IB Economics 4.9 Barriers to Economic Growth and Economic Development Questionbank

(i) Using the text/data provided and your knowledge of economics, recommend a policy which the government of Albania could implement in order to reduce unemployment.

Economic Developments and Challenges in Ethiopia

Ethiopia, located in the Horn of Africa, has undergone rapid economic transformation in recent years. From 2015 to 2022, the country’s real GDP growth averaged approximately 7.5% per annum, largely driven by an expansion in the services sector and increased investment in infrastructure. Coffee remains Ethiopia’s largest export commodity, accounting for about 25% of total export earnings. Yet, recurring droughts, coupled with a high population growth rate of nearly 2.7% per year, have heightened concerns about food security and rural poverty.

Government programs, such as the Growth and Transformation Plans (GTP I and GTP II), have prioritized industrialization, infrastructure development, and agricultural modernization. Although these programs stimulated some growth in the manufacturing sector, limited foreign currency reserves and inflationary pressures have posed major challenges. Ethiopia’s inflation rate peaked at around 35% in 2021 due to a combination of supply shocks, global commodity price increases, and expansionary monetary policy. The National Bank of Ethiopia has since adopted tighter monetary measures to reduce inflation. However, small businesses complain that tighter credit availability hinders their operations.

Despite sustained growth, Ethiopia’s Human Development Index (HDI) remains relatively low, indicative of widespread poverty and inequality. An estimated 22% of the population lives below the national poverty line, while rural areas struggle with underemployment and limited access to clean water. The government has attempted to address these issues through rural electrification programs, improvements in primary education, and targeted social protection schemes. Nevertheless, inequality persists, and rising urban living costs make life difficult for low-skilled workers in cities. Furthermore, frequent currency devaluations have increased the cost of imported inputs for domestic industries, prompting calls for greater export diversification beyond coffee and traditional agricultural products.

Ethiopia has also sought to enhance its global economic integration by reducing tariffs on specific manufacturing inputs and negotiating free trade agreements within regional blocs. These efforts, officials argue, accelerate the country’s transition from a largely agrarian economy to a more diversified one, while attracting foreign direct investment (FDI) into industrial parks. However, bureaucratic bottlenecks and limited infrastructure in some regions—especially inadequate road and rail networks—remain obstacles to realizing Ethiopia’s transformative goals.

Table 1: Selected Macroeconomic Indicators (2018–2021)

Table 2: Poverty Indicators and Development Measures

Solana is an emerging agricultural economy in Southeast Asia with a population of approximately $35$ million. While the country has successfully industrialized its urban centers, the rural regions remain heavily dependent on rice cultivation, which provides employment for nearly $40\%$ of the labor force. Rice is not only a dietary staple but also a culturally significant commodity. However, Solana's domestic rice farmers face significant pressure from large-scale exporters in neighboring countries, where production costs are lower due to favorable climates and advanced irrigation technologies.

In recent years, the Solanian government has prioritised food security and the protection of rural livelihoods. To achieve this, they have moved away from free trade in the rice sector. In $2023$, following a period of high import volumes that depressed local prices, the Ministry of Agriculture introduced a strict import quota on rice. This policy aimed to stabilize domestic prices and encourage local production, though it sparked debates regarding its impact on urban poverty and international trade relations.

The following tables provide data on Solana’s macroeconomic indicators and the domestic rice market.

Table 1: Selected Economic Data for Solana ($2022$–$2023$)

Table 2: Quarterly Domestic Rice Market Data in Solana

Table 3: Solana Rice Trade Policy Data ($2023$)

Note: Assume Solana is a small open economy and a price-taker in the global rice market.

Use the diagram below for the relevant part.

Poland is a country in Central Europe with a population of approximately $38$ million. Its membership in the European Union (EU) has contributed to strong economic ties with other European nations. In recent years, Poland has experienced both robust economic growth and rising inflationary pressures. While unemployment remains low, concerns about income inequality have drawn the government’s attention.

Poland is also one of the largest producers of apples in the EU, exporting a significant portion of its harvest to other European countries, especially Germany. However, rising production costs and shifting demand conditions have affected both domestic producers and international consumers of Polish apples. Discussions surrounding potential government interventions include tax policy changes, labor market incentives, and expanded social welfare programs. The statistics below provide insights into macroeconomic performance, apple market dynamics, taxation, and household consumption behavior in Poland.

Table 1: Selected Macroeconomic Data for Poland

Table 2: Apple Market Data (Exports to Germany)

Table 3: Corporate Taxation in Poland ($2022$)

Cambodia’s Economic Transition

Cambodia, located in Southeast Asia, has experienced significant economic transformation over the past decade. Prior to $2018$, its economy relied heavily on the garment sector and agriculture, but more recently, rapid growth in tourism, microfinance, and construction has contributed to gross domestic product (GDP) expansion, which averaged about $6.8\%$ annually from $2018$ to $2021$. Despite this robust growth, pockets of poverty remain, and the government has promoted both infrastructure development and targeted social welfare policies to reduce rising income inequality.

One of the main drivers of growth is the garment industry, accounting for over $65\%$ of total merchandise exports in $2021$. However, environmental concerns have arisen due to waste disposal and water pollution from garment factories. In response, the Ministry of Environment has tightened factory inspection procedures and is considering a tradable (emissions) permits scheme for large industrial polluters. Although Cambodia’s capacity to implement environmental regulations is modest, proponents argue that clearer standards could reduce negative externalities and encourage industries to adopt greener technologies.

Tourism has also become a vital component of the economy, comprising about $26\%$ of total service exports before recent global downturns affected international travel. In $2021$, over $1.3$ million visitors arrived, a sharp decline compared to prior years, but the authorities anticipate a rebound as global travel normalizes. To diversify income, the government supports small and medium enterprises (SMEs) through microfinance programs, focusing on rural households engaged in hospitality or artisanal crafts. Critics maintain that high microfinance interest rates can trap borrowers in debt, underscoring the need for regulatory oversight and financial literacy programs.

Monetary policy in Cambodia is complex, as the local currency (riel) circulates alongside the US dollar. Over $70\%$ of transactions are dollarized, reducing the National Bank of Cambodia’s ability to influence the money supply. Nonetheless, the government has periodically intervened in currency markets to limit volatility in the riel exchange rate. Inflation rates declined from a peak of $3.8\%$ in $2019$ to $2.7\%$ in $2021$, partly due to global factors and stable domestic demand.

Fiscal policy has emphasized infrastructure, particularly rural roads and modernizing the energy grid. Officials claim these investments will enhance productivity and attract foreign direct investment (FDI), which reached US$ $3.2$billion in$2021$. However, concerns persist about rising external debt levels, mainly financed by bilateral loans. The government maintains some subsidies on electricity and fertilizer to support agricultural producers, but budget pressures have led to debates over gradually phasing out these price supports to fund more targeted social programs.

In terms of international trade, Cambodia benefits from tariff reductions under the Association of Southeast Asian Nations (ASEAN) framework. Recent bilateral trade agreements with China and regional economies are expected to further increase Cambodia’s exports of rice, textiles, and electronics. Yet, local businesses claim that non-tariff barriers, such as administrative requirements for exporters, hinder their competitiveness. Advocates call for streamlined procedures and better infrastructure at ports, which could lower trade costs and boost export diversification.

Income inequality, reflecting urban-rural disparities, remains a concern. The official Gini coefficient stood at $0.34$ in $2018$, then rose slightly to $0.36$ by $2021$. The government introduced a minimum wage in the garment sector to raise real incomes for laborers, sparking debates on whether higher labor costs might deter investment. Proponents argue that robust growth and rising productivity can accommodate moderate wage increases without jeopardizing competitiveness. Meanwhile, rural regions continue to rely on agriculture, and recurring floods pose challenges to harvests.

Going forward, Cambodia’s economic trajectory depends on balancing social welfare with fiscally sustainable spending. Policymakers must weigh the costs and benefits of further debt accumulation, the possible implementation of environmental taxes, and persistent attempts to manage the exchange rate. If the nation effectively addresses its infrastructure gaps and diversifies away from garments and tourism alone, Cambodia could see inclusive, long-term development.

Table 1: Cambodia’s Selected Macroeconomic Indicators (2018–2021)

Table 2: Cambodia’s Export Distribution by Sector (2021)

(d) Using the data in Table 1, calculate the absolute change in the unemployment rate between 2021 and 2022.

(e) Define the term “progressive tax.”

(f) Using an AD/AS diagram, explain how an increase in government spending on infrastructure could affect real GDP in Albania.

(g) Using information from Table 1, calculate the approximate percentage change in Albania's Gini coefficient between 2021 and 2022. Show your working.

(h) Using information from the text, explain how a persistent trade deficit might impact Albania’s economic growth.

(a) Define the term inflation as mentioned in the text (Paragraph 2).

(b) Define the term export diversification referred in the text (Paragraph 3).

(c) Using information from Table 1, calculate the absolute increase in Ethiopia’s nominal GDP (in US$ billion) between 2018 and 2021.

(d) Sketch an exchange rate diagram to show how the rise in Ethiopia’s exchange rate (ETB per US$) from 2018 to 2021 might affect import costs for domestic firms.

(a) Using the data in Table 2 and Table 3, calculate the percentage change in the domestic price of rice in Solana resulting from the implementation of the import quota.

(b) Using the data provided, calculate the total value of the quota rents generated by this policy. Show your working.

(c) Using the information in Table 2, calculate the price elasticity of supply (PES) for Solana’s domestic rice when the price increases from $120$ to $150$ per tonne.

(d) Calculate the change in total quarterly consumer expenditure on rice in Solana after the quota is implemented. Show your working.

(a) Using information from Table 1, calculate the real GDP growth rate for Poland between $2021$ and $2022$.

(b) The Polish government decides to increase its expenditure by $5$ billion PLN. Assuming the Marginal Propensity to Consume (MPC) in Poland remains at $0.8$, calculate the change in real GDP that may result from this increase in government spending.

(c) Using the data in Table 2, calculate the price elasticity of demand (PED) for Polish apples in Germany when the price increases from €$2.00$ to €$2.40$ per kilogram.

(d) Using the data in Table 2, calculate the price elasticity of supply (PES) for Polish apples over the same price range.

(a) Define the term “tradable permits” mentioned in the text.

(b) List two functions of microfinance in Cambodia.

(c) Using information from Table 1, calculate the percentage increase in Cambodia’s government debt (as a share of GDP) from 2018 to 2021, relative to the 2018 level.

(d) Sketch a business cycle diagram to illustrate what might happen to real GDP when global tourism demand falls abruptly.