Economic growth and/or economic development strategies Paper 2| IBDP Economics HL |

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

Economic growth and/or economic development strategies Paper 2?

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Solar power in Kenya

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.
M-Kopa estimates that 80 % of its customers live on less than US$$$2 a day, and without access to credit, are caught in a poverty trap (poverty cycle). Many of them rely on subsistence farming or run a small business as their source of income. Energy accounts for a significant amount of their spending.
Kopa means “to borrow” in Swahili, and each panel the company sells is in effect a loan of about US$$$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.
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.
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.
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.
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

Using information from the text/data and your knowledge of economics, examine the extent to which access to credit and appropriate technology can contribute to economic development in Kenya.

▶️Answer/Explanation

Responses may include:

definition of economic development
definition of appropriate technology
definition of access to credit (including micro-credit)
a way to break out of the poverty trap (paragraph [2])
access to credit allows farmers to move away from subsistence farming (paragraph [2])
examples of access to M-Kopa solar panels, allows shopkeepers to have access to electricity, keep shops open and earn more income, which contributes to economic development (paragraph [1])
customers can save US$$$750 over four years (paragraph [5])
solar power as an alternative to “dirty” electricity (causing negative externalities)
M-Kopa offers loans for other equipment (paragraph [4]) which would improve the standards of living, that customers otherwise weren’t able to afford, due to a lack of collateral (paragraph [4])
buying a water tank would improve sanitation (paragraph [4])
the company is offering loans to pay for school fees, improving education (paragraph [4])
better health due to the reduction of kerosene use (paragraph [5])
increasing access to credit of US$100 000 per day to people who might otherwise not have access to credit (paragraph [6])
M-Kopa (potentially) employs locals.

China’s increasing presence in Bolivia

Between 2000 and 2014, annual bilateral trade between China and Bolivia increased dramatically from US$$$75.3 million to US$$$2.25 billion. China has become the fifth-largest market for Bolivian exports, which mostly consist of raw materials such as minerals, hydrocarbons, wood and soybeans.
At the same time, China has become Bolivia’s main source of imports. China now supplies half of Bolivia’s clothing, cars, motorcycles, cell phones, computers and other electronics. Bolivia’s expenditure on Chinese imports significantly exceeds the revenue that is received from its exports to China. Since 2014, Bolivia has experienced significant current account deficits with China.
In recent years, the Bolivian government has taken loans from Chinese banks to support the purchase of Chinese imports of goods and services, along with Chinese-built roads, bridges, railways, hydroelectric power plants and mining facilities. In 2015, the Bolivian government owed more than US$$$600 million to Chinese banks.
The socialist Bolivian government wants to implement an ambitious Five-Year National Development Plan from 2016 to 2020. Faced with sharply declining export revenues and commodity prices, it will rely increasingly on foreign capital to fund its projects.
All projects financed by Chinese loans must be awarded to Chinese companies, which come with their own materials, equipment and technology, and often their own labour. The new loans will have a combination of commercial interest rates, between 2.5 % and 4 %, and concessional interest rates, up to 1 %. The Bolivian government is expecting to be able to repay the loans through continued growth of the economy.
China’s foreign direct investment (FDI) is mostly being aimed at energy and infrastructure development. Chinese firms are currently involved in major road-building projects, hydroelectric power station projects, expanding airports and developing a steel-producing plant. These projects have created problems for local communities in terms of water contamination and the overuse of Bolivia’s scarce water supply.
This FDI strategy generates profits for Chinese firms in the short term, as they build and improve the infrastructure. Since Bolivia is a resource-rich country, Chinese firms will be looking to invest in profitable mining projects in the future, once the infrastructure is in place.

Question

Describe the nature of foreign direct investment (paragraph [6]).

▶️Answer/Explanation

An explanation that it is any two of the following:

long-term investment in another country
investment by a multinational corporation (MNC)
investment in another country representing at least 10 % ownership
investment in productive facilities
any reasonable answer that describes the nature of FDI.

China’s increasing presence in Bolivia

Between 2000 and 2014, annual bilateral trade between China and Bolivia increased dramatically from US$$$75.3 million to US$$$2.25 billion. China has become the fifth-largest market for Bolivian exports, which mostly consist of raw materials such as minerals, hydrocarbons, wood and soybeans.
At the same time, China has become Bolivia’s main source of imports. China now supplies half of Bolivia’s clothing, cars, motorcycles, cell phones, computers and other electronics. Bolivia’s expenditure on Chinese imports significantly exceeds the revenue that is received from its exports to China. Since 2014, Bolivia has experienced significant current account deficits with China.
In recent years, the Bolivian government has taken loans from Chinese banks to support the purchase of Chinese imports of goods and services, along with Chinese-built roads, bridges, railways, hydroelectric power plants and mining facilities. In 2015, the Bolivian government owed more than US$$$600 million to Chinese banks.
The socialist Bolivian government wants to implement an ambitious Five-Year National Development Plan from 2016 to 2020. Faced with sharply declining export revenues and commodity prices, it will rely increasingly on foreign capital to fund its projects.
All projects financed by Chinese loans must be awarded to Chinese companies, which come with their own materials, equipment and technology, and often their own labour. The new loans will have a combination of commercial interest rates, between 2.5 % and 4 %, and concessional interest rates, up to 1 %. The Bolivian government is expecting to be able to repay the loans through continued growth of the economy.
China’s foreign direct investment (FDI) is mostly being aimed at energy and infrastructure development. Chinese firms are currently involved in major road-building projects, hydroelectric power station projects, expanding airports and developing a steel-producing plant. These projects have created problems for local communities in terms of water contamination and the overuse of Bolivia’s scarce water supply.
This FDI strategy generates profits for Chinese firms in the short term, as they build and improve the infrastructure. Since Bolivia is a resource-rich country, Chinese firms will be looking to invest in profitable mining projects in the future, once the infrastructure is in place.

Question

Using information from the text, explain two reasons why Chinese multinational corporations (MNCs) are investing in Bolivia.

▶️Answer/Explanation

Reasons may include:

expanding market/gain economies of scale as bilateral trade has increased (paragraph 1) and China provides a significant portion of Bolivia’s imports (paragraph 2)
creates lending opportunities for Chinese banks (paragraphs 3 and 5) to gain profits from interest payments Increased business opportunities for Chinese firms, as the loans from Chinese banks are spent on Chinese imports (paragraph 3)
access to exploit resources (paragraph 7) to use for their own production/profit purposes
profits (paragraph 7) generated from investments in energy/infrastructure.

China’s increasing presence in Bolivia

Between 2000 and 2014, annual bilateral trade between China and Bolivia increased dramatically from US$75.3 million to US$2.25 billion. China has become the fifth-largest market for Bolivian exports, which mostly consist of raw materials such as minerals, hydrocarbons, wood and soybeans.
At the same time, China has become Bolivia’s main source of imports. China now supplies half of Bolivia’s clothing, cars, motorcycles, cell phones, computers and other electronics. Bolivia’s expenditure on Chinese imports significantly exceeds the revenue that is received from its exports to China. Since 2014, Bolivia has experienced significant current account deficits with China.
In recent years, the Bolivian government has taken loans from Chinese banks to support the purchase of Chinese imports of goods and services, along with Chinese-built roads, bridges, railways, hydroelectric power plants and mining facilities. In 2015, the Bolivian government owed more than US$600 million to Chinese banks.
The socialist Bolivian government wants to implement an ambitious Five-Year National Development Plan from 2016 to 2020. Faced with sharply declining export revenues and commodity prices, it will rely increasingly on foreign capital to fund its projects.
All projects financed by Chinese loans must be awarded to Chinese companies, which come with their own materials, equipment and technology, and often their own labour. The new loans will have a combination of commercial interest rates, between 2.5 % and 4 %, and concessional interest rates, up to 1 %. The Bolivian government is expecting to be able to repay the loans through continued growth of the economy.
China’s foreign direct investment (FDI) is mostly being aimed at energy and infrastructure development. Chinese firms are currently involved in major road-building projects, hydroelectric power station projects, expanding airports and developing a steel-producing plant. These projects have created problems for local communities in terms of water contamination and the overuse of Bolivia’s scarce water supply.
This FDI strategy generates profits for Chinese firms in the short term, as they build and improve the infrastructure. Since Bolivia is a resource-rich country, Chinese firms will be looking to invest in profitable mining projects in the future, once the infrastructure is in place.

Question

Using information from the text/data and your knowledge of economics, discuss the possible effects of Chinese involvement on economic growth and development in the Bolivian economy.

▶️Answer/Explanation

Responses may include:

definitions of economic growth and economic development
definition of FDI.

Positive outcomes for growth and/or development:

increased export markets (paragraph [1])
lower prices and choice for domestic consumers from Chinese imports
improvements in infrastructure (paragraph [3])
continued growth in the economy (paragraph [5])
improvements in infrastructure lowering input costs (paragraph [6])
possibility of increased domestic employment
filling of the savings gap
breaking the poverty cycle
technology transfer.

Negative outcomes for growth and/or development:

dependency on China (throughout)
worsening current account deficit (paragraph [2])
problems of indebtedness (paragraph [3])
minimal opportunity for increasing local employment as Chinese bring their own labour (paragraph [5])
problems associated with commercial loans (paragraph [5])
problems associated with tied aid – contracts only to Chinese companies (paragraph [5])
opportunity cost of interest payments (paragraph [5])
Chinese interests are advanced before Bolivian growth and development (paragraph [5])
negative externalities (paragraph [6])
overexploitation of Bolivia’s natural resources (paragraph [7])
possible loss of control of assets and infrastructure.

Turkey’s rising current account deficit

According to forecasts from the International Monetary Fund (IMF), Turkey’s current account deficit is expected to rise from 4.4 % of gross domestic product (GDP) in 2016 to 5.6 % of GDP in 2017, with real GDP growth falling from 3.3 % in 2016 to 2.9 % in 2017. The current account deficit is perceived to be the biggest problem for Turkey’s economy. An international credit agency has reduced Turkey’s credit rating to “negative” because risks to the country’s credit profile have risen significantly in recent months.
Economic activity has been further damaged by several factors, including political uncertainty, conflicts in neighbouring countries and trade protection by its trading partners. Turkey’s tourism revenues, which contribute 10 % to the country’s GDP, have fallen significantly due to security concerns related to terrorist attacks.
The current account deficit has contributed to a massive depreciation of the Turkish lira (Turkey’s currency), which dropped by 20 % against the United States dollar (US$$$) over the previous year. This is a significant problem for Turkey, which relies on a steady inflow of overseas investment to finance its current account deficit.
Part of the problem is Turkey’s dependence on imports, especially energy. Higher import costs for energy will further worsen Turkey’s current account deficit and create further pressure on inflation (Figure 4).
The Turkish government has blamed the currency collapse on speculators. The president of Turkey has asked Turkish citizens to help. There is approximately US$$$140 billion worth of foreign currency being held in foreign currency savings accounts in Turkey. The president wants Turkish people to use their foreign currency saving to support the Turkish lira. However, Turkish citizens seem to have ignored his wishes, and bought US$$$1 billion worth of foreign currency in September 2018.
Analysts believe that the only solution to the falling value of the Turkish lira and the current account deficit is an increase in the official interest rate by the central bank. However, Turkey’s president has made it clear that he will not accept higher interest rates. In fact, he has demanded lower interest rates to stimulate the economy.

Question

State two functions of the International Monetary Fund (IMF) (paragraph [1]).

▶️Answer/Explanation

Any two relevant functions, such as;

ensure the stability of the international monetary system
promote international monetary cooperation
lend money to help members in balance of payments difficulties
overseeing the economies of (member) countries (surveillance)
providing technical assistance / practical help (to countries) to manage their economies.

Economic development in two West African countries

Ghana

Ghana is the world’s second largest cocoa producer and Africa’s second largest gold producer. It is one of Africa’s fastest growing economies and has made major progress in achieving persistent economic growth.
Over the last decade, Ghana has enjoyed increasingly stable and improving democratic governance. Four successful elections during the decade have strengthened the effectiveness of key national institutions, improved investor confidence and created an environment that promotes investment and growth.
Ghana enjoys a high degree of media freedom; the private press and broadcasters operate without significant restrictions. The media are free to criticize the authorities without fear of punishment, says the non governmental organization (NGO) Reporters Without Borders. The private press is allowed to express criticism of government policy, which increases the accountability and transparency of the government.
Although Ghana’s growth has been fairly strong, the source of growth has always been dominated by commodities and the capital-intensive services sector. Neither of these has a direct effect on poverty reduction. Growth in rural areas is often limited by basic infrastructure, such as roads. This limits the ability of people in rural areas to access markets in urban areas.

Nigeria
Nigeria is Africa’s leading oil producer. In 2016, it experienced its first full year of recession in 25 years. Global oil prices reached a 13-year low and oil production was drastically cut. Oil has continued to dominate Nigeria’s growth pattern, but the volatility of oil-dependent growth prevents progress in social and economic development.
On the political front, the transition from military dictatorship to democratic rule has been acclaimed as one of Nigeria’s major successes in the last decade. The 2011 general election, supported by the United Nations, was widely acknowledged by international observers and domestic monitors as one of the freest and fairest elections conducted in the country in recent years.

Ghana and Nigeria
Both Ghana and Nigeria have cut fuel subsidies in order to reduce their budget deficits. This has had severe consequences for low-income households.

Question

Using information from the text/data and your knowledge of economics, compare and contrast the level of economic development in Ghana and Nigeria.

▶️Answer/Explanation

Responses may include:

definition of economic development.
references to the Sustainable Development Goals (or MDGs) as a way of measuring achievements towards development goals.

Economic analysis, focusing on economic development, may include:

Lorenz curve
poverty cycle
long run / short run
elasticities relating to commodities.

To explore the impact on:
Similarities between Ghana and Nigeria:

Both are dependent on commodities, which makes them vulnerable, and may impact on economic development through unstable government revenues.
Both are low-income countries, which implies a low level of development.
In both countries, the GNI per capita is lower than their GDP per capita (Table 1), which means that there is a net outward flow of income, possibly reducing economic growth and development opportunities.
There is some indication of some good governance in both Ghana (paragraph [2]) and Nigeria (paragraph [6]). Good governance/accountable governments are more likely to pursue pro-poor development strategies.
Both countries are similar in terms of income distribution (Table 1), though this figure is quite high. A more equitable distribution of income is a development objective, so both are doing rather poorly.
Both countries have cut fuel subsidies (paragraph [7]), which had negative impacts for low-income households, who may now not be able to afford other necessities.

Differences between Ghana and Nigeria:

Although both are dependent on commodities, Ghana seems more diversified (paragraph [4]), and so may be less vulnerable than Nigeria to swings in oil prices.
Paragraphs [2] and [3] suggest several factors leading to good governance and security in Ghana. There is incomplete information to judge governance in both countries.
Although Nigeria’s GNI per capita is higher than Ghana’s (Table 1), its HDI is lower than Ghana’s, suggesting that the benefits of Nigeria’s higher level of economic activity are not being used to achieve development objectives.
A higher proportion of people are living in poverty in Nigeria, as measured by people earning less than PPP US$$$1.90 per day (Table 1), although this figure does not necessarily indicate the number of people living near to this poverty line.
The health indicators for Ghana are all more favourable in terms of economic development, showing that people are healthier and living longer lives (Table 1).
The education indicators are all more favourable for Ghana, indicating that more people have access to an education, and that this has favourable implications for future development (Table 1).
The data given provide a small picture of development in Nigeria and Ghana and more information would be useful. However, it appears that Ghana is more economically developed than Nigeria, despite its lower average national income.

Economic growth in Cambodia

Economic growth in Cambodia Cambodia has become one of the fastest growing economies in Asia and has now been classified as an upper middle-income country, according to the World Bank.
Export promotion has helped Cambodia to grow. It has used low-cost labour to manufacture products for export. This has been helped by the fact that the price of labour has increased in China and other Asian countries. Cambodia’s large supply of inexpensive, low-skilled labour has attracted much foreign direct investment (FDI) into the production of garments and footwear for export and contributed to its economic growth. Last year, there was a 10.2 % increase in the export of garments and footwear in Cambodia, which makes up 70 % of its exports.
Throughout Asia, hundreds of millions of people have been lifted out of poverty through manufacturing jobs that allowed them to better educate their children, who could then have a better life.
However, Cambodia’s manufacturing competitiveness is being challenged by other countries in the region, particularly those that manufacture low-cost clothing. A recent increase in the minimum wage may also pose problems. Industry representatives have raised concerns that the garment industry may lose investors, who may leave to find cheaper places, if the minimum wage continues to increase.
Cambodia needs to further diversify its economy if it hopes to maintain the high growth rates it has achieved in recent years. To support diversification, the government has launched an industrial development policy aimed at upgrading industry from low-cost, labour-intensive manufacturing to production with higher value added. The policy encourages the expansion and modernization of small and medium-sized enterprises, stronger regulations and enforcement, and a better environment for doing business.
There remain many challenges to deal with. One of them is growing inequality—there is income inequality between urban and rural areas—as well as gender inequality. Women continue to face disadvantages in gaining access to higher education, well-paid employment opportunities and decision-making roles in government.
Approximately 30 000 young Cambodians enter the labour force each year but often do not have the required skills to meet the needs of the labour market. While a large proportion of the labour force is employed, many jobs are informal, vulnerable, unstable and poorly paid. There is a critical need to address problems in education and training and to help children complete school. While 98 % of children attend primary school in Cambodia, many drop out later due to a lack of funds. Only 30 % of young people complete high school.
The rapid economic and population growth in Cambodia is leading to significant environmental pollution. Environmentalists have identified garment factories as being one of the four main industrial activities that significantly contribute to air and water pollution.

Question

Define the term diversification indicated in bold in the text (paragraph [5]).

▶️Answer/Explanation

An explanation that it is a process resulting in the production of a greater variety of goods and services that a country produces.
OR
An explanation that it is a strategy to increase the variety of goods and services produced in order to avoid (the risks associated with) overspecialization.

Economic growth in Cambodia

Economic growth in Cambodia Cambodia has become one of the fastest growing economies in Asia and has now been classified as an upper middle-income country, according to the World Bank.
Export promotion has helped Cambodia to grow. It has used low-cost labour to manufacture products for export. This has been helped by the fact that the price of labour has increased in China and other Asian countries. Cambodia’s large supply of inexpensive, low-skilled labour has attracted much foreign direct investment (FDI) into the production of garments and footwear for export and contributed to its economic growth. Last year, there was a 10.2 % increase in the export of garments and footwear in Cambodia, which makes up 70 % of its exports.
Throughout Asia, hundreds of millions of people have been lifted out of poverty through manufacturing jobs that allowed them to better educate their children, who could then have a better life.
However, Cambodia’s manufacturing competitiveness is being challenged by other countries in the region, particularly those that manufacture low-cost clothing. A recent increase in the minimum wage may also pose problems. Industry representatives have raised concerns that the garment industry may lose investors, who may leave to find cheaper places, if the minimum wage continues to increase.
Cambodia needs to further diversify its economy if it hopes to maintain the high growth rates it has achieved in recent years. To support diversification, the government has launched an industrial development policy aimed at upgrading industry from low-cost, labour-intensive manufacturing to production with higher value added. The policy encourages the expansion and modernization of small and medium-sized enterprises, stronger regulations and enforcement, and a better environment for doing business.
There remain many challenges to deal with. One of them is growing inequality—there is income inequality between urban and rural areas—as well as gender inequality. Women continue to face disadvantages in gaining access to higher education, well-paid employment opportunities and decision-making roles in government.
Approximately 30 000 young Cambodians enter the labour force each year but often do not have the required skills to meet the needs of the labour market. While a large proportion of the labour force is employed, many jobs are informal, vulnerable, unstable and poorly paid. There is a critical need to address problems in education and training and to help children complete school. While 98 % of children attend primary school in Cambodia, many drop out later due to a lack of funds. Only 30 % of young people complete high school.
The rapid economic and population growth in Cambodia is leading to significant environmental pollution. Environmentalists have identified garment factories as being one of the four main industrial activities that significantly contribute to air and water pollution.

Question

Using information from the text/data and your knowledge of economics, evaluate export promotion as a strategy for achieving economic development in Cambodia.

▶️Answer/Explanation

Responses may include:

definition of export promotion
definition of economic development.

Economic analysis, focusing on economic development, may include:

AD/AS theory
poverty cycle
comparative advantage
FDI role.

To explore the impact on:
Strengths of export promotion:

Export promotion has helped Cambodia’s economy to grow (paragraph [2]) by producing manufactured products using its low-cost workers.
Cambodia has a comparative advantage in the production of garments and footwear because it has a large supply of low-skilled, inexpensive labour (paragraph [2]); this has allowed it to specialize.
There has been an increase of 10.2 % exports of garments and footwear (paragraph [2]).
It has attracted much foreign direct investment (paragraph [2]).
Manufacturing jobs have lifted millions of people out of poverty in Asia; Cambodia hopes to benefit in the same way (paragraph [3]).
Creation of employment leads to higher incomes and can lead to higher standards of living.
30 000 young Cambodians enter the labour force each year and could find jobs in the export industries.
Net exports is a component of AD; if exports increase then this will result in an increase in RGDP, which may be used for development objectives.
Transfer of technology as a result of FDI.
Foreign firms in the export industries may provide training for the workers, helping them to become more productive.
As a way to encourage exports, Cambodia is supporting diversification with supply-side policies (paragraph [5]) that could enhance the opportunities for small and medium-sized enterprises, which could bring about economic development.

Limitations of export promotion:

Over-specialization is a risk for Cambodia, making it vulnerable to forces outside of its control.
If minimum wages in Cambodia continue to increase, foreign investors may move to cheaper places (paragraph [4]).
Export centres are likely to locate in urban areas, worsening rural–urban inequality, which is already high (paragraph [6]).
Women may be more likely to be workers in the garment industry and may be trapped in low-wage jobs, worsening gender inequality (paragraph [6]).
The garment and footwear industries create air and water pollution, threatening sustainability (paragraph [8])

Fiji’s challenges and opportunities

In 2016, the island nation of Fiji suffered from cyclone Winston (a tropical storm), costing more than 40 lives and damaging its infrastructure. One of the country’s four sugar mills was severely damaged, harming raw sugar processing. Processed sugar is, in addition to bottled water and tourism, a major export in Fiji. A recent study found that the damage from the cyclone continues to have a lasting effect on communities as fisherwomen report fewer and smaller crabs and fishes. The social safety net is limited and there are calls for the government to help the citizens who have been affected by the cyclone. However, the government had to use its budget to rebuild infrastructure.
The government has prepared several strategies to strengthen the economy. These include financial support for sugar cane producers, diversification of its agricultural produce, better access to finance and encouragement of investment. The government has committed to provide equal opportunities for all: promoting the participation of women in education and political leadership, because Fiji has one of the lowest female participation rates in politics in the world.
To support its sugar cane farmers, the government provides a 55 % subsidy on pesticides (products that kill weeds) used in farming. However, small farmers are complaining about the excessive paperwork that needs to be completed to receive the subsidy and there is potential for corruption. Fiji competes with Brazil, which has an absolute advantage, in the world market for sugar.
To diversify, the government plans to expand the ginger and coconut industries. Both industries are economically and environmentally sustainable. The industries provide an increased number of Fijians with a worthwhile income. Coconut production plays a very important role in Fiji’s economy, particularly in the more isolated rural communities, where formal employment is scarce and where alternative cash crops (crops grown to be sold for profit) do not exist. Coconut is a staple food and is vital for food security (ensuring that people have access to enough food), but is also important for health, economic and cultural reasons. New market opportunities have emerged in high-value products – green coconut products, such as coconut water, are becoming increasingly popular throughout the world.
The Asian Development Bank encourages Fijian farmers to access “green finance”. These financial investments support economic development through sustainable development initiatives and policies. Under the government’s new reforms, farmers are able to use assets such as crops and contracts as collateral for loans, creating improved access to finance. However, to increase incomes, farmers will also need to improve their financial knowledge.
To create an investment-friendly environment, the government must develop more infrastructure, create market access through greater economic integration and reduce asymmetric information between farmers and wholesale buyers. Australia has decided to help Fiji by financing infrastructure through grants and concessional loans.

Question

Using information from the text/data and your knowledge of economics, discuss the view that government intervention is the best way to achieve economic development in Fiji.

▶️Answer/Explanation

Answers may include:

Definition of economic development.

Economic analysis may include

Poverty cycle
Lorenz curve
AD/AS diagram
Externality diagram
PPC.

Discussion that government intervention is the best way to achieve economic development may include:

Financial support for sugar cane producers needed for diversification (paragraph [2]) needed for access to credit and to encourage investment.
The diversification supported through government intervention may lead to more value-added products (paragraph [4]). May result in more jobs, increasing household income, raised standard of living as able to access basic necessities.
Education for women is highlighted as an area for development (paragraph [2]), leads to improved human capital, productivity, increased incomes, access to health and basic necessities – raising living standards.
Government strategies are targeting equality for all, including gender equality (paragraph [2])
Support in coconut production vital for food security (paragraph [4]).
The investment (paragraph [2]) leads to AD increase and increase in economic growth, may lead to economic development if incomes and access to health and education are improved.
The government provides subsidies on pesticides to support/increase sugar production (paragraph [3]); this may or may not result in more jobs, which could increase household incomes and thereby standards of living.
Ginger and coconut production are economically and environmentally sustainable (paragraph [4]) which implies that they are efficient industries, but also environmentally friendly, leading to sustainable growth and development.
Ginger and coconut production provide “worthwhile income” for an increasing number of Fijians (paragraph [4]), leading to an increased standard of living and breaking out of the poverty cycle.
Social safety net is limited; therefore, government intervention is needed (paragraph [1]).
Infrastructure spending vital to support the tourism industry as a major export (paragraph [1]), if exports decrease, economic growth decrease, leads to lower employment opportunities.
“Green finance” (paragraph [5]) would allow sustainable ginger and coconut farmers to have access to credit and invest in their farms to make them more productive and earn more income.
To improve information flows by reducing asymmetric information, would improve information between farmers and middlemen (paragraph [6]). When farmers have more information, they can make better economic decisions that benefit their families in terms of income.

Discussion that government intervention may not be best way to achieve economic development may include:

Intervention may not reach the very poor/those with limited resources. The subsidy for pest control (paragraph [3]) requires excessive paperwork, so not all may benefit from the support.
To be effective government intervention needs to be targeted to areas of need. Farmers’ financial literacy needs to be improved (paragraph [5]). So, access to credit will only be effective if government can also provide education.
The government must develop major infrastructure (paragraph [6]), which will be costly and take a long time to develop and will have opportunity costs.
Potential for corruption means government subsidies may not reach those who need it (paragraph [3]).
Subsidies for pesticides may create a negative externality (paragraph [3])
Brazil has absolute advantage in sugar and is Fiji’s competitor, so the subsidies may be better directed alternative development areas (paragraph [3]).

Students may offer alternative strategies to achieve economic development:

Trade liberalization and development might be better by creating market access through greater economic integration (paragraph [6]), the export revenue earned from this could be used to improve or build new infrastructure in the future, leading to economic development for many in society.
Grants and concessional loans from Australia (paragraph [6])
Export promotion – new markets opportunities emerging as products such as coconut water is becoming popular throughout the world (paragraph [4])
Green finance through Asian Development Bank (paragraph [5]).

Can the Democratic Republic of the Congo achieve its economic potential?

The Democratic Republic of the Congo (DRC) is a nation of great potential. It has large mineral resources and an abundance of fertile land. The mining and export of cobalt, copper and gold are the main source of government revenue. However, the abundance of natural resources causes devastating conflicts as rebel groups fight for control of the DRC’s resources. With a population of 80 million and gross domestic product (GDP) per capita of only US$$$457, the DRC is one of the world’s poorest nations. It is ranked 176 in the world in terms of the Human Development Index (HDI).
The government has been accused of relying too much on tariffs, but to improve living standards, the government needs revenue to spend on agriculture, electricity and roads. Furthermore, business owners in the DRC complain of corruption and increasing “red tape” (excessive regulations).
The government believes that a strong agricultural sector could boost economic growth but only 10 % of the land is used for farming. Rice, maize and other crops grow well in the tropical climate and yet the government spends US$$$1 billion per year importing basic foods. According to a government spokesperson, the lack of infrastructure is a major barrier to the processing and transporting of agricultural products. The DRC’s road network is so bad that farmers and traders often make a two-week trip in small boats down the Congo River to sell their produce. The DRC has just 27 877 kilometres (km) of roads. It is estimated that 90 000 km of national roads and 150 000 km of rural roads must be built.
In addition, the World Bank reports that only 17 % of the DRC’s population has access to electricity, despite the capacity of the Congo River to generate enough electricity to satisfy the needs of the region.
To make matters worse, the regional conflicts have affected the availability of healthcare services. It is estimated that half of the health centres have been looted*, burnt or destroyed. Government expenditure on healthcare per capita remains one of the lowest in the world. Non-governmental organizations (NGOs) are relied on to protect the health and wellbeing of citizens. NGOs help to achieve this by distributing medicine and teaching families about hygiene and proper sanitation.

Question

Using information from the text/data and your knowledge of economics, evaluate the effectiveness of interventionist policies as a means of achieving economic development in the DRC.

▶️Answer/Explanation

Responses may include:

a definition of economic development
a definition of interventionist policies.

Economic analysis may include:

poverty cycle
interventionist supply-side policies
trade protection
PPC
FDI.

Strengths of interventionist policies may include:

government could provide a social safety net as GDP per capita is low (paragraph [1])
government spending to encourage investment in agricultural sector (e.g. subsidies) (paragraph [2])
increased spending in the agricultural sector will create jobs (paragraph [2])
increased spending in the agricultural sector will reduce reliance on imports and improve food security
government provision of infrastructure in roads and cities encourages future FDI which may create jobs (increase in LRAS or PPF) (paragraph [3])
government building hydroelectric generation plants increases electricity access to citizens and business and encourages FDI which creates jobs (paragraph [4])
tariffs can supply additional revenue for government spending (paragraph [2])
tariffs can protect infant industries particularly in agriculture (paragraph [2])
positive externalities / welfare loss reduced when government increases healthcare provision (paragraph [5]).

Limitations of interventionist policies may include:

overdependence on income from mining sector (paragraph [1])
increased government intervention may increase corruption (paragraph [2])
weak private sector means reduces potential to collect tax revenue
significant costs to budget to provide road and hydroelectricity infrastructure (paragraph [3] and [4])
government investment in infrastructure may lead to high debt creating a burden to future generations (paragraph [3] and [4])
increasing red tape discourages investment in the private sector (paragraph [2])
tariffs on imported inputs increases input costs for firms and reduces output (paragraph [2]).

To reach level 3, students must show awareness of the ways in which interventionist policies will impact upon economic development (not simply discuss the advantages and disadvantages of interventionist policies in general). This means to link the evaluation to how they will reduce poverty, increase living standards, reduce income inequalities and increase employment opportunities, improve health and education indicators.

Economic development in Honduras and Guatemala

Honduras

Honduras is a developing country in Central America. While historically dependent on the export of primary products, Honduras has more recently diversified its exports to include clothing and automobile components. Honduras’ economy depends heavily on exports to the United States (US) and, to a lesser extent, on remittances (money sent by a foreign worker to their home country).
In rural areas, approximately one out of five Hondurans lives in absolute poverty. The country is also vulnerable to external shocks and has experienced worsening terms of trade. Revenue earned by the agricultural sector has decreased by one-third over the past two decades. This is partially due to the declining prices of the country’s export crops, especially bananas and coffee beans.
The Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) has helped attract foreign direct investment (FDI). However, a threat to future FDI inflows is Honduras’ high level of crime and violence. It has one of the highest murder rates in the world.

Guatemala
Guatemala shares a border with Honduras. Guatemala has the largest population and the biggest economy in Central America. Guatemala is the top remittance recipient in Central America as a result of large numbers of Guatemalans living and working in the US. These inflows on the current account are equivalent to two-thirds of the country’s export revenue and about 10 % of its gross domestic product (GDP).
The agricultural sector employs 31 % of Guatemala’s labour force. Key agricultural exports include sugar, coffee, bananas and vegetables. The CAFTA-DR has reduced the barriers to FDI, resulting in increased investment and diversification of exports, particularly in iron, steel and non-traditional agricultural exports (such as high-priced fruits and vegetables). While the free trade agreement has improved the conditions for investment, FDI continues to be limited by concerns over security, the lack of skilled workers and poor infrastructure.
With some of the worst poverty, malnutrition and infant mortality rates in the region, Guatemala’s economic development is slowing. Those worst affected live in rural areas. Faster economic growth is crucial to achieving the country’s medium- and long-term poverty reduction objectives.

Question

Define the term investment indicated in bold in the text (paragraph [5]).

▶️Answer/Explanation

An explanation that it is any addition to the capital stock of the economy OR expenditure/spending by firms and/or government on capital.

Changing times for Vanuatu

Vanuatu is an island nation in the west of the Pacific Ocean. The islands are isolated with 80 % of the population living in rural villages as subsistence farmers. In recent years, Vanuatu has experienced strong economic growth driven by tourism, construction and foreign aid. However, Vanuatu has a United Nations (UN) status as the world’s most vulnerable country to natural disasters, and this vulnerability is intensified through climate change. Furthermore, economic development in Vanuatu is constrained by lack of education, limited public sector capacity, poor infrastructure and low labour market participation rates of women and youth.
Vanuatu currently faces growing income disparities between rural and urban areas. The poverty rate is currently at 3.8 % in the rural areas and 10.4 % in Port Vila, the capital city. Urbanization has led to large numbers of unskilled low-income workers concentrated in informal sectors in Port Vila. As a result, there is a shortage of housing, water and electricity services.
The UN categorizes Vanuatu as a Least Developed Country, but it will be moving to the higher category of Developing Country by the end of 2020. This will mean that some special assistance such as access to development finance, trade and market access, and technology transfer will be slowly withdrawn. However, there will be benefits for Vanuatu as it will gain greater access to commercial lenders, foreign direct investment (FDI) and climate finance funds.
To help with the transition to the new UN category, Australia and New Zealand are continuing aid projects to improve public sector capacity, increase economic participation of women and youth and improve access to electricity in Vanuatu. Moreover, Japan and China have significantly increased aid through grants and concessional loans. China is now the leading donor to Vanuatu.
The Vanuatu government has targeted the development of human capital through education, healthcare and infrastructure. Most of the aid from China has been used to develop new airports and shipping ports. This infrastructure will further help producers to access export markets and gain economies of scale. However, government institutions need to be improved so that the benefits of export revenues are redistributed to those in need. Historically, the lack of good governance has led to misuse of funds.
Economists believe the foreign aid spending could help attract FDI, which is important to help Vanuatu develop export markets in organic beef, sandalwood oil, tamanu oil and canarium nuts to provide areas for growth. Historically, growth was driven through import substitution by subsidizing manufacturing industries.
Vanuatu is currently reforming the tax system to lower the reliance on indirect taxes and implementing a progressive tax system to increase government revenue. The increased tax revenue will also decrease Vanuatu’s dependence on foreign aid.

Question

Define the term foreign direct investment indicated in bold in the text (paragraph [3])

▶️Answer/Explanation

An understanding that it is any two of the following:

long-term investment in another country
investment by a multinational corporation (MNC) abroad
investment in another country representing at least 10% ownership
investment in productive facilities abroad.

Changing times for Vanuatu

Vanuatu is an island nation in the west of the Pacific Ocean. The islands are isolated with 80 % of the population living in rural villages as subsistence farmers. In recent years, Vanuatu has experienced strong economic growth driven by tourism, construction and foreign aid. However, Vanuatu has a United Nations (UN) status as the world’s most vulnerable country to natural disasters, and this vulnerability is intensified through climate change. Furthermore, economic development in Vanuatu is constrained by lack of education, limited public sector capacity, poor infrastructure and low labour market participation rates of women and youth.
Vanuatu currently faces growing income disparities between rural and urban areas. The poverty rate is currently at 3.8 % in the rural areas and 10.4 % in Port Vila, the capital city. Urbanization has led to large numbers of unskilled low-income workers concentrated in informal sectors in Port Vila. As a result, there is a shortage of housing, water and electricity services.
The UN categorizes Vanuatu as a Least Developed Country, but it will be moving to the higher category of Developing Country by the end of 2020. This will mean that some special assistance such as access to development finance, trade and market access, and technology transfer will be slowly withdrawn. However, there will be benefits for Vanuatu as it will gain greater access to commercial lenders, foreign direct investment (FDI) and climate finance funds.
To help with the transition to the new UN category, Australia and New Zealand are continuing aid projects to improve public sector capacity, increase economic participation of women and youth and improve access to electricity in Vanuatu. Moreover, Japan and China have significantly increased aid through grants and concessional loans. China is now the leading donor to Vanuatu.
The Vanuatu government has targeted the development of human capital through education, healthcare and infrastructure. Most of the aid from China has been used to develop new airports and shipping ports. This infrastructure will further help producers to access export markets and gain economies of scale. However, government institutions need to be improved so that the benefits of export revenues are redistributed to those in need. Historically, the lack of good governance has led to misuse of funds.
Economists believe the foreign aid spending could help attract FDI, which is important to help Vanuatu develop export markets in organic beef, sandalwood oil, tamanu oil and canarium nuts to provide areas for growth. Historically, growth was driven through import substitution by subsidizing manufacturing industries.
Vanuatu is currently reforming the tax system to lower the reliance on indirect taxes and implementing a progressive tax system to increase government revenue. The increased tax revenue will also decrease Vanuatu’s dependence on foreign aid.

Question

Using information from the text/data and your knowledge of economics, discuss the effectiveness of foreign aid in achieving economic development in Vanuatu.

▶️Answer/Explanation

Answers may include:

Definition of economic development, foreign aid.

Economic analysis, focusing on economic development, may include:

AD/AS.
Poverty cycle.
PPC.
Lorenz curve.

Effectiveness of foreign aid in achieving economic development may include:

Aid could be essential to help with transition to a higher developing country status (paragraph [3]).
Aid spending on Education:
- Higher skilled labour leads to high incomes – breaking poverty cycle/helping with the poverty gap (paragraph [2]).
- Higher level of skill may allow people to move from the informal sector to formal sector with better working conditions (paragraph [2])
- Could help increase participation of women in the workplace (paragraph [4])
- Aid spending on health care
- Workforce more productive – higher incomes – break poverty cycle (paragraph [5]).
Aid spending on Infrastructure:
- Access to export markets – increases real GDP, increased output – increase employment opportunities – increasing incomes and lowering poverty (paragraph [6]).
Isolated island nation, more shipping ports/airports may lower costs (paragraph [1]).
Shipping ports/airports – larger markets – access economies of scale (paragraph [5]).
PPC or AD/AS – increases quality and quantity of resources (paragraph [5]).
Infrastructure spending could include improving access to water and electricity (paragraph [2] and [4]).
Infrastructure may help decrease the poverty gap/decrease pressure on cities (paragraph [2]).
Allow for export industry grow and government may be able to remove subsidies and spend on other areas for economic development (paragraph [6]).
Aid spending may help with decreasing the natural disaster vulnerability (paragraph [1]).

Lack of effectiveness of foreign aid in achieving economic development may include:

Lacks the capacity to deliver the quality education and healthcare needed (paragraph [5]).
Institutions are lacking to support redistribution of benefits from potential export growth (paragraph [5]).
Infrastructure spending mentioned is targeted on export growth (paragraph [6]) and may not be in areas that directly improve standards of living such as access to electricity and water (paragraph [3]).
Problems with misuse of funds (paragraph [6]).
Over-reliance on aid is seen as a potential issue (paragraph [7]).
Intentions of donors, China is focusing on infrastructure – but this may not benefit the very poor (paragraph [4]).
Concession loans may cause repayment issues in the future (paragraph [4]).
The new UN developing country status may allow Vanuatu to access funds from other areas and therefore aid might not be needed (paragraph [3]).
Vanuatu’s most vulnerable status and climate change does not appear to be part of the aid strategy and this could be more important than the targeted sectors(paragraph [1]).

New policies for Brazil

From 2010 to 2014, Brazil experienced an economic boom with annual gross domestic product (GDP) growth of 8 %. During this time, the government spent heavily on social programmes (including cash transfers and pensions) that helped millions to get out of the poverty cycle. The poverty rate decreased from 22 % to 9 % and the Gini coefficient dropped from 0.581 to 0.515. However, the spending on social programmes resulted in fiscal deficits and a large public debt, which is currently 80 % of GDP.
In 2015, Brazil entered a recession that lasted until 2017. During the recession GDP declined by an average of 3 % per year. By 2017, the number of Brazilians living in absolute poverty climbed by 13 %, inequality worsened, and unemployment was 12 %. From late 2017 to 2019, Brazil struggled to recover, with only approximately 1 % annual economic growth.
Some economists blamed the slow recovery on the lack of investment in education and technology during the economic boom. According to those economists, investment in human and physical capital was necessary to improve productivity and decrease the reliance on the production of primary commodities. Historically, spending on education has not been effective in reaching the very poor.
In 2018, a newly elected government, aiming to stimulate economic growth, introduced market-oriented policies. Since Brazil has a large economy, the new government believed that Brazil should take advantage of world trade and foreign investment to boost economic growth and achieve economic development.
The new government aimed to increase the number of multinational corporations (MNCs) investing in Brazil through deregulation and trade liberalization. Furthermore, in 2020 several state-owned enterprises were privatized.
Additionally, new labour market and tax reforms were introduced to create jobs, increase labour force participation and make it easier for firms to hire and fire workers. The reforms included increasing the retirement age and reducing transfer payments. However, trade unions claim that the reforms are unfair and will lead to the exploitation of workers.
There is concern that deregulation, privatization and market liberalization will put pressure on Brazil’s environment, threaten sustainable development, and benefit only urban areas. In 2017, the government introduced “green GDP” as an official measure and committed to environmental protection goals. This is necessary because, for example, over 40 % of the population live in areas without access to a sewage system and manufacturing companies are dumping untreated wastewater in rivers, contributing to water pollution.

Question

Define the term multinational corporations indicated in bold in the text (paragraph [5]).

▶️Answer/Explanation

An understanding that it is a company that has productive units/ operates in more than one country OR that it is a company that carries out foreign direct investment in another country.

New policies for Brazil

From 2010 to 2014, Brazil experienced an economic boom with annual gross domestic product (GDP) growth of 8 %. During this time, the government spent heavily on social programmes (including cash transfers and pensions) that helped millions to get out of the poverty cycle. The poverty rate decreased from 22 % to 9 % and the Gini coefficient dropped from 0.581 to 0.515. However, the spending on social programmes resulted in fiscal deficits and a large public debt, which is currently 80 % of GDP.
In 2015, Brazil entered a recession that lasted until 2017. During the recession GDP declined by an average of 3 % per year. By 2017, the number of Brazilians living in absolute poverty climbed by 13 %, inequality worsened, and unemployment was 12 %. From late 2017 to 2019, Brazil struggled to recover, with only approximately 1 % annual economic growth.
Some economists blamed the slow recovery on the lack of investment in education and technology during the economic boom. According to those economists, investment in human and physical capital was necessary to improve productivity and decrease the reliance on the production of primary commodities. Historically, spending on education has not been effective in reaching the very poor.
In 2018, a newly elected government, aiming to stimulate economic growth, introduced market-oriented policies. Since Brazil has a large economy, the new government believed that Brazil should take advantage of world trade and foreign investment to boost economic growth and achieve economic development.
The new government aimed to increase the number of multinational corporations (MNCs) investing in Brazil through deregulation and trade liberalization. Furthermore, in 2020 several state-owned enterprises were privatized.
Additionally, new labour market and tax reforms were introduced to create jobs, increase labour force participation and make it easier for firms to hire and fire workers. The reforms included increasing the retirement age and reducing transfer payments. However, trade unions claim that the reforms are unfair and will lead to the exploitation of workers.
There is concern that deregulation, privatization and market liberalization will put pressure on Brazil’s environment, threaten sustainable development, and benefit only urban areas. In 2017, the government introduced “green GDP” as an official measure and committed to environmental protection goals. This is necessary because, for example, over 40 % of the population live in areas without access to a sewage system and manufacturing companies are dumping untreated wastewater in rivers, contributing to water pollution.

Question

Using information from the text/data and your knowledge of economics, evaluate the impact of market-oriented policies on economic development in Brazil.

▶️Answer/Explanation

Answers may include:

Definitions of:
- Economic development.
- Market-orientated policies.

Economic analysis, focusing on economic development, may include:

AD/AS analysis.
Poverty cycle.
Lorenz curve.
Externalities.

Positive outcomes on economic development may include:

Labour reforms (raising retirement age), may increase the size of the labour force, which may increase LRAS as quantity of labour has increased. This may increase LRAS, leading to increased real GDP/potential output, which may increase job opportunities and increase income, for low income earners and encourage economic development (paragraph [6]).
Lowering business costs through labour reforms, making the hiring and firing of employees easier, may increase AS, leading to increased real GDP and a possibility of more employment opportunities for low income earners.
Privatization may decrease public debt and government can redirect spending into economic development (paragraph [5]).
More multinationals/foreign investment – may lead to more jobs (paragraph [4]).
Trade liberalization may lead to lower prices for consumers, more choice (paragraph [5]).
May promote diversification and move away from commodities (paragraph [1]).
Encouraging more competition from MNCs may promote more efficiency (paragraph [5]).

Negative outcomes on economic development may include:

Spending on education in the past has been ineffective (paragraph [3]).
Labour reforms decreasing standard of living through lower job security (paragraph [4]).
Privatization may increase prices of goods and services / cause unemployment as private firms aim for efficiency and profit maximization (paragraph [5]).
Multinationals repatriate profits and may not employ local people (paragraph [5]).
Some industries may suffer from increased competition due to trade liberalization (paragraph [3]).
Concern of environment destruction and externalities (paragraph [7]).
Increasing the retirement age may decrease standards of living (paragraph [6]).
Inequalities may occur through market-orientated policies.
Dual economy can develop as a result of market-orientated policies.

Text D — Overview of Lebanon

Lebanon is in the Middle East, bordering the Mediterranean Sea, and is home to nearly 7 million people. Lebanon is in an economic crisis, facing a recession, huge government debt and rising income inequality, poverty and inflation. Corruption and poor governance have been blamed for misallocation of funds that has led to low levels of investment and extensive capital flight. Additionally, Lebanon has one of the most unequal distributions of wealth in the world. In 2019, the top 10% of income earners owned over 70% of personal wealth in Lebanon.
Infrastructure in Lebanon is poor, water and sewerage systems are basic, and roads are inadequate. Electricity supply is unreliable with people going without power for much of the day. In 2020, major buildings including food storage buildings, schools and hospitals were damaged in Beirut (the capital city of Lebanon). This was concerning as 85% of the country’s food arrives through Beirut. Fortunately, humanitarian aid was given by the international community to help rebuild the damaged buildings.
Despite a history of inflows from luxury tourism and remittances (money sent by a foreign worker to their home country), there is a persistent current account deficit. To help with this, the Lebanese central bank has used high interest rates to attract financial inflows. Additionally, the government has borrowed funds from overseas. However, the misuse of these funds and overspending have contributed to one of the highest foreign debts in the world. Lebanon recently defaulted on foreign debt repayments worth 1.2 billion euros, which damaged its international credit rating, making it difficult to access loans needed to help solve its current economic problems.

Text E — Further challenges facing Lebanon

Social unrest is prevalent and intensified when the government suggested raising revenue by imposing an indirect tax on social media applications such as WhatsApp. As the government struggles to pay its debts, people are concerned that subsidies on necessities such as wheat, medicine and fuel will be removed.
Mismanagement of the state-run electricity and telecommunications sectors has resulted in unreliable services and high telecommunication prices. The state-run monopoly firms make losses, and the electricity sector relies heavily on government subsidies, putting pressure on the budget deficit.
Lebanon currently has a managed exchange rate system with the Lebanese pound (Lebanon’s currency) linked to the US dollar (US$). However, the government is finding it difficult to maintain the exchange rate at the desired level due to insufficient reserve assets. Recent falling remittances, low levels of exports and lack of foreign direct investment (FDI) are placing downward pressure on the Lebanese pound. Lebanon has limited natural resources and a small manufacturing industry, thus relies heavily on imports. As a consequence, the gradual depreciation of the Lebanese pound has led to cost-push inflation.

Text F — Reforms and strategies for economic recovery

The Lebanese government is seeking help from the International Monetary Fund (IMF) to restructure the government debt and develop its infrastructure. However, loans from the IMF will require the following conditions to be met:
- procedures and processes established to ensure good governance, including enforcement of anti-corruption laws
- financial sector reforms implemented to build confidence in the banking system and laws to control capital flight
- government spending reduced and revenue increased through higher corporate, wealth and personal income taxes for high-income earners. Introduction of a tax on imported luxury goods and an increase of indirect taxes
- partially privatizing the electricity and telecommunications sectors to increase efficiency and encourage the exploration of new energy sources
- transitioning from a managed to a floating exchange rate system.
Other organizations are offering development aid to rebuild infrastructure and support small to medium-sized businesses to develop the manufacturing sector and attract FDI. Currently, the manufacturing sector accounts for only 12.5% of gross domestic product (GDP). Some experts recommend that Lebanon decreases its reliance on food imports by developing its own food industry. However, Lebanon must commit to establishing good governance systems before aid organizations will provide their support.
Lebanon has resisted seeking help from the IMF and other agencies in the past due to concerns about high levels of interference and imposed conditions that may conflict with their own government objectives.

Question

Define the term humanitarian aid indicated in bold (Text D, paragraph [2]).

▶️Answer/Explanation

An understanding that it is aid given to alleviate short-term suffering/in emergencies
in the form of basic necessities/emergency relief aid (supplies)/aid such as food/medical aid

São Tomé and Príncipe Economic Development Challenges

São Tomé and Príncipe (STP) is an island nation and is one of the smallest economies in Africa. STP faces many economic development challenges including: a limited range of export products (mostly commodities) and markets, limited human capital, insufficient infrastructure, vulnerability to supply-side shocks due to climate change, limited access to credit, political instability and poor governance. All these challenges have led to a high dependence on foreign aid.
International organizations estimate that approximately 50 % of STP’s population is living in relative poverty. Its economic growth rate has been consistent at 4–5 % between 2013 and 2018, but the International Monetary Fund (IMF) suggests that STP will need an economic growth rate of 6 % to have an impact on the poverty rate.
To increase economic growth and reduce its dependence on foreign aid and cocoa exports (80 % of its total exports), STP is planning to extract offshore oil and develop the comparative advantage it has in tourism. Over 50 % of its exports go to the European Union. It is hoped that diversifying STP’s exports will increase the number of its potential trading partners. To achieve this aim, STP is seeking membership with the World Trade Organization (WTO) and the Central African Economic and Monetary Community. Developing export markets could help STP benefit from economies of scale and overcome the restrictions of its geographical remoteness and high transport costs. However, STP will need help from multinational oil companies to exploit its oil reserves, and the government needs to improve transparency to ensure that oil revenues are used to support economic development.
In STP, foreign aid accounts for 57 % of gross domestic product (GDP) and 93 % of public investments, including a significant portion of health and education spending. In addition, concessional loans have been provided by the IMF. However, STP had to agree to decrease the budget deficit as a condition of the loan from the IMF.
There are some government officials who believe that aid will not solve the economic development challenges in STP. It did not meet the nutrition targets set by the Millennium Development Goals and continues to struggle with providing adequate clean water and nutritional intake for its population. Clean water is becoming scarce in STP due to business pollution and poor household sanitation, which is also spreading diseases. Other environmental concerns are climate change, deforestation and erosion of coastal areas due to the sand extracted for the construction of roads and buildings.

Question

Using information from the text/data and your knowledge of economics, discuss the role of aid in achieving economic development in STP.

▶️Answer/Explanation

Answers may include:

Definitions of aid, economic development.

Economic analysis may include:

poverty cycle
AD/AS diagram
PPC curve
Lorenz curve.

To discuss:
Role of aid in achieving economic development:

Taiwanese aid before 2016 would have contributed to economic development through public health (paragraph [4])
- increases human capital – leads to greater opportunity for breaking out of the poverty cycle
- citizens can access higher income, more employment due to increased productivity, leads to increase living standards
- businesses may benefit from healthier workforce. Encouraging economic growth which may lead to further economic development, if widespread.
Chinese aid (paragraph [4])
- targets economic development challenges (paragraph [1]); insufficient infrastructure, limited range of export products and markets could be overcome through deep-sea port and airport improvements (paragraph [4])
- deep-sea port and airport spending may help overcome STP’s remoteness and high transport costs (paragraph [3]), this supports expanding export markets (paragraph [3]), which may offer employment and growth opportunities leading to higher incomes and increased standard of living
- economic growth rate is insufficient to have an impact on poverty rate (paragraph [2]), targeted aid spending on areas to support increasing exports may encourage higher economic growth, so it is sufficient to start translating into economic development and having an impact on the poverty rate
- airport work supports exploiting the high value-added and comparative advantage of tourism (paragraph [4]). More employment opportunities and economic growth.

Aid in general has been very important in supporting the economy:

57 % of GDP and 93 % of public investments – needed for health and education spending.
Limited access to credit (paragraph [1]), has meant that aid could be used to bridge the savings gap to help break poverty cycle.
Nutritional needs of the people are a concern and aid could help improve this (paragraph [5]). Significant aspect to support improving human capital.
Aid could help with setting up institutional support/good governance/transparency (paragraph [1] and paragraph [3]), to help develop trade and management of revenue from oil at the onset (paragraph [3]). This may help with the income equality as it avoids mismanagement or misappropriation of funds/revenues.
Decrease reliance on cocoa (paragraph [3]) needs new industry, which can be supported by aid in short term (infant industry support – new export products/tourism), to help support long term diversification. Significant argument considering 80 % of exports are from cocoa (paragraph [3]).
Aid can be used to help deal with climate change issues (paragraph [1] and paragraph [5]). Important area as it is an island and has limited resources to solve these issues.
Cannot develop without the finance from economic growth to spend on infrastructure (paragraph [1]), human capital (paragraph [1]), health/nutrition/water issues (paragraph [5]).

Aid might not support economic development:

Intentions – China may be promoting own export routes to Africa with deep-sea port.
Corruption/misallocation due to poor governance (paragraph [1]), may mean that areas in need have not received the funds needed to decrease poverty.
Changing donors may change projects and focus – Nutrition is an issue (paragraph [5]), and was being helped with Taiwan, but may not have that focus with China (paragraph [4]).
High level of dependence with poor governance (paragraph [1]) may mean that it could be difficult to break the level of dependency or seek other methods to support economic development.
Aid is often tied to specific projects or to spending on machines or goods from the donor country – China on deep sea port/airport (paragraph [4]).
Aid (concessional loans) from the IMF has come with conditions – decreasing government spending (paragraph [4]), this may mean some areas involving economic development may suffer, AD decrease and lower economic growth will not help meet the 6 % needed to elevate the poverty rate (paragraph [2]).

Text A — Overview of Vietnam

Economic reforms in Vietnam during the past 30 years have led to rapid economic growth, which has transformed a poor nation into a lower middle-income economy. The percentage of the population with an income of less than US$$$1.90 a day declined from 38 % in 2002 to below 2 % in 2018.
Vietnam used to be a food-insecure nation, in which many people sometimes lacked access to affordable food, but it is now a leading exporter of basic food commodities. It also aims to become an exporter of high quality and processed food products. However, agricultural production only accounts for 18 % of gross domestic product (GDP), although it uses 40 % of the land and employs 43 % of the labour force. Due to the growing rural population, land is often divided up between a greater number of farmers, causing some farms to become smaller. These farms have fewer opportunities to benefit from economies of scale and lower average costs of production.
Vietnam’s rapid growth and industrialization, focused on export-oriented manufacturing, have had a harmful impact on the environment. Electricity consumption has tripled since 2010, growing faster than GDP. Electricity generation, which mainly uses fossil fuels, accounts for approximately 60 % of Vietnam’s carbon emissions. Demand for water continues to increase. Unsustainable exploitation of natural resources, such as land, fisheries, and timber, could negatively affect prospects for long-term growth. In addition, Vietnam’s primary sector is highly vulnerable to the climate and is therefore subject to supply shocks.
Vietnam has signed several free trade agreements (FTAs). Its first FTA was a partnership with Japan in 2008. Both Vietnam and Japan are members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which took effect at the beginning of 2019. These FTAs also promote inward foreign direct investment (FDI). In addition, Vietnam has introduced policies to attract foreign investment, such as tax incentives and spending on infrastructure.
Japan is the biggest provider of foreign aid to Vietnam and the largest source of FDI. Japanese firms and aid agencies are jointly financing large-scale projects, including port infrastructure and a high-speed railway, which will reduce the Hanoi to Ho Chi Minh journey time from about 35 hours to under six hours. Other Japanese-funded aid projects are in the areas of health care, education, and the environment.

Text B — Trade and investment flows between Vietnam and Japan

Japan imports seafood and consumer products such as textiles, leather shoes and processed foods from Vietnam, because Vietnam has a comparative advantage in such items. Conversely, Vietnam imports machinery, technology, and raw materials for production from Japan. Gradually barriers to trade are being removed. In 2020, Vietnam began exporting lychees (a luxury fruit) to Japan after five years of negotiations on quality standards. The improved access to the Japanese market has increased the number of consumers and the revenue earned by Vietnamese lychee farmers.
Japanese firms invest in Vietnam, particularly in urban areas, because wages are low and they can export from Vietnam to other CPTPP members and to China and Indonesia. Panasonic, a Japanese multinational company (MNC), relocated a major factory, which manufactures refrigerators and washing machines, from Thailand to Vietnam in 2020. The construction of a coal-fired power plant is mainly funded by Japanese firms. The Japanese government is promoting further investment by subsidizing over 30 firms that are relocating from China to Vietnam. Most of these firms are food processors or producers of manufactured goods (for example, medical equipment).

Text C — Roles of the central bank in Vietnam

The central bank in Vietnam has been lowering interest rates since mid-2019. However, it has kept the minimum reserve requirement at 3 % of commercial bank deposits, despite suggestions that this requirement could be lowered.
The central bank also regulates the exchange rate of the dong (Vietnam’s currency). It actively intervenes in the foreign exchange market to stabilize the rate when necessary. In April 2020, there was downward pressure on the dong due to the lower interest rates and fewer foreign tourists. However, the central bank has a large amount of reserve assets, which were used to prevent the dong from depreciating.

Question

Using information from the texts/data and your knowledge of economics, discuss the view that trade with Japan is more beneficial for Vietnam’s economic development than foreign direct investment (FDI) from Japan.

▶️Answer/Explanation

Answers may include:

definition of development
definition of trade
definition of foreign direct investment.

Economic models / theories may include:

AD/AS
poverty cycle
PPC
trade creation / diversion
comparative advantage
free trade / protectionism.

Points that support the view that trade is more beneficial:
Benefits of trade with Japan:

trading based on comparative advantage enables Vietnam to consume beyond its production possibilities curve therefore could increase living standard in Vietnam (Text B, paragraph [1])
create more employment in export industries leading to improved living standard for the workers employed in these industries (Table 1)
more exports of agricultural goods enable farms to earn and invest more, leading to more efficiency (Text A, paragraph [2] or Text B, paragraph [1])
incomes are rising and will rise more in rural areas ( Text B, paragraph [1] or Table 1).

Costs of FDI from Japan:

because Japanese factories tend to locate in urban areas, inequality is increasing as shown by the rise in the Gini coefficient (Table 2)
Japanese firms are taking advantage of low-cost labour (Text B, paragraph [2])
environmental impact of more factories and coal-fired power plants and its effects on economic development (Text A, paragraph [3] or Text B, paragraph [2])
foreign firms are getting preferential tax treatment and the government is spending on infrastructure, which has an opportunity cost of possibly less government spending on health and education (Text A, paragraph [4]).

Points that support the view that FDI is more beneficial:
Benefits of FDI from Japan:

more jobs are available leading to improving indicators for health and life expectancy (Table 2) and rising incomes (Text A, paragraph [1] and Table 1)
Japanese FDI also results in Japanese aid directed at required infrastructure. This improves Vietnam’s economic capacity (Table 2 and Text A, paragraph [5])
Japanese firms are introducing more technology leading to improved human capital and enabling more exports of manufactured goods leading to more growth and consequential improvement in economic development (Text B, paragraph [2])
FDI enables Vietnam to add more value to the primary products it produces. This helps avoid economic problems attached to specializing in primary product exports and therefore may increase living standards in rural areas (Text B, paragraph [2]).

Costs of trade with Japan:

because Vietnam is specializing in primary goods, trade with Japan may be disrupted by supply shocks (particularly due to the climate) and volatile prices (due to inelastic demand and supply) restricting economic development in rural areas (Text A, paragraph [3] and Text B, paragraph [1])
land and fisheries and forests are being unsustainably used (Text A, paragraph [3]).

Synthesis of relative benefits of trade vs FDI:

trade and FDI are not substitutes for each other but together may have a significant impact on economic development, because more FDI allows Vietnam to start exporting manufactured and higher value-added goods (Text B, paragraph [2])
both are contributing to development, but both have drawbacks.

Text D — Overview of Lebanon

Lebanon is in the Middle East, bordering the Mediterranean Sea, and is home to nearly 7 million people. Lebanon is in an economic crisis, facing a recession, huge government debt and rising income inequality, poverty and inflation. Corruption and poor governance have been blamed for misallocation of funds that has led to low levels of investment and extensive capital flight. Additionally, Lebanon has one of the most unequal distributions of wealth in the world. In 2019, the top 10% of income earners owned over 70% of personal wealth in Lebanon.
Infrastructure in Lebanon is poor, water and sewerage systems are basic, and roads are inadequate. Electricity supply is unreliable with people going without power for much of the day. In 2020, major buildings including food storage buildings, schools and hospitals were damaged in Beirut (the capital city of Lebanon). This was concerning as 85% of the country’s food arrives through Beirut. Fortunately, humanitarian aid was given by the international community to help rebuild the damaged buildings.
Despite a history of inflows from luxury tourism and remittances (money sent by a foreign worker to their home country), there is a persistent current account deficit. To help with this, the Lebanese central bank has used high interest rates to attract financial inflows. Additionally, the government has borrowed funds from overseas. However, the misuse of these funds and overspending have contributed to one of the highest foreign debts in the world. Lebanon recently defaulted on foreign debt repayments worth 1.2 billion euros, which damaged its international credit rating, making it difficult to access loans needed to help solve its current economic problems.

Text E — Further challenges facing Lebanon

Social unrest is prevalent and intensified when the government suggested raising revenue by imposing an indirect tax on social media applications such as WhatsApp. As the government struggles to pay its debts, people are concerned that subsidies on necessities such as wheat, medicine and fuel will be removed.
Mismanagement of the state-run electricity and telecommunications sectors has resulted in unreliable services and high telecommunication prices. The state-run monopoly firms make losses, and the electricity sector relies heavily on government subsidies, putting pressure on the budget deficit.
Lebanon currently has a managed exchange rate system with the Lebanese pound (Lebanon’s currency) linked to the US dollar (US$). However, the government is finding it difficult to maintain the exchange rate at the desired level due to insufficient reserve assets. Recent falling remittances, low levels of exports and lack of foreign direct investment (FDI) are placing downward pressure on the Lebanese pound. Lebanon has limited natural resources and a small manufacturing industry, thus relies heavily on imports. As a consequence, the gradual depreciation of the Lebanese pound has led to cost-push inflation.

Text F — Reforms and strategies for economic recovery

The Lebanese government is seeking help from the International Monetary Fund (IMF) to restructure the government debt and develop its infrastructure. However, loans from the IMF will require the following conditions to be met:
- procedures and processes established to ensure good governance, including enforcement of anti-corruption laws
- financial sector reforms implemented to build confidence in the banking system and laws to control capital flight
- government spending reduced and revenue increased through higher corporate, wealth and personal income taxes for high-income earners. Introduction of a tax on imported luxury goods and an increase of indirect taxes
- partially privatizing the electricity and telecommunications sectors to increase efficiency and encourage the exploration of new energy sources
- transitioning from a managed to a floating exchange rate system.
Other organizations are offering development aid to rebuild infrastructure and support small to medium-sized businesses to develop the manufacturing sector and attract FDI. Currently, the manufacturing sector accounts for only 12.5% of gross domestic product (GDP). Some experts recommend that Lebanon decreases its reliance on food imports by developing its own food industry. However, Lebanon must commit to establishing good governance systems before aid organizations will provide their support.
Lebanon has resisted seeking help from the IMF and other agencies in the past due to concerns about high levels of interference and imposed conditions that may conflict with their own government objectives.

Question

Using information from the text/data and your knowledge of economics, discuss the impact of the proposed IMF conditions (Text F, paragraph [1]) on Lebanon’s economic growth and economic development.

▶️Answer/Explanation

Definitions may include:

Economic growth
Economic development

Economic models to support analysis may include:

PPC
Lorenz curve
ADAS diagram
Poverty cycle
Exchange rate diagram

Discussion may include some of the following proposed IMF conditions:

Procedures and processes established to ensure good governance, including enforcement of anti-corruption laws:

High levels of corruption (Table 4) have led to misallocation of funds (Text D, paragraph [1]). Growth has not occurred because funds are not given to areas of need. Anti-Corruption will prevent this, resources allocated more efficiently leading to increases in AD/AS leads to higher econ growth leading to higher levels of output and employment.
Good governance and accountability (Text F, paragraph [2]) is needed for confidence to attract investment (domestic and foreign) which would support growth.
Good governance and accountability (Text F, paragraph [2]) needed for aid to provide support which is aimed at rebuilding infrastructure and small/medium size business growth. This may help with growth, but also development.
High levels of corruption are often associated with low growth and instability, growing poverty.
Decrease tax evasion and improve tax collection to support problems with growing budget deficit, debt and provide funds needed to support growth.

Financial sector reforms implemented to build confidence in the banking system and laws to control capital flight:

Build confidence in banking sector to encourage remittances to come back into the country – increases AD, supporting economic growth and may help with the relative poverty growth (Table 4)
Will help control capital flight (Text D, paragraph [1]), and the resulting downward pressure this place on the currency, this may help with cost push inflation (Text E, paragraph [3]).

Government spending reduced and revenue increased through higher corporate, wealth and personal income taxes for high-income earners. Introduction of a tax on imported luxury goods and an increase of indirect taxes:

Budget deficit will be helped (Table 3)
Fiscal measures may result in decreased AD and hardship for some groups, may lead to further reduction in AD, further negative growth, loss of output, increased unemployment, lower economic development.
If reduced spending is on removal of subsidies on basic needs hinders economic development (Text E, paragraph [1])
Increased tax revenue could be used to fund inadequate infrastructure (Text D, paragraph [2]), and development of the manufacturing sector. (Text F, paragraph [2])
Progressive tax system to redistribute income helps to decrease poverty/income inequality (Text D, paragraph [1]). Improving income equality leads to economic development. May help with the relative poverty (Table 4)
Increase government revenue through indirect taxes – helps with meeting debt repayments therefore improving credit ratings and access to loans (Text D, paragraph [3])
Indirect tax increases, decrease AS – cause cost push inflation is already problematic (Text E, paragraph [1], Table 3).

Partially privatizing the electricity and telecommunications sectors to increase efficiency and encourage the exploration of new energy sources.

Efficient electricity and telecommunications that are essential for business activity to lead to economic development.
Private partnership will encourage more efficiency, average costs may decrease, reduce need for government subsidies, and less pressure on the budget deficit (Text E, paragraph [2])
Private sector may have conflicting objectives.
New energy projects will be initiated to improve supply of electricity, improving quality and quantity of resources through better infrastructure (Text D, paragraph [2]).

Transitioning from a managed to a floating exchange rate system.

May initially be another depreciation – higher cost push inflation, however exports (luxury tourism) will become cheaper and more competitive – help with the persistent current account deficit (Text D, paragraph [3]).
Less reserve assets needed to maintain the managed rate. (Text E, paragraph [3]).
Floating rate is more likely to be self-correcting and therefore interest rate can be used for other objectives instead of attracting financial inflows to cover the current account deficit. (Text D, paragraph [3]).
Managed rates may have more certainly compared to floating.

If Lebanon meets the conditions, then this leads to:

Government debt restructuring (Text F, paragraph [1], Table 3):
- Creating a sustainable repayment plan may ease debt repayments so the government can spend in other areas of need.
- Will restructure debt to avoid future defaults (Text D, paragraph [3]), so will improve credit rating for future borrowing for further investment.
Funds for infrastructure will be obtained (Text F, paragraph [1]).

However,

Unknown level of interference (Text F, paragraph [3])
Any conditional lending may go against other government objectives. Poverty may increase further (Text F, paragraph [3]).

Economic growth and/or economic development strategies Paper 2?

IBDP Economic HL- All Topics

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