IB Economics HL 3.4 Economics of inequality and poverty Question Bank

Read the extracts and answer the questions that follow.
Text A — Costa Rica: Economic growth and development strategies

(1) In the early 1990s, Costa Rica, a Central American country with a population of approximately 5 million people, was considered an economic development success story. This stable democracy has experienced consistent economic growth (approximately 4 % annually) for the last 20 years. Some experts say this has been due to moving from a failed import substitution policy to outward-oriented economic policies. The outward-oriented policies included export promotion, diversification, trade liberalization and inward foreign direct investment (FDI). During the same period, social and environmental policies were implemented. Public education and healthcare were guaranteed for all citizens, social programmes were improved to include extensive transfer payments and minimum wages were increased. This helped the reduction in absolute poverty rates and Costa Rica became known as a global leader in environmental conservation efforts.

(2) The Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), was a significant move towards trade liberalization. In addition to reducing trade barriers, it established a secure and predictable environment for foreign investors. This agreement also led to the breakup of the state-owned monopolies in the telecommunication and insurance industries in Costa Rica. Additionally, trade agreements with Canada, China, the European Union (EU), Mexico, Peru and Singapore were established.

(3) Costa Rica encouraged inward FDI by lowering regulations and providing tax incentives in manufacturing industries. In 1997, Intel, a large multinational tech company from the United States (US) invested US$300 million in building a computer parts factory. Intel's investment helped diversify Costa Rica's main exports away from coffee and bananas to electronics. Moreover, the FDI allowed Costa Rica to benefit from production externalities, as multinational companies provided training to local employees. Manufacturing and services overtook agriculture in terms of contribution to gross domestic product (GDP), and Costa Rica experienced its first trade surplus in 50 years. The increase in real GDP from the FDI was significant, as the marginal propensity to consume (MPC) was 0.8 at the time.

(4) To promote diversification, export subsidies for companies in the manufacturing sector were granted. Agricultural diversification was also encouraged through subsidising farmers who were adopting new technology to produce higher value-added products, such as roasted coffee beans.
Text B - Current concerns

(1) Despite earlier successes, income inequality in Costa Rica has remained high and poverty levels have remained unchanged for several years. This has been blamed on insufficient transfer payments due to a tax system that is not progressive enough and tax exemptions offered to foreign firms. Unemployment has consistently risen, and despite high levels of spending in education, a significant number of young people have not completed secondary or higher education. The focus on higher value-added sectors did not create jobs for low skilled workers, which had a disproportionate impact on women and youth. Additionally, the social programmes have often failed, and still fail, to reach the very poor.

(2) High social and environmental spending, large increases in public sector wages, and insufficient revenue have resulted in very large government (national) debt. Most of the debt is domestic, which is raising concerns about possible crowding out.

(3) FDI has historically supported economic growth, however, domestic investment and further FDI have slowed down due to rising costs and outdated infrastructure. Additionally, the appreciating colón (Costa Rica's currency) has lowered export competitiveness, and Costa Rica remains heavily dependent on one major trading partner, the US.
Text C - "Green Trademark" environmental policy
The "Green Trademark" policy has reversed deforestation and has resulted in Costa Rica becoming one of the countries with the greatest level of biodiversity in the world. However, it is difficult to maintain the environmental focus due to pressure on government resources and the high opportunity costs associated with land use. The consistent economic growth has made it difficult for Costa Rica to reduce carbon emissions from fossil fuels. Increasing urbanization and the growth in the manufacturing sector have increased air and water pollution. Moreover, the overuse of chemicals in farming has caused river pollution, and the intensive use of land for agriculture has generated concern for environmental conservation.

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*2011 figure
}

Burundi is a landlocked country in Central Africa. Its economy is heavily reliant on the agricultural sector, which employs 92 % of the labour force but contributes only 40 % of gross domestic product (GDP). Most of the 11.5 million population live in poverty, especially in rural areas. The level of food insecurity (people without access to enough food) is almost twice as high as the average for sub-Saharan African countries with more than 60 % of the population living below the poverty line.

Infrastructure in Burundi is poor. There are no railroads and only three major routes through the country, two of which involve water transport, across Lake Tanganyika. Access to clean water is low, while fewer than 5 % of the population have access to electricity. The literacy rate for those aged 15 and over is 61.6 %, while only 1 % of secondary schools have access to the internet.

"Best Meals" is one of many small catering companies, each of which prepares a variety of different meals for airlines in Country X. Table 1 shows the costs of production in US dollars (US$) on a per hour basis for "Best Meals".

Text A - Overview of Vietnam

(1) Economic reforms in Vietnam during the past 30 years have led to rapid economic growth, which has transformed a poor nation into a lower middle-income economy. The percentage of the population with an income of less than US$1.90 a day declined from 38\% in 2002 to below 2 % in 2018.

(2) Vietnam used to be a food-insecure nation, in which many people sometimes lacked access to affordable food, but it is now a leading exporter of basic food commodities. It also aims to become an exporter of high quality and processed food products. However, agricultural production only accounts for 18 % of gross domestic product (GDP), although it uses 40 % of the land and employs 43 % of the labour force. Due to the growing rural population, land is often divided up between a greater number of farmers, causing some farms to become smaller. These farms have fewer opportunities to benefit from economies of scale and lower average costs of production.

(3) Vietnam's rapid growth and industrialization, focused on export-oriented manufacturing, have had a harmful impact on the environment. Electricity consumption has tripled since 2010, growing faster than GDP. Electricity generation, which mainly uses fossil fuels, accounts for approximately 60 % of Vietnam's carbon emissions. Demand for water continues to increase. Unsustainable exploitation of natural resources, such as land, fisheries, and timber, could negatively affect prospects for long-term growth. In addition, Vietnam's primary sector is highly vulnerable to the climate and is therefore subject to supply shocks.

(4) Vietnam has signed several free trade agreements (FTAs). Its first FTA was a partnership with Japan in 2008. Both Vietnam and Japan are members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which took effect at the beginning of 2019. These FTAs also promote inward foreign direct investment (FDI). In addition, Vietnam has introduced policies to attract foreign investment, such as tax incentives and spending on infrastructure.

(5) Japan is the biggest provider of foreign aid to Vietnam and the largest source of FDI. Japanese firms and aid agencies are jointly financing large-scale projects, including port infrastructure and a high-speed railway, which will reduce the Hanoi to Ho Chi Minh journey time from about 35 hours to under six hours. Other Japanese-funded aid projects are in the areas of health care, education, and the environment.
Text B - Trade and investment flows between Vietnam and Japan

(1) Japan imports seafood and consumer products such as textiles, leather shoes and processed foods from Vietnam, because Vietnam has a comparative advantage in such items. Conversely, Vietnam imports machinery, technology, and raw materials for production from Japan. Gradually barriers to trade are being removed. In 2020, Vietnam began exporting lychees (a luxury fruit) to Japan after five years of negotiations on quality standards. The improved access to the Japanese market has increased the number of consumers and the revenue earned by Vietnamese lychee farmers.

(2) Japanese firms invest in Vietnam, particularly in urban areas, because wages are low and they can export from Vietnam to other CPTPP members and to China and Indonesia. Panasonic, a Japanese multinational company (MNC), relocated a major factory, which manufactures refrigerators and washing machines, from Thailand to Vietnam in 2020. The construction of a coal-fired power plant is mainly funded by Japanese firms. The Japanese government is promoting further investment by subsidizing over 30 firms that are relocating from China to Vietnam. Most of these firms are food processors or producers of manufactured goods (for example, medical equipment).
Text C - Roles of the central bank in Vietnam

(1) The central bank in Vietnam has been lowering interest rates since mid-2019. However, it has kept the minimum reserve requirement at 3 % of commercial bank deposits, despite suggestions that this requirement could be lowered.

(2) The central bank also regulates the exchange rate of the dong (Vietnam's currency). It actively intervenes in the foreign exchange market to stabilize the rate when necessary. In April 2020, there was downward pressure on the dong due to the lower interest rates and fewer foreign tourists. However, the central bank has a large amount of reserve assets, which were used to prevent the dong from depreciating.

* 2018 figure

* 2018 figure

Read the extracts and answer the questions that follow.
Text A - Overview of Tanzania

(1) Tanzania is one of Africa's fastest growing economies with an average of 7 % annual economic growth since 2000. It is a politically stable country, rich in wildlife and natural resources. However, the growth has been concentrated in urban manufacturing, using capital intensive production. The benefits from this growth have not reached all people and significant inequalities exist between urban and rural areas. Although the relative poverty rate has fallen over the last 15 years, the number of people living in absolute poverty has increased.

(2) Most people are employed in the slow-growing agricultural sector that relies on unskilled labour. Although incomes increased from 2008 to 2018, the demand for agricultural goods only increased by 21 % during this time period. Over 70 % of Tanzania's population lives in rural areas, relying on subsistence farming with limited tradable crops. Only 30 % of land is being used for agricultural production. With investment, the remaining unused land could be developed and generate income for farmers.

(3) The rural sector struggles to meet Tanzania's food requirements due to low levels of skilled labour and productivity. Additionally, high youth unemployment leads to large numbers of unskilled rural youth migrating to the cities, often finding employment in the informal sector where wages and working conditions are poor. Insufficient investment and lack of government support for diversifying the agriculture sector have been blamed for the persistent inequalities and poverty.

(4) Tanzania's cities have experienced a growing middle class with strong purchasing power and political influence who have placed demands on the government for cheaper electricity, better infrastructure, and more imported goods. In response, the government provided subsidies for electricity in city centres and tax benefits to foreign companies operating in Tanzania. There is concern that these measures may worsen inequality and lead to social unrest.

(5) The growth of Tanzania's manufacturing and service sector was funded through aid and large government borrowing, resulting in high national debt. Most of the government borrowing was from foreign sources and in US dollars (US$), which is a concern due to a recent depreciation of the Tanzanian shilling (Tanzania's currency) against the US$. Some of the debt was borrowed domestically and placed upward pressure on interest rates. Higher interest rates have resulted in crowding out but helped keep inflation under control.
Text B - Strategies and opportunities for Tanzania

(1) Previous governments have used interventionist supply-side policies to improve access to water, education, and health services. However, the health service improvements are not keeping up with population growth and many young people are still not completing secondary school. Infrastructure has improved, but it is still insufficient as producers in the rural sector find it difficult to reach markets and access supplies.

(2) Aid organizations are currently supporting new sustainable businesses in rural areas through training programmes, especially for women and young people, who make up most of the unemployed in rural areas. Economists have advised the government to improve access to credit through microfinance organizations and to simplify regulations to make it easier to start new businesses.

(3) The government is establishing property rights in rural areas to provide security for farmers. Historically, farmers could easily lose their land, which reduced their incentive to invest in productive farming methods. The government wants to develop Tanzania's land resources and lower its reliance on imported food. To reduce food imports, a subsidy will be granted to dairy farmers to allow them to compete against imported dairy products.

(4) Tanzania is a member of the East African Community (EAC) customs union and common market. However, Tanzania needs to improve human capital and encourage diversification so that the benefits of regional integration can reach the poor. These policies can also help attract foreign direct investment (FDI). Opportunities for growth through trade will expand as the EAC works towards becoming a monetary union in 2024.
Text C - Oil pipeline to be constructed
Tanzania and Uganda plan to construct a major oil pipeline from Uganda through Tanzania, ending at a port in Tanzania. This will attract FDI which could help fund infrastructure and generate jobs. However, environmentalists are concerned about potential ecological damage due to the waste created during the construction of the pipeline. Economists have suggested the waste could be avoided through a circular economy approach in the planning and construction stage.

* Estimate