Question 21M.2.HL.TZ0.d
| Date | May 2021 | Marks available | [Maximum mark: 8] | Reference code | 21M.2.HL.TZ0.d |
| Level | HL | Paper | 2 | Time zone | TZ0 |
| Command term | Evaluate | Question number | d | Adapted from | N/A |
Filipino rice farmers prepare for trade liberalization
- To meet its obligations under World Trade Organization (WTO) rules, the president of the Philippines has asked the government to eliminate the current quota system for rice imports. As an important part of food security measures, the government wants to achieve self-sufficiency in the production of rice. To support this goal, the WTO allowed the Philippines to extend its rice quota until June 2017 to allow more time for local farmers to prepare for free trade.
- The current quota system for rice imports makes domestic prices rise dramatically during periods of low domestic supply.
- Eliminating the quota on rice aims to make the rice market more competitive, which could reduce the price of rice by as much as 7 Philippine pesos (PH₱) per kilogram (kg). The National Economic and Development Authority has estimated that lower rice prices could save Filipino households as much as PH₱2362 per year. However, if the rice quota is eliminated, economists have warned that the government must prepare local rice producers so that they can either compete with rice imports or move to producing other crops. “Currently Filipino farmers cannot compete with Vietnamese farmers who may enjoy economies of scale” declared one economist. “The solution is to bring down the cost of production of rice.”
- To help Filipino farmers to adjust to competition from lower-priced rice imports, the government has allocated funds to the Rice Competitiveness Enhancement Fund. This fund will provide support to farmers in order to increase productivity by supplying high-yield seeds and fertilizer. It will also provide subsidies to encourage the use of agricultural machinery and will offer support services and training to farmers.
- Apart from being an essential food for many Filipinos, rice is also an important input for the food industry. The plan to remove the import quota will reduce the inflation rate in the Philippines by up to 0.4 %. In July 2018, the central bank governor reported that inflation had reached 5.7 %, well above the government’s target range of 2 % to 4 %. He stated that “supply-side factors are the main drivers of the present inflation. These factors include rising international oil prices, higher indirect taxes and poor weather conditions that have affected food supply”. The president stated that the removal of the rice quota was one solution to ease the rising inflation.
Table 1: Average economic costs and prices of rice in the Philippines and Vietnam
[Source: Rappler, 2018. Gov’t to support farmers amid moves to lift rice import quotas. Available at: https://www.rappler.com/business/203837-government-support-philippine-farmers-lifting-rice-import-quotas [accessed 1 June 2018]. Source adapted.
Philippine News Agency, 2018. Tariff on imported rice to rake in P20-B yearly. Available at: http://www.pna.gov.ph/articles/1043516 [accessed 2 August 2018]. Source adapted.
Ernesto M. Ordoñez / Inquirer.net, 2018. Averting the 35% rice tariff crisis. Available at: https://business.inquirer.net/258373/averting-35-rice-tariff-crisis#ixzz5VJ32ugph.
Ben O. de Vera, Inquirer.net, 2018. Tariff on rice to curb inflation by 0.4 percentage point. Available at: https://business.inquirer.net/256313/tariff-rice-curb-inflation-0-4-percentage-point#ixzz5VGfm0xUp [accessed 29 August 2018]. Source adapted.]
Using information from the text/data and your knowledge of economics, evaluate the impact on the economy in the Philippines of removing the rice quota.
[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.
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations.
Economic Analysis may include:
- trade protection
- theory of comparative advantage / allocation of resources
- AD /AS
- employment
- inflation
- standard of living
- economies of scale.
Positive impacts may include:
- attempts at self-sufficiency of production improved by eliminating quotas (paragraph [1]) and providing assistance to farmers (paragraph [4])
- rice is a staple food so less volatility in rice prices when quota removed – helps households (paragraph [2])
- lowers rice price for households – significant annual savings (paragraph [3])
- lower rice price has forward linkage effect reducing input costs for food manufacturers (paragraph [5])
- more competition from Vietnamese rice imports encourages domestic producer efficiency and innovation (paragraph [3])
- more efficient allocation of resources if farmers “move to producing other crops” – comparative advantage (paragraph [3])
- opportunity to achieve economies of scale in the long run by bringing “down the cost of production” (technical economies through mechanization and possibility of farm consolidations) (paragraph [3])
- lower rice prices reduce input costs and increase SRAS therefore relieving cost-push inflation (paragraph [5]).
Negative impacts may include:
- goal of self-sufficiency in rice could be compromised in the long run if the number of rice farmers is reduced (paragraph [1])
- rice is a staple food so maintaining rice production is a matter of national security (paragraph [1])
- rice farmers are already making a loss so removing quotas will increase losses and cause some farmers to leave the rice market in the long run (Table 1)
- likely to be unemployment in the sector as rice farmers leave the market (paragraph [3] and Table 1)
- local unemployment can lead to hollowing out of rural communities as unemployed migrate to urban areas
- government revenue allocated to support programs to help rice farmers adjust carries significant opportunity costs (paragraph [4])
- ATC in the Philippines is almost double that in Vietnam, so it might take a long time for Filipino farmers to become competitive (Table 1).
Any reasonable evaluation.
As with most part (d) questions, there was a general lack of depth of analysis and effective evaluation with a disappointing number of students managing to achieve a Level 3 quality of answer. The higher-achieving answers focused on the macroeconomic impact of the removal of the quota, i.e. impact on inflation, employment (focusing on specific sectors) and economic growth. Some students highlighted the impact on the balance of payments. Lower-achieving responses spent too much time explaining the effect of a quota rather than the impact of its removal. Such an approach attracted few marks and wasted valuable time that would have been better spent on the more salient aspects of the question. Candidates should be encouraged to only focus on the question being asked rather than the one they would like to have been asked. In addition, little effective use was made of the information in the extract, with too many students simply repeating the points made in the text without much analysis or evaluation.
