2.8 Market failure - externalities, common pool resources, public goods, asymmetric information Questionbank

Economic Dynamics in Angola

Angola, located in southwestern Africa, is one of the continent’s largest oil producers, with over 90% of its exports tied to crude oil. In recent years, its real GDP growth has been volatile, fluctuating between –1.2% and 2.4% annually from 2018 to 2022, reflecting significant dependence on global energy prices. Despite this oil dominance, the Angolan government has embarked on diversification initiatives to stabilize the economy and reduce vulnerability to external shocks.

Inflationary pressures have been a persistent challenge. In 2021, annual inflation reached 22%, eroding household purchasing power, particularly among lower-income groups. The Banco Nacional de Angola has responded with tight monetary policy, raising benchmark interest rates to 20% in 2022 to curb excess liquidity. Meanwhile, high food costs and depreciation of the kwanza (Angola’s currency) continue to push up import prices.

Angola’s external debt stood at approximately US$52 billion by the end of 2022, prompting government measures to manage debt-service obligations. The nation has engaged in negotiations with international organizations to secure favorable terms. While these arrangements have enabled the financing of infrastructure projects, critics argue that the burden of debt repayment poses risks to future fiscal stability.

In the domestic arena, the government introduced targeted subsidies for agricultural inputs such as fertilizer and seeds to incentivize local food production. However, some policymakers and economists question the efficiency of these subsidies, citing the risk of resource misallocation and corruption. At the same time, partial privatization of several state-owned enterprises aims to encourage private sector investment and improve overall productivity.

Beyond the oil sector, Angola’s economy relies on diamonds, fisheries, and agriculture. In 2022, Angola exported approximately US$1.3 billion worth of diamonds, representing a crucial revenue source after oil. To further diversify, the government has prioritized investments in education and health to strengthen human capital, hoping to spur growth in technology-driven and service-based industries. Infrastructure expansion, especially in rural areas, is underway to bridge the urban-rural divide and stimulate market integration.

International trade relationships are also undergoing transformation. While Angola remains an active member of the Organization of the Petroleum Exporting Countries (OPEC), it has recently signed trade facilitation agreements to reduce import tariffs on selected capital goods. This move aims to attract foreign direct investment (FDI) in manufacturing, but concerns persist about local firms’ competitiveness, given power supply challenges and limited access to finance. Angola’s central bank manages the exchange rate of the kwanza, occasionally intervening in currency markets to stabilize fluctuations arising from volatile oil earnings.

Socioeconomic disparities are still evident, with an estimated Gini coefficient of 0.54 in 2021. Although the government has expanded health and education programs, rural communities remain underserved. Youth unemployment, recorded at 28% in 2022, underscores the need for better job creation policies and entrepreneurial support. The success of Angola’s economic reforms will likely hinge on sustained political commitment, effective resource management, and the gradual diversification away from oil-dependence toward a resilient, broad-based economy.

Table 1: Angola’s Selected Macroeconomic Indicators (2018–2022)

Table 2: Private Sector and Export Data for Angola (2018–2022)

Case Study: Germany’s Economy and Energy Transition in the Early 2020s

Germany, as Europe’s largest economy, has historically relied on its robust industrial sector, strong exports of machinery and automobiles, and high-value-added manufacturing. During the early 2020s, it faced a combination of opportunities and challenges. On the one hand, demand for German exports remained high in global markets, supported by a reputation for quality engineering. On the other hand, supply chain disruptions in semiconductors and rising energy prices, partly triggered by shifts in international energy markets and global uncertainties, weighed on industrial output.

In 2022, Germany recorded a nominal GDP of US$4.4 trillion, with real GDP growth at 1.8% a deceleration from the 2.5% reported in 2021. Average inflation rose to 7.5% in 2022, up from 3.2% the previous year. Some macroeconomists attributed this spike in inflation to a combination of higher global commodity prices, labor shortages, and an expansionary fiscal stance aimed at countering pandemic-related slowdowns. The government’s budget deficit reached 3.8% of GDP in 2022, spurred by increased health expenditures and targeted subsidies for certain industries, especially those transitioning to greener production methods.

A core focus of German policy has been the energy transition (“Energiewende”), which aims to phase out nuclear power while boosting renewable energy sources such as wind and solar. The government introduced new subsidies for households installing solar panels and for firms adopting more energy-efficient processes. Although these measures have helped reduce emissions, critics argue they impose higher short-term production costs on businesses. In 2022, approximately 46% of Germany’s electricity came from renewables, illustrating a notable increase compared to 35% five years earlier. Nevertheless, some economists worry about energy security, cautioning that reliance on imported natural gas may expose the economy to price volatility.

In microeconomic terms, the government has also promoted a minimum wage policy to address income inequality and stimulate productivity within the service sector. In 2021, the minimum wage was increased by almost 10%, affecting over 4 million workers. Critics claim that small businesses may struggle with higher labor costs, while proponents emphasize that increased household income boosts consumption. Moreover, with Germany’s aging population, policymakers have launched campaigns to attract high-skilled migrant labor to fill gaps in advanced manufacturing and technological innovation.

Internationally, Germany’s trade relationships with European Union partners remain pivotal. Its exporters benefit from lower intra-EU trade barriers, and the euro acts as a common currency among 20 member states. However, some German manufacturers report that demand is influenced by exchange rate fluctuations with non-eurozone trading partners, particularly the United States and China. Before 2022, the euro experienced periods of depreciation against the U.S. dollar, making German exports more competitive globally.

With sustainability goals on the horizon, Germany has advanced plans to tax carbon-intensive production and invest in green infrastructure. Early results suggest an uptick in purchases of electric vehicles (EVs). A government-backed EV subsidy, set at €4,500 per vehicle, significantly lowered the price for consumers and led to a 30% increase in EV registrations from 2021 to 2022. Automotive firms quickly adapted supply chains to meet demand, though rising lithium and battery costs introduced uncertainties. In parallel, the government occasionally intervenes in energy markets to stabilize electricity prices and support households facing higher utility bills.

Many German economists expect moderate growth prospects in the coming years but emphasize caution due to potential external shocks such as geopolitical tensions and global financial volatility. The labor market, historically strong with an unemployment rate around 5.3% in 2022, could see pressure if foreign demand weakens. Nevertheless, policymakers remain focused on balancing green initiatives, fiscal prudence, and social welfare reforms. Their strategy includes maintaining Germany’s status as a leading export-driven economy, advancing climate objectives, and sustaining social protections.

Table 1: Germany’s Selected Macroeconomic Indicators

Table 2: Germany’s Energy and EV Transition Indicators

ECONOMIC REALITIES AND POLICIES IN BANGLADESH

Bangladesh is a rapidly developing country in South Asia, recognized for its thriving ready-made garment (RMG) industry, which accounts for over 80% of export earnings. Government reforms since the early 2000s, aimed at boosting export competitiveness, have led to steady gains in real GDP. For instance, between 2019 and 2022, Bangladesh’s real GDP growth averaged 5.2% annually. However, persistent challenges such as high rural poverty rates (officially at 20.1%, with extreme poverty at 10.5%) and vulnerability to climate risks continue to threaten inclusive growth.

Remittances form a major pillar of the economy, totaling over US$24 billion in 2021. Inflows from the Bangladeshi diaspora support household consumption and reduce external vulnerabilities, contributing to the country’s foreign currency reserves. Even so, the government has been concerned about maintaining exchange rate stability, especially in light of global inflationary pressures and supply chain disruptions, which have driven up the cost of essential imports like fuel and machinery. To cope with rising expenditures on food and energy, the government raised tariffs on luxury goods while restricting administrative barriers for essential commodity imports.

On the microeconomic front, the government recently introduced a consumption tax on sweetened beverages to curb rapidly rising obesity rates. Local bottlers initially protested the policy, arguing it would reduce their profits and force layoffs in urban factories. Yet public health advocates insist that the potential long-term social benefits reduced health-care costs and a healthier workforce outweigh the short-term economic costs. Meanwhile, targeted subsidies on fertilizers aim to support agricultural productivity; farmers in the northern regions have long claimed that lack of affordable inputs restricts their ability to increase crop yields and incomes.

Bangladesh’s push for infrastructure improvements particularly in roads, ports, and energy has attracted modest but growing foreign direct investment (FDI), totaling around US$2.8 billion in 2022. Corporate tax incentives are given to firms that establish manufacturing plants in special economic zones, spurring output in electronics and pharmaceuticals. Yet the domestic labor force often lacks specialized skills, leading to high underemployment. The government’s Skills for Employment Initiative, launched in 2020, aims to address these gaps by providing technical training and apprenticeships to youths aged 18–30.

Concurrently, there are ongoing debates on reducing import tariffs further to encourage greater participation in regional trade blocs. Economists highlight that a more liberalized trade environment can improve access to cheaper raw materials for local industries. Critics, however, worry that swiftly removing tariffs might destabilize nascent domestic firms already grappling with competition from established foreign producers.

Bangladesh faces significant environmental and developmental hurdles. Climate change-related floods frequently destroy crops, thereby exacerbating rural poverty. Government officials have begun working with international donors to finance climate-resilient infrastructure elevated roads and flood barriers while also supporting microfinance programs targeted at poor households. These policies seek to break the vicious cycle of poverty, whereby low incomes lead to low investments in education and productivity, perpetuating underdevelopment. Early signs suggest that expanded access to small loans, particularly for female entrepreneurs, is reducing extreme poverty in several flood-prone districts.

Despite these efforts, inequalities persist. In urban areas, the Gini coefficient remains relatively high, reflecting income gaps within the service sector. Doctors and engineers earn significantly above the national average, boosting demand for private education that many poor households cannot afford. The government has tried to bridge this inequality by directing additional funds to public schools, focusing on science and technology curricula.

The prospects for Bangladesh hinge on effective policy coordination. Balancing short-term macroeconomic stability such as keeping inflation below 8% with long-term structural reforms in education, infrastructure, and trade policy remains a central challenge. The government’s ability to manage environmental risks, attract investment, and provide social protection will greatly influence whether Bangladesh can transition from a lower-middle-income to a higher-income country in the coming decades.

Table 1: Selected Macroeconomic Indicators for Bangladesh (2019–2022)

Table 2: Development and Social Indicators for Bangladesh

Japan–European Union Economic Partnership Agreement (JEEPA)

1. In July 2017, the Japan–European Union Economic Partnership Agreement (JEEPA) was announced and it may come into force in 2019. Jointly, Japan and the European Union (EU) currently account for 28 % of global gross domestic product (GDP). The trade agreement could raise the EU’s exports to Japan by 34 % and Japan’s exports to the EU by 29 %. Economists say that this trade agreement marks a determined effort to combat rising protectionism and sends a powerful signal that cooperation, not trade protection, is the way to tackle global challenges.

2. The largest benefit to Japan will be for Japanese car manufacturers, as Europe will gradually lower tariffs from 10 % on Japanese cars. Car tariffs are a big concern for Japanese car manufacturers, who struggle to compete with South Korean car manufacturers. South Korean cars are sold to the EU tariff-free thanks to a free trade agreement signed in 2011. Within Europe, car manufacturers are one of the largest sources of jobs. Car manufacturers in the EU are concerned that cutting tariffs on car imports from Japan may lead to a large increase of Japanese cars into the European market.

3. The trade agreement will also resolve non-tariff barriers, such as technical requirements and regulations. More importantly, however, the EU and Japan will make their environmental and safety standards on cars the same, which will make trade easier.

4. Japanese politicians have been defending their relatively inefficient farmers for a long time. Now, Japan will lower tariffs on European meat, dairy products and wine, cutting 85 % of the tariffs on food products coming into Japan. This includes removing the current 30 % tariff on some European cheeses, such as cheddar and gouda cheese. However, imported camembert cheese will face a quota. This may be because Japan produces some camembert cheese.

5. JEEPA is particularly alarming for United States (US) beef and pork farmers because Japan has been the biggest export market for US beef and the second biggest export market for US pork. Any preferential tariff that EU farmers receive will make it much tougher for American farmers to sell meat in Japan.

6. With this trade agreement, the EU and Japan are trying to promote the values of economic cooperation and environmental conservation, which are both important for long-term economic growth and sustainability. However, JEEPA faces significant challenges because it will have to be passed by the Japanese Parliament, the European Parliament and European national governments. There is no guarantee that all governments will agree to the economic partnership.

Source: adapted from The Japan-EU Trade Agreement: Pushing Back Against Protectionism, http://globalriskinsights.com, 15 July 2017; Japan-EU trade agreement may hurt U.S. meat producers, by Katherine Hyunjung Lee, Jul 12, 2017, _Medill_ _News Service_, https://dc.medill.northwestern.edu; and A new trade deal between the EU and Japan, _The Economist_ (London, England), Jul 8th 2017, https://www.economist.com/finance-and-economics/2017/07/08/a-new-trade-deal-between-the-eu-andjapan. © The Economist Newspaper Limited, London, July 8th 2017

Pakistan’s Economic Recovery Challenges

Pakistan faces persistent economic challenges as a developing nation with a rapidly growing, youthful population. The country’s fiscal position remains precarious, characterized by a large budget deficit fueled by rising defense spending and debt servicing costs, with interest payments consuming approximately 40% of total government revenue. This fiscal strain is further aggravated by persistent current account deficits and a dependence on external financial assistance from international institutions.

In response, the Pakistani government has engaged with the International Monetary Fund (IMF) and other multilateral lenders. Under its latest IMF bailout program, Pakistan has committed to a set of structural reforms, including the privatization of state-owned enterprises to improve efficiency, reforming energy subsidies to lower government expenditure, enhancing tax collection mechanisms to increase revenue, tightening monetary policy to control inflation, and maintaining a market-determined exchange rate to stabilize the external sector.

Government officials stress that international financial support is critical for economic recovery, as it restores investor confidence, attracts Foreign Direct Investment (FDI), and facilitates access to additional funding from institutions like the Asian Development Bank (ADB) and World Bank. However, critics argue that IMF programs often lead to austerity measures that can slow economic growth and disproportionately impact low-income households.

Pakistan has a long history of engagement with the IMF, having participated in more than twenty IMF programs since the 1980s. A recurring pattern has emerged: temporary improvements in external balances followed by economic reversals, raising questions about the effectiveness of IMF-led reforms and Pakistan’s ability to sustain long-term economic stability.

Beyond macroeconomic stabilization, development economists emphasize the need for human capital investment to unlock Pakistan’s demographic dividend. Key policy recommendations include expanding education and vocational training programs to improve workforce productivity, promoting gender equality in labor markets to increase economic participation, and encouraging youth employment initiatives to leverage Pakistan’s young population.

While multilateral development banks support initiatives like green energy projects, infrastructure development, and digital transformation, concerns remain about policy implementation, governance challenges, and environmental sustainability. Some critics argue that economic stabilization efforts often overshadow long-term development goals, leading to an ongoing policy dilemma: how should Pakistan balance short-term fiscal stability with long-term economic development?

Table 1: Pakistan’s Government Expenditure and Debt Servicing

Table 2: Foreign Direct Investment and Current Account Balance in Pakistan