CATHOLIC JUNIOR COLLEGE JC 2 H2 PRELIMINARY EXAMINATIONS 2007 ECONOMICS PAPER 1

Monday

27th August 2007

2 hours 15 minutes

DO NOT OPEN THIS BOOKLET UNTIL YOU ARE TOLD TO DO SO

INSTRUCTIONS TO CANDIDATES

Attempt all questions in the paper. Begin each question on a separate sheet of paper. Remember to write your name and class on every sheet of paper submitted.

This paper consists of 7 printed pages

CJC /2007/H1 Economics/Preliminary Examinations

Question 1 :
The Price of Chinas Growth

Extract 1: Inequality in China China succeeded in lifting 250 million people out of poverty over the past 25 years. However, during the same period income inequality has doubled. A person living in a city earns on average $1000 a year, compared to just over $300 in the countryside. An urban citizen can also expect to live over 5 years longer than a farmer. In Tibet, only half of the population can read and write while over 97 percent Chinese living in Beijing, Shanghai or Tianjin are literate. At national level, illiteracy rate for women is more than double that of men. The Chinese Government has realized the grave consequences of social inequity, and has started to tackle the problem head-on, says Khalid Malik, UNDP Resident Representative and UN Resident Coordinator. This report is particularly timely as the Government is shaping its new economic blueprint to ease the strains of inequality. There is no question that more can be done to mind the gap that so often triggers social unrest when economic growth on a national scale leaves the poor and the disadvantaged behind. The Government is already taking concrete steps to address these human development inequities. By the end of this year, it will have completely abolished agriculture taxes across the country. To improve literacy rates in rural communities, the government is promoting compulsory education for the rural poor through renovation of primary and middle schools and providing free textbooks for 24 million students from poor families.
Source: United Nations Development Programme, Human Development Report 2005

Extract 2: China is slowly starting to tackle its huge pollution problems

Water and waste pollution is the single most serious environmental issue for China. Inadequate investments in supply and treatment infrastructure means that even where water is not scarce, it is rarely clean. Around half the population, have water supplies that are contaminated by animal and human waste. Pan Yue, deputy head of the State Environmental Protection Administration (SEPA), the country's environmental watchdog ministry, calls it the bottleneck constraining economic growth in China. In late July an environmental disaster occurred on the Huai river, one of China's seven big rivers. A 133km-long black and brown plume swept along the river killing millions of fish and devastating wildlife. According to Mr Pan, the catastrophe occurred because too much water had been taken from the river system, reducing its ability to clean itself. Others say that numerous factories dump untreated waste directly into the water. SEPA found over 70% of the water in five of China's seven major river systems was unsuitable for human contact. Only 20% of China's 168m tonnes of solid waste per year is properly disposed of. The air is not much better. According to the World Bank, China has 16 of the world's 20 most polluted cities. Estimates suggest that 300,000 people a year die prematurely from respiratory diseases. The main reason is that around 70% of China's mushrooming energy needs are supplied by coal-fired power stations, compared with 50% in America. Combined with the still widespread use of coal burners to heat homes, China has the world's highest emissions of sulphur dioxide and a quarter of the country endures acid rain. In 2002, SEPA found that the air quality in almost two-thirds of 300 cities it tested failed World Health Organisation standards yet emissions from rocketing car ownership are only just becoming an issue. Hopes that China will leapfrog the West with super-green cars are naive, since dirty fuel messes up clean engines and the high cost of new cars keeps old ones on the road.
CJC /2007/H1 Economics/Preliminary Examinations

Adding it all up, the World Bank concludes that pollution is costing China an annual 8-12% of its $1.4 trillion GDP in direct damage, such as the impact on crops of acid rain, medical bills, lost work from illness, money spent on disaster relief following floods and the implied costs of resource depletion. With health costs escalating, that figure will increase, giving rise to some grim prognoses that growth itself will be undermined. This has spurred the government into belated action. In 1998, SEPA was elevated to ministerial rank and three years later the 10th Five-year Plan for Environmental Protection set ambitious emission-reduction targets and boosted environmental spending to 700 billion yuan ($85 billion) for 2001-05 equivalent to 1.3% of GDP, up from 0.8% in the early 1990s. A legal framework has been created. Beijing's good intentions, however, have so far had only limited impact, thanks to the vast, decentralised bureaucracy through which it is forced to govern such a huge country. Much of the environmental energy generated at the national level dissipates as it diffuses through the multilayered state structure, producing outcomes that have little concrete effect. SEPA, the government's chosen weapon in the fight against pollution, is under-resourced despite its enhanced status, with little money and just 300 central staff. In the capital, it must battle for influence with other agencies, such as the Construction Ministry that handles water and sewage treatment. Bureaucratic rivalries mean there is no co-operation and no sharing of the (often patchy) data that are collected with limited funds. Around the country, SEPA's branches, known as Environmental Protection Bureaus, are supposed to monitor pollution, enforce standards and collect fines. But they are more in thrall to local governments whose priorities are to maintain growth and employment in their jurisdiction than to head office in Beijing. It is no rarity, therefore, to find a bureau imposing a fine on a dirty local enterprise (thus fulfilling its duty), but then passing the money on to the local administration, which refunds it to the company via a tax break. SEPA's impotence is one reason why penalties, even when it can impose them, remain laughably light. Mr Sun says the maximum he can fine a polluting company in Shanghai is 100,000 yuan or about $12,000. But just as fundamental is that China lacks an understanding of the concept that the polluter should pay. Furthermore, the central government is unwilling to impose price rises in basic services like electricity and water, for fear that this could spark public unrest. Water is an example. While customer tariffs have been raised in showcase cities, such as Beijing and Dalian in the north-east, water remains stunningly cheap in China. According to the World Bank, water for agriculture, which makes up three-quarters of the total used, is priced at 0.03 yuan (0.4 cents) per cubic metre, or about 40% of cost. More than half is lost in leaky irrigation systems. Meanwhile, the cost of more modern services, such as Guangzhou's solid-waste disposal, is entirely borne by the government. There is no need to be unremittingly gloomy about China's environment, nevertheless. As developing countries get richer, they tend to pollute less. Most east-coast cities are enjoying more sunny days and the pollution load in the rivers is falling. Environmentally, in many places, China may have passed its nadir.
Source: The Economist, 19 Aug 2004

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Figure 1: Various discharges by China (m tones)

Figure 2: Chinas waste-water discharge (bn tones)

Table 1: Gini Index of Selected Countries (2005) Country China Hong Kong, China (SAR) Japan South Korea Singapore Gini Index 0.447 0.434 0.249 0.316 0.425

Source: World Bank, 2005, World Development Indicators 2005

Tasks: (ai) (ii) (b) (c) (di) (ii) Using Table 1, explain if Chinas income inequality was serious. Explain a policy that China can adopt to reduce income inequality. [2] [4]

To what extent does the data support the phrase, there is no need to be unremittingly gloomy about China's environment? [4] With the aid of a diagram and reference to the data, explain why the Chinese government should intervene in the face of pollution. [6] Assess a policy adopted by the Chinese government in dealing with the problem of pollution. [6] Evaluate two other policies that the Chinese government can adopt to solve the problem of pollution. [8]

{Total: 30 marks}

Question 2 Extract 1: Ten years after the crisis: The facts about investment and growth Ten years have passed since Asias twin currency and banking crises. In many ways, an air of normality has returned. Per capita incomes in the crisis economies now surpass their pre-crisis peaks, social indicators are improving, and the region is again enjoying growth that is the envy of many parts of the developing world. But despite welcome recovery, the effect of the crisis has not been completely erased. Growth has settled on a lower trajectory, especially in the ASEAN countries that were most directly affected (Indonesia, Malaysia, Philippines, and Thailand). All of these countries see a fall in their investment rates. Although the evidence in Malaysia suggests that the overall business climate in both countries compares favourably internationally, increased uncertainty may have led investors to sit on the sidelines to wait for clearer direction. It is also possible that bottlenecks in the supply of complementary factors, particularly skilled technical and scientific workers, may have clipped growth. An investigation of a range of possible explanations for low investment and slower growth draws out little that is concrete. Interest rate remains low, while credit and loanable funds do not seem to be constraints. The idea that investment has been redirected to the China is also difficult to square with the facts. China and East and Southeast Asia show much complementarity in trade and investment.
Adapted from Asian Development Outlook 2007, Asian Development Bank

Extract 2: Malaysia focuses on services Malaysia has increased its focus on the service sector as it attempts to develop a second string to its export bow. While the manufacturing sector remains a main source of growth for Malaysia, it is imperative that Malaysia broadens its economic base. Between 1996 and 2004 (January to November), total investment in Malaysia averaged around RM25.3 billion, of which 55% was foreign direct investment. Foreign investment mostly went into electronic, petroleum and base metal products. The government is promoting new growth areas to diversify its manufacturing base and to counter competition from China in traditional manufacturing activities. Growth areas include information and communications technology, biotechnology, optics, photonics, nanotechnology, medical devices and advanced materials. Exports remain Malaysia's lifeblood. ASEAN has been reducing tariffs among one another since its inception. Trade with ASEAN is expected to expand further now that the ASEAN Free Trade Agreement (AFTA) has been implemented. ASEAN has identified 11 sectors for accelerated tariff reduction - to be completed in 2007, instead of 2010. Under the AFTA agreement, ASEAN will become a free trade bloc with a population of 530 million. Growth in exports to ASEAN offset the decline of Malaysia's share in its key markets - the US, Singapore and Japan. Malaysia's good export performance was buoyed by high global demand for electrical and electric products. Higher prices and volumes of commodities such as palm oil, crude petroleum and LNG also played a role.
Adapted from Asian Times Online, May 18, 2005

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Extract 3: Malaysia piggybacks on China's boom By Federico Bordonaro As China entered many of the same low-end industries that fueled Southeast Asia's extraordinary growth in the 1980s and 1990s, many commentators predicted a large number of Malaysia's exporters would be driven out of business. Indeed, Malaysia's previous comparative advantage in unskilled, labor-intensive manufacturing has gradually been eroded by China's low-wage policies over the past decade. However, Kuala Lumpur has managed to move many of its industries quickly up the value-added ladder into more high-skilled, technology-intensive manufacturing. In recent years, the government has led an investment spree into science and technology resources. It has also enhanced its already well-developed education system toward producing more skilled technicians and engineers. Although electronics manufacturing is still Malaysia's most important economic sector, the country has astutely avoided industries that China is heavily invested in, and has moved into more high-end niche markets, including bio- and nanotechnologies, micro-electromechanical systems and other technologyrelated services.
Adapted from Asian Times Online, June 30, 2006

Table 1: Total trade of ASEAN ($ US mil)

Source: ASEAN Secretariat

1996 2003 2004 Intra-ASEAN trade 145001.1 182936.6 233406.6 Extra-ASEAN trade 528965.9 617501.4 810518.4 Note: Intra-ASEAN trade refers to ASEANs trade within its members, Extra-ASEAN trade refers to ASEANs trade with countries outside the organisation. Table 2: Malaysias Key Economic Indicators
Source: Asian Development Bank

2004 GDP growth rate Unemployment rate Inflation rate Trade balance (US$ mil) Current Account balance (US$ mil) 7.2% 3.5% 1.4% 27,493 14,871

2005 5.2% 3.5% 3.0% 33,155 19,984

2006 5.9% 3.4% 3.6% 30,526 19,642

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Figure 1: Malaysias Per Capita GDP and Fixed Investment as a % of GDP

Source: Asian Development Bank

140 Per Capita GDP (Index, 1996=100) 120 100 80 60 40 20 Per Capita GDP 0 1996 1997 1998 1999 2000 Fixed Investment 2001 2002 2003 2004

50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2005 Fixed Investment as a % of GDP

Tasks: a)(i) (ii) b)(i) (ii) c)(i) (ii) (iii) d) e) Compare the share of Intra-ASEAN trade out of ASEANs trade of 1996 with 2004. Consider whether the evidence in Extract 2 would lead you to expect the change in shares in (i) [3] Calculate what happened to the non-goods elements in the current account of Malaysia between 2004 and 2006. [2] Explain this change with reference to extracts 2 and 3. Explain the relationship between investment and GDP. To what extent does Figure 1 support this relationship? [2] [3] [3] [2]

Identify one other piece of data needed and explain how it may lead to a better verification of the relationship. [2] With reference to the data where applicable, discuss any one policy that the government of Malaysia can adopt to increase investments in Malaysia. [5] Evaluate the effect of an increase in investments on the government achieving its macroeconomic objectives. [8] {Total: 30 marks}

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