Practise IB Economics SL 3.7.5 by evaluating how supply-side policies affect productive capacity, growth, employment, inflation and equity, using marked exam evidence.
Read the extracts and answer the questions that follow.
Text D - Macroeconomic policies in Uruguay
(1) Compared to many other Latin American countries, Uruguay has a high Human Development Index (HDI). This is due to its higher gross national income (GNI) per capita and wider access to health care and education.
(2) One aim of Uruguay's fiscal policy has been income redistribution. For example, in 2017 the tax rate applied to the highest income bracket was raised from 25 % to 36 %. Spending on social programmes, which are targeted towards the poor, has also increased. However, while expenditure on schools is benefitting all families, expenditure on higher education still tends to favour higher-income families, because there are relatively few students from low-income families in universities.
(3) Recently, concern about a growing budget deficit has led to new budget guidelines being implemented. These guidelines aim to reduce borrowing and the national debt by encouraging the government to increase tax revenue and/or reduce expenditures. The main policy goal of Uruguay's central bank is to keep a low rate of inflation. It has announced that it will reduce the inflation target to below 6% by September 2022.
(4) Several constraints to growth remain, which may limit progress towards sustainable development. Despite plans to upgrade road networks and construct a new central railway, investment in infrastructure needs to be increased further. Education and training could also be improved to meet the needs of new sectors, such as the information and communication technology (ICT) industry.
(5) State-owned enterprises, including railways and suppliers of fuel, water and electricity, are a significant part of the Uruguayan economy. The prices charged by these enterprises tend to be high relative to prices in other countries. As part of a strategy to eliminate excessive costs, the government has proposed measures to improve efficiency in state-owned enterprises and to gradually reduce prices.
(6) The International Monetary Fund (IMF) considers that more labour market flexibility is needed to make it easier for workers to change jobs and for firms in growing sectors such as ICT to hire workers. The government is, therefore, considering deregulation of the labour market.
(7) Overall, by boosting competitiveness and private investment through supply-side policies, the government aims to raise growth and employment.
Text E - Health care system in Uruguay
The public and private sectors that offer health care in Uruguay were combined into one system in 2007, with both overseen by the government and both eligible to receive subsidies. Most medical care is free for low-income patients. The first row of data in Table 3 shows that per capita demand for health care increased by 54.22 % from 2010 to 2018 . The advantages are seen in longer life expectancy figures, which imply an increase in productivity, and other benefits.
Table 3: Health care expenditure and GNI per capita for Uruguay
Text F - Trade and exchange rates
(1) Over 50 % of Uruguayan exports are forestry and agricultural goods, including soybeans, rice, and cattle meat. Increasing global demand and a significant rise in commodity prices from 2000 to 2012 encouraged investment in the agricultural sector. However, the price of soybeans has been declining since 2013, partly due to rising productivity in agriculture. Climate-related shocks, such as droughts in 2017 and 2020, and economic crises in the major export markets of Brazil and Argentina have also caused difficulties for producers.
(2) Therefore, Uruguay aims to diversify its export markets. For example, with the growth of the ICT sector, Montevideo (the capital city of Uruguay) has become a leading software development centre. In addition, Uruguay is broadening its markets towards Europe and Asia. Under a proposed trade agreement between the European Union (EU) and the South American trade bloc, Mercosur (Argentina, Brazil, Paraguay, Venezuela, and Uruguay), 93 % of all tariffs will gradually be eliminated. However, a quota will be imposed on cheese imports from the EU.
(3) To help the economy adjust to external shocks and to avoid large fluctuations in the exchange rate of the peso (Uruguay's currency), the central bank uses its plentiful reserve assets of foreign currencies. In 2019, the decline in agricultural export revenues put downward pressure on the peso exchange rate. However, the central bank was able to prevent a large depreciation by using its reserve assets in the foreign exchange market.
Table 4: Economic data for Uruguay
Table 5: Development data for Uruguay
Table 6: Balance of payments data for Uruguay in 2019
Using information from the text/data and your knowledge of economics, evaluate the effectiveness of the government's macroeconomic policies in achieving economic growth and economic development in Uruguay.