| Date | May 2019 | Marks available | 4 | Reference code | 19M.2.HL.TZ0.3 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 3 | Adapted from | N/A |
Question
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]
Define the term interest rates indicated in bold in the text (paragraph [5]).
Describe the nature of foreign direct investment (paragraph [6]).
Using information from the text, explain two reasons why Chinese multinational corporations (MNCs) are investing in Bolivia.
Using an externalities diagram, explain how the Chinese infrastructure projects have caused negative externalities (paragraph [6]).
Using information from the text/data and your knowledge of economics, discuss the possible effects of Chinese involvement on economic growth and development in the Bolivian economy.
Markscheme
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.
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
“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:
- definitions of economic growth and economic development
- definition of FDI.
Positive outcomes for growth and/or development:
- increased export markets (paragraph [1])
- lower prices and choice for domestic consumers from Chinese imports
- improvements in infrastructure (paragraph [3])
- continued growth in the economy (paragraph [5])
- improvements in infrastructure lowering input costs (paragraph [6])
- possibility of increased domestic employment
- filling of the savings gap
- breaking the poverty cycle
- technology transfer.
Negative outcomes for growth and/or development:
- dependency on China (throughout)
- worsening current account deficit (paragraph [2])
- problems of indebtedness (paragraph [3])
- minimal opportunity for increasing local employment as Chinese bring their own labour (paragraph [5])
- problems associated with commercial loans (paragraph [5])
- problems associated with tied aid – contracts only to Chinese companies (paragraph [5])
- opportunity cost of interest payments (paragraph [5])
- Chinese interests are advanced before Bolivian growth and development (paragraph [5])
- negative externalities (paragraph [6])
- overexploitation of Bolivia’s natural resources (paragraph [7])
- possible loss of control of assets and infrastructure.
Any reasonable discussion.
To reach level 3, students must be aware of the particular situation in the Bolivian economy, not just present a discussion of growth and development factors in general. They must also present a balanced evaluative approach between both growth and development.
Examiners report
Most students were able to define this term accurately.
Most students received 1 mark but a significant number failed to identify two points from the list in the markscheme to obtain 2 marks.
There were some excellent answers where candidates identified two reasons from the text and explained them effectively. Other candidates, however, scored badly as their answers addressed the reasons why China (the country) invests in Bolivia rather than the MNCs. In other instances students copied sections of the text but with no added value.
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.
Many candidates did not answer the question with few making a clear distinction between growth and development. The focus of a large number of answers was on how growth could be achieved, not the impact of the involvement of China on growth and development in Bolivia. The focus of many candidates was on growth, often ignoring development or simply stating ''....leads to growth and therefore development''. There were too many assertions/statements without reasoning or justification. This resulted in unbalanced and/or superficial answers, which resulted in a L1 or low L2 mark.
