Case Study — Rare Earths, the Internet and Standard of Living

Case

Note: this set is a topical extract. The questions begin at Extract 3 and run through Extract 7, covering parts (a) to (d) — a partial paper drawn from a longer case study.

Extract 3: The on-going efforts to challenge China’s monopoly in the rare earths market

Today, China enjoys a monopoly in the rare earths market. The country is also believed to hold a large proportion of the planet’s remaining rare earth element reserves. China’s domination of rare earth production can also be explained by the high cash outlay in opening a new mine. It is an expensive and time-intensive process due to the complexity and scale of machinery and manpower involved. Most mines must operate for years to cover the initial start-up costs.

In 2010, rare earth prices skyrocketed when China cut its quotas for rare earth exports by 40 per cent. In that same year, a territorial dispute with Japan led China to halt exports to that country for two months, proving its control over rare earths could also be a weapon in any international dispute.

In response, many countries which had relied on low-price rare earths from China quickly began exploring different solutions, such as opening rare earth mines, diversifying their sources of rare earths, or innovating to reduce their usage of rare earths. However, it is costly and difficult to find alternatives to low-priced Chinese rare earths. Nonetheless, in the current situation, where China has major control over global supply, continuing efforts to diversify the supply-chain portfolio are critical for the United States and its allies.

Source: The Diplomat, 29 August 2017, and Communications of the ACM Vol. 62 No. 3, March 2019.

Extract 4: Benefits of the Internet

The internet is a pervasive, fundamental part of daily life that continues to deliver massive economic and social benefits around the world. Yet some 3.9 billion people — more than 52% of the world’s population — are still not online. Multiple studies by The Boston Consulting Group have detailed the internet’s macroeconomic benefits to Gross Domestic Product (GDP), the broad economic and job impact of the digital economy’s rapid growth in online retail and advertising, and the big impact of information and communications technology (ICT) on small-business revenue growth and job creation. Most studies have verified the positive impact of greater broadband penetration on GDP growth. One of the first, by the World Bank, concluded that every 10-percentage-point improvement in broadband penetration increases GDP by 1.3%.

Research also highlights a positive relationship between the application of digital technologies and the quality of life. Some researchers have considered internet usage, including social networking sites, as one type of leisure activity. The internet is also increasingly a source of high-quality educational content and online courses, which can increase the availability of formal instruction to underserved population segments.

Source: World Economic Forum, White Paper: Internet for All, April 2016.

Extract 5: Singapore, Sweden Top the Global Inclusive Internet Index

Singapore and Sweden lead the world in terms of internet inclusivity, according to a recent report. Device innovation, technological advances and declining prices afford increased connectivity; yet prices are still quoted as one of the key barriers to access in developing economies. Also prominent is the proportion of those who do not use the internet because they do not see the need and lack knowledge of how to use it. The Singapore government will roll out a series of new courses targeted at the elderly, covering e-payment, chat apps and digital government services, expanding the official Silver Infocomm Initiative, which has promoted IT literacy among more than 130,000 seniors.

Singapore tops the availability rankings, owing largely to government initiatives — it is “arguably a standard-bearer” of public-access Wi-Fi, providing free internet access in public areas with more than 10,000 hotspots across the city. The UN-defined threshold for affordability is 5 per cent of average national monthly income, with efforts underway to reduce it to 2 per cent.

Source: www.edb.gov.sg, 12 April 2017, and The Straits Times, 2 June 2018.

Table 3: Prices of fixed-broadband services of selected economies in 2016

Economy	as % of GNI per capita	USD	PPP$
United Kingdom	0.22	8.10	7.55
Norway	0.5	39.17	32.35
Singapore	0.5	21.64	25.02
United States	0.82	38.10	38.10
Sweden	0.89	43.10	39.50
China	2.42	15.95	27.73

Source: International Telecommunication Union.

Extract 6: Higher learning institutes to train more adults

A major revamp of how working adults are trained for the new economy is under way, with more courses, more funding and a more significant role for Singapore’s institutes of higher learning (IHLs). The Ministry of Education (MOE) is pumping $70 million into this effort over three years. Each institute will focus on one of eight emerging areas of growth, including data analytics, finance and entrepreneurship, delivered as short modules and subsidised up to 70 per cent for Singaporeans and permanent residents.

Source: The Straits Times, 29 October 2017.

Extract 7: Education, infrastructure and fiscal sustainability vital to Singapore’s future

While cohort sizes may be falling and money “may be tight”, Singapore is ploughing more investments into education, which “has, and must, continue to be the backbone” of the Republic’s economic strategy. From 2019, foreign students will no longer receive subsidies for most vocation-based master’s degrees and post-graduate diplomas offered by autonomous universities, while subsidies for permanent residents will be reduced, generating S$25 million in annual savings that will be channelled to support shorter, industry-relevant modular courses for Singaporeans and PRs.

Source: The Straits Times, 5 March 2018.

Questions

(a)(i) With reference to Extract 3, explain two barriers to entry that help China enjoy a monopoly in the rare earths market. [4]

(a)(ii) Explain why China’s cut in export quotas for rare earths (Extract 3) will result in a sharp rise in the world price of rare earths. [4]

(b)(i) Using Table 3, explain what could be inferred from the difference in values between prices of fixed-broadband services in USD and PPP$ for Singapore. [2]

(b)(ii) Using Table 3, explain the difference between GNI per capita and GDP per capita, and comment on which might be a better indicator of affordability of internet access. [2]

(c) Using the information in Extract 4, explain how the internet would affect standard of living. [4]

(d) With reference to Extract 5, explain two economic reasons for government intervention in the market for internet access. [4]

Answers

(a)(i) Explain two barriers to entry that help China enjoy a monopoly in the rare earths market. [4] (explain)

Setting up a mine requires a “high cash outlay” because of the scale of machinery and manpower involved, signifying a high fixed cost — a barrier to entry. Because fixed costs are high, a potential rival must produce at very large output to spread these costs and capture the internal economies of scale China already enjoys, which deters entry. Second, China controls an essential input: it holds “a large proportion of the planet’s remaining rare earth element reserves”, so it can deny rivals the natural resources (land) needed to enter the industry.

Marking points: state and explain high internal economies of scale — 2m; state and explain control of an essential input — 2m.

(a)(ii) Explain why China’s cut in export quotas for rare earths will result in a sharp rise in the world price of rare earths. [4] (explain)

When China cuts export quotas, the world supply of rare earths falls from S₀ to S₁, since the quantity producers can sell on the world market falls. The price elasticity of demand of rare earths is likely price-inelastic, because there are few close substitutes. As supply falls against price-inelastic demand, price rises more than proportionately (P₀ to P₁) relative to the fall in quantity exchanged — a sharp rise in the world price.

(b)(i) Using Table 3, explain what could be inferred from the difference between the USD and PPP$ prices of fixed-broadband services for Singapore. [2] (explain)

For Singapore the USD price ($21.64) is lower than the PPP price (\25.02). This implies the Singapore dollar is undervalued relative to the US dollar in terms of relative purchasing power, which could reflect a lower cost of living in Singapore than in the US.

Marking points: explain the difference in terms of purchasing power — 1m; infer the cause as a difference in cost of living — 1m.

(b)(ii) Explain the difference between GNI per capita and GDP per capita, and comment on which might be a better indicator of affordability of internet access. [2] (explain / comment)

GNI per capita is the market value of all final goods and services produced anywhere in the world by resources belonging to a country’s residents in a given period, divided by population. GDP per capita is the market value of final goods and services produced within the country’s geographical boundaries in a given period, divided by population. GNI per capita is the better affordability indicator, because it captures the income residents earn abroad and remit home, giving a more accurate picture of residents’ incomes — and hence what they can afford — in a globalised world.

Marking points: definitions of GNI and GDP highlighting the key difference — 1m; comment on which is more accurate — 1m.

(c) Using the information in Extract 4, explain how the internet would affect standard of living. [4] (explain)

Extract 4 reports that a 10-percentage-point improvement in broadband penetration raises GDP by 1.3%, because the internet boosts online retailing and advertising, raising consumption (C) and investment (I), hence aggregate demand and GDP. As GDP rises, household disposable incomes rise, increasing the quantity and quality of goods and services households can consume — improving the material standard of living. Extract 4 also notes a positive relationship between digital technologies and quality of life: social networking and online educational courses raise literacy and reduce stress, improving the non-material (intangible) standard of living.

Marking points: positive impact on material SOL — 2m; positive impact on non-material SOL — 2m.

(d) With reference to Extract 5, explain two economic reasons for government intervention in the market for internet access. [4] (explain)

First, Extract 5 notes many consumers “do not see the need and lack knowledge of how to use” the internet — a case of imperfect information. Ignorant of the true benefits, consumers under-consume internet access, producing allocative inefficiency, which justifies government intervention. Second, the government provides free public internet access because it views connectivity as a necessity in a digitalised world; direct provision ensures low-income households who could not otherwise afford it can still get online, improving equity.

Marking points: identify the market’s impact on efficiency (information failure) — 1m; identify the market’s impact on equity — 1m.