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Question 22N.2.HL.TZ0.2g

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Date November 2022 Marks available [Maximum mark: 15] Reference code 22N.2.HL.TZ0.2g
Level HL Paper 2 Time zone TZ0
Command term Discuss Question number g Adapted from N/A
g.
[Maximum mark: 15]
22N.2.HL.TZ0.2g

Text D — Overview of Lebanon

  1. Lebanon is in the Middle East, bordering the Mediterranean Sea, and is home to nearly 7 million people. Lebanon is in an economic crisis, facing a recession, huge government debt and rising income inequality, poverty and inflation. Corruption and poor governance have been blamed for misallocation of funds that has led to low levels of investment and extensive capital flight. Additionally, Lebanon has one of the most unequal distributions of wealth in the world. In 2019, the top 10 % of income earners owned over 70 % of personal wealth in Lebanon.

  2. Infrastructure in Lebanon is poor, water and sewerage systems are basic, and roads are inadequate. Electricity supply is unreliable with people going without power for much of the day. In 2020, major buildings including food storage buildings, schools and hospitals were damaged in Beirut (the capital city of Lebanon). This was concerning as 85 % of the country’s food arrives through Beirut. Fortunately, humanitarian aid was given by the international community to help rebuild the damaged buildings.

  3. Despite a history of inflows from luxury tourism and remittances (money sent by a foreign worker to their home country), there is a persistent current account deficit. To help with this, the Lebanese central bank has used high interest rates to attract financial inflows. Additionally, the government has borrowed funds from overseas. However, the misuse of these funds and overspending have contributed to one of the highest foreign debts in the world. Lebanon recently defaulted on foreign debt repayments worth 1.2 billion euros, which damaged its international credit rating, making it difficult to access loans needed to help solve its current economic problems.


Text E — Further challenges facing Lebanon

  1. Social unrest is prevalent and intensified when the government suggested raising revenue by imposing an indirect tax on social media applications such as WhatsApp. As the government struggles to pay its debts, people are concerned that subsidies on necessities such as wheat, medicine and fuel will be removed.

  2. Mismanagement of the state-run electricity and telecommunications sectors has resulted in unreliable services and high telecommunication prices. The state-run monopoly firms make losses, and the electricity sector relies heavily on government subsidies, putting pressure on the budget deficit.

  3. Lebanon currently has a managed exchange rate system with the Lebanese pound (Lebanon’s currency) linked to the US dollar (US$). However, the government is finding it difficult to maintain the exchange rate at the desired level due to insufficient reserve assets. Recent falling remittances, low levels of exports and lack of foreign direct investment (FDI) are placing downward pressure on the Lebanese pound. Lebanon has limited natural resources and a small manufacturing industry, thus relies heavily on imports. As a consequence, the gradual depreciation of the Lebanese pound has led to cost-push inflation.


Text F — Reforms and strategies for economic recovery

  1. The Lebanese government is seeking help from the International Monetary Fund (IMF) to restructure the government debt and develop its infrastructure. However, loans from the IMF will require the following conditions to be met:
    • procedures and processes established to ensure good governance, including enforcement of anti-corruption laws
    • financial sector reforms implemented to build confidence in the banking system and laws to control capital flight
    • government spending reduced and revenue increased through higher corporate, wealth and personal income taxes for high-income earners. Introduction of a tax on imported luxury goods and an increase of indirect taxes
    • partially privatizing the electricity and telecommunications sectors to increase efficiency and encourage the exploration of new energy sources
    • transitioning from a managed to a floating exchange rate system.

  2. Other organizations are offering development aid to rebuild infrastructure and support small to medium-sized businesses to develop the manufacturing sector and attract FDI. Currently, the manufacturing sector accounts for only 12.5 % of gross domestic product (GDP). Some experts recommend that Lebanon decreases its reliance on food imports by developing its own food industry. However, Lebanon must commit to establishing good governance systems before aid organizations will provide their support.

  3. Lebanon has resisted seeking help from the IMF and other agencies in the past due to concerns about high levels of interference and imposed conditions that may conflict with their own government objectives.

Table 3: Economic data for Lebanon

     * 2019


Table 4: Development data for Lebanon



[Source: Text E Chulov, M., 2019. Lebanon’s mass revolt against corruption and poverty continues [online] Available at:
https://www.theguardian.com/world/2019/oct/20/lebanons-mass-revolt-against-corruption-and-poverty-continues
[Accessed 4 April 2021]. Source adapted.
Text F World Bank. 2019. Lebanon Economic Monitor, Fall 2019: So When Gravity Beckons, the Poor Don’t Fall.
World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/33279
License: CC BY 3.0 IGO.
Balsom, S., 2020. UNICEF Lebanon’s Cash 4 Work programme brings jobs and training to 2,700 youths; boosts
WASH support [online] Available at: https://www.unicef.org/lebanon/stories/unicef-lebanons-cash-4-workprogramme-
brings-jobs-and-training-2700-youths-boosts-wash [Accessed 4 April 2021]. Source adapted.
Table 4 United Nations Development Programme, 2021. Human Development Index (HDI) [online] Available at:
http://www.hdr.undp.org/en/indicators/137506 [Accessed 4 April 2021].
The World Bank Group, 2011. Poverty headcount ratio at national poverty lines (% of population) [online] Available
at: https://data.worldbank.org/indicator/SI.POV.NAHC?locations=LB [Accessed 4 April 2021].
World Bank. 2020. Lebanon Economic Monitor, Fall 2020 : The Deliberate Depression. World Bank, Washington,
DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/34842 License: CC BY 3.0 IGO.
The Lebanese Transparency Association (2021) Transparency International is licensed under CC BY 4.0; [online]
Available at: https://www.transparency.org/en/countries/lebanon [Accessed 4 April 2021].]

(g)

Using information from the text/data and your knowledge of economics, discuss the impact of the proposed IMF conditions (Text F, paragraph [1]) on Lebanon’s economic growth and economic development.

[15]

Markscheme

Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.

Definitions may include:

  • Economic growth
  • Economic development

Economic models to support analysis may include:

  • PPC
  • Lorenz curve
  • ADAS diagram
  • Poverty cycle
  • Exchange rate diagram


Discussion may include some of the following proposed IMF conditions:

Procedures and processes established to ensure good governance, including enforcement of anti-corruption laws:

  • High levels of corruption (Table 4) have led to misallocation of funds (Text D, paragraph [1]). Growth has not occurred because funds are not given to areas of need. Anti-Corruption will prevent this, resources allocated more efficiently leading to increases in AD/AS leads to higher econ growth leading to higher levels of output and employment.
  • Good governance and accountability (Text F, paragraph [2]) is needed for confidence to attract investment (domestic and foreign) which would support growth.
  • Good governance and accountability (Text F, paragraph [2]) needed for aid to provide support which is aimed at rebuilding infrastructure and small/medium size business growth. This may help with growth, but also development.
  • High levels of corruption are often associated with low growth and instability, growing poverty.
  • Decrease tax evasion and improve tax collection to support problems with growing budget deficit, debt and provide funds needed to support growth.


Financial sector reforms implemented to build confidence in the banking system and laws to control capital flight:

  • Build confidence in banking sector to encourage remittances to come back into the country - increases AD, supporting economic growth and may help with the relative poverty growth (Table 4)
  • Will help control capital flight (Text D, paragraph [1]), and the resulting downward pressure this place on the currency, this may help with cost push inflation (Text E, paragraph [3]).


Government spending reduced and revenue increased through higher corporate, wealth and personal income taxes for high-income earners. Introduction of a tax on imported luxury goods and an increase of indirect taxes:

  • Budget deficit will be helped (Table 3)
  • Fiscal measures may result in decreased AD and hardship for some groups, may lead to further reduction in AD, further negative growth, loss of output, increased unemployment, lower economic development.
  • If reduced spending is on removal of subsidies on basic needs hinders economic development (Text E, paragraph [1])
  • Increased tax revenue could be used to fund inadequate infrastructure (Text D, paragraph [2]), and development of the manufacturing sector. (Text F, paragraph [2])
  • Progressive tax system to redistribute income helps to decrease poverty/income inequality (Text D, paragraph [1]). Improving income equality leads to economic development. May help with the relative poverty (Table 4)
  • Increase government revenue through indirect taxes - helps with meeting debt repayments therefore improving credit ratings and access to loans (Text D, paragraph [3])
  • Indirect tax increases, decrease AS - cause cost push inflation is already problematic (Text E, paragraph [1], Table 3).


Partially privatizing the electricity and telecommunications sectors to increase efficiency and encourage the exploration of new energy sources.

  • Efficient electricity and telecommunications that are essential for business activity to lead to economic development.
  • Private partnership will encourage more efficiency, average costs may decrease, reduce need for government subsidies, and less pressure on the budget deficit (Text E, paragraph [2])
  • Private sector may have conflicting objectives.
  • New energy projects will be initiated to improve supply of electricity, improving quality and quantity of resources through better infrastructure (Text D, paragraph [2]).


Transitioning from a managed to a floating exchange rate system.

  • May initially be another depreciation - higher cost push inflation, however exports (luxury tourism) will become cheaper and more competitive - help with the persistent current account deficit (Text D, paragraph [3]).
  • Less reserve assets needed to maintain the managed rate. (Text E, paragraph [3]).
  • Floating rate is more likely to be self-correcting and therefore interest rate can be used for other objectives instead of attracting financial inflows to cover the current account deficit. (Text D, paragraph [3]).
  • Managed rates may have more certainly compared to floating.


If Lebanon meets the conditions, then this leads to:

  • Government debt restructuring (Text F, paragraph [1], Table 3):
    • Creating a sustainable repayment plan may ease debt repayments so the government can spend in other areas of need.
    • Will restructure debt to avoid future defaults (Text D, paragraph [3]), so will improve credit rating for future borrowing for further investment.
  • Funds for infrastructure will be obtained (Text F, paragraph [1]).


However,

  • Unknown level of interference (Text F, paragraph [3])
  • Any conditional lending may go against other government objectives. Poverty may increase further (Text F, paragraph [3]).

 

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

A maximum of [9] should be awarded if only economic growth or economic development is discussed.

Examiners report

Good answers demonstrated effective use of the text to support the arguments as well as to focus on the effect of IMF conditions on both growth and development policies. The impact of the IMF conditions on Lebanese economic growth and economic development were not fully understood by a large number of students. One positive point was that most students defined the key terms, but many were over-reliant on quotes/re-writing of the text rather than analysis / evaluation. Too many relied on generic economic theory and forgot the focus of the question. For example, some candidates focused on other solutions, unrelated to the IMF, in order to achieve economic growth and development, thus did not address the demands of the question.

Syllabus sections