Question 120 marks
Question
Ethiopia to develop through infrastructure investment Extract 1: Ethiopia economic overview With 99.4 million people, Ethiopia has the second largest population in Sub-Saharan Africa. Its annual population growth rate was 2.5% in 2015. It is also one of the world’s poorest countries. The country’s per capita income of US$590 is substantially lower than the regional average. In 2011, 33.5% of the population lived in extreme poverty. The economy has experienced strong and broad-based growth over the past decade, averaging 10.8% per year between 2003 and 2015 compared to the regional average of 5.4% per year. Private consumption and public investment have been the main drivers of aggregate demand in recent years. In 2017, the government was implementing the second phase of its Growth and Transformation Plan (GTP II), due to run from 2015 to 2020. Its aim was to continue improvements in physical infrastructure through public investment, transforming the country into a manufacturing hub. The goal was to reduce poverty in Ethiopia by 2025. Developments in the balance of payments in Ethiopia have been largely driven by the implementation of major infrastructure projects in the country that contributed to higher current account deficits, balanced by growing foreign direct investment (FDI) and long-term foreign borrowings. Source: World Bank, April 2017 Extract 2: Ethiopia plans US$90 million infrastructure spending spree Despite Ethiopia being a landlocked country, the vast majority of its imports and exports are conveyed by sea. The ports in neighbouring country Djibouti are crucial to Ethiopia because they are used for 90% of its trade. In January 2017, a US$4 billion railway project was officially completed linking Ethiopia’s capital, Addis Ababa, to the main port in Djibouti, cutting the travel time along the route from three days to just 12 hours. It was expected to cut the cost of transporting freight by a third, having a huge impact on trade flow and the lives of Ethiopians. The project was partially built and funded by Chinese companies with the assistance of the Chinese government. China Railway Group and the China Civil Engineering Construction Corporation built the railway line, while China loaned Ethiopia US$2.49 billion to build the new railway. Contracts were awarded to Chinese firms to build various sections of the railway. Chinese investment in Ethiopia’s infrastructure provides opportunities for Chinese steel and construction industries. China has an overcapacity in steel and needs to find markets for its excess supply. China also has the technical expertise and companies available to assist in major foreign infrastructure projects. Chinese infrastructure investment in Ethiopia is not just limited to the railway network. Chinese firms are also building more than 65% of the new roads in Ethiopia including the prominent Addis Ababa ring road. As part of its policy of investing in infrastructure, the Ethiopian government is spending US$89 million of its own revenue upgrading the national road network. Source: Neil Ford, African Business, 21 March 2017 Table 1.1: Ethiopia’s current account of the balance of payments, 2015 Balance of trade in goods and services Current account balance (US$ million) (US$ million) −14 275 −7427 Table 1.2: Ethiopia’s Foreign Direct Investment inflows, 2012–2015 (US$ millions) Year 2012 2013 2014 2015 279 1281 2132 2168 Source for tables: IMF World Economic Outlook, October 2016 (a) (i) Suggest two reasons that would explain why Ethiopia’s current account balance differs from its balance of trade in goods and services in 2015 as shown in Table 1.1. [2] (ii) Explain one possible impact on Ethiopia’s balance of trade in goods and services of operating the new railway line to Djibouti. [2] (b) Identify two ways in which China’s economy would benefit from the building of infrastructure in Ethiopia. [2] (c) Use a production possibility curve to explain the opportunity cost that Ethiopia would face if it did not have access to help from China in building new infrastructure. [4] (d) Consider whether a road network, such as that upgraded in Ethiopia with government funds, should be classified as a public good. [4] (e) Use aggregate demand and aggregate supply analysis to discuss how output, employment and prices might be affected by the development of infrastructure in Ethiopia. [6] Section B Answer one question.
Mark scheme
1(a)(i) Suggest two reasons that would explain why Ethiopia’s current 2 The current account balance and the trade balance account balance differs from its balance of trade in goods and differ because of primary and secondary income services in 2015 as shown in Table 1.1. balances. The primary balance refers to the balance of profits, interest and dividends. The secondary • reference to the balance of profits, interest and dividends balance mainly refers to the balance of current (primary income balance) (1 mark) transfer payments. The candidate should show • reference to the balance of current transfer payments knowledge of both categories, so if only profits, (secondary income balance) (1 mark) interest and dividends is referred to with no reference to components of the secondary income The terms ‘primary income balance’ and ‘secondary income balance’ balance, this only gains 1 mark. are not yet used regularly in all centres so these terms are not required for both marks available. It is essential however that the If the candidate uses the terms ‘primary income candidate makes reference to at least one item from each category balance’ and ‘secondary income balance’, but is to score both marks. clearly confused on what these mean, e.g. reference to capital flows, then 1 mark maximum. 1(a)(ii) Explain one possible impact on Ethiopia’s balance of trade in 2 It is clear from the data that both the cost of goods and services of operating the new railway line to transporting freight, and the time it takes to reach the Djibouti. port, will be significantly reduced. Cutting the travel time/cost should lead to an increased volume of For an explanation that the cost of exporting and/or importing goods international trade. should fall (1 mark) and that this Although the mark scheme states that candidates • could have a ‘positive’ effect on the balance of trade in goods should explain that the ‘cost’ of exporting goods has and services if the new railway line results in exports becoming fallen, accept alternatives such as, ‘time’, greater than imports (1 mark) ‘convenience’, ‘ease’. OR • could have a ‘negative’ effect on the balance of trade in goods The impact upon the balance of trade can only be and services if the new railway line results in exports becoming assessed after consideration of the impact upon both less than imports (1 mark) import expenditure and export expenditure. OR Candidates who only consider the effect upon • could have no effect on the balance of trade in goods if the new imports or exports have not fully assessed the railway line results in exports becoming equal to the imports overall impact upon the balance of trade in goods (1 mark) and services and will not gain both marks. 1(b) Identify two ways in which China’s economy would benefit from 2 It is essential that the benefits identified relate to the building of infrastructure in Ethiopia. China’s economy. An inflow of profits for example will benefit China’s balance of payments. There will For identification of any two benefits e.g. also be more employment, higher incomes, the • inflow of profits to China reduction of excess capacity in the steel industry and • reduction in unemployment so on. Identification without explanation can gain (2 @ 1 mark) both marks, however there may be a need to be clear why the identified point is beneficial, e.g. a candidate might state that China’s currency might appreciate. This might be a benefit but might also be a disadvantage. If there is doubt that the effect is beneficial it needs to be clarified. 1(c) Use a production possibility curve to explain the opportunity 4 The context of the text makes it clear that a large cost that Ethiopia would face if it did not have access to help number of the Ethiopian population are living in from China in building new infrastructure. ‘extreme poverty’. This means that the infrastructure without external help could only be developed For an accurate PPC with appropriate choices on the axes (1 mark); through sacrifice of current living standards. The that demonstrates the opportunity cost of choosing infrastructure or production possibility curve would show consumption/living standards (1 mark). infrastructure or an example of infrastructure e.g. railways (accept capital goods) and consumer goods For a clear explanation of the opportunity cost of using internal on the axes. The accompanying explanation should resources rather than Chinese funds in terms of the sacrifice of living refer to the choice between developing the standards that would be required (up to 2 marks). infrastructure and the opportunity cost of a reduction in consumption if Chinese funds are not available. If the candidate is discussing incorrect choices in the diagram and the resulting explanation but it is clear that they are correctly A candidate may explain that not investing in demonstrating an accurate understanding of what opportunity cost infrastructure will incur a cost in terms of lost means (i.e. the cost of giving up the next best alternative) either on production. This is represented by a shift to the left the diagram or in the resulting explanation then the response may be of the PPC. This is incorrect because this does not given a maximum mark of 1 only. accurately describe opportunity cost in terms of the sacrifice entailed in choosing between infrastructure and consumer goods. This approach could still score one mark for an accurate diagram. 1(d) Consider whether a road network, such as that upgraded in 4 The upgraded road network cannot be classified as Ethiopia with government funds, should be classified as a a public good because it is excludable and rival in public good. consumption. • explaining two characteristics of public goods: non- Non-rejectability is not relevant in the case of a road excludability (1 mark); non-rivalry in consumption (1 mark) network. • applying these characteristics to the upgraded road network and concluding that the network is not a public good (up to 2 If a candidate explains that a road network is a marks) quasi-public good, not a public good this is an acceptable approach and can gain full marks if explained well. 1(e) Use aggregate demand and aggregate supply analysis to 6 The effect of the improved infrastructure will increase discuss how output, employment and prices might be affected both aggregate demand and aggregate supply. The by the development of infrastructure in Ethiopia. impact upon output, employment and prices depends upon where the curves intersect and • spending on infrastructure will shift the aggregate demand whether there is unused capacity in the economy. curve to the right (1 mark) Candidates need to recognise this when explaining • development of infrastructure will shift the aggregate supply the impact upon each economic indicator. curve to the right (1 mark) • discussion of the impact upon output, employment and Accept answers that suggest that the spending on prices that considers the relative change in both aggregate the new railway can increase as a result of more demand and aggregate supply (up to 4 marks) consumption expenditure as more are employed to build the new infrastructure, or increased investment If only the impact of a shift in either AD or AS (but not both) is as businesses are encouraged to invest more as the discussed then, because the relative change is not considered, expectation of profits increase, or increased net 2 marks maximum exports as the new railway results in more exports. However, do not reward answers that argue that consumption will increase as a result of lowered prices due to improved efficiency/lowered costs of transport, etc. as this would not lead to a shift in AD merely a movement along the curve. Candidates should be credited for effective use of appropriate diagrams; however, the question does not ask for a diagram so full marks are available even if no diagram is provided. For full marks, the impact on output, employment and prices must be discussed.