Question 20N.2.SL.TZ0.3d
| Date | November 2020 | Marks available | [Maximum mark: 8] | Reference code | 20N.2.SL.TZ0.3d |
| Level | SL | Paper | 2 | Time zone | TZ0 |
| Command term | Evaluate | Question number | d | Adapted from | N/A |
Pakistan and the International Monetary Fund
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.]
Using information from the text/data and your knowledge of economics, evaluate the potential impact of the IMF and the World Bank on economic development in Pakistan.
[8]
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Do not award beyond Level 2 if the answer does not contain reference to the information provided.
Command term
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions and conclusions should be presented clearly and supported with appropriate evidence and sound argument.
Responses may include:
- Functions of IMF, World Bank.
- Definition of economic development.
- The difference between the IMF and the World Bank.
May promote/achieve economic development because:
- IMF loans provide help with balance of payments deficit and external debt obligations (paragraph [1]), allows government revenue to be used for improving quality of life through expenditure on merit goods.
- The IMF may learn from previous agreements and provide the monitoring/support needed for successful implementation of realistic conditions to reduce the burden of debt payments (paragraph [4]).
- Other potential lenders may be persuaded or given the confidence to provide finance to help with economic development projects (paragraph [3]).
- The World Bank’s education projects directly influence education and female enrolment rates which promote gender equality, employment possibilities, increasing incomes and access to basic needs (paragraph [5]).
- Providing key infrastructure such as hydroelectric dams allows access to electricity and provides basic needs and infrastructure for business development (paragraph [6]).
- Loans help build capacity and attract FDI to facilitate economic growth needed to break out of the poverty cycle (paragraph [3]), may provide employment opportunities and increased tax revenue.
- IMF suggestions/conditions such as improved tax collection and access to credit can help support economic development (paragraph [2]).
Above points should link to how these impacts will reduce poverty, increase living standards, reduce income inequalities and/or increase employment opportunities, improve health and education indicators, ie achieve economic development.
However, may not promote economic development because:
- Loan conditions (paragraph [2]) may limit the government’s ability to achieve its development objectives, particularly the improvement in human capital (paragraph [5]).
- Development spending might be decreased due to contractionary fiscal policy.
- Balance of payments issue has not been dealt with in the past (paragraph [4]).
- World Bank infrastructure project – may lack sustainability (paragraph [6]).
- The lending conditions may reduce economic growth, increase unemployment and hamper economic development.
- While FDI may lead to increased employment and economic growth, attracting FDI may require offering concessions (tax, regulatory, etc) which may limit its development impact.
- More loans and extending loans (paragraph [3]) may not be dealing with other fundamental issues of managing the loans, such as servicing costs (paragraph [4]).
- Environmental issues may be overlooked, threatening sustainability (paragraph [6]).
Any reasonable evaluation.
Unfortunately, there were not many good answers to this question. Candidates did not seem familiar with the work of the World Bank and the IMF. Those who had memorised the multilateral institutions' functions and aims, struggled to explain/analyse how they might affect development. Many answers were limited to the benefits of loans in terms of financing education and healthcare and tended to be rather one-sided, with relatively little analysis of why the actions of the IMF and World Bank might not promote economic development. The text was used, but often rather superficially.
