IB Economics HL 3.4 Economics of Inequality and Poverty Questions

Read the extracts and answer the questions that follow.
Text A - The economy of Argentina

(1) Argentina, the third-largest economy in Latin America, has experienced several cycles of high economic growth and deep recessions over the last 70 years. It has vast natural resources in energy and agriculture and potential for renewable energy. Its leading exports include soybeans and beef products, which contribute significantly to gross domestic product (GDP) and employment and are major sources of foreign currency. However, Argentina faces unfavourable climate conditions that create problems for the agriculture sector. A drought in 2023 caused over 20 billion United States dollars (USD) in losses for soybean farmers.

(2) Argentina faces high relative poverty rates despite redistribution policies such as transfer payments. Argentina is known for extensive government intervention, including price ceilings on rent and strong protection for labour unions and workers.

(3) For many years, Argentina managed its exchange rate by limiting the amount of foreign currency that citizens could purchase as well as by restricting imports. The aim was to protect reserve assets and prevent currency depreciation. This led to the establishment of an informal (unofficial) foreign exchange market and discouraged foreign direct investment (FDI). However, the foreign currency limitations resulted in an overvalued currency and failed to stop the level of reserve assets from decreasing.

(4) In 2018, Argentina requested a loan from the International Monetary Fund (IMF) to help fund its budget deficit and large external debt repayments. However, Argentina defaulted on its debt repayments to the IMF, which led to low consumer and business confidence, causing large FDI and portfolio investment outflows. To receive future loans, the IMF requires Argentina to promote good governance, reduce government spending, increase reserve assets and control inflation.

(5) In 2022, Argentina's economic challenges continued with high inflation and a persistent budget deficit, leading to unsustainable debt. High inflation has led to declining real wages. Moreover, uncertainty about future prices has contributed to lower business investment.
Text B - Argentina's new economic reforms

(1) In December 2023, Argentina's new government initiated reforms to help solve its economic challenges. The new economic reforms included:
- deregulating markets, such as removing price controls and restrictions on buying foreign currency
- privatization of 41 state-owned enterprises to improve efficiency, including the national airline, rail networks, state media, and major oil, water and sewage companies
- increasing labour market flexibility by reducing labour union power and lowering labour costs
- reducing government spending by cancelling infrastructure projects, reducing the size of the public sector and eliminating transport and energy subsidies.

(2) The immediate result of removing restrictions on foreign currency purchases was a large depreciation of the Argentine peso (ARS), Argentina's currency, as predicted by speculators. Moreover, inflation increased to over 250 %. The new government maintained that while the reforms may cause a short-term recession, the policies would ultimately lead to long-term price stability and economic growth, despite predictions that relative poverty rates could increase to 60 %. However, the government has stated it will continue spending on programmes to decrease poverty.

(3) To address the budget deficit and maintain a trade surplus, the government increased taxes on cigarettes and imposed tariffs on imports such as laptops. Income taxes were increased, but the level of income on which no income tax is paid was raised from ARS 1.35 million to ARS 1.55 million per month.

(4) The IMF supported the reforms and agreed to grant future loans to Argentina. The loans are important to establish international credibility and finance government spending.

Text C - Education and productivity in Argentina
Despite significant investments in education, achievement levels are not improving. Experts recommend that Argentina focus on improving the quality of education to decrease poverty rates and increase the economy's productive capacity. Additionally, Argentina's low female labour force participation rate indicates an underutilized resource. An improved education system could increase female participation in the economy and raise household incomes.

Sketch a Lorenz curve to show how the change in the "level of income on which no income tax is paid" may affect Argentina's income distribution (Text B, paragraph 3 ).

Read the extracts and answer the questions that follow.
Text A - The economy of Argentina

(1) Argentina, the third-largest economy in Latin America, has experienced several cycles of high economic growth and deep recessions over the last 70 years. It has vast natural resources in energy and agriculture and potential for renewable energy. Its leading exports include soybeans and beef products, which contribute significantly to gross domestic product (GDP) and employment and are major sources of foreign currency. However, Argentina faces unfavourable climate conditions that create problems for the agriculture sector. A drought in 2023 caused over 20 billion United States dollars (USD) in losses for soybean farmers.

(2) Argentina faces high relative poverty rates despite redistribution policies such as transfer payments. Argentina is known for extensive government intervention, including price ceilings on rent and strong protection for labour unions and workers.

(3) For many years, Argentina managed its exchange rate by limiting the amount of foreign currency that citizens could purchase as well as by restricting imports. The aim was to protect reserve assets and prevent currency depreciation. This led to the establishment of an informal (unofficial) foreign exchange market and discouraged foreign direct investment (FDI). However, the foreign currency limitations resulted in an overvalued currency and failed to stop the level of reserve assets from decreasing.

(4) In 2018, Argentina requested a loan from the International Monetary Fund (IMF) to help fund its budget deficit and large external debt repayments. However, Argentina defaulted on its debt repayments to the IMF, which led to low consumer and business confidence, causing large FDI and portfolio investment outflows. To receive future loans, the IMF requires Argentina to promote good governance, reduce government spending, increase reserve assets and control inflation.

(5) In 2022, Argentina's economic challenges continued with high inflation and a persistent budget deficit, leading to unsustainable debt. High inflation has led to declining real wages. Moreover, uncertainty about future prices has contributed to lower business investment.
Text B - Argentina's new economic reforms

(1) In December 2023, Argentina's new government initiated reforms to help solve its economic challenges. The new economic reforms included:
- deregulating markets, such as removing price controls and restrictions on buying foreign currency
- privatization of 41 state-owned enterprises to improve efficiency, including the national airline, rail networks, state media, and major oil, water and sewage companies, many of which were recording losses and burdening the government budget
- increasing labour market flexibility by reducing labour union power and lowering labour costs
- reducing government spending by cancelling infrastructure projects, reducing the size of the public sector and eliminating transport and energy subsidies.

(2) The immediate result of removing restrictions on foreign currency purchases was a large depreciation of the Argentine peso (ARS), Argentina's currency, as predicted by speculators. Moreover, inflation increased to over 250 %. The new government maintained that while the reforms may cause a short-term recession, the policies would ultimately lead to long-term price stability and economic growth, despite predictions that relative poverty rates could increase to 60 %. However, the government has stated it will continue spending on programmes to decrease poverty.

(3) To address the budget deficit and maintain a trade surplus, the government increased taxes on cigarettes and imposed tariffs on imports such as laptops. Income taxes were increased, but the level of income on which no income tax is paid was raised from ARS 1.35 million to ARS 1.55 million per month.

(4) The IMF supported the reforms and agreed to grant future loans to Argentina. The loans are important to establish international credibility and finance government spending.

Text C - Education and productivity in Argentina
Despite significant investments in education, achievement levels are not improving. Experts recommend that Argentina focus on improving the quality of education to decrease poverty rates and increase the economy's productive capacity. Additionally, Argentina's low female labour force participation rate indicates an underutilized resource. An improved education system could increase female participation in the economy and raise household incomes.

Read the extracts and answer the questions that follow.
Text D - Overview of the Philippines

(1) The Philippines is a country in the Asia-Pacific region. Growth rates of gross domestic product (GDP) in the 2020s are expected to average 5 % per year. With increasing urbanization, a growing middle class and a large, young population, the Philippines' economic growth is based on strong consumer demand.

(2) Although the primary sector is still important, there is stronger growth in the services sector, including tourism and insurance. Remittances from overseas workers also contribute a lot to national income.

(3) The government has made progress in reducing poverty, partly due to policies that encourage workers to leave agriculture for higher wage jobs in other sectors. However, poverty reduction is proceeding slowly, with more than 70 % of the labour force still working in low-wage jobs in the informal economy. The Philippines is vulnerable to natural disasters, such as earthquakes and droughts, which damage the economy and most severely affect the poor who work in farming and fishing. Fish stocks are falling due to illegal fishing and climate change. Agricultural productivity is low and unsustainable practices have caused deforestation.

(4) Infrastructure and public services, including health care and education, are inadequate in many rural areas and there is poor nutrition in low-income households. Rising food and fuel prices will further reduce real incomes. For the lowest income earners, food amounts to 60 % of total expenditure, while the highest income earners spend only 28 % on food. This can be explained by the low-income elasticity of demand (YED) for food.

(5) An expansionary fiscal policy has caused a persistent budget deficit. Higher global energy prices and the depreciation of the peso ( PHP, the Philippine currency) have added to inflationary pressures. In response, the central bank raised its interest rate several times, from 2\% in 2021 to 5.5\% in 2022.

(6) The Philippines has experienced more free trade in agricultural goods following its membership of the ASEAN economic community (a free trade area). For example, a quota on pork imports into the Philippines has been removed.

(7) However, to help local farmers, a 35 % tariff has been placed on rice imported into the Philippines, even though rice and other cereals account for a large proportion of imports. Tariff revenues are used to provide subsidies for modern farm equipment, seeds and training for rice farmers. The aim is to create a more efficient and competitive agricultural sector.
Text E - Reduction of poverty rates in the Philippines

(1) In order to achieve the first Sustainable Development Goal (SDG), the government of the Philippines aims to eliminate extreme poverty by 2040. In 2019, taxes were increased on tobacco, alcohol and e-cigarettes, partly to fund an expansion of the public health care system.

(2) Another programme provides regular cash payments to mothers, conditional on their children regularly attending school and receiving preventive health check-ups. Therefore, it is reducing poverty, improving human capital and increasing gender equality. According to a World Bank study, the Philippines' programme is one of the most efficient social support systems in the world: it costs only 0.4 % of GDP, yet covers nearly 20 million people.

(3) The government gives fuel subsidies to private bus drivers who provide transport in rural areas. In addition, the bus drivers are asking for an increase in the legal minimum price that they charge passengers, although the minimum (floor) price is already above the equilibrium price.
Text F - Infrastructure and job creation in the Philippines
Infrastructure in the Philippines, including infrastructure related to information technology, is being improved, in order to create jobs and connect the poor to more opportunities and basic services. Many projects are financed by Official Development Assistance (ODA), which includes loans and grants. The ODA funding also supports programmes for youth employment and for improving skills. Training is provided for priority areas: agricultural businesses, construction, information technology, management, tourism, and firms run by women entrepreneurs.

* estimate

Using information from the text/data and your knowledge of economics, evaluate the policies used in the Philippines to reduce poverty and income inequality.