| Date | May 2019 | Marks available | 2 | Reference code | 19M.2.SL.TZ0.4 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Define | Question number | 4 | Adapted from | N/A |
Question
Chinese investment helps Peru to develop
- Over the past decade, Peru has been one of South America’s fastest-growing economies, with an average economic growth rate of 5.9 % and low average annual inflation of 2.9 %. This has been mostly due to a favourable external environment, sensible macroeconomic policies and reforms of environmental regulations designed to increase investment in Peru’s profitable mining sector. However, the deregulation in the mining sector has been opposed by environmental groups and trade unions, fearing increased pollution and poorer working conditions.
- Strong growth in employment and income has dramatically reduced poverty rates. Absolute poverty fell from 27.6 % in 2005 to 9 % in 2015.
- Gross domestic product (GDP) growth continued to accelerate in 2016, very much helped by higher mining export output as several new large mining projects entered into production and reached full capacity. Peru mines and exports many commodities, including copper, gold, lead, zinc, tin, iron ore, silver, and oil and petroleum products.
- China is Peru’s main trading partner, taking 22.1 % of Peru’s exports and supplying 22.7 % of their imports in 2016. Chinese companies are also significant suppliers of foreign direct investment (FDI) to Peru, recently investing over US$2 billion to purchase a hydroelectric power plant. The second main trading partner is the United States (US), taking 15.2 % of Peru’s exports and supplying 20.7 % of their imports in 2016.
- Peru’s current account deficit declined significantly from 4.9 % to 2.8 % of GDP in 2016, owing to increasing export growth and lower imports. Peru’s government continues to support a free trade policy; since 2006, Peru has signed trade deals with 17 different countries including the US, Canada, China and Japan. In addition, a trade deal has also been signed with the European Union.
- Real GDP growth is expected to slow slightly in 2017 due to an anticipated lower growth rate in the mining sector and weak private investment. To support the economy as mining production slows, the government is expected to increase public investment in 2017.
- Growth projections may not be achieved if any, or a combination, of the following occur: external shocks in commodities prices, a further deceleration of China’s economic growth, unpredictability in world capital markets and the threat of tight monetary policy in the US. Raising economic growth requires structural and fiscal reforms to improve productivity, reduce the size of the informal sector and improve the efficiency of public services.
[Source: adapted from “The World Bank Country Overview: Peru”, http://www.worldbank.org/en/country/peru/overview, 17 April
2017; and “The World Factbook”, https://www.cia.gov/library/publications/the-world-factbook/geos/pe.html, 6 September 2017]
Define the term absolute poverty indicated in bold in the text (paragraph [2]).
Define the term foreign direct investment (FDI) indicated in bold in the text (paragraph [4]).
Explain two reasons why Chinese companies may have been attracted into Peru (paragraph [4]).
Using a poverty cycle diagram, explain how increased foreign direct investment might break the cycle (paragraph [4]).
Using information from the text/data and your knowledge of economics, evaluate the factors that may allow Peru to continue to achieve high rates of economic growth in the future.
Markscheme
Example of poverty cycle (any cycle, starting and ending with an indicator of poverty, is acceptable):
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.
Responses may include:
- definition of economic growth.
Factors affecting economic growth:
- deregulation should increase investment (paragraph [1]) and so will lead to an increase in AD and thus economic growth, however, there are the dangers of pollution and poorer working conditions (paragraph [1])
- growth could be limited if loose environmental regulations cause, for example, pollution that harms health and therefore workers' productivity (paragraph [1])
- growth in employment and income (paragraph [2]) should lead to increases in consumption and so AD, however, this will only continue if the economy keeps growing
- higher mining export volumes (paragraph [3]) should continue to provide economic growth, however, this will be dependent on continued growth in the global economy
- FDI (paragraph [4]) could fill the investment gap, shifting AD and increasing economic growth, however, FDI has several negative aspects and its continuation will be dependent on the situation in the economies providing it, eg “deceleration of China’s economic growth (paragraph [7])
- free trade (paragraph [5]), with continued trade surpluses, will provide continued economic growth, but is once again dependent on the state of the world economy and on the trade policies of other countries
- increased public investment (paragraph [6]) should create economic growth, but will it be enough to outweigh “the lower growth rate in the mining sector and weak private investment” (paragraph [6])
- external shocks in commodities prices (paragraph [7]) could negatively affect future export earnings
- a further deceleration of China’s economic growth (paragraph [7]) could affect demand for commodities from the main trading partner and FDI (paragraph [4])
- unpredictability in world capital markets (paragraph [7]) could affect investment
- the threat of tight (contractionary) monetary policy in the US (paragraph [7]) could lead to a slowdown in the US economy and hence reduce the demand for commodities from the second main trading partner (paragraph [4])
- tight (contractionary) monetary policy in the US (paragraph [7]) could lead to an outflow of savings to the US, reducing funds available for investment in Peru.
To reach level 3, students must be aware of the particular situation in the economy of Peru, not just present a discussion of growth factors in general.
Examiners report
The majority of candidates could reach at least L1 by indication a specific monetary level of daily income but many still list the out-of-date figure “US$1 a day”.
This is a common and hence well-attempted definition.
Most candidates could identify 2 reasons, but fewer could provide sufficient explanation. As it is often the case for questions without a diagram, candidates were unsure of the extent to which they needed to elaborate on the two reasons and often over-elaborated.
There were lots of variations of the poverty cycle and most were appropriate. Often, candidates struggled to explain how FDI would break the cycle and instead explained their poverty cycle which was not required by the question.
“Evaluate” requires candidates to make an appraisal by weighing up the strengths and limitations. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
The candidates who had the most difficulties with this question were those who did not read the question carefully enough and wrote on the policies which contributed to economic development in Peru. Many also discussed the policies which the government could adopt to promote growth.
As for other parts (d), some candidates just repeated the text and failed to use economic theory to explain the impact on future levels of economic growth. An AD/AS framework could have helped many achieve higher marks. Some candidates could not achieve L3 due to a lack of evaluation. Those who reached L3 were often those who considered factors that might hinder economic growth in the future such as the price volatility or depletion of minerals and other primary products.
