Practise poverty-cycle diagrams and country-based explanations of economic, political and social barriers to growth and development in IB Economics SL questions.
Study the extract below and answer the questions that follow.
Micro-credit conflict of interest
(1) The idea of giving small loans to poor people, especially women, was hailed as the key to achieving economic development for even the poorest citizens. Muhammad Yunus, the economist who pioneered the practice by lending small amounts to basket weavers in Bangladesh, won a Nobel Peace Prize in 2006.
(2) The practice has grown so popular, helping establish small businesses such as tailors and hairdressers, that some are now concerned over the direction it has taken. Attracted by the prospect of profits from even the smallest of loans, some banks now dominate micro-credit, with some charging interest rates of over 100 %.
(3) The key question facing the industry remains how much money investors should make from lending to poor people, mostly women, often at hidden interest rates. "Micro-credit should be seen as an opportunity to help people out of poverty, not as an opportunity to make money out of poor people," Yunus said. "Interest rates should be 10 to 15 % above the cost of raising the money and anything beyond that is exploitation. Most micro-credit lenders would fail this test."
(4) How much interest and profit are acceptable and what constitutes exploitation? The interest rates that draw the most concern include those in Nigeria and Mexico, where the demand for small loans from a large population cannot be met by existing lenders. One Mexican lender charges an annual rate of 125 %. The average in Mexico is about 70 %, compared with a global average of about 37 % in interest and fees.
5 There is debate over whether micro-credit loans actually lift people out of poverty. Some researchers conclude that not every poor person is an entrepreneur in waiting but the loans do help relieve some of the worst aspects of poverty.
(6) The micro-credit industry has outgrown its charitable beginning. Despite a promise to put the money back into development, analysts say the high interest rates and healthy profits of the largest micro-credit institutions pushed up interest rates across Mexico.
Using a poverty cycle diagram, explain how micro-credit can "help relieve some of the worst aspects of poverty" (paragraph (5)).
Read the extracts and answer the questions that follow.
Text A — Bangladesh: the economic role of women
(1) Bangladesh is a densely populated country in Asia. Its currency is the Bangladeshi taka (BDT). The annual rate of growth of gross domestic product (GDP) has steadily increased from 5.6 % in 2010 to 8.1 % in 2019. Absolute poverty has declined, but inequality has risen, partly due to higher unemployment rates for women than men. Moreover, the labour force participation rate for women is much lower than the rate for men. Over 80 % of the women's jobs are in the informal economy, and these jobs are low paid and insecure. Women need regular paid work, which not only raises household income but also improves economic well-being in terms of education and health.
(2) The structure of the economy is changing. The growth of cities is due to the expansion of the manufacturing sector, which now contributes a larger share to GDP than the agricultural sector. These changes have increased the number of women in the labour force. In particular, the growth of the ready-made garments (RMG) industry (mass-produced clothing) has given women the opportunity to move into formal employment. The RMG industry provides jobs for almost 4 million low-skilled and semi-skilled workers, accounting for over 40 % of total manufacturing employment. The majority of these jobs are being filled by women, with the result that the gap between the wages of men and women is gradually being reduced.
(3) There are concerns about working and safety conditions in the RMG factories. After an accident in a factory in 2013, reforms are being implemented, partly in response to criticisms from overseas retailers and consumers who purchase the garments. The minimum wage has been increased, inspections are carried out, and there are fewer small, unsafe factories.
(4) While working conditions are improving, such reforms raise the costs of manufacturing garments. Furthermore, the international garment market is becoming more competitive, putting pressure on Bangladeshi factories to reduce costs.
(5) The overseas demand for Bangladeshi garments had been rising strongly until 2019. However, demand has recently fallen, reducing firms' revenue. The reduction in revenue and the need to lower costs have forced certain firms to reduce the size of their labour force by dismissing some of their female workers.
(6) The number of ethically and environmentally concerned consumers is increasing globally. Rather than trying to lower costs, firms can be more successful if they produce "green ready-made garments" by implementing sustainable practices. About 100 garment factories in Bangladesh have already been certified as producers that meet specified environmental standards. In addition, global retailers and fashion brands are supporting recycling initiatives through the Circular Fashion Partnership.
Text B - Trade prospects for exports of ready-made garments (RMG)
(1) Exports of RMG account for over 84 % of Bangladesh's total exports. At present, Bangladesh is the world's second largest garment exporter after China. Bangladeshi exports could further increase as Chinese garments become more expensive due to rising wages in China.
(2) Bangladesh is designated as an Economically Least Developed Country (ELDC) and is therefore able to sell goods in Europe and China without any quotas or tariffs being imposed. However, Bangladesh will graduate from ELDC status by 2026 and will then no longer be eligible for preferential trade agreements. Moreover, the USA, which is the largest export market for Bangladeshi garments, has applied a 15 % tariff on imports from Bangladesh since 2013, citing concerns about working conditions in factories.
Text C - Role of foreign direct investment in the RMG sector
(1) Vietnam and Myanmar have significantly increased their garment exports to China due to foreign direct investment (FDI) from China. Chinese investors have set up factories that import raw materials from China and re-export the finished goods back to China.
(2) Consequently, to compete successfully in the huge Chinese market, Bangladesh needs to attract more FDI from China. Bangladesh is developing the required infrastructure, such as transport links. It is also necessary to diversify into expensive high-end fashion, market more aggressively, and use branding strategies.
(3) The funds from additional FDI would be helpful, because the relative contribution of Official Development Assistance (ODA) to Bangladesh's budget is declining. Furthermore, the foreign exchange obtained from foreign investors assists in financing the current account deficit.
Table 1: Economic data for Bangladesh
Table 2: Development data for Bangladesh
*estimate
Define the term informal economy indicated in bold in the text (Text A, paragraph 1).
Explain how political and social factors can act as barriers to economic growth and economic development.
Using real-world examples, discuss the significance of economic barriers for a country's economic growth and economic development.
Explain how political and social factors can act as barriers to economic growth and economic development.
Study the following extract and answer the questions that follow.
Burundi
(1) Burundi is a small landlocked African country. Densely populated, it has a population of approximately 10.6 million inhabitants. The economy is dominated by subsistence agriculture, which employs 90 % of the population, though cultivatable land is extremely scarce. More than a decade of conflict led to the destruction of much of the country's physical, social and human capital. However, substantial improvements have occurred since the conflict ended in 2006, thanks largely to the success of measures implemented to reduce the excessive control of the military.
(2) Even though Burundi is enjoying its first decade of sustained economic growth, poverty remains widespread. Burundi's ranking on the Human Development Index (HDI) increased by 2.5 % per year between 2005 and 2013 as education and health outcomes have significantly improved over the period, yet the country still ranks low at 180th out of 187 countries in 2013. Per capita gross national income more than doubled between 2005 (US$130) and 2013 (US$280).
(3) Burundi is making the transition from a post-conflict economy to a stable and growing economy. Economic reforms and institution building are ongoing. After significant improvements to achieve peace and security, the country's development program is shifting gradually towards modernizing public finance. However, the government has limited "fiscal space" because tax collection is very hard to carry out and tax receipts are low.
(4) With its limited resources, the government is attempting to strengthen basic social services and upgrade infrastructure and institutions, particularly in the energy, mining, and agricultural sectors. This has been accompanied by increasing participation of the private sector. The goal now is to grow a more stable, competitive and diversified economy with enhanced opportunities for employment and improved standards of living.
(5) Over the last decade, annual economic growth in Burundi has been between 4 % and 5 %. Inflation continues to decline reaching 3.9 % in July 2016, down from 24 % in March 2012, reflecting a careful monetary policy helped by a recent decrease in the prices of imports, especially oil, which is an essential commodity.
(6) Burundi's main exports are agricultural; coffee and tea account for 90 % of foreign exchange earnings, and exports are a relatively small share of Gross Domestic Product (GDP). overview. Licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported license.
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Using information from the text/data and your knowledge of economics, evaluate the challenges to economic growth and economic development faced by Burundi.