Question 23M.2.HL.TZ0.2
| Date | May 2023 | Marks available | [Maximum mark: 40] | Reference code | 23M.2.HL.TZ0.2 |
| Level | HL | Paper | 2 | Time zone | TZ0 |
| Command term | Calculate, Define, Discuss, Explain, Sketch | Question number | 2 | Adapted from | N/A |
Text D — Overview of Indonesia and palm oil production
- Indonesia is the largest economy in Southeast Asia and its gross domestic product (GDP) has grown strongly. The proportion of those living in absolute poverty in Indonesia decreased from 37.4% in 1999 to 2.7% in 2019.
- The palm oil industry is a major contributor to the Indonesian economy, accounting for 4.5 % of GDP and providing employment for over three million Indonesians. Palm oil production is technologically simple and profit margins are large. As a low-cost producer, Indonesia produces over 50 % of the world’s output. Palm oil is the most widely used vegetable oil in the global market. It is an ingredient in many products (including foods, cosmetics, cleaning products and biofuel) and demand continues to increase.
- In 2015, despite a widening budget deficit, the Indonesian government began subsidizing biodiesel (a type of renewable fuel) made from palm oil to make it more price competitive with conventional diesel. The subsidies were aimed at reducing Indonesia’s dependence on fossil fuel imports and at increasing exports of high-value refined palm oil products.
- In Indonesia, 80 % of the palm oil produced is exported, contributing substantially to export revenue and to government tax revenue. However, palm oil prices are volatile, due to changes in supply, making planning difficult and causing fluctuations in the exchange rate. For example, studies show that, due to the low price elasticity of demand (PED) for primary commodities, an increase in the price of palm oil results in greater export revenue. Consequently, the rupiah (Indonesia’s currency) may appreciate.
- In 2019, the European Union (EU) decided to impose an 18 % tariff on imports of palm oil based biodiesel from Indonesia, partly due to concerns that palm oil production damages the environment. The EU also claimed the tariff was necessary to offset the effects of the biodiesel subsidy.
Text E — Sustainable Development Goal (SDG) 12 and concerns about palm oil production in Indonesia
- In the past, the Indonesian government supported the rapid growth of palm oil production in order to increase GDP and employment. This policy often resulted in an inefficient use of land and high carbon emissions, as a result of deforestation.
- Sustainable Development Goal (SDG) 12 (responsible consumption and production) requires resources to be used more efficiently and sustainably through changes in production methods. Unsustainable use of Indonesia’s natural resources will probably reduce long-term economic growth. Forests are necessary for food security, fuel, shelter and jobs. They also reduce the carbon in the atmosphere and protect against floods.
- Rates of deforestation in Indonesia have decreased recently. The World Bank’s Forest Carbon Partnership Facility is providing US$110 million in aid to help reduce deforestation. Protecting forests from agricultural expansion will significantly reduce emissions. Profits will be lower, but the reputation of the palm oil industry will be improved and its long-term future made more secure.
- More than 50 multinational companies (MNCs) which use palm oil in their products have pledged to ensure that their suppliers do not contribute to deforestation. Pressure from the MNCs is encouraging Indonesian producers to use natural resources more sustainably.
Text F — Small-scale farmers and the Indonesian Sustainable Palm Oil (ISPO) certificate
- Small-scale farmers manage approximately 40 % of Indonesian plantations, but produce only 30 % of Indonesia’s palm oil, because of poor farming techniques, low quality seeds, and a weak banking system, which limits their access to finance. In addition, land disputes occur due to a lack of property rights. To make up for their low productivity, farmers sometimes illegally clear more land for planting.
- The Indonesian Sustainable Palm Oil (ISPO) certification system requires that palm oil producers only occupy land legally, that they do not plant in areas designated as forest, and that they use sustainable agricultural practices. Initially, only large plantations had to get certification. However, the system was extended in 2020 and now small-scale farmers also have to obtain certification. Participating in the system should improve the productivity of small-scale farmers and reduce deforestation.
Table 3: Economic data for Indonesia
Table 4: Development data for Indonesia
Table 5: National income statistics for Indonesia
[Source: Text D: The World Bank, 2021. Indonesia Economic Prospects : Boosting the Recovery [online] Available at:
https:// documents.worldbank.org/en/publication/documents-reports/documentdetail/379141623773793892/
indonesia- economic-prospects-june-2021 [Accessed 14 March 2022] License: CC BY 3.0 IGO.
Text E: Shigetomi, Y., Ishimura, Y., 2020. Trends in global dependency on the Indonesian palm oil and resultant
environmental impacts [online] Available at: https://www.nature.com/articles/s41598-020-77458-4.pdf [Accessed
14 March 2022] Source adapted.
Table 3 World Bank Data Bank, World Development Indicators, n.d. [online] Available at: https://databank.worldbank.org/
source/world-development-indicators [Accessed 14 March 2022] Source adapted.
Table 4 World Bank Data Bank, World Development Indicators, n.d. [online] Available at: https://databank.worldbank.org/
source/world-development-indicators [Accessed 14 March 2022] Source adapted.
Table 5 World Bank Data Bank, World Development Indicators, n.d. [online] Available at: https://databank.worldbank.org/source/world-development-indicators [Accessed 14 March 2022] Source adapted.
Define the term profit indicated in bold in the text (Text D, paragraph 2).
[2]
Most candidates defined the term accurately.
Define the term property rights indicated in bold in the text (Text F, paragraph 1).
[2]
Over a third of students did not mention that property rights should be legal, while another third of the students did not mention the right to determine how the land/property is used or controlled.
Using information from Table 5, calculate net factor income from abroad (in US$) for Indonesia in 2019.
[2]
1085 – 1119 = –34
Any valid working should be rewarded with [1]
–34 billion or –34 000 million
An answer of -34 billion or -34 000 million without workings or without units, is sufficient for [1]. (An answer of -34 without the appropriate unit is considered incorrect.)
If the negative sign is missing or not otherwise indicated, but the workings approach is correct, a maximum of [1] should be awarded.
This was very poorly answered with the majority of candidates scoring 0 marks. It was surprising that most candidates used the incorrect formula (i.e. 1119–1085) instead of 1085–1119. It gave the impression that perhaps some students are reluctant to give negative numbers.
Sketch an AD/AS diagram, to show how the change in the balance of trade in goods from 2010 to 2019 is likely to have affected real GDP (Table 3).
[3]
For an AD/AS diagram, the vertical axis may be Average (General) Price Level or Price Level. The horizontal axis may be real output, real national output, real income, real national income, real GDP or real Y. The intersections can be shown as Q1 and Q2 or similar. All abbreviations are acceptable. A title is not necessary.
Candidates who incorrectly label diagrams can be awarded a maximum of [2].
While most students correctly recognised there would be a shift to the left of the AD curve, a significant minority increased the AD curve and/or shifted the AS curve. Students should be careful with labelling. Many potentially good diagrams were spoiled with careless labelling.
Using a demand and supply diagram, explain the effect of a subsidy on the market for palm oil based biodiesel (Text D, paragraph 3).
[4]
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
The vertical axis may be price or P. The horizontal axis may be quantity or Q. A title is not necessary.
The subsidy diagram was in the main well-constructed. The explanation was generally well answered but a significant minority omitted the significance of the subsidy in reducing production costs.
Using an exchange rate diagram, explain how a rise in palm oil prices may cause an appreciation of the Indonesian rupiah (Text D, paragraph 4).
[4]
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
The vertical axis may be exchange rate, price/value of rupiah in another currency, other currency/rupiah or other currency per rupiah. The horizontal axis may be quantity or quantity of rupiah. All abbreviations are acceptable. A title is not necessary.
Good responses effectively used the text to explain their answers (i.e. low PED of palm oil). Diagrams were generally good but some were spoiled with inaccurate Y-axis labelling. Also, a minority of candidates shifted the supply curve instead of the demand curve, demonstrating a lack of understanding of how currencies change values.
Using an international trade diagram, explain the effect of the EU tariff on the imports of palm oil based biodiesel from Indonesia (Text D, paragraph 5).
[4]
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
The use of P and Q on the axes is sufficient for an international trade diagram. The world supply curve must be labelled Sw, Sworld, SIndonesia, Pw, Pworld, PIndonesia, or any similar label indicating the horizontal line is world (Indonesia) price/supply. A title is not necessary.
International trade diagrams were often well-drawn and labelled and students effectively used the annotations on the diagrams to explain the decrease in imports.
Using a Lorenz curve diagram, explain how the distribution of income changed in Indonesia between 2010 and 2019 (Table 4).
[4]
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For the vertical axis, the label may be cumulative percentage of income or percentage of income (GDP and GNI are valid alternatives to income but wealth is not acceptable). For the horizontal axis, the label may be cumulative percentage of population/households or percentage of population/households. All abbreviations are acceptable. The diagonal line need not be labelled. A title is not necessary.
There were some excellent answers to this question. However, several weaknesses were evident. Many students incorrectly labelled the axes (e.g. "income" and "population" rather than "% income" and "% population"). Other students reversed the labelling. Weaker responses suggested there would be an improvement in the distribution of income with an inward shift of the Lorenz curve.
Using information from the texts/data and your knowledge of economics, discuss whether there is a conflict between meeting Sustainable Development Goal 12, (responsible consumption and production), and the objective of economic growth in Indonesia.
[15]
- definition of growth
- definition of consumption
- definition of production
- definition of responsible/sustainable
- an externalities diagram
- a PPC diagram
- an AD/AS diagram.
Ways in which Indonesia is not meeting the SDG because of growth (ie there is a conflict):
- negative production externalities of palm oil production (Text E, paragraph 1 or 2)
- negative consumption externalities of using palm oil based diesel (Text D,paragraph 3 or 5)
- planning production/government expenditure is difficult, because exporting acommodity with low PED and PES leads to volatile prices and uncertainty (Text D,paragraph 4)
- exports may not be sustained if importing countries become more concerned aboutenvironmental damage (Text D, paragraph 5)
- small-scale farmers use resources inefficiently/unsustainably (Text F)
- small-scale farmers’ lack of property rights leads to disputes and uncertainty (TextF, paragraph 1)
- inequality has not been lessened and has increased (Table 3)
- deforestation still occurring, even if reducing
- illegal clearing of land due to lack of property rights
- still poor production techniques in small scale farming-only very recently extended ISPO certification scheme
- demand still rising for palm oil in many product areas.
Ways in which Indonesia is meeting the SDG while achieving growth (i.e. there is not a conflict):
- manufacturing palm oil based diesel, which will be better for the environment (Text D, paragraph 3)
- palm oil production provides jobs and has probably contributed to the sustained growth and the lower absolute poverty levels (Text D, paragraph 1; Table 4)
- palm oil production provides export revenue which will be useful for buying capital imports etc for production of secondary goods, rather than relying on primary exports (Text D, paragraph 2; Table 3)
- the tax revenue provides the government with funds, which it can use to improve development and which will help with reducing the widening budget deficit (Text D, paragraph 4, Table 3)
- MNCs’ pressure to stop deforestation is successfully exerting pressure on Indonesia (Text E, paragraph 4)
- the establishment of property rights will help both objectives (Text F, paragraph 1)
- Indonesia is extending the IPSO certification system to small-scale farmers, which may encourage both a more sustainable use of resources and economic growth (Text F, paragraph 2).
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
While there were some outstanding responses to this question the majority were not able to access the higher markbands. In general, the question was quite well understood. However, a significant minority focused on economic development in general rather than SDG12. Also, many candidates offered/analysed policy solutions that could help Indonesia meet SDG 12 and thus were not directly addressing the specific demands of the question. This often led to a limited and at times an irrelevant answer. Also, too often the quality and use of economic theory was limited with students taking a descriptive approach. There was a general lack of balance in most responses. Candidates would be advised to use appropriate diagrams to enhance the quality of their analysis. While judgments were made, evaluation tended to be superficial or appropriate with often a lack of balance.
