4.3 Emerging & Developing Economies

Discuss the problems for the Ivory Coast of dependency on cocoa for a large proportion of their exports. Refer to Figure 2 in your answer. (12)

Figure 2: Ivory Coast exports – relative share of main products (%), 2016 

Refer Extract

Discuss whether borrowers benefit from microfinance. Make reference to Mozambique in your answer (12)

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Discuss the benefits of aid to Indonesia (12)

Apart from externalities, discuss the problems that Chile faces as a result of dependency on copper mining (12)

 

Extract A

Chile’s economic outlook brightens

Chile has been hit hard by a worldwide fall in commodity prices since 2011. Copper accounts for 20% of Chile’s GDP and 60% of its exports; one third of the world’s copper is produced by Chile. China purchased 40% of the world’s copper, so a slowdown in China combined with increased global over-supply has meant copper prices have collapsed (see Figure 1). Chilean government income from copper exports had reached $11.5 billion a year before copper prices fell, but now tax revenues from this source have fallen drastically. Growing numbers of copper mines struggle to break even at current prices.

Chile’s GDP is now growing, helped by a weak currency that has boosted export  industries outside the mining sector, such as its successful wine and salmon industries. There are strengths in tourism and high-tech products. Public services are good in Chile, and poverty rates have been falling fast. On top of this, a large and diversified financial sector with high domestic savings provides a useful safety net, given high levels of corporate debt and the government’s need to finance a fiscal deficit of 3% of GDP.    

Chile’s economy is often regarded as the best run in the region. This is attributed to the credibility of its financial institutions, relatively low levels of national debt (about 15% of GDP) and its free-trade model, which is unrestricted by government interventionism that has distorted the economies of countries such as Argentina and Venezuela. “Chile is an example of how credible institutions can smooth the economic cycle and make adjustments less traumatic,” said Mr Valdés, the minister of finance in Chile, pointing to its widely respected and independent central bank and a well-established fiscal rule that give officials the freedom to implement counter-cyclical policies. However, there are worries that without enough spare capacity in the economy, expansionary fiscal and monetary policies could end up increasing inflation rather than economic growth. Meanwhile monetary policy is restricted by inflation that has reached 5%, well outside the central bank’s 2–4% target range, fuelled by a weaker exchange rate. Crucially, investment remains low because of uncertainty over the outcome of the Prime Minister’s reforms, which are aimed at reducing inequality. A recent rise in corporation tax from 20% to 25% and labour market reforms that strengthen the power of trade unions may have a negative effect on business confidence.

Despite a “mildly contractionary” budget, Valdés insisted that the government would continue with costly reforms. Increased taxes on those on higher incomes are considered by the government to be necessary to sustain economic development in Chile. “We do want to change society, while recognising all the good things that have been done in the past 25 years,” said Mr Valdés, referring to an average growth rate of 5.3% over the past three decades, but under 2% in 2015. There is broad consensus that investment in education is the key to unlocking Chile’s growth potential.

(Sources: adapted from http://www.ft.com/cms/s/0/89926ce8-df96-11e4-a6c400144feab7de html#axzz3pCnzT3PC FT 20 April 2015 and http://www.ft.com/cms/s/0/d60ac2b2-7453-
11e5-a129-3fcc4f641d98. html?siteedition=uk#axzz3pCnzT3PC FT 19 October 2015 and
http://www.ft.com/cms/s/0/d60ac2b2-7453-11e5-a129-3fcc4f641d98.html?siteedition=
uk#axzz3pCnzT3PC FT 19 October 2015 all by Benedict Mander)

Discuss the role of the financial sector in the growth and development of developing countries (15)

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Evaluate the microeconomic and macroeconomic factors, apart from access to credit and banking, influencing growth and development in Mozambique.

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With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects on Indonesia of the volatility of prices of commodities such as coal.

Trade and Development Issues in Africa

Figure 1: The Fairtrade scheme in the cocoa industry. How the additional revenue is spent by cocoa farmers.

Extract A

Cheap cocoa is costing farmers dear

The median annual income of cocoa farmers in the west African country, Ivory Coast, is just US$2 600. Research suggests that an annual income of US$6 133 is needed for this country’s farmers to have a decent, living income. This situation is even worse for farmers who are not part of a Fairtrade scheme.                                                                   

World cocoa prices fell by more than a third in 2017. Cocoa farmers have to accept all the risk from price volatility, putting a significant strain on their fragile incomes. On the other hand, cocoa processors and chocolate manufacturers are able to adapt or even make high profit and consumers continue to enjoy their chocolate.

This is still happening despite considerable investment in agriculture to build a sustainable cocoa sector. The focus has been on raising productivity and diversifying crops. The average cocoa farm in the Ivory Coast produces only around half of the output that could be achieved with training and resources such as fertilisers, equipment and replanting. If farmers diversify into other crops, livestock or non‑farm activities, they lower the risk they face of fluctuating world cocoa prices.                                            

Even tripling farm output would not provide the average cocoa farmer with a living income. Diversification alone will not always make farms more profitable. If we want farmers to earn a living income, we must also be willing to pay farmers more.

(Source adapted from: https://www.fairtrade.org.uk/Media‑Centre/Blog/2018/October/ Cheap‑cocoa‑is‑costing‑farmers‑dear)

With reference to Figure 1 and Extract A, explain the likely impact of a Fairtrade scheme on agricultural communities.

Refer Extract

With reference to Extract D line 21, explain why ‘opportunity cost’ is a problem for governments of developing countries when servicing debt.

The table shows the selected economic data in 2014 for Vietnam and India.

	Gross National Income per capita (2011 PPPs)	Human Development Index (HDI) value
Vietnam	5 092	0.666
India	5 497	0.609

 

With reference to the data provided, explain two limitations of using the HDI to compare levels of development between countries and over time.

(Source: www.hdr.undp.org/en/composite/HDI)

Examine two ways, apart from Fairtrade schemes, in which cocoa farmers could boost their incomes despite the falling price of cocoa.
 

Trade and Development Issues in Africa

Figure 1: The Fairtrade scheme in the cocoa industry. How the additional revenue is spent by cocoa farmers.

Extract A

Cheap cocoa is costing farmers dear

The median annual income of cocoa farmers in the west African country, Ivory Coast, is just US$2 600. Research suggests that an annual income of US$6 133 is needed for this country’s farmers to have a decent, living income. This situation is even worse for farmers who are not part of a Fairtrade scheme.                                                                   

World cocoa prices fell by more than a third in 2017. Cocoa farmers have to accept all the risk from price volatility, putting a significant strain on their fragile incomes. On the other hand, cocoa processors and chocolate manufacturers are able to adapt or even make high profit and consumers continue to enjoy their chocolate.

This is still happening despite considerable investment in agriculture to build a sustainable cocoa sector. The focus has been on raising productivity and diversifying crops. The average cocoa farm in the Ivory Coast produces only around half of the output that could be achieved with training and resources such as fertilisers, equipment and replanting. If farmers diversify into other crops, livestock or non‑farm activities, they lower the risk they face of fluctuating world cocoa prices.                                            

Even tripling farm output would not provide the average cocoa farmer with a living income. Diversification alone will not always make farms more profitable. If we want farmers to earn a living income, we must also be willing to pay farmers more.

(Source adapted from: https://www.fairtrade.org.uk/Media‑Centre/Blog/2018/October/ Cheap‑cocoa‑is‑costing‑farmers‑dear)

Refer Extract

Examine two reasons, apart from access to finance, why 90% of the manufacturing sector in Mozambique ‘is made up of small enterprises’ (Extract E, line 9).