| Date | May 2021 | Marks available | 4 | Reference code | 21M.2.SL.TZ0.4 |
| Level | Standard level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 4 | Adapted from | N/A |
Question
Economic growth in Laos
- The construction of the China–Laos railway is a major contributor to Laos’ economic growth. This landlocked country is projected to grow by 7 % this year, which is a good achievement for a country still experiencing low incomes and over-reliance on the agricultural sector.
- The 420 kilometre railway line will connect China to Laos and link Southeast Asian countries all the way to Singapore. The railway will improve the communication between resource-rich Laos and its neighbours, all of which have larger markets. This will increase both trade and tourism in the region. With the help of Chinese investment, the Lao government also plans to increase its hydroelectric power generation capacity in the next 12 years. This could mean a total of 429 dams on the Mekong River by 2030. However, environmentalists say that the excessive construction of dams could destroy the ecosystem.
- Five years ago, the Lao government introduced a policy to privatize state-owned property, designed to attract foreign direct investment (FDI). The privatization policy was especially appealing to Chinese investors and has succeeded in increasing FDI in Laos. The Lao government sold a share in its telecommunication industry to a Chinese firm, which helped launch Laos’ first satellite. This not only improved internet connection quality for communication purposes but also made health services and education more accessible in rural areas, where 61 % of the labour force work as farmers.
- The Lao government hopes that Chinese investment will not only introduce technological innovations but will also bring jobs that would help many of the citizens of Laos to break out of the poverty trap. Six Chinese construction companies are now carrying out construction along the entire railway track and are employing a total of 50000 workers, although these are mostly Chinese.
- Many are concerned that Laos may be heading for a debt crisis with so much investment financed through borrowing. The construction of the railway will cost an estimated US$6 billion, which will be 60 % funded by foreign investors. The governments of China and Laos will finance the remaining 40 %. Laos’ total commitment to the building of this infrastructure is US$840 million. Around US$500 million of that amount will come from loans from China. The remaining amount will be drawn from the government budget.
[Source: Foreign Policy In Focus, 2018. China’s Belt and Road Hits Bumps in Laos. Available at: https://fpif.org/chinas-belt-and-road-hits-bumps-in-laos/ [accessed 19 January 2019]. Source adapted.
Radio Free Asia, 2018. China’s Fast Track to Influence: Building a Railway in Laos. Available at: https://www.rfa.org/english/news/special/laoschinarailway/ [accessed 25 October 2018]. Source adapted.]
Define the term economic growth indicated in bold in the text (paragraph [1]).
Define the term poverty trap indicated in bold in the text (paragraph [4]).
Using an AD/AS diagram, explain how the construction of the China–Laos railway will contribute to economic growth in Laos (paragraph [1]).
Using an externalities diagram, explain why the construction of dams on the Mekong River might lead to market failure (paragraph [2]).
Using information from the text/data and your knowledge of economics, evaluate the role of foreign direct investment in promoting economic development in Laos.
Markscheme
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For AD/AS, the vertical axis may be price level or average price level or general price level.
The horizontal axis may be real output, real national output, real national income, or real GDP. Any abbreviation is acceptable. A title is not necessary.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For an externalities diagram, the y axis may be labelled price or P or costs or benefits, and the x axis labelled quantity or Q.
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.
Answers may include:
- definition of foreign direct investment
- definition of economic development.
Strengths of FDI/MNCs may include:
- help reduce the over-reliance on the agricultural sector (paragraph [1]) where income is low
- provide employment and hence break the poverty trap (paragraph [4])
- Laos is landlocked so rail project facilitates cheaper transport of goods and services and raw materials (paragraph [1])
- potential to develop tertiary sector with tourism and exposure to “larger markets” (paragraph [2])
- foreign investment leads to economic growth (paragraph [1])
- brings efficiency and expertise/technology (paragraph [4])
- MNCs provide training
- MNCs may help finance infrastructure (paragraph [5])
- MNCs help generate tax revenue.
Limitations of FDI/MNCs may include:
- many of the jobs created do not go to the locals (paragraph [4])
- profits may be repatriated
- MNCs may influence local politics and taxation policies
- spending on infrastructure to attract MNCs may mean that less is spent on health and education (paragraph [5])
- a lot of infrastructure needs to be financed by loans to attract MNCs which may lead to debts (paragraph [5])
- MNCs may take advantage of less strict labour and environment protection laws
- rail project/dams may lead to negative externalities (paragraph [2]).
Any reasonable evaluation.
Examiners report
Most candidates scored Level 2 on both definitions.
A few lost 1 mark in this question because they left out the term 'real'.
Most candidates scored Level 2 on both definitions.
Most could give a clear and concise definition of this term.
This question did not seem to pose candidates any problems, with a good mix of increases in LRAS and AD, both adequately supported.
Some candidates had issues with the labelling of the curves (reversed MSC and MPC or confused MPB/MSB with MPC/MSC) but otherwise most did very well for this question. Some missed 1 mark because they did not explain market failure satisfactorily using the diagram.
Most responses achieved marks in the mid/top Level 2 mark band. The nature of FDI and economic development were usually understood and explained adequately. Those answers provided a balanced view on the impact of FDI and MNCs in terms of development. Unfortunately, too few made sufficient use of the text to achieve Level 3. Very few candidates considered common unit 4 issues such as the lack of diversification, over-reliance on the primary sector or indebtedness in their answers. Lower-achieving responses were usually those with insufficient knowledge of FDI — which was generally understood as general 'investment'.
