| Date | May 2017 | Marks available | 4 | Reference code | 17M.2.HL.TZ0.03 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 03 | Adapted from | N/A |
Question
Indonesia’s economy
- Indonesians hope that their new president will be able to speed up reforms to stimulate economic growth and economic development. These reforms include upgrading infrastructure, reducing red tape (excessive regulations) and reducing corruption. It is also hoped that he will increase Indonesia’s global competitiveness, create new jobs and educate one of the world’s youngest workforces.
- Some government policies are already being implemented. These include a large power plant construction programme, tax incentives to infant industries and tax cuts for industries like transport, telecommunications, metal production and agricultural processing. In addition, there has been a decision to reduce fuel subsidies in order to contribute funds towards the government’s record US$22 billion investment in infrastructure projects. The subsidies had kept fuel prices low in a country where millions of people live in poverty.
- Despite the policies, Indonesia is struggling. Economic growth is slow and consumer confidence has deteriorated. Indonesia’s main export commodities are coal, gold and palm oil, for which prices have fallen. The inflation rate is 7.26%, which is above the central bank’s target range of 3 to 5%. Slower growth in the world economy makes the situation even worse for Indonesia’s struggling economy.
- Economists have said that the president must put his efforts into improving export competitiveness by making investments in education and training.
- The costs of doing business in Indonesia are high due to paperwork and confusing regulations. The government has adopted policies to improve this. These policies aim to create certainty and transparency for foreign investors and to empower small businesses, which play a critical part in Indonesia’s economy. Other policies, such as obtaining loans and encouraging micro-credit institutions, make it easier to gain access to credit.
- Trade protection and intervention are increasing as policymakers look to reduce imports, manage markets and promote domestic industries.
Figure 1 – Indonesian development statistics
[Sources: adapted from World Bank and Statistics Indonesia; www.legalbusinessonline.com, accessed 18 September 2015; www.indonesia-investments.com, accessed 23 August 2015; www.hdr.undp.org, accessed 23 August 2015; www.bloombergview.com, accessed 9 August 2015; www.reuters.com, accessed 9 August 2015; www.lowyinterpreter.org, accessed 23 August 2015 and www.data.worldbank.org, accessed 23 August 2015]
* signifies no data available
Define the term infrastructure indicated in bold in the text (paragraph 1).
Define the term micro-credit indicated in bold in the text (paragraph 5).
Using a demand and supply diagram, explain the impact on the market for fuel of the government’s decision to reduce fuel subsidies (paragraph 2).
Using a production possibilities curve (PPC) diagram, explain how “the government’s record US$22 billion investment in infrastructure projects” will affect Indonesia’s production possibilities (paragraph 2).
Using information from the text/data and your knowledge of economics, discuss the possible impacts of market-oriented and interventionist policies on Indonesia’s economic development.
Markscheme
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is (any one of the following is sufficient):
- large scale services or facilities of a country
- necessary for economic activity
- add to the capital stock of a nation
- usually supplied by the government.
2 Accurate definition. [2]
An explanation that it is (any two of the following is sufficient):
- large scale services or facilities of a country
- necessary for economic activity
- add to the capital stock of a nation
- usually supplied by the government.
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is a small loan.
2 Accurate definition. [2]
An explanation that it is a small loan, plus one further descriptor, such as:
- micro-credit allows poor people to set up a small scale business
- micro-credit is loaned to borrowers who do not have security/collateral
- at a low rate of interest.
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a correctly labelled demand and supply diagram with a shift of the supply curve to the left and a higher price and lower quantity or for explaining that the reduction in fuel subsidies will lead to increased costs and so a fall in supply with a higher price and a lower quantity.
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled demand and supply diagram with a shift of the supply curve to the left and a higher price and lower quantity and for explaining that the reduction in fuel subsidies will lead to increased costs and so a fall in supply with a higher price and a lower quantity.
Candidates who incorrectly label diagrams can receive a maximum of [3].
For a demand and supply diagram, the vertical axis should be price or p. The horizontal axis should be quantity or q. A title is not necessary.
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 There is a correct diagram or an accurate written response. [1–2]
For drawing a PPC (outward shift) showing an increase in production possibilities in Indonesia or for explaining that the government’s record US$22 billion investment in infrastructure projects would likely improve the quality and/or the quantity of the factors of production (capital) and therefore may increase production possibilities and/or potential economic output.
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a PPC (outward shift) showing an increase in production possibilities in Indonesia and for explaining that the government’s record US$22 billion investment in infrastructure projects would likely improve the quality and/or the quantity of the factors of production (capital) and therefore may increase production possibilities and/or potential economic output.
Candidates who incorrectly label diagrams can receive a maximum of [3].
An alternate approach would be to explain that improved infrastructure allows firms to make more efficient use of their factors of production, leading to increased production possibilities.
For a PPC diagram, there must be two goods or groups of goods competing for the same resources on the axes. Good X and Good Y are appropriate, but simply X and Y are not sufficient.
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.
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 Few relevant concepts are recognized.
There is basic knowledge/understanding. [1–2]
2 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is some attempt at application/analysis. [3–5]
3 Relevant concepts are recognized and developed in reasonable depth.
There is clear knowledge/understanding.
There is effective application/analysis.
There is synthesis/evaluation, supported by appropriate theory and evidence. [6–8]
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.
Responses may include:
- definition of economic development
- explanation of supply-side policies
- explanation/definition of interventionist policies (paragraph 1, 2 and 5)
- explanation/definition of market-oriented supply side policies (paragraph 1 and 2)
- examples of market-oriented policies: reducing red tape, tax cuts, tax incentives, reducing fuel subsidies
- examples of interventionist policies: infrastructure projects, investment in education and training, increased trade protection, access to micro-credit.
Benefits of government intervention:
- government spending on infrastructure – “upgrading infrastructure” (paragraph 1) including power plants (paragraph 2) which could lead to increased growth and can contribute to economic development
- “create new jobs” (paragraph 1), more employment leads to economic growth / higher incomes, a reduction in the unemployment rate and thus contributes to economic development
- “educate one of the world's youngest workforces” (paragraph 1), this would allow the young workforce to get better paid jobs and support their families better
- increased access to credit and micro-credit (paragraph 5), this would allow entrepreneurs to take out loans that otherwise they may not have access to. Having access to credit might stimulate the number of small businesses in Indonesia (which “play a critical part in Indonesia’s economy”, paragraph 5), allowing for increased incomes and standards of living
- increased trade protection (paragraph 6) – this would allow domestic firms to set up, or survive; it protects already existing businesses from cheaper imports, allowing economic growth to happen; more employment contributes to economic development.
Concerns (weaknesses of) about government intervention:
- interventionist policies may lead to inefficiency, bureaucracy and corruption, which hinder economic growth and economic development, which the citizens are hoping the new president will reduce (paragraph 1)
- budget implications of increased government spending, with possible implications for future government spending on development objectives
- poor planning of project and no long-term plans.
Benefits of market-oriented policies:
- reducing red tape (paragraph 1), less bureaucracy and deregulation might lead to more incentives to set up formal businesses, which may lead to economic growth and economic development (more jobs); more (foreign) investment
- tax cuts, tax incentives (paragraph 2), industries like transport, telecommunications, metal production and agricultural processing, which are now promoted on a national scale, which may lead to economic growth and economic development (through more jobs)
- reducing corruption (paragraph 1), reducing costs for individuals and firms, more opportunities for entrepreneurs, more formal businesses that pay tax.
Concerns (weaknesses of) about market-oriented policies:
- reducing fuel subsidies (paragraph 2), allowing world prices to determine the price of fuel (which might be seen as a necessity in Indonesia for transport, cooking), likely will result in higher prices of this essential product. This could be problematic for the 28 million people in absolute poverty (Figure 1)
- (greater) inequality, which already exists (Figure 1)
- intervention may be necessary to provide merit goods, correct market failures, and reduce poverty but market-oriented policies may be needed to ensure a high enough rate of economic growth (which is already slow, paragraph 3).
Any reasonable discussion.
