Practise explaining how customs unions, monetary unions and WTO rules affect trade, policy choices and member economies in IB Economics SL questions.
Read the extracts and answer the questions that follow.
Text A — Overview of North Macedonia
(1) North Macedonia is a small, landlocked nation that shares borders with five countries, including Bulgaria and Greece. Bulgaria and Greece are members of the European Union (EU) common market, which North Macedonia hopes to join soon. Since the country began negotiating for EU membership, trade with the EU has increased rapidly and now accounts for 75 % of North Macedonia's exports and 62 % of its imports.
(2) Despite its small market, with a population of approximately 2 million, North Macedonia's proximity to the EU, low wages and expected entry into the common market have attracted foreign investors. Greece, its richest neighbour, was its third highest source of foreign investment in 2019. The lower cost of living also appeals to Greek tourists.
(3) EU companies have invested in the financial, telecommunication, energy and food processing industries in North Macedonia. Many of the most profitable companies are from the EU. If EU membership is granted, foreign direct investment (FDI) inflows may increase as firms located in North Macedonia will be allowed to bypass all custom checks and enjoy tariff-free trade within the common market. One particular challenge for North Macedonia, however, is that most of the profits of foreign companies are likely to be repatriated (sent back to the companies' home countries).
(4) In 2018, North Macedonia's export revenue was US billion and its import expenditure was US$9.56 billion. The country's main exports are iron and steel, clothing and accessories, and food products. Food, livestock and consumer goods account for 33 % of imports while the remainder are machinery, petroleum and other materials needed for the industrial production process.
(5) The manufacturing sector, which now employs 31 % of the labour force, has gained more importance. The agricultural sector remains strong, contributes over 10 % of North Macedonia's gross domestic product (GDP) and employs about 16 % of the country's workforce.
(6) The unemployment rate decreased from over 30 % in 2010 to 17.3 % in 2019. However, youth unemployment is almost 40 %. Over 20 % of the population lives below the poverty line. Unemployment and poverty contribute to high rates of emigration. More than 20 % of the North Macedonian population have emigrated since 1994, mostly to the EU. As a member of the EU, North Macedonia will enjoy free movement of labour which will make it easy for its citizens to live and work in other EU countries.
Text B - North Macedonia's economic reforms
(1) To be considered for EU membership, North Macedonia implemented a series of supply-side policies to reform its economy. The EU imposes strict requirements for membership but provides financial assistance to countries preparing for membership. North Macedonia has received 633 million euros (the currency of the EU) to help with the reforms.
(2) Most of the supply-side policies seek to improve the international competitiveness of North Macedonia's industries. The authorities are increasing access to education and training for workers. The expansion of the transport network and other infrastructure is also expected to increase efficiency.
(3) Protection of the environment is also on the list of requirements for EU membership. North Macedonia aims to reduce its dependence on coal and to instead promote the use of solar, wind and hydropower technologies. These low-carbon energy sources would help decrease its air pollution, which is among the worst in Europe.
(4) The reforms, which started in 2014, have shown progress. Exports and manufacturing output are more diversified and more concentrated on high-value products. To attract FDI, North Macedonia maintains one of the lowest tax rates on corporate income in the region. The central bank also prevents the denar (North Macedonia's currency) from appreciating against the euro through managing foreign reserves. However, skill shortages and a mismatch of skills with those required by companies discourage foreign firms from investing. Important investment gaps in public infrastructure also remain.
Text C - North Macedonia's trade agreements
North Macedonia participates in five free trade agreements (FTAs), that together cover 95 % of its exports and 78 % of its imports. Most of its trade with the EU is already free but imports of wine, beef and fish products are still subject to quotas. North Macedonia is currently a net importer of agricultural and food products. All protectionist measures on EU products would be removed upon entry into the common market.
Table 1: Consumer Price Index (CPI) for North Macedonia (base year = 2010)
Table 2: Economic data for North Macedonia
Using information from the texts/data and your knowledge of economics, discuss the likely economic effects on North Macedonia of its entry into the European Union (EU) Common Market.
Using real-world examples, discuss the advantages and disadvantages of a country being a member of a trading bloc.
Study the extract and data below and answer the questions that follow.
Tedious journey towards West African single currency
(1) The Economic Community of West African States (ECOWAS) has continued to push for a monetary union. Those involved in pursuing increased economic integration strongly believe that a common currency for the West African Monetary Zone (WAMZ) would increase trade in the region, increase competition (particularly in commodity markets) and stimulate economic growth.
(2) The proposed currency, the eco, will be initially introduced in the 14 member countries of WAMZ* which include The Gambia, Ghana and Nigeria.
(3) The proposal has been postponed four times, largely because of unequal progress among member countries in meeting the requirements to establish a monetary union by 2020.
(4) The main requirements for membership of the monetary union are:
- the budget deficit of each member country should not exceed 3 % of its gross domestic product (GDP)
- the average annual inflation of each country should be below 10 %
- each country must have enough foreign currency reserves to buy a minimum of three months' worth of imports
- the public debt to GDP ratio of each country should not be more than 70 %
- each country's exchange rate should be stable.
(5) Meeting the requirements for all countries by 2020 will be difficult, given that member countries have different economies with their own challenges. Nigeria is the only country which has met all requirements so far.
(6) For the monetary union to succeed there must be honesty among member countries. In addition, member countries would have to double their efforts in strengthening fiscal performance through improving tax revenue collection and reducing government expenditure on public services.
(7) Although a single currency in the region is likely to promote trade, it will mean that individual member countries will lose control over their own monetary policy, creating conflicts of interests. Research shows that the balance of trade of Nigeria, an oil exporter, tends to move in the opposite direction to its neighbours, who are largely importers of oil. Nigeria would push for higher interest rates in periods of high oil prices. That would be disastrous for other WAMZ economies which would be desperate for lower rates. and www.economist.com, 3 October 2014]
* WAMZ: Ghana, Nigeria, Sierra Leone, The Gambia, Guinea, Liberia, Benin, Togo, Cote d'Ivoire, Niger, Mauritania, Senegal, Burkina Faso, and Mali.
Figure 1-2015 projected economic data for selected members of WAMZ
Define the term monetary union indicated in bold in the text (paragraph (1)).