate income for farmers.

  3. The rural sector struggles to meet Tanzania’s food requirements due to low levels of skilled labour and productivity. Additionally, high youth unemployment leads to large numbers of unskilled rural youth migrating to the cities, often finding employment in the informal sector where wages and working conditions are poor. Insufficient investment and lack of government support for diversifying the agriculture sector have been blamed for the persistent inequalities and poverty.

  4. Tanzania’s cities have experienced a growing middle class with strong purchasing power and political influence who have placed demands on the government for cheaper electricity, better infrastructure, and more imported goods. In response, the government provided subsidies for electricity in city centres and tax benefits to foreign companies operating in Tanzania. There is concern that these measures may worsen inequality and lead to social unrest.

  5. The growth of Tanzania’s manufacturing and service sector was funded through aid and large government borrowing, resulting in high national debt. Most of the government borrowing was from foreign sources and in US dollars (US$), which is a concern due to a recent depreciation of the Tanzanian shilling (Tanzania’s currency) against the US$. Some of the debt was borrowed domestically and placed upward pressure on interest rates. Higher interest rates have resulted in crowding out but helped keep inflation under control.


Text B — Strategies and opportunities for Tanzania

  1. Previous governments have used interventionist supply-side policies to improve access to water, education, and health services. However, the health service improvements are not keeping up with population growth and many young people are still not completing secondary school. Infrastructure has improved, but it is still insufficient as producers in the rural sector find it difficult to reach markets and access supplies.

  2. Aid organizations are currently supporting new sustainable businesses in rural areas through training programmes, especially for women and young people, who make up most of the unemployed in rural areas. Economists have advised the government to improve access to credit through microfinance organizations and to simplify regulations to make it easier to start new businesses.

  3. The government is establishing property rights in rural areas to provide security for farmers. Historically, farmers could easily lose their land, which reduced their incentive to invest in productive farming methods. The government wants to develop Tanzania’s land resources and lower its reliance on imported food. To reduce food imports, a subsidy will be granted to dairy farmers to allow them to compete against imported dairy products.

  4. Tanzania is a member of the East African Community (EAC) customs union and common market. However, Tanzania needs to improve human capital and encourage diversification so that the benefits of regional integration can reach the poor. These policies can also help attract foreign direct investment (FDI). Opportunities for growth through trade will expand as the EAC works towards becoming a monetary union in 2024.


Text C — Oil pipeline to be constructed

Tanzania and Uganda plan to construct a major oil pipeline from Uganda through Tanzania, ending at a port in Tanzania. This will attract FDI which could help fund infrastructure and generate jobs. However, environmentalists are concerned about potential ecological damage due to the waste created during the construction of the pipeline. Economists have suggested the waste could be avoided through a circular economy approach in the planning and construction stage.

Question

Using information from the text/data and your knowledge of economics, discuss the different barriers to economic growth and to economic development faced by Tanzania.

▶️Answer/Explanation

Definitions may include:
Economic growth
Economic development
Interventionist supply-side policies

Economic models to support analysis may include:

  • Lorenz diagram
  • ADAS diagram
  • Poverty cycle
  • PPC

Possible barriers to economic growth and/or economic development in Tanzania may include a discussion on some of the following:

Increasing absolute poverty

  • Absolute poverty means that people do not have access to basic needs, trapping them in the poverty cycle and limited possibilities for economic growth and development. (Text A, paragraph [1], Table 2)
  • But relative poverty has fallen possibly explained by the divide between urban and rural areas (Text A, paragraph [1], Table 2)
  • Although HDI has improved, the HDI country ranking is lower, meaning that Tanzania’s economic development has not improved as much compared to other countries (Table 2).

Rising inequality:

  • Gini coefficient has increased from 2000-2018 (Table 2), may lead to problems with social unrest (Text A, paragraph [4]).
  • Persistent inequality has not allowed for all people to benefit from the economic growth (Text A, paragraph [1])
  • Rural – urban inequalities (Text A, paragraph [1], Table 2 data)
    • growth has not reached rural areas due to the focus on manufacturing and service industries (Text A, paragraph [1])
    • Most of the population is employed in agriculture (Text A, paragraph [2]), limited opportunity for higher skilled jobs, which leads to higher incomes, better human capital, supporting further economic growth and development.
    • Rural areas have less access to electricity (Table 2), less economic development, also may inhibit new businesses and investment needed in rural areas (Text A, paragraph [3]).
    • Urban middle class accessing more resources (Text A, paragraph [4]), resources may not be used in areas of need hindering economic development and economic growth.
    • Higher youth unemployment (Table 1), youth may be less skilled/experienced and therefore may find it more difficult to find jobs leading to lower growth and development.

Limited infrastructure:

  • Insufficient infrastructure is significant as it supports the functioning of an economy and the ability for the population to conduct economic activity hindering economic growth. (Text B, paragraph [1]).
  • Inappropriate provision of infrastructure – urban rather than rural (Text A, paragraph [4]), leading to less opportunities for economic growth and development.
  • Farmers complaining that they cannot reach markets or suppliers due to lack of infrastructure (Text B, paragraph [1])
  • Insufficient infrastructure may slow down potential land development, which is currently only using 30 % (Text A, paragraph [2]) limiting economic growth and access to increased income opportunities in the rural areas.

Low levels of human capital:

  • Rural sector only involved in unskilled work, so population not developing human capital (Text A, paragraph [2]), limiting opportunities for economic development.
  • Economic growth focussed on capital intensive manufacturing/services (Text A, paragraph [1]), limiting opportunities for developing human capital and economic development.
  • Education spending has decreased (Table 2).
  • Numbers of students completing secondary school has fallen (Table 2).
  • Currently not exploiting opportunities EAC may offer the low-income earners as human capital needs improving (Text B, paragraph [4])
  • Less significant over time if aid programmes are successful (Text B, paragraph [2]).

Access to healthcare

  • Improvements in healthcare struggle to keep up with population growth (Text B, paragraph [1]).
  • Government spending on healthcare has decreased (Table 2).
  • Leads to poor human capital – traps people in the poverty cycle.

Rural sector barriers/Reliance on primary sector:

  • Poor productivity in the rural sector (Text A, paragraph [3]).
  • Lack of investment (Text A, paragraph [3]).
  • Low YED (Text A, paragraph [2]) leads to limited growth – economic growth needed for economic development.
  • However, a new oil pipeline might bring in FDI, fund infrastructure and create new jobs. (Text C, paragraph [1])
  • Aid and government programmes could encourage new business development (Text B, paragraph [2])
  • Lack of tradable crops and land resources not fully utilised to fully capacity (Text A, paragraph [2]).

Level of external and government (national) debt:

  • Financing repayments could take funds away from development initiatives (Table 1, Text 1 paragraph [5])
  • Significant at the moment with the depreciating currency (Text A, paragraph [5]), but may be less of an issue if there is increased FDI (ECA and oil pipeline) inflows which may increase the demand of the currency and therefore the value. (Text B, paragraph [4], Text C, paragraph [1]).

Informal Sector:

  • Number of migrating youths are employed in the urban informal sector\ where working conditions are poor and unlikely to develop human capital (Text A, paragraph [3]).

Access to credit:

  • Economists advised government to improve access to credit. If farmers cannot access credit, it is difficult for them to access capital needed to diversify. (Text B, paragraph [2]).

Property rights:

  • Lack of property rights has historically disincentivized farmers to invest in production, leading to low skills/productivity. Less significant now as the government has begun to introduce clear property rights. (Text B, paragraph [3]).
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