4.4 Economic Integration Questionbank

Botswana is a landlocked country in Southern Africa with a population of approximately 2.35 million. Since its independence, Botswana has transitioned from one of the poorest countries in the world to an upper-middle-income country, mainly due to its diamond mining industry. Diamonds account for roughly 80% of export earnings and about a third of Botswana’s gross domestic product (GDP). However, the country faces challenges such as a high rate of unemployment and one of the highest levels of income inequality in the world, with a Gini coefficient of around 0.53.

There are attempts to diversify the economy away from diamonds, focusing on sectors such as tourism, agriculture, and financial services. In 2022, the government increased infrastructure spending to boost employment and reduce poverty. This increased government expenditure was partially financed through higher VAT rates, from 12% to 14%, and reforms in corporate taxation.

To provide further context, the following tables offer data on Botswana’s recent macroeconomic indicators, diamond market data, and tax structure.

Table 1: Selected Macroeconomic Data for Botswana (2021–2022)

Notes:
• “P” stands for Botswana pula.
• Real GDP is adjusted for price changes.

Table 2: Diamond Market Data for Botswana

Table 3: Tax Rates in Botswana

In 2022, a local manufacturing firm purchased machinery worth P1.14 million (including VAT). The government believes that raising corporate tax or further altering VAT may affect both domestic and foreign investment.

A country, Econland, has been experiencing significant trade imbalances, with a persistent current account deficit. The country has an overreliance on imported manufactured goods while its primary exports include raw materials such as agricultural produce and minerals. The government has introduced a protectionist policy to restrict the importation of specific goods by imposing tariffs and quotas.

In addition to trade imbalances, Econland faces sluggish GDP growth, increasing income inequality, and fluctuating tax revenues. The government is evaluating fiscal and monetary policies to stimulate growth while maintaining economic stability.

Table 1: Trade Balance of Econland (in USD Million)

Table 2: Price Elasticity of Demand (PED) for Selected Imported Goods

Table 3: Tax Revenue and GDP Growth in Econland

Table 4: Gini Coefficient and Income Distribution

Study the following extract and answer the questions that follow. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Australia and Japan 1 In 2018, Australia signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)*. The agreement creates the third largest free trade area in the world, covers nearly 500 million people and is worth more than US$12 trillion. The members of the agreement have stated that economic integration and free trade is important to help foster good political relations and inclusive growth for all nations. 2 The trade agreement will aim to gradually eliminate most trade protection within the member countries. The agreement will see tariffs eliminated for Australian cheese and beef exports to Japan, and increased quotas for the export of rice to Japan from 4400 to 8400 tonnes. Nikkei Asian Review reported that "Fast-food restaurants in particular are embracing the import as a way to cut costs to cope with rising wages." Additionally, Japanese food manufacturers will be able to lower production costs for rice-based meals and benefit from increased stability of input prices. The benefits from the agreement for Japan's economy are projected to exceed US$70 billion, but some industries would be negatively affected. 3 Japanese farmers are worried about the increase in imported food from Australia. Furthermore, the Japanese government is concerned about the effects of the CPTPP on Japan's food self-sufficiency—Japan relies on other countries for over 60% of its food. In response to these concerns the Japanese government has offered support for domestic farmers to diversify production into other crops. The government also plans to subsidize the rice farmers through the initial phase of lowering trade barriers. 4 The agreement is said to be worth more than US$37 billion to Australian agricultural exports. It is hoped that CPTPP and the falling value of the Australian dollar will help Australia to reduce its current account deficit, but some economists have argued that this can take a long time. According to some estimations, the short-run price elasticity of demand (PED) for Australian exports is 0.2 and the short-run PED for imports in Australia is 0.4. However, the long-run PED for Australian exports is 1.1 and the long-run PED for imports in Australia is 1.3. 5 There have also been concerns about the CPTPP from trade unions in Australia. They argue that it deregulates the labour markets and gives corporations from other countries an ability to take legal action against governments for implementing laws that raise wages or protect the environment, if the foreign corporation can prove that the law hurt their commercial interests. One university lecturer said that the future costs to the taxpayer could be significant if foreign companies take the Australian government to court. 6 The trade agreement would allow workers from other countries to work in Australia without employers being required to check if Australian citizens are available to fill the jobs before the migrant workers are employed. It is estimated this may risk 39000 jobs in Australia. Furthermore, environmental activists have expressed concerns that the negative environmental and social effects of the agreement have not been well considered. This may lead to conflicts with Australia's commitment to the United Nations' Sustainable Development Goals. * The CPTPP includes eleven member countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

Nigeria and Ghana

Nigeria and Ghana are neighboring countries in West Africa.

Nigeria

Nigeria's economy is dominated by its oil sector. It is Africa's largest oil producer. Oil production and related activities contribute about 65% of gross domestic product (GDP), approximately 75% of government revenue and over 90% of the country's exports. Natural gas contributes an additional 7% to exports. Subsistence agriculture remains crucial for most Nigerians' livelihoods, yet the country imports significant quantities of its food.

Since 2007, the Nigerian government has secured substantial loans from China, the World Bank, African Development Bank, and various international partners to develop its infrastructure. The global oil price crash of 2014-2015 severely impacted economic growth. Particularly, declining oil prices during this period reduced GDP growth to 2.7% in 2015, causing numerous infrastructure projects to be suspended.

The recent volatility in oil prices and sluggish growth in non-oil sectors have dampened growth prospects. Nigeria has responded with various policy measures, including reducing fuel subsidies and implementing import restrictions. Fuel subsidies have been significantly reduced, though not eliminated. Corruption, particularly in the oil sector, remains a persistent challenge.

Ghana

Ghana's economy relies heavily on mining and mineral processing for export revenue. The mining sector accounts for 14% of GDP but generates over 45% of foreign exchange earnings. Ghana is Africa's largest gold producer. Additionally, Ghana has significant reserves of bauxite, manganese, and recently discovered offshore oil deposits. Despite its mineral wealth, the mining sector employs only about 1.5% of the population. Ghana typically imports about 45% of its food requirements.

A relatively high per capita GDP for the region masks significant income inequality. The Ghanaian economy maintains strong ties with regional partners through the Economic Community of West African States (ECOWAS).

Ghana's economy remains susceptible to global commodity price fluctuations and climate-related challenges. Rising costs in the mining sector, particularly in deep-level gold mining, have squeezed profit margins. Ghanaian authorities acknowledge these challenges and emphasize the need for economic diversification.

Table 1: Economic Indicators of Nigeria and Ghana

Table 2: Trade and Economic Indicators

Cuba is an island nation in the Caribbean with a long history of state-led economic policies and a continued trade embargo imposed by the United States since 1960. The Cuban economy is heavily dependent on two key sectors: sugar and tourism. Sugar has traditionally been Cuba’s largest export, accounting for over 70% of export revenues, although inefficiencies and outdated technology have constrained growth in output. Meanwhile, tourism has become an increasingly important source of foreign exchange, representing nearly 24% of the nation’s gross domestic product (GDP). However, environmental concerns have arisen from rapid growth in visitor arrivals, including water pollution and congestion in popular coastal areas.

Cuba’s real GDP grew modestly from 2021 to 2022, although high inflation and global supply chain disruptions presented serious challenges. The government has attempted some economic reforms, including allowing limited private enterprise and trying to attract modest amounts of foreign direct investment (FDI). Nevertheless, significant barriers to trade remain in place due to the decades-long embargo, as do restrictions on access to many imported goods.

The Cuban government operates a progressive tax system to finance public healthcare, education, and subsidized food programmes. Alongside this, it has announced a new subsidy plan to boost sugar production and modernize processing facilities. Policymakers hope that these measures will generate both export revenues and improved economic prospects.

Below are selected data from the Cuban economy:

Table 1: Key Macroeconomic Indicators for Cuba (2021–2022)

Table 2: Demand for Sugar in Cuba

Table 3: Tourism in Cuba

Table 4: Selected Cuban Tax Rates

South Sudan joins the East African Community

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

Trade strategies in the Philippines

For more than 20 years, the Philippines has been limiting the volume of rice it imports. However, the agreement with the World Trade Organization (WTO) that permitted these restrictions expired in 2017. In early 2019, the government replaced the quantity restrictions with tariff protection. A 35% tariff on imported rice from the Association of Southeast Asian Nations (ASEAN)* was imposed to protect the domestic rice industry in the Philippines. Following the replacement of the quota with a tariff, rice prices are expected to fall significantly. However, urban households want the president to allow rice to be imported without any tariffs to reduce food bills even further.

The poorest quintile of households in the Philippines consumes nearly twice as much ordinary rice and 20 times more National Food Authority (NFA) rice compared to the richest quintile. Rising food prices are pushing up inflation as a result of increasing salaries in urban areas. The daily minimum wage in Manila, the Philippine capital, will increase by 4.9%, the highest hike in six years, to the equivalent of US$10.11. Farming and fishing provide the livelihoods for around one-third of the labour force in the Philippines. Land reform programmes are slowly being implemented to change the current situation of unfair ownership of land and resources by a few individuals. However, uncertainty continues to discourage investment in adequate irrigation systems in the countryside. As an agricultural country, irrigation in the Philippines is very important. Improvements in the quality of infrastructure services will help cut the cost of doing business, attract more investment, and enhance productivity around the country. Food manufacturing, including food and beverage processing, remains the most dominant primary industry in the Philippines. This has become a focus in the hope of increasing farm incomes, because this part of the economy is currently dominated by big international companies. Major exports of processed fruits and nuts include mangos, pineapples, bananas, and peanuts.

The Philippine Export Development Plan (PEDP) 2018–2022 calls for boosting the export of services, increasing export competitiveness, and exploring new markets. Efforts have already been made to harmonize the country’s standards, testing, certification, and quality accreditation of products to improve trade and comply with standards in the European Union. The PEDP aims to increase the volume and value of exports by encouraging investment in production processes and supply chains. Another strategy to achieve the plan’s objective is to exploit existing and new opportunities from trade agreements.

The Philippines lacks the infrastructure needed to attract export-oriented manufacturing. To support the PEDP, the government needs to increase its spending on new airports, roads, and bridges. These public works are critical to boosting the incomes of people in poorer areas by connecting them better to Manila. To allow for this extra spending, a series of tax reforms was started: the income tax for the highest income earners has been raised from 30% to 35%, and indirect taxes have been increased.

Table 1: Trade and Economic Data for the Philippines

Table 2: Wage and Export Data

The World Trade Organization (WTO) is an international organization that oversees global trade rules and ensures smooth trade relations between nations. It plays a crucial role in trade negotiations, dispute resolution, and trade liberalization. As of 2023, the WTO had 164 member countries, accounting for 98% of global trade. One of its primary functions is to reduce trade barriers, such as tariffs and quotas, which can distort market efficiency.

In 2022, the WTO mediated a dispute between Country A and Country B, where Country A had imposed tariffs on agricultural imports from Country B. The dispute was resolved with a tariff reduction agreement. Additionally, Country A recently implemented a subsidy for domestic wheat production, affecting international trade dynamics.

Country A's economy is facing mixed economic conditions. Its GDP growth rate has slowed due to declining exports, while its government has introduced tax reforms to boost revenue. Table 1 shows the price elasticity of demand (PED) for various goods in Country A, and Table 2 presents key macroeconomic indicators.

Table 1: Price Elasticity of Demand (PED) for Selected Goods in Country A

Table 2: Key Macroeconomic Indicators of Country A (2023)

Figure 3 illustrates the market for cotton in the country of San Marcus, a small closed economy. Cotton is used as an input in the San Marcus textile industry. Quantity is in thousands of kilograms (kg).

The Government of San Marcus decides to provide a subsidy equal to $8 per kilogram to its producers of cotton.

San Marcus now joins the World Trade Organization (WTO) and agrees to slowly liberalize trade, becoming an open economy.

The world price for cotton is $2 per kg. The WTO permits the government of San Marcus to maintain the$8 subsidy.