IB Economics HL 4.10.1 Trade and diversification strategies

[Maximum number: 8]

Study the extract and data below and answer the questions that follow.
Nigeria

(1) In August 2016 Nigeria, the largest economy in Africa, went into recession. This was accompanied by rising inflation and growing unemployment.

(2) 80 % to 90 % of Nigeria's export revenue is earned from oil exports. The recent fall in the world price of oil has had a significant impact on export revenues. Therefore, government revenue has fallen by about 30 %. This has prompted economists to argue that Nigeria should not be so dependent on oil and needs to diversify.

(3) Until the end of the 1960s, Nigeria was food self-sufficient and a net exporter of agricultural products. This changed in the early 1970s when the dependence on oil started. Researchers have suggested that Nigeria should start to focus on the production of agricultural goods for export. It has also been suggested that Nigeria should try to promote tourism. Government officials have said that agriculture is the most viable option for Nigeria to create employment for the large number of unemployed young people.

(4) Farmers have asked the government for more protection against foreign agricultural products. The government has already banned several agricultural imports. It also imposed strict currency controls that limit how much foreign currency Nigerians can spend online and how much businesses and individuals can exchange on a daily basis, limiting imports further. The evidence is clear that the government is adopting an import-substitution strategy.

(5) In the state of Osun, the first step towards diversification has been made. The cocoa processing industry has been revived to produce globally competitive chocolates and other cocoa products. The state governor said that it is slowly leading to more employment and higher revenues for firms. However, many firms remain small and are unable to achieve the economies of scale that would make them more competitive.

(6) The government is planning to create jobs in other areas such as the textile industry. 6000 young people will be trained and provided with facilities like sewing machines, fabrics and other equipment to make school uniforms for the growing young population. The president said that youth employment is needed to help eradicate poverty.

(7) One of Nigeria's challenges is the existence of powerful monopolies in some sectors, including the electricity sector. These monopolies refuse to lower prices for businesses and households, creating a welfare loss.

(8) To help the process of diversification, the country urgently needs better private sector regulation to increase healthy competition, reduce monopoly power, remove illegal cartels, lower corruption and encourage technological innovation.
[Sources: adapted from www.vanguardngr.com, accessed 17 August 2016 and www.sciedupress.com, accessed 18 August]

Figure 3 - Selected economic data for Nigeria

[Sources: adapted from www.tradingeconomics.com, accessed 14 August 2016; http://hdr.undp.org, accessed 14 August 2016; www.cia.gov, accessed 14 August 2016; http://data.worldbank.org, accessed 14 August 2016; http://allafrica.com, accessed 13 August 2016; www.theguardian.com, accessed 13 August 2016; www.theguardian.com, accessed 13 August 2016 and www.proshareng.com, accessed 2 October 2016]

Using information from the text/data and your knowledge of economics, evaluate import-substitution and diversification as a means of achieving economic development in Nigeria.

Using information from the text/data and your knowledge of economics, evaluate import

substitution and diversification as a means of achieving economic development in Nigeria. [8]

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Marking guidance:

Do not award beyond Level 2 if the answer does not contain reference to the information provided.

Level

Marks

0

The work does not meet a standard described by the descriptors below.

1

Few relevant concepts are recognized.

1-2

There is basic knowledge/understanding.

2

Relevant concepts are recognized and developed in reasonable depth.

3-5

There is clear knowledge/understanding. There is some attempt at application/analysis.

3

Relevant concepts are recognized and developed in reasonable depth.

6-8

There is clear knowledge/understanding.

There is effective application/analysis.

There is synthesis/evaluation, supported by appropriate theory and evidence.

Command term
"Evaluate" requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.

Responses may include:
- definition of economic development
- definition of import-substitution
- definition of diversification.

Advantages
- reduces vulnerability to price shocks (paragraph (2) and therefore increases the stability of producers' incomes to allow for better planning and investment
- more predictable/increased government revenues (paragraph 2) to be used for for provision of healthcare and education to increase economic development
- more employment opportunities (paragraph 3 and 5 ) and therefore higher incomes for people who are currently unemployed
- protection for farmers against foreign competition (paragraph 4) and therefore increases in farmers' incomes
- ability of firms to increase in size and achieve economies of scale (paragraph (5) will help them expand, hire more people and increase incomes
- training programmes will improve human capital (paragraph (6) and therefore affect positively economic development
- reduction in youth unemployment will help to eradicate poverty (paragraph 6) as this is high 46 % (figure 3).

Disadvantages
- possible retaliation which would have negative political and economic consequences
- higher prices for consumers and therefore reduced incomes in real terms
- reduced competition and increased inefficiency will affect economic growth (and therefore economic development) in the long-run
- reduced access to foreign exchange, damaging to firms and consumers (paragraph (4))
- possibility of increased corruption, which will negatively affect economic growth (and therefore economic development) over time
- import-substitution may work against diversification and therefore the two goals conflict with each other
- government may not be able to correctly identify industries to support and therefore waste public funds which could be used for provision of healthcare and education to increase economic development.

To reach Level 3, candidates must be aware of the particular situation in the economy of Nigeria, not just present a discussion of policies to achieve development in general.

IB Economics HL 4.10.1 Trade and diversification strategies Question Bank

Exam points

4.10.1—Trade and diversification strategies question 1