Question 19M.2.HL.TZ0.c
| Date | May 2019 | Marks available | [Maximum mark: 4] | Reference code | 19M.2.HL.TZ0.c |
| Level | HL | Paper | 2 | Time zone | TZ0 |
| Command term | Explain | Question number | c | Adapted from | N/A |
China’s increasing presence in Bolivia
- Between 2000 and 2014, annual bilateral trade between China and Bolivia increased dramatically from US$75.3 million to US$2.25 billion. China has become the fifth-largest market for Bolivian exports, which mostly consist of raw materials such as minerals, hydrocarbons, wood and soybeans.
- At the same time, China has become Bolivia’s main source of imports. China now supplies half of Bolivia’s clothing, cars, motorcycles, cell phones, computers and other electronics. Bolivia’s expenditure on Chinese imports significantly exceeds the revenue that is received from its exports to China. Since 2014, Bolivia has experienced significant current account deficits with China.
- In recent years, the Bolivian government has taken loans from Chinese banks to support the purchase of Chinese imports of goods and services, along with Chinese-built roads, bridges, railways, hydroelectric power plants and mining facilities. In 2015, the Bolivian government owed more than US$600 million to Chinese banks.
- The socialist Bolivian government wants to implement an ambitious Five-Year National Development Plan from 2016 to 2020. Faced with sharply declining export revenues and commodity prices, it will rely increasingly on foreign capital to fund its projects.
- All projects financed by Chinese loans must be awarded to Chinese companies, which come with their own materials, equipment and technology, and often their own labour. The new loans will have a combination of commercial interest rates, between 2.5 % and 4 %, and concessional interest rates, up to 1 %. The Bolivian government is expecting to be able to repay the loans through continued growth of the economy.
- China’s foreign direct investment (FDI) is mostly being aimed at energy and infrastructure development. Chinese firms are currently involved in major road-building projects, hydroelectric power station projects, expanding airports and developing a steel-producing plant. These projects have created problems for local communities in terms of water contamination and the overuse of Bolivia’s scarce water supply.
- This FDI strategy generates profits for Chinese firms in the short term, as they build and improve the infrastructure. Since Bolivia is a resource-rich country, Chinese firms will be looking to invest in profitable mining projects in the future, once the infrastructure is in place.
[Source: adapted from Financial sovereignty or a new dependency? How China is remaking Bolivia,
http://nacla.org/blog/2017/08/11/financial-sovereignty-or-new-dependency-how-china-remaking-bolivia,
10 August 2017, this article was originally published by NACLA; and Trading Economics, Bolivia Current Account,
https://tradingeconomics.com/bolivia/current-account, accessed 9 October 2017]
Using an externalities diagram, explain how the Chinese infrastructure projects have caused negative externalities (paragraph [6]).
[4]
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
The y axis may be labelled price but could be costs or benefits and the x axis labelled quantity.
Overall it was evident that there was a good understanding of the concept of externalities but this was often spoiled by careless inaccuracies / omissions. Too often, on otherwise excellent answers, negative externalities or welfare loss was not identified on the diagram as required. Also the welfare loss was frequently inaccurately placed on the diagram. Most candidates used the negative externalities of production approach while a minority analysed in terms of negative externalities of consumption. Both were acceptable as long as the explanation matched the diagram. This was not always the case and on occasions there was a dis-connect between the diagram and explanation.
