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Question 22M.2.HL.TZ0.g

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

Text A — Overview of Vietnam

  1. Economic reforms in Vietnam during the past 30 years have led to rapid economic growth, which has transformed a poor nation into a lower middle-income economy. The percentage of the population with an income of less than US$1.90 a day declined from 38 % in 2002 to below 2 % in 2018.

  2. Vietnam used to be a food-insecure nation, in which many people sometimes lacked access to affordable food, but it is now a leading exporter of basic food commodities. It also aims to become an exporter of high quality and processed food products. However, agricultural production only accounts for 18 % of gross domestic product (GDP), although it uses 40 % of the land and employs 43 % of the labour force. Due to the growing rural population, land is often divided up between a greater number of farmers, causing some farms to become smaller. These farms have fewer opportunities to benefit from economies of scale and lower average costs of production.

  3. Vietnam’s rapid growth and industrialization, focused on export-oriented manufacturing, have had a harmful impact on the environment. Electricity consumption has tripled since 2010, growing faster than GDP. Electricity generation, which mainly uses fossil fuels, accounts for approximately 60 % of Vietnam’s carbon emissions. Demand for water continues to increase. Unsustainable exploitation of natural resources, such as land, fisheries, and timber, could negatively affect prospects for long-term growth. In addition, Vietnam’s primary sector is highly vulnerable to the climate and is therefore subject to supply shocks.

  4. Vietnam has signed several free trade agreements (FTAs). Its first FTA was a partnership with Japan in 2008. Both Vietnam and Japan are members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which took effect at the beginning of 2019. These FTAs also promote inward foreign direct investment (FDI). In addition, Vietnam has introduced policies to attract foreign investment, such as tax incentives and spending on infrastructure.

  5. Japan is the biggest provider of foreign aid to Vietnam and the largest source of FDI. Japanese firms and aid agencies are jointly financing large-scale projects, including port infrastructure and a high-speed railway, which will reduce the Hanoi to Ho Chi Minh journey time from about 35 hours to under six hours. Other Japanese-funded aid projects are in the areas of health care, education, and the environment.

Text B — Trade and investment flows between Vietnam and Japan

  1. Japan imports seafood and consumer products such as textiles, leather shoes and processed foods from Vietnam, because Vietnam has a comparative advantage in such items. Conversely, Vietnam imports machinery, technology, and raw materials for production from Japan. Gradually barriers to trade are being removed. In 2020, Vietnam began exporting lychees (a luxury fruit) to Japan after five years of negotiations on quality standards. The improved access to the Japanese market has increased the number of consumers and the revenue earned by Vietnamese lychee farmers.

  2. Japanese firms invest in Vietnam, particularly in urban areas, because wages are low and they can export from Vietnam to other CPTPP members and to China and Indonesia. Panasonic, a Japanese multinational company (MNC), relocated a major factory, which manufactures refrigerators and washing machines, from Thailand to Vietnam in 2020. The construction of a coal-fired power plant is mainly funded by Japanese firms. The Japanese government is promoting further investment by subsidizing over 30 firms that are relocating from China to Vietnam. Most of these firms are food processors or producers of manufactured goods (for example, medical equipment).

Text C — Roles of the central bank in Vietnam

  1. The central bank in Vietnam has been lowering interest rates since mid-2019. However, it has kept the minimum reserve requirement at 3 % of commercial bank deposits, despite suggestions that this requirement could be lowered.

  2. The central bank also regulates the exchange rate of the dong (Vietnam’s currency). It actively intervenes in the foreign exchange market to stabilize the rate when necessary. In April 2020, there was downward pressure on the dong due to the lower interest rates and fewer foreign tourists. However, the central bank has a large amount of reserve assets, which were used to prevent the dong from depreciating.

Table 1: Economic data for Vietnam

Table 2: Development data for Vietnam

Text A The World Bank, 2020.The World Bank in Vietnam [online] Available at: https://www.worldbank.org/en/country/vietnam/overview [Accessed July 2020]. Source adapted.

Food and Agricultural Organization of the United Nations, 2018. Small Family Farms Country factsheet: Vietnam [online] Available at: http://www.fao.org/publications/card/en/c/I8358EN/ [Accessed July 2020]. Source adapted.

Text B Hoang Tien, N., 2020. Analysis of Japan’s international trade and investment activities in Vietnam [online]
Available at: https://www.researchgate.net/publication/338719794_Analysis_of_Japan’s_international_trade_and_
investment_activities_in_Vietnam [Accessed July 2020]. Source adapted.

Minh, A., 2020. After years of negotiations, Vietnam finally sells lychees to Japan [online] Available at: https://e.vnexpress.net/news/business/economy/after-years-of-negotiations-vietnam-finally-sells-lychees-to-japan-4119587.html [Accessed July 2020]. Source adapted.

Table 1 World Bank Data Bank, World Development Indicators, n.d. [online] Available at: https://databank.worldbank.org/reports.aspx?source=2&country=VNM [Accessed July 2020]. Source adapted.

Table 2 World Bank Data Bank, World Development Indicators, n.d. [online] Available at: https://databank.worldbank.org/reports.aspx?source=2&country=VNM [Accessed July 2020]. Source adapted.

Using information from the texts/data and your knowledge of economics, discuss the view that trade with Japan is more beneficial for Vietnam’s economic development than foreign direct investment (FDI) from Japan.

[15]

Markscheme

Answers that only deal with trade or only deal with FDI should be rewarded a maximum of level 3.

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.

Answers may include:

  • definition of development
  • definition of trade
  • definition of foreign direct investment.

Economic models / theories may include:

  • AD/AS
  • poverty cycle
  • PPC
  • trade creation / diversion
  • comparative advantage
  • free trade / protectionism.

Points that support the view that trade is more beneficial:
Benefits of trade with Japan:

  • trading based on comparative advantage enables Vietnam to consume beyond its production possibilities curve therefore could increase living standard in Vietnam (Text B, paragraph [1])
  • create more employment in export industries leading to improved living standard for the workers employed in these industries (Table 1)
  • more exports of agricultural goods enable farms to earn and invest more, leading to more efficiency (Text A, paragraph [2] or Text B, paragraph [1])
  • incomes are rising and will rise more in rural areas ( Text B, paragraph [1] or Table 1).

Costs of FDI from Japan:

  • because Japanese factories tend to locate in urban areas, inequality is increasing as shown by the rise in the Gini coefficient (Table 2)
  • Japanese firms are taking advantage of low-cost labour (Text B, paragraph [2])
  • environmental impact of more factories and coal-fired power plants and its effects on economic development (Text A, paragraph [3] or Text B, paragraph [2])
  • foreign firms are getting preferential tax treatment and the government is spending on infrastructure, which has an opportunity cost of possibly less government spending on health and education (Text A, paragraph [4]).

Points that support the view that FDI is more beneficial:
Benefits of FDI from Japan
:

  • more jobs are available leading to improving indicators for health and life expectancy (Table 2) and rising incomes (Text A, paragraph [1] and Table 1)
  • Japanese FDI also results in Japanese aid directed at required infrastructure. This improves Vietnam's economic capacity (Table 2 and Text A, paragraph [5])
  • Japanese firms are introducing more technology leading to improved human capital and enabling more exports of manufactured goods leading to more growth and consequential improvement in economic development (Text B, paragraph [2])
  • FDI enables Vietnam to add more value to the primary products it produces. This helps avoid economic problems attached to specializing in primary product exports and therefore may increase living standards in rural areas (Text B, paragraph [2]).

Costs of trade with Japan:

  • because Vietnam is specializing in primary goods, trade with Japan may be disrupted by supply shocks (particularly due to the climate) and volatile prices (due to inelastic demand and supply) restricting economic development in rural areas (Text A, paragraph [3] and Text B, paragraph [1])
  • land and fisheries and forests are being unsustainably used (Text A, paragraph [3]).

Synthesis of relative benefits of trade vs FDI:

  • trade and FDI are not substitutes for each other but together may have a significant impact on economic development, because more FDI allows Vietnam to start exporting manufactured and higher value-added goods (Text B, paragraph [2])
  • both are contributing to development, but both have drawbacks.

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

Examiners report

A large number of students’ answers strayed away from what was being asked and did not clearly focus on economic development.

Often the evaluation was very superficial, especially for some who found it difficult to identify the separate impact on economic development of trade and FDI as these are heavily interwoven.

In several of the responses, the students understood the effect that trade and FDI might have on Vietnam's economy in general, they used diagrams, theories and terminologies, but focused entirely on economic growth and so were not awarded beyond 6 marks as these responses do not clearly indicate an understanding of the “specific demands of the question”.

In some instances, some appeared to present pre-prepared answers and thus the work matched the descriptor for 1-3 marks.