| Date | May 2017 | Marks available | 4 | Reference code | 17M.2.HL.TZ0.04 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 04 | Adapted from | N/A |
Question
Zambia’s reliance on copper exports
- Due to its economic success, Zambia has recently been classified as a middle-income country by the World Bank. According to the United Nations (UN) classification, Zambia is in the medium human development category. However, outside mining and export areas, the standard of living remains extremely low for Zambians.
- Zambia is one of the world’s top producers of copper. The country’s economy is reliant on copper exports, which make up 80% of export earnings. Mining employs approximately 90 000 people and contributes approximately 25–30% of government revenue in Zambia.
- From 1997 to 2013, mining attracted US$12.6 billion in foreign direct investment, helping Zambia become one of Africa’s top economic performers, with average annual gross domestic product (GDP) growth of 6.4% over the last decade.
- But now foreign and local businesses, including giant multinational mining corporations and small Zambian companies, have been hit hard by a rapid fall in the price of copper. In January 2015, the price reached a five-and-a-half year low of approximately US$5353 per tonne, below the estimated marginal cost of production of US$5500. Sadly for many domestic Zambian mines, their marginal costs are even higher because their mines are old, deep and expensive to operate.
- The fall in commodity prices is linked to the slowdown in Chinese economic growth. China accounts for 45% of global copper consumption. The situation highlights the vulnerability of Africa’s resource-dependent nations to changes in China’s economy. This is an indicator of the need for Zambia to diversify its economy away from primary commodities. This will require the government to implement structural reforms to improve the supply side of the economy.
- Zambia is facing other economic problems as well as the falling price of copper. Most of Zambia’s electricity is produced from hydropower, but a severe drought has led to widespread power cuts, further threatening copper mining. The power problems and fall in copper prices have driven the Zambian kwacha (Zambia’s currency) to record lows due to a widespread selling of currencies which are linked to commodities. It lost 17% of its value against the US dollar from December 2014 through to the end of March 2015. The weakness of the Zambian kwacha is raising import costs and feeding into inflation.
- The governing Patriotic Front party, which has been in power since 2011, attracted voters by promising to share the country’s mineral wealth more equitably, raise wages and improve infrastructure. But now the government is struggling to maintain fiscal discipline, as the budget deficit has risen to an unacceptable level of approximately 10% of GDP.
- There has also been much attention to the unsustainable mining practices of foreign and domestic mines in Zambia. These have added to Zambia’s challenges of poverty alleviation, economic growth and economic development.
[Sources: adapted from www.reuters.com, 8 September 2015; Financial Times, “Zambia’s copper belt reels as price falls”, 26 January 2015; Financial Times, “Zambia bears the brunt of China’s economic slowdown”, 9 September 2015; Wall Street Journal, “Copper Mine Shutdown Threatens Zambia’s Economy”, 3 August 2015 and World Bank, “Making Mining Work for Zambia”, 17 June 2015]
Figure 1 – Selected economic indicators for Zambia, Malawi, Sub-Saharan Africa and middle income countries
Define the term foreign direct investment indicated in bold in the text (paragraph 3).
Define the term marginal cost indicated in bold in the text (paragraph 4).
Using an AD/AS diagram, explain how the falling value of the Zambian kwacha (Zambia’s currency) is “feeding into inflation” (paragraph 6).
Using information from the text/data and your knowledge of economics, discuss the possible impacts of Zambia’s reliance on copper production on its 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 investment by companies abroad.
2 Accurate definition. [2]
An explanation that it is any two of the following:
- long-term investment in another country
- Investment (spending on capital) by a multinational corporation (MNC)
- investment in another country representing at least 10 % ownership
- investment in productive facilities.
Level
0 The work does not meet a standard described by the descriptors below. [0]
1 Vague definition. [1]
The idea that it is the extra costs of production.
2 Accurate definition. [2]
An explanation that is the (extra) cost of producing an additional unit of output
Or
The change in total costs divided by the change in output/quantity.
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 AD/SRAS diagram showing a shift of the SRAS to the left and an increase in the price level or for an explanation that the falling value of the kwacha results in higher costs of imported factors of production and thus a fall in SRAS and thus (cost-push) inflation.
2 There is a correct diagram and an accurate written response. [3–4]
For drawing a correctly labelled AD/SRAS diagram showing a shift of the SRAS to the left and an increase in the price level and for an explanation that the falling value of the kwacha results in higher costs of imported factors of production and thus a fall in SRAS and thus (cost-push) inflation.
Candidates who incorrectly label diagrams can receive a maximum of [3].
For AD/AS, the vertical axis may be price level, average price level or APL. The horizontal axis may be real output, national output, real GDP, national income, Y or GDP. A title is not necessary.
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.
Possible positive consequences:
- may have been instrumental in allowing Zambia to become both a middle-income and a medium human development country (paragraph 1)
- Zambian HDI higher than that of the sub-Saharan average even though its GNI per capita is lower. This suggests that its economic development might be benefitting from the economic growth
- creation of jobs in the copper sector (paragraph 2) leading to higher incomes and improved standards of living
- generation of tax/government revenue (paragraph 2), which may be used to finance development objectives (through spending on health, education and infrastructure)
- attraction of FDI = strong economic growth (paragraph 3), plus the theoretical benefits of FDI (increase in AD diagram, increase in LRAS diagram, jobs, government revenue, multiplier effects, training for workers) and the ways that these might impact upon economic development (increased incomes, improved skill levels, government revenue to finance development objectives, paragraph 7).
Possible negative consequences:
- “resource curse” arguments
- while growth rates have been good, there is evidence to suggest that the benefits have not been shared equitably (paragraph 1, paragraph 7)
- vulnerable to price volatility (both demand and supply of copper likely to be inelastic, so a fall in demand from China leads to a significant fall in the price) (paragraph 5)
- falling price may lead to a fall in Zambia’s terms of trade since copper generates 80% of its export revenues. If the terms of trade deteriorate, the current account will worsen since demand for copper is likely to be inelastic
- copper mining uses a lot of hydropower, possibly diverting its use from households and other industries
- the currency is vulnerable to changes in the price of copper
- threat to government budget when the price falls making it difficult for the government to finance its development objectives
- fluctuating revenues make it difficult for governments to plan for spending on development objectives
- copper mining may generate external costs and represent a threat to sustainable development (negative externalities of production diagram).
Any reasonable discussion.
