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Date	November 2018	Marks available	2	Reference code	18N.2.HL.TZ0.1
Level	Higher level	Paper	Paper 2	Time zone	Time zone 0
Command term	Define	Question number	1	Adapted from	N/A

Question

South Sudan joins the East African Community

The East African Community (EAC) is the most integrated trading bloc in Africa. In 2005, the members established a customs union, and then in 2010 it became a common market. There are ambitious plans to establish a monetary union by 2024.
According to a recent report, the region is wealthier and more peaceful as a result of the increased integration. Economic models suggest that bilateral trade between member countries was 213 % higher in 2011 than it would have been without the integration. This is despite the fact that progress on fully eliminating trade barriers has been rather slow and there are still a large number of non-tariff barriers.
Until recently the customs union was made up of Burundi, Kenya, Rwanda, Tanzania and Uganda. Very recently, South Sudan joined the bloc. This presents a tremendous opportunity for South Sudan, which was recently recognized as an independent country.
South Sudan is one of many developing countries that are dependent on oil exports for the majority of its export revenues and oil prices have been falling due to increased supply of oil in the market. The deteriorating terms of trade have resulted in a worsening of the current account and lower government revenues. Regional economic integration might help South Sudan to diversify its economy.
Agriculture is one potential area that South Sudan could focus on to diversify its economy. According to some estimates, 70 % of land is suitable for agriculture, but less than 4 % is currently being cultivated. The large flood plains in the country are suitable for rice production and the hope is that South Sudan can develop a comparative advantage in this essential food.
South Sudan is landlocked and most of its road network is unpaved. This is just one example of its poor infrastructure. Since infrastructure is an expensive investment, regional cooperation will be vital for improving its road systems. Furthermore, effective transport links to sea ports in Kenya and Tanzania will allow for greater trade and therefore economies of scale.
In the short term, there will be challenges for South Sudan associated with joining the common market. For example, before Rwanda joined the EAC in 2007, there were lower tariffs on many imported inputs. However, the cost of living for the poor population rose because of trade diversion that occurred after joining the EAC. South Sudan is likely to face the same problem.
Labour costs in South Sudan are higher than those of other member countries and years of conflict have left the population with low levels of education and skills. This may present a barrier for South Sudan in attracting foreign direct investment, despite being part of the common market.

Figure 1: Intra-East African Community* trade in goods (USD$bn)

* Burundi, Kenya, Rwanda, Tanzania and Uganda.
Not including South Sudan, which acceded to the treaty in 2016.

Define the term monetary union indicated in bold in the text (paragraph [1]).

[2]

a.i.

Define the term comparative advantage indicated in bold in the text (paragraph [5]).

[2]

a.ii.

Explain why “deteriorating terms of trade have resulted in a worsening of the current account” in South Sudan (paragraph [4]).

[4]

Using a cost diagram, explain how membership in the common market may allow producers in South Sudan to gain economies of scale (paragraph [6]).

[4]

Using information from the text/data and your knowledge of economics, evaluate the likely impact on South Sudan of its membership of the EAC common market.

[8]

Markscheme

a.i.

a.ii.

PLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.

definition/explanation of terms of trade
fall in the price of oil leads to a worsening of the terms of trade in South Sudan
demand for oil is price inelastic
thus a fall in the terms of trade leads to a fall in export revenue resulting in a worsening on the current account on the balance of payments.

Candidates who incorrectly label diagrams can be awarded a maximum of [3].

For a cost diagram, the vertical axis may be labelled Cost (C) or Average cost (AC) or Long run average cost (LRAC). The horizontal axis may be labelled Quantity (Q) or Output. 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.

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 economic integration
definition of common market.

Advantages/opportunities of economic integration:

larger export markets, may allow South Sudan producers to gain economies of scale, as noted in part (c). In the market for rice, this may allow South Sudan to develop a comparative advantage (paragraph [5])
larger market may encourage diversification, and reduce South Sudan’s reliance on oil
further stimulus for foreign direct investment as foreign companies will benefit from the larger market size; however, this may be limited by the low levels of human capital and high production costs (paragraph [8])
opportunities to South Sudan workers who, with free movement of labour, may work in other East African countries
advantages to South Sudan companies who, with free movement of capital, may invest in other East African countries
cost of imported factors of production may decrease
South Sudan can gain from the rapidly growing trade within the trading bloc (graph)
greater political stability and cooperation, (paragraph [2]) may also result in higher levels of investment, leading to economic growth
trade creation will benefit producers who can import inputs without tariffs (paragraph [7])
greater efficiency as domestic producers will have to compete with lower priced imports from other member countries
consumers may have access to less expensive imported goods and services. However, this might be limited if trade diversion takes place and the new common external tariff makes some imported products more expensive
bargaining power of South Sudan in multilateral trade negotiations can improve if it is part of the larger trading bloc
economic integration can result in greater peace.

Disadvantages/challenges of economic integration:

trade diversion (paragraph [7])
the role of the WTO might be undermined, since it allows East African Countries to look inwards
trade becomes more complicated with a series of intra-trading bloc agreements
unemployment, as less efficient South Sudan companies (with higher labour costs, paragraph [8]), can’t compete with lower priced imports from other member countries
any potential new trade agreements with non-members may be restricted by common external tariffs
the larger the group the more difficult it is to come to agreements.

Any reasonable evaluation.