EC320PS4 - Syed Hamza Haider Economic Development CAS EC...

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Syed Hamza Haider Economic Development CAS EC 320 Problem Set 4 April 29, 2010 1. What is the natural resource curse? Explain how it works. Give an example of a country that has suffered this curse and explain briefly how the country has suffered. [6 points] The natural resource curse refers to the paradox that countries with an abundance of natural resources tend to have low economic growth and poor development outcomes. While these countries can use this wealth to boost their economies, history has shown that this has not usually been the case. Discovery of large reserves of natural resources has often led to political unrest and separatist movements, which has slowed economic growth. Also, these countries suffer from large revenue volatility. For example, oil prices rise during economic booms but are followed by sharp decreases in price. If a country accumulates a large amount of debt during the boom, it can fail to pay it off once the price decreases. Also, the economy may be unable to continue making large investments and the local economy may fall into a recession. Last of all, a large inflow of money which doesn’t depend on the hard work of the population is likely to encourage corruption, especially when foreign corporations are involved in the extraction. Nigeria has suffered from the natural resource curse. The country has large reserves of oil and gas, yet has failed to improve living conditions for the majority of its population. Political unrest and crime in the Niger Delta, political divide between the north and south and high levels of corruption have hampered its growth. 2. Ethnic diversity [6 points] a. What is a measure of ethnic diversity within a country? b. How does ethnic diversity inhibit economic development in poor countries? A measure of ethnic diversity is: D= 1- ∑(Si)^2, for i=1,…,n Ethnic diversity has often stirred internal conflict and hampered growth. If a country has low diversity, the government is committed to improving conditions for the entire population. Ethnic minorities are often viewed with contempt, especially if they take over jobs from the indigenous population. Instead of concentrating on economic growth, the country spends time and other resources in sorting out political conflict. In some exceptional cases, diversity has helped spur economic growth. But usually a less diverse population is more likely to be committed to economic growth as they see their own ethnic group reaping the benefit. 3. What type of pollution is the most serious problem in very poor countries? Draw and explain a diagram to show the relation between this type of pollution and per capita income. [4 pts]
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Pollution inside the home (eg emissions from burning fuel inside the house) and water pollution are the most serious problems in very poor countries. Unclean drinking water is responsible for many health problems and often leads to many deaths in the poorest countries. In the poorest countries, as per capita income rises people are able to afford better housing, clean
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This note was uploaded on 11/09/2010 for the course CAS ec399 taught by Professor Tack during the Spring '10 term at BCUC.

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EC320PS4 - Syed Hamza Haider Economic Development CAS EC...

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