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Question 21M.2.SL.TZ0.d

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Date May 2021 Marks available [Maximum mark: 8] Reference code 21M.2.SL.TZ0.d
Level SL Paper 2 Time zone TZ0
Command term Evaluate Question number d Adapted from N/A
d.
[Maximum mark: 8]
21M.2.SL.TZ0.d

Angola’s economic reforms

  1. Following an oil price crash in 2014, Angola has endured a recession, a dramatic rise in inflation and empty supermarket shelves caused by severe shortages of foreign currency. Angola is highly dependent on export revenues from oil production, a major source of United States dollars. The foreign currency is needed to import manufactured goods because the country’s manufacturing sector is small.

  2. To respond to these challenges, the president of Angola has presented a plan with desperately needed reforms to promote economic development. The plan proposes tax incentives to attract foreign investment and privatization of the telecommunication and railway sectors. It also aims to expand infrastructure projects with private sector involvement. In addition, reforms are recommended to make the banking sector stronger. This is important if the government wants to reduce the borrowing costs experienced by Angolan businesses.

  3. The recent 20 % devaluation of the kwanza (Angola’s currency) is another sign that the government is serious about making Angola attractive to foreign direct investment (FDI). Angola has a fixed exchange rate. As the kwanza has been overvalued, this has caused a reduction in foreign currency reserves.

  4. Angola’s future economic growth is likely to be low. The business environment for firms remains difficult. High borrowing costs, corruption and poor infrastructure remain challenges. The government has failed to exploit Angola’s vast agricultural potential. The country depends heavily on oil revenues, which are falling.

  5. Living conditions for households are also poor as inflation is expected to remain above 25 %. Approximately 40 % of Angolans live in absolute poverty and unemployment is high, especially in rural areas. Aware of the urgent need to reduce regional inequality, the government has announced plans to encourage investment in rural areas. However, there are also proposals to reduce public debt by removing some subsidies on food and by introducing ad valorem taxes.

  6. Although Angola’s economic growth has been slow, it remains the third-largest economy in sub-Saharan Africa and the government is the second-largest public spender in the region.

[Source: Business Day, 2018. President Lourenço’s economic reforms are making Angola attractive. Available at: https://www. businesslive.co.za/bd/opinion/2018-02-16-president-lourenos-economic-reforms-are-making-angola-attractive/# [accessed 19 January 2019]. Source adapted.

AFP, News24, 2018. Angola president vows investment drive, graft fight. Available at: https://www.news24.com/Africa/News/angola-president-vows-investment-drive-graft-fight-20181015 [accessed 19 January 2019]. Source adapted.]

Using information from the text/data and your knowledge of economics, evaluate the effectiveness of market-oriented policies in achieving economic development in Angola.

[8]

Markscheme

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.

Answers may include:

  • Definition of market-oriented policies
  • Definition of economic development.

Strengths of market-oriented policies:

  • Promotes growth and creates employment and possibly higher wages by attracting foreign investment (paragraph [2])
  • Devaluing the exchange rate has reduced the need for foreign exchange reserves (paragraph [3])
  • Privatization may lead to competition, lower costs and lower prices and more choice for consumers (paragraph [2])
  • Privatization will provide revenue to the government to pay down debt or invest in infrastructure and/or social spending
  • Expanding infrastructure projects with private sector involvement encourage FDI (paragraph [2])
  • Market-oriented policies may increase long run aggregate supply allowing inflation to fall below 25 % (paragraph [5])
  • Tax incentives in rural areas would create jobs and reduce inequalities (paragraph [5])
  • Reforms of the banking sector will possibly make it easier for small-scale businesses to get loans (paragraph [2]).

Limitations of market-oriented policies:

  • The privatization of railways and telecommunications may lead to higher prices for consumers and more inequality
  • Incentive-based policies may not be sufficient to allow for diversification since manufacturing base is small and likely underdeveloped (paragraph [1] and [4])
  • Stopping subsidies on food and using ad valorem taxes will raise prices causing inflation and inequality to worsen in the short term (paragraph [5])
  • Measures to reduce public debt could worsen income inequality
  • Market-oriented policies (e.g. more inward FDI) are unlikely to work without complementary interventionist policies such as the building of infrastructure (paragraph [4]) to support diversification
  • Less intervention in the exchange rate may lead to depreciation and higher prices and/or less certainty for foreign investors
  • Market-oriented policies may lead to externalities
  • Encouraging more inward FDI and other investment will increase private sector debts and debt-servicing costs, leading to less income available to spend on merit goods
  • Market-oriented policies tend to lead to higher inequalities (e.g. through lower wages).

Any reasonable evaluation.

Examiners report

Unfortunately, there were not very many good answers to this question. Candidates did not seem familiar with the concept of market-oriented policies or had a very narrow view of what they constitute. Another problem is that too few answers reflected an understanding of economic development. It would be wise for candidates to define the concept for such questions. That could help them focus on the impact of government policies on the standard indicators of development. Some students discussed the impact on economic growth rather than development and did not establish how growth could lead to development. Candidates need to be more aware of the need to address the actual question asked. 

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