Pakistan and the International Monetary Fund

1. Pakistan is a low-income country with a rapidly growing population and widespread poverty. As of 2019, it has a large budget deficit due to high levels of military spending and high costs of debt servicing (35 % of the deficit is interest payments). It is also experiencing a widening current account deficit and is heavily dependent on foreign aid.

2. Pakistan’s government is negotiating a loan from the International Monetary Fund (IMF). Amongst its conditions, the IMF has said that the government must decrease private-sector regulation such as regulations on financial institutions. The government must also sell state-owned enterprises and government revenue must be raised by increasing indirect taxes and improving tax collection systems. Furthermore, the IMF insists that the government cuts its spending further.

3. The government has stated that the IMF loan is essential to restore confidence in Pakistan’s economy. This would help to attract foreign direct investment (FDI) to encourage economic growth and help break out of the poverty cycle. High debt levels and slowing economic growth in 2018 discouraged FDI. The IMF loan is also needed to help persuade other multilateral lenders such as the World Bank and the Asian Development Bank to provide and extend loans.

4. In the past, Pakistan has had 21 agreements with the IMF with limited success—any balance of payments or external debt improvement has been temporary. The IMF states that this is because Pakistan has not always met the conditions of the loans, while other stakeholders argue it was the lack of support given to Pakistan to implement the conditions and to allocate the loan funds appropriately.

5. Economists say that there needs to be a focus on improving human capital to provide the large number of young people entering the labour force with the skills to grow businesses. The quality of education needs to improve and to be combined with an effort to provide girls with greater access to education—female participation in the labour force is the lowest in the region.

6. The World Bank has financed education and infrastructure, such as renewable energy projects, in poor regions of Pakistan. However, critics of the World Bank argue that the projects are not making a significant difference and the construction of hydroelectric dams leads to environmental damage.

7. The government believes that the macroeconomic concerns of the IMF should be addressed first, and poverty issues in Pakistan can be dealt with later.

[Source: © International Baccalaureate Organization 2020.]

Indonesia’s economy

1. Indonesians hope that their new president will be able to speed up reforms to stimulate economic growth and economic development. These reforms include upgrading infrastructure, reducing red tape (excessive regulations) and reducing corruption. It is also hoped that he will increase Indonesia’s global competitiveness, create new jobs and educate one of the world’s youngest workforces.

2. Some government policies are already being implemented. These include a large power plant construction programme, tax incentives to infant industries and tax cuts for industries like transport, telecommunications, metal production and agricultural processing. In addition, there has been a decision to reduce fuel subsidies in order to contribute funds towards the government’s record US$22 billion investment in infrastructure projects. The subsidies had kept fuel prices low in a country where millions of people live in poverty.

3. Despite the policies, Indonesia is struggling. Economic growth is slow and consumer confidence has deteriorated. Indonesia’s main export commodities are coal, gold and palm oil, for which prices have fallen. The inflation rate is 7.26%, which is above the central bank’s target range of 3 to 5%. Slower growth in the world economy makes the situation even worse for Indonesia’s struggling economy.

4. Economists have said that the president must put his efforts into improving export competitiveness by making investments in education and training.

5. The costs of doing business in Indonesia are high due to paperwork and confusing regulations. The government has adopted policies to improve this. These policies aim to create certainty and transparency for foreign investors and to empower small businesses, which play a critical part in Indonesia’s economy. Other policies, such as obtaining loans and encouraging micro-credit institutions, make it easier to gain access to credit.

6. Trade protection and intervention are increasing as policymakers look to reduce imports, manage markets and promote domestic industries.

Figure 1 – Indonesian development statistics

[Sources: adapted from World Bank and Statistics Indonesia; www.legalbusinessonline.com, accessed 18 September 2015; www.indonesia-investments.com, accessed 23 August 2015; www.hdr.undp.org, accessed 23 August 2015; www.bloombergview.com, accessed 9 August 2015; www.reuters.com, accessed 9 August 2015; www.lowyinterpreter.org, accessed 23 August 2015 and www.data.worldbank.org, accessed 23 August 2015]

* signifies no data available

Ghana to seek help from International Monetary Fund

1. Ghana has said it will seek financial aid in the form of a loan from the International Monetary Fund (IMF) to help stop the rapid decline in the value of the cedi, Ghana’s currency, and close a large budget deficit. Ghana’s transformation from one of Africa’s fastest growing economies to the home of the world’s worst-performing currency has become a concern. The exchange rate depreciated by 40 % against the US dollar in 2014. The fall in the currency has led to increases in the price of consumer goods such as sugar and fuel;
   inflation is at an unacceptable 15 %.

2. Despite being a major exporter of gold, oil and cocoa, Ghana’s current account deficit has risen sharply to 12 % of its gross domestic product (GDP). This is partly due to a rapid increase in demand for imports and falling gold prices. Additionally, oil revenues have not been as strong as expected.

3. The government is also struggling with a wide budget deficit, which stood at 10 % of GDP last year. Ghana’s good reputation for fiscal responsibility has worsened considerably as the government tripled salaries for police officers and soldiers.

4. It is expected that the news of talks with the IMF will be positively received in international financial markets. The finance minister has said the step would help to stabilize the currency, to bring domestic prices under control, and also to restore investors’ confidence in Ghana’s economy.

5. A Ghanaian spokesperson noted that the IMF would insist on the government introducing measures to tackle inflation and reduce its budget deficit. The IMF says that Ghana needs to tighten its budget immediately, by reducing public sector wages, lowering subsidies and increasing taxes. The IMF is likely to demand a limit on borrowing and perhaps some privatization of power and water companies.

6. Earlier this year, problems in the economy had led to nationwide protests, with thousands of workers across the country protesting in the streets about the rise in the cost of living. The country’s largest trade union says the government has been mismanaging the economy. In response to the protests, a government minister said that the government would work very hard to achieve economic development to make life easier for the working people of Ghana but that all Ghanaians would have to make “some sacrifices for the economy to recover”.

Angola and Namibia

1. Angola and Namibia are neighbouring countries on the west coast of Africa.

   Angola

2. Angola’s economy is driven by its oil sector. It is the second largest oil producer in Africa. Oil production and its supporting activities contribute about 50% of gross domestic product (GDP), more than 70% of government revenue and more than 90% of the country’s exports. Diamonds contribute an additional 5% to exports. Subsistence agriculture provides the main livelihood for most people in Angola, but half of the country’s food is still imported.

3. Since 2005, the Angolan government has borrowed billions of US dollars from China, Brazil, Portugal, Germany, Spain and the European Union (EU) to help rebuild Angola’s infrastructure. The global recession that started in 2008 slowed economic growth. In particular, lower prices for oil and diamonds during the global recession slowed GDP growth to 2.4% in 2009, and many construction projects stopped.

4. Falling oil prices and slower than expected growth in non-oil sectors have reduced growth prospects for 2015. Angola has responded by reducing government subsidies and by proposing import quotas and making it more difficult to import. Domestic fuel subsidies have been eliminated. Corruption, especially in the mining sector, is a major long-term challenge.

   Namibia

5. Namibia’s economy is heavily dependent on the mining and processing of minerals for export. Mining accounts for 11.5 % of GDP, but provides more than 50% of foreign exchange earnings. Namibia is a primary source for high-quality diamonds. In addition, Namibia is the world’s fifth-largest producer of uranium, produces large quantities of zinc and is a smaller producer of gold and copper. The mining sector employs less than 2% of the population. Namibia normally imports about 50% of its grain requirements.

6. A high per capita GDP, relative to the region, hides one of the world’s most unequal income distributions. The Namibian economy is closely linked to South Africa with the Namibian dollar pegged one-to-one to the South African rand. Namibia receives 30% to 40% of its revenues from the countries in the Southern African Customs Union (SACU). Angola is not a member of the SACU.

7. Namibia’s economy remains vulnerable to world commodity price fluctuations and drought. The rising cost of mining diamonds, increasingly from the sea, has reduced profit margins. Namibian authorities recognize these issues and have emphasized the need for diversification.

Figure 1: Selected economic data for Angola and Namibia (2014)

[Sources: adapted from www.commons.wikimedia.org, 14 August 2014; The World Factbook, Country Reports,
Central Intelligence Agency, 2015; www.databank.worldbank.org, accessed 13 August 2015 and www.cia.gov, accessed 13 August 2015]

Inequality in China

1. As China’s economy first began to use market-oriented policies in the 1970s, it was famously suggested that some citizens, particularly through hard work, “should be allowed to get rich before others”. The government still plays a dominant role in the allocation of resources and benefits, keeping most of the gains for itself and its employees. Civil servants, who are assigned government housing, have benefited more and accumulated more wealth than the private sector employees.

2. Income inequality is a politically sensitive issue in China and the government has not reported on it for 26 years. In 1988, the Gini coefficient was 0.38 and the next set of figures released in 2014 give a value of 0.47.

3. According to research by the China Reform Foundation (CRF), “hidden income” amounts to more than US$1.4 trillion, or the equivalent of Australia’s annual gross domestic product (GDP). “Hidden incomes” refer to money gained from bribery or other corrupt behaviour, for example, bribes for officials or corrupt payments for doctors.

4. Low-income households are stuck with an outdated tax system that fails to address the inequality issue. They carry the burden of tax payments while the rich and powerful operate largely outside the tax system. Low-income households also have difficulty accessing credit.

5. Although the Chinese government expenditure is high, there tends to be inadequate spending on social protection programmes relating to health and old age. The lack of social protection has resulted in a high marginal propensity to save (MPS) amongst the low-income households as they put money away to provide for future health, education and retirement needs. The high savings result in a low marginal propensity to consume at 37 % of household income (compared to an average of more than 50 % of household income in more developed-market economies). The low marginal propensity to consume and the associated high savings rate have received significant attention in domestic and international policy circles and are viewed as a key barrier to China’s continuing road to development.

Trade strategies in the Philippines

1. For more than 20 years the Philippines has been limiting the volume of rice it imports. However, the agreement with the World Trade Organization (WTO) that permitted these restrictions expired in 2017. In early 2019, the government replaced the quantity restrictions with tariff protection. A 35% tariff on imported rice from the Association of Southeast Asian Nations (ASEAN)* was imposed to protect the domestic rice industry in the Philippines. Following the replacement of the quota with a tariff, rice prices are expected to fall significantly. However, urban households want the president to allow rice to be imported without any tariffs to reduce food bills even further.

2. The poorest quintile of households in the Philippines consumes nearly twice as much ordinary rice and 20 times more National Food Authority (NFA) rice compared to the richest quintile. Rising food prices are pushing up inflation as a result of increasing salaries in urban areas. The daily minimum wage in Manila, the Philippine capital, will increase by 4.9 %, the highest hike in six years, to the equivalent of US$10.11. Farming and fishing provide the livelihoods for around one-third of the labour force in the Philippines. Land reform programmes are slowly being implemented to change the current situation of unfair ownership of land and resources by a few individuals. However, uncertainty continues to discourage investment in adequate irrigation systems in the countryside. As an agricultural country, irrigation in the Philippines is very important. Improvements in the quality of infrastructure services will help cut the cost of doing business, attract more investment, and enhance productivity around the country. Food manufacturing, including food and beverage processing, remains the most dominant primary industry in the Philippines. This has become a focus in the hope of increasing farm incomes, because this part of the economy is currently dominated by big international companies. Major exports of processed fruits and nuts include mangos, pineapples, bananas and peanuts.

3. The Philippine Export Development Plan (PEDP) 2018–2022 calls for boosting the export of services, increasing export competitiveness, and exploring new markets. Efforts have already been made to harmonize the country’s standards, testing, certification and quality accreditation of products to improve trade and comply with standards in the European Union. The PEDP aims to increase the volume and value of exports by encouraging investment in production processes and supply chains. Another strategy to achieve the plan’s objective is to exploit existing and new opportunities from trade agreements.

4. The Philippines lacks the infrastructure needed to attract export-oriented manufacturing. To support the PEDP, the government needs to increase its spending on new airports, roads and bridges. These public works are critical to boosting the incomes of people in poorer areas by connecting them better to Manila. To allow for this extra spending, a series of tax reforms was started: the income tax for the highest income earners has been raised from 30 % to 35 %, and indirect taxes have been increased.

[Source: Adapted from Philippines News Agency, “Proposed Ph Export Plan Backs PDP 2017-2022 Targets”, June 21, 2018,
https://www.pna.gov.ph/articles/1039017.\]

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* ASEAN consists of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), Philippines, Singapore, Thailand and Vietnam.

Chinese investment helps Peru to develop

1. Over the past decade, Peru has been one of South America’s fastest-growing economies, with an average economic growth rate of 5.9 % and low average annual inflation of 2.9 %. This has been mostly due to a favourable external environment, sensible macroeconomic policies and reforms of environmental regulations designed to increase investment in Peru’s profitable mining sector. However, the deregulation in the mining sector has been opposed by environmental groups and trade unions, fearing increased pollution and poorer working conditions.

2. Strong growth in employment and income has dramatically reduced poverty rates. Absolute poverty fell from 27.6 % in 2005 to 9 % in 2015.

3. Gross domestic product (GDP) growth continued to accelerate in 2016, very much helped by higher mining export output as several new large mining projects entered into production and reached full capacity. Peru mines and exports many commodities, including copper, gold, lead, zinc, tin, iron ore, silver, and oil and petroleum products.

4. China is Peru’s main trading partner, taking 22.1 % of Peru’s exports and supplying 22.7 % of their imports in 2016. Chinese companies are also significant suppliers of foreign direct investment (FDI) to Peru, recently investing over US$2 billion to purchase a hydroelectric power plant. The second main trading partner is the United States (US), taking 15.2 % of Peru’s exports and supplying 20.7 % of their imports in 2016.

5. Peru’s current account deficit declined significantly from 4.9 % to 2.8 % of GDP in 2016, owing to increasing export growth and lower imports. Peru’s government continues to support a free trade policy; since 2006, Peru has signed trade deals with 17 different countries including the US, Canada, China and Japan. In addition, a trade deal has also been signed with the European Union.

6. Real GDP growth is expected to slow slightly in 2017 due to an anticipated lower growth rate in the mining sector and weak private investment. To support the economy as mining production slows, the government is expected to increase public investment in 2017.

7. Growth projections may not be achieved if any, or a combination, of the following occur: external shocks in commodities prices, a further deceleration of China’s economic growth, unpredictability in world capital markets and the threat of tight monetary policy in the US. Raising economic growth requires structural and fiscal reforms to improve productivity, reduce the size of the informal sector and improve the efficiency of public services.

[Source: adapted from “The World Bank Country Overview: Peru”, http://www.worldbank.org/en/country/peru/overview, 17 April
2017; and “The World Factbook”, https://www.cia.gov/library/publications/the-world-factbook/geos/pe.html, 6 September 2017]

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).

Economic development in two West African countries

Ghana

1. Ghana is the world’s second largest cocoa producer and Africa’s second largest gold producer. It is one of Africa’s fastest growing economies and has made major progress in achieving persistent economic growth.

2. Over the last decade, Ghana has enjoyed increasingly stable and improving democratic governance. Four successful elections during the decade have strengthened the effectiveness of key national institutions, improved investor confidence and created an environment that promotes investment and growth.

3. Ghana enjoys a high degree of media freedom; the private press and broadcasters operate without significant restrictions. The media are free to criticize the authorities without fear of punishment, says the non governmental organization (NGO) Reporters Without Borders. The private press is allowed to express criticism of government policy, which increases the accountability and transparency of the government.

4. Although Ghana’s growth has been fairly strong, the source of growth has always been dominated by commodities and the capital-intensive services sector. Neither of these has a direct effect on poverty reduction. Growth in rural areas is often limited by basic infrastructure, such as roads. This limits the ability of people in rural areas to access markets in urban areas.

   **Nigeria

   **

5. Nigeria is Africa’s leading oil producer. In 2016, it experienced its first full year of recession in 25 years. Global oil prices reached a 13-year low and oil production was drastically cut. Oil has continued to dominate Nigeria’s growth pattern, but the volatility of oil-dependent growth prevents progress in social and economic development.

6. On the political front, the transition from military dictatorship to democratic rule has been acclaimed as one of Nigeria’s major successes in the last decade. The 2011 general election, supported by the United Nations, was widely acknowledged by international observers and domestic monitors as one of the freest and fairest elections conducted in the country in recent years.

   Ghana and Nigeria

7. Both Ghana and Nigeria have cut fuel subsidies in order to reduce their budget deficits. This has had severe consequences for low-income households.

Table 1: Selected economic data for Ghana and Nigeria

[Source: adapted from UNDP Ghana country profile, http://hdr.undp.org, accessed 19 February 2019;
UNDP Nigeria country profile, http://hdr.undp.org, accessed 19 February 2019; About Ghana, http://hdr.undp.org,
accessed 19 February 2019; About Nigeria, http://hdr.undp.org, accessed 19 February 2019]

* measles: a highly contagious disease that is one of the leading causes of death among young children

Figure 3 illustrates the market for cotton in the country of San Marcus, a small closed economy. Cotton is used as an input in the San Marcus textile industry. Quantity is in thousands of kilograms (kg).

The Government of San Marcus decides to provide a subsidy equal to $8 per kilogram to its producers of cotton.

San Marcus now joins the World Trade Organization (WTO) and agrees to slowly liberalize trade, becoming an open economy.

The world price for cotton is $2 per kg. The WTO permits the government of San Marcus to maintain the$8 subsidy.