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Question 22N.2.SL.TZ0.g

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

Text D — Macroeconomic policies in Uruguay

  1. Compared to many other Latin American countries, Uruguay has a high Human Development Index (HDI). This is due to its higher gross national income (GNI) per capita and wider access to health care and education.

  2. One aim of Uruguay’s fiscal policy has been income redistribution. For example, in 2017 the tax rate applied to the highest income bracket was raised from 25 % to 36 %. Spending on social programmes, which are targeted towards the poor, has also increased. However, while expenditure on schools is benefitting all families, expenditure on higher education still tends to favour higher-income families, because there are relatively few students from low-income families in universities.

  3. Recently, concern about a growing budget deficit has led to new budget guidelines being implemented. These guidelines aim to reduce borrowing and the national debt by encouraging the government to increase tax revenue and/or reduce expenditures. The main policy goal of Uruguay’s central bank is to keep a low rate of inflation. It has announced that it will reduce the inflation target to below 6 % by September 2022.

  4. Several constraints to growth remain, which may limit progress towards sustainable development. Despite plans to upgrade road networks and construct a new central railway, investment in infrastructure needs to be increased further. Education and training could also be improved to meet the needs of new sectors, such as the information and communication technology (ICT) industry.

  5. State-owned enterprises, including railways and suppliers of fuel, water and electricity, are a significant part of the Uruguayan economy. The prices charged by these enterprises tend to be high relative to prices in other countries. As part of a strategy to eliminate excessive costs, the government has proposed measures to improve efficiency in state-owned enterprises and to gradually reduce prices.

  6. The International Monetary Fund (IMF) considers that more labour market flexibility is needed to make it easier for workers to change jobs and for firms in growing sectors such as ICT to hire workers. The government is, therefore, considering deregulation of the labour market.

  7. Overall, by boosting competitiveness and private investment through supply-side policies, the government aims to raise growth and employment.


Text E — Health care system in Uruguay

The public and private sectors that offer health care in Uruguay were combined into one system in 2007, with both overseen by the government and both eligible to receive subsidies. Most medical care is free for low-income patients. The first row of data in Table 3 shows that per capita demand for health care increased by 54.22 % from 2010 to 2018. The advantages are seen in longer life expectancy figures, which imply an increase in productivity, and other benefits.


Table 3: Health care expenditure and GNI per capita for Uruguay


Text F — Trade and exchange rates

  1. Over 50 % of Uruguayan exports are forestry and agricultural goods, including soybeans, rice, and cattle meat. Increasing global demand and a significant rise in commodity prices from 2000 to 2012 encouraged investment in the agricultural sector. However, the price of soybeans has been declining since 2013, partly due to rising productivity in agriculture. Climate-related shocks, such as droughts in 2017 and 2020, and economic crises in the major export markets of Brazil and Argentina have also caused difficulties for producers.

  2. Therefore, Uruguay aims to diversify its export markets. For example, with the growth of the ICT sector, Montevideo (the capital city of Uruguay) has become a leading software development centre. In addition, Uruguay is broadening its markets towards Europe and Asia. Under a proposed trade agreement between the European Union (EU) and the South American trade bloc, Mercosur (Argentina, Brazil, Paraguay, Venezuela, and Uruguay), 93 % of all tariffs will gradually be eliminated. However, a quota will be imposed on cheese imports from the EU.

  3. To help the economy adjust to external shocks and to avoid large fluctuations in the exchange rate of the peso (Uruguay’s currency), the central bank uses its plentiful reserve assets of foreign currencies. In 2019, the decline in agricultural export revenues put downward pressure on the peso exchange rate. However, the central bank was able to prevent a large depreciation by using its reserve assets in the foreign exchange market.


Table 4: Economic data for Uruguay


Table 5: Development data for Uruguay


Table 6: Balance of payments data for Uruguay in 2019


[Source: Text D Bucheli, Marisa; Lara Ibarra, Gabriel; Tuzman, Diego. 2020. Assessing the Effects of Fiscal Policies on Poverty
and Inequality : The Case of Uruguay. Policy Research Working Paper; No. 9499. World Bank, Washington, DC.
© World Bank. http://localhost:4000//entities/publication/3e7d0f74-aa72-552c-b94d-239f7e89c243
License: CC BY 3.0 IGO. 
Table 3 The World Bank [online] Available at: https://databank.worldbank.org/source/world-development-indicators
[Accessed 29 September 2021].
Text F The European Commission, 2019. EU and Mercosur reach agreement on trade [online] Available at:
https://ec.europa.eu/commission/presscorner/detail/en/IP_19_3396 [Accessed 29 September 2021].
Source adapted.
Table 4 The World Bank [online] Available at: https://databank.worldbank.org/source/world-development-indicators
[Accessed 29 September 2021].
Table 5 Country Economy, n.d. Uruguay - Human Development Index - HDI [online] Available at:
https://countryeconomy. com/hdi/uruguay United Nations Development Programme.
[Accessed 29 September 2021].
The World Bank [online] Available at: https://databank.worldbank.org/source/world-development-indicators
[Accessed 29 September 2021].
Table 6 The World Bank [online] Available at: https://databank.worldbank.org/source/world-development-indicators
[Accessed 29 September 2021].]

Using information from the text/data and your knowledge of economics, evaluate the effectiveness of the government’s macroeconomic policies in achieving economic growth and economic development in Uruguay.

[15]

Markscheme

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

A maximum of [9] should be awarded if only economic growth or only economic development is discussed.

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.


Answers may include:

  • Definition of development
  • Definition of growth
  • An explanation of the links between growth and development
  • Definition of supply-side policies
  • Definition of fiscal policy
  • Definition of monetary policy
  • Diagram(s) (e.g. AD/AS, poverty cycle, PPC…).


Supply-side policies: strengths may include:

  • Interventionist supply-side policies can be used to increase spending on infrastructure and on education (Text D, paragraph [4])
  • Can increase competition and efficiency in state-owned enterprises (or maybe privatize them) to lower prices (Text D, paragraph [5])
  • Can make the labour market more flexible and able to supply labour to new and growing sectors (Text D, paragraph [6])
  • Can attract more FDI (Text D, paragraph [7])
  • By promoting certain sectors, can diversify exports (Text F, paragraph [2])
  • Surplus on trade balance has increased significantly maybe due to supply-side policies (Table 4)


Supply-side policies: limitations may include:

  • Market-based policies (such as the abolition of the minimum wage and reductions in unemployment benefits) may increase inequality and poverty if labour market is deregulated (Text D, paragraph [6])
  • Time lags before they are effective
  • May damage the environment


Fiscal policies: strengths may include:

  • Used to redistribute income by progressive taxes and transfer payments which promote equality, lowering the Gini coefficient (Text D, paragraph [2]; Table 5)
  • Used to subsidise education and health care which has raised the HDI (Text D, paragraph [1]; Text E, Table 5)


Fiscal policies: limitations may include:

  • Growth rate has fallen and unemployment has risen (despite growing budget deficits) (Table 4)
  • Budget deficits mean that government has had to borrow funds, which raises debt (Text D, paragraph [3])
  • New budget guidelines require the government to raise taxes and/or reduce spending which will have a negative impact on growth (Text D, paragraph [3])
  • Some of the spending (for example on higher education) has benefitted the rich more than the poor (Text D, paragraph [2])


Synthesis: limited effectiveness on growth but can be targeted at development.


Monetary policies: strengths may include:

  • Have kept inflation at a reasonably low level (Table 4)
  • Have been able to set a target rate of inflation and plans to lower it (Text D, paragraph [3])
  • Have been able to lower interest rates which should expand AD through increased investment/consumption (Table 4)


Monetary policies: limitations may include:

  • The reduction in interest rates so far does not seem to have expanded growth, implying limited effects on investment (Table 4)
  • Further reductions in interest rates, if expansionary policies are needed, will become more difficult as interest rates are now already relatively low (Table 4).


Trade policies: strengths may include:

  • Increase in exports due to greater diversification (Text F. paragraph [2])
  • Increase in exports due to greater market access based EU/Mercosur tariff reduction agreement (Text F, paragraph [2])
  • Cheaper imports due to lower tariffs will reduce consumer prices (maybe aiding the poor) (Text F, paragraph [2])
  • Central Bank exchange rate policies aimed at appreciation will make importing capital goods/technology cheaper (Text F, paragraph [3])
  • Rising surplus on balance of trade will add to growth through increasing AD (Table 4)


Trade policies: limitations may include:

  • Increase in imports due to EU/Mercosur tariff reduction agreement, which could harm development in rural areas (Text F, paragraph [2])
  • Central Bank exchange rate policies aimed at appreciation could harm export competitiveness (Text F, paragraph [3])
  • Over-reliance on the export of agricultural goods may lead to unpredictable growth outcomes (Text F, paragraph [1])
Examiners report

Most candidates understood the difference between economic growth and development and could identify at least two relevant policies. The responses which reached 10-12 marks and 13-15 marks were those where the discussion of implemented policies presented sufficient links to economic growth and development. Such links had to be explained rather than stated. It was not uncommon to read responses with some possibly good but unfortunately underdeveloped economic arguments. In such cases, a low score on the second descriptor often brought down the entire score as theory was 'described' rather than 'explained'. Stronger responses distinguished between different types of government intervention/policies (e.g. demand-side, supply side...), while lower-achieving responses would cover many policies without organising their answers and/or consider the impacts of these policies in sufficient depth. A few candidates did not achieve high marks because their response mostly suggested/recommended policies (such as privatization) rather than evaluating the impact of the intervention being implemented in Uruguay. Some of the best answers used the data in the tables as well as the information in the text to assess the effectiveness of the policies.

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