RI H2 ECONS P1

9757/01/Prelim/Y6/18 © RI 2018 [Turn over RAFFLES INSTITUTION 2018 YEAR 6 PRELIMINARY EXAMINATIONS Higher 2 ECONOMICS 9757/01 Paper 1 Case Study 28 August 2018 2 hrs 15 minutes Additional Materials: Answer Paper READ THESE INSTRUCTIONS FIRST Write your name, index number and civics class on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for diagrams, graphs or rough working. Do not use paper clips, highlighters, glue or correction fluid. Answer all questions. The number of marks is given in brackets [ ] at the end of each question or part question. This document consists of 8 printed pages.

2 9757/01/Prelim/Y6/18 © RI 2018 [Turn over Question 1: Madagascar – The Story of Vanilla Table 1: Madagascan Exports of Vanilla to the US Year Price of Vanilla (USD$/kg) Volume (kg) Export Revenue (USD$) 2008 21.5 1,300,000 27,950,000 2009 23 1,150,000 26,450,000 2010 21 - - Source: www.datamnye.com Extract 1: Background Knowledge of Vanilla Vanilla is an essential ingredient used in sweet foods, alcohol, scented perfumes as well as cosmetics. It is a difficult spice to cultivate and a vanilla vine takes three to four years to mature, before it could be harvested. One of the world’s most popular spices, vanilla is also the second most expensive spice in the world. Today, vanilla accounts for approxim ately 20% of Madagascan exports, worth $600m at current prices, and is a significant contributor to Madagascar’s GDP. In fact, Madagascar is the main exporter of vanilla in the world. Together with the fishing industry, the agriculture sector, being the largest sector in the Madagascan economy, employs 82% of its labour force and accounts for 30% of the country’s GDP. Vanilla farmers, like farmers all over the world, face dramatic fluctuations in the price of the crops they produce. In the early 1900s, the Madagascar government imposed a fixed price on vanilla and also intervened in the market through a buyback programme that ensured the surplus stocks were purchased and kept as inventory. Such intervention ensured price stability and equity in the distribution of gains from vanilla farming to all. Price fixing succeeded in keeping the price high and brought about positive results for the farmers for a limited period. In the end, sustained government intervention meant that the cost of keeping exploding inventories escalated beyond what could be financed. This led to stocks of inventories being burnt ultimately, which was an extraordinary waste, given the high unit value of vanilla and the extreme poverty of the farmers whose output was thus destroyed. Madagascar’s agriculture performance has also been hindered by problems such as low productivity and high vulnerability to climatic conditions. A recent cyclone in 2017 destroyed a number of vanilla plantations and dented supp lies from Madagascar. This accelerated an upswing in prices which had been caused by food manufacturers promising to use real vanilla rather than synthetic flavourings as well as speculative hoarding by traders in Madagascar. Vanilla pod producers are now frantically planting more, but it could be several years before harvesting can take place, allowing prices to subside. In the meantime, challenges continue to plague the Madagascar economy. The emphasis on the agriculture sector – dominated by vanilla crops – has resulted in major threats such as deforestation and soil erosion, and this, together with the lack of investments in new farming practices and diversification to other crops, had in turn compromised the productivity levels in farming. In addition, several periods of civil unrest and political uncertainties have disrupted the economy and made investments scarce. Source: Adapted from Various Sources

3 9757/01/Prelim/Y6/18 © RI 2018 [Turn over Extract 2: The History of Madagascar’s Vanilla Industry Throughout history, the vanilla market had been marred by price instability and low incomes. In a bid to bring more stability and equity in the distribution of gains from vanilla farming, the Government of Madagascar created a vanilla stabilization fund where prices were guaranteed, and a cartel, named the “Vanilla Alliance”, was formed with two neighbouring countries, the Comores and the Réunion. The creation of Vanilla Alliance initially brought about positive results, with the world market expanding rapidly and Madagascar exports swelled. However, the region’s huge market power in vanilla production and export led to the cartel’s price being significantly higher than the welfare-maximizing level. The inefficiencies associated with the over-pricing of vanilla culminated in the flourishment of illegal vanilla trade, while the cartel’s high prices encouraged the entry of Indonesia into the vanilla market. Source: http://documents.worldbank.org Extract 3: The High Price of Madagascar’s Vanilla dependency Vanilla, like most commodities grown in developing countries, is a fickle crop, which depended heavily on natural as well as man-made c onditions. It is highly labour-intensive and hand- pollination had to be carried out before the crop could be harvested. The market for vanilla is also characterised by low entry and exit costs. This had caused the French colonialists to shift the production of the crop around the world, but only to have production take off when the method of hand-pollination of the vanilla orchid was devised. Production eventually settled in Madagascar, where not only was the climate perfect, but it was also “one of the only places on earth poor enough to make the laborious process of hand pollination worthwhile”. Today, while over 80 per cent of the world’s fine-quality natural vanilla is exported from Madagascar, its price volatility has made it difficult for farmers to make a stable living. Prices over the past five years have whiplashed from US$20 a kilo to a peak of US$600 earlier this year. Herein lies the common curse of commodity dependency, whether crude oil, copper, cocoa or vanilla: heavy dependency on exporting a small number of commodities correlates with poverty, high mortality rates, low “human development” performance, poor education, corruption and high levels of income inequality. But it is Madagascar and its vanilla that tells the depressing story most consistently: its 25 million people share a GDP per capita of barely US$400 – 13 times lower than South Africa, 20 times lower than China and 143 times lower than the US. Seventy-seven per cent of the population live below the World Bank’s poverty line of US$1.90 a day, with a Human Development Index in the bottom 30 of countries worldwide. Against the backdrop of such depressing statistics, it is important to note that when vanilla prices fell below US$40 five years ago, while India’s farmers simply left the market, Madagascar’s farmers, were unable to do the same. This is because if they do, they will end up starving as the economy is not as well-diversified. So, while times for Madagascar’s 80,000 vanilla farmers are comparatively good at present, the reality of the commodity curse means that it is only a matter of time before the next crash. Ever since the development of synthetic vanilla, there has been an inevitable shift away from the “real thing” to synthetic vanillin. More recently, however, a glimmer of hope has arisen from a surge among leading vanilla users, which include General Mills, Hershey’s, Kellogg and Nestle, for “all-natural” ingredients. This being the case, the commitment from these firms must be regarded as precarious, given the current high price of vanilla. Source: https://www.scmp.com

4 9757/01/Prelim/Y6/18 © RI 2018 [Turn over Questions (a) With reference to Table 1, (i) Using the da