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The economics of diversity


Hasitha Jayatilake

By

May 16th, 2018


The effect of ethnic diversity on development has long been a subject of fierce debate. Hasitha Jayatilake takes a close look at the key issues in this debate.


 

People often refer to the USA as the ‘great melting pot of cultures’, and often attribute some of the innovation and growth that takes place in the US, to the diversity of its society. At the same time, social diversity is widely blamed for causing the ‘tragedy of Africa.’[1]

This context raises some interesting questions. Is America an exception when it comes to benefiting from diversity? Do ethnically diverse countries remain poor because of tensions between different groups of people?

A lot of the early literature on the issue does suggest that ethnic diversity correlates with poor levels of economic performance. This implies that many developing countries, which are often quite ethnically diverse, may require economic policies specifically tailored to address the unique challenges they face as a result of this ‘fractionalisation.’

However, as this article lays out, more recent studies have not been able to establish a causal relationship between ethnic diversity and economic underdevelopment, with some studies in fact finding many practical benefits arising from diversity.

 

What is diversity, and how is it measured?

Intuitively, diversity is the number of different ethnic or cultural groups that exist in a country. However, in reality, ethnic and cultural identity can be quite complex. Researchers have to grapple with questions such as how people define their ethnic identity.

They then decide on an external trait that can capture this definition. Some measures use language differences, while others focus on race, as this criteria. This is why there are many different measures of ethnic diversity in development research.

While these criteria vary, most studies in economics use the same, simple mathematical concept to calculate the extent to which a country is ‘fractionalised.’ That is; the probability that any two people picked at random from the population will be of two different ethnicities/socio-cultural groups.

 

Does diversity present a challenge?

The research in this area is immensely vast, but two particular studies stand out as foundational in shaping our understanding of the economics of diversity.

The first is the 1997 paper titled, ‘Africa’s Growth Tragedy: Policies and Ethnic Divisions,’ which concluded that diversity explains many of the economic woes faced by the continent.[2] The paper simultaneously claims that the imposition of careless and arbitrary borders by colonial powers was responsible for this situation, ‘exacerbating’ the fractionalisation within countries.

Using language as the main criteria to distinguish between ethnic groups, the study found per capita GDP growth to be inversely related to the level of diversity in the sample of African countries they focused on.

Looking beyond growth, their data showed that higher levels of diversity were correlated with factors like low schooling levels, and political instability. Since these factors were known to be obstacles to strong economic growth, the researchers drew the conclusion that diversity could be an underlying cause of underdevelopment in Africa.

The second study, titled, ‘Fractionalization,’ by researchers at Harvard University in 2003, used a much larger and more global sample of 190 countries.[3] The other key difference was in the measure of diversity. Whereas the previous study only classified people by language group, this paper defined ethnic diversity along the lines of both language and race, while introducing a third measure – religious fractionalisation (divisions across religious groups).

This let them make some very nuanced findings. On ethnic diversity, they largely came to very similar conclusions as the previous study, across the larger sample of countries.[4] They also found that ethnic fragmentation is more common in poorer countries that are closer to the equator.

Religious fractionalisation, on the other hand, painted a different picture. Their results showed a positive relationship between religious diversity and good governance (which is associated with growth). Their analysis was that good governance needs to exist, in order for a society to be tolerant and free enough to be conducive to diverse religious views. They considered the US a good example of this, as it displayed one of the highest levels of religious fractionalisation.

By and large, as these two major studies exemplify, there is a substantial body of work showing a correlation between underdevelopment (low schooling levels, low income, political instability, etc.), and high levels of ethnic diversity. Yet, the question remains: does diversity actually cause underdevelopment?

 

All correlation and no causation?

The focus of most recent studies on diversity has been precisely on the question above. Again, two particularly interesting studies can be used to highlight the relevant core issues.

The first is a 2017 study that gets to the heart of the issue – ‘Does social diversity impede sound economic management?’[5] This approach seems quite logical. If diversity inhibited the making of good economic policy, then it can be quite reasonable to claim diversity caused underdevelopment.

After analysing data from a sample of 116 countries, over a period of 31 years, using multiple measures of diversity, this study in fact found that social diversity is not a good predictor of economic failure. Using the ‘economic freedom index’ as a proxy for measuring good economic governance, the researchers found no strong link between the level of diversity, and the quality of economic governance.

The study even looked at the rate of policy change. Using the ‘rate of change of economic freedom’ as a proxy to measure policy change, it found no significant correlation between levels of ethnic diversity, and the ability for economic policy to be reformed easily. This allowed the researchers to conclude that social diversity does not impede economic policy change in any meaningful way.

To add to this, the researchers also found that good economic policies can arise in diverse populations, even without the need for autocratic leadership. This refuted the commonly held belief that in order to lead a diverse populous, one has to rule with an iron fist.

The second study, ‘Migration, Diversity, and Economic Growth,’ also published in 2017, looks at the contentious question of whether the diversity brought about by immigration, impacts development.[6] Its analysis revealed that most countries benefit from this diversity in terms of growth, and that developing countries are likely to benefit more strongly. The interpretation of these results was embedded in previous research, which have found that diverse teams behave more productively, and societies with diverse norms and cultures experience faster diffusion of new ideas, and the ‘production of a greater variety of goods and services.’

These two studies clearly testify to the fact that, while most diverse countries, tend to be those that are less developed, their diversity may not be the main cause of their underdevelopment.

Nonetheless, the debate on diversity is quite complex, and is by no means settled. There is room for debate, on issues ranging from the most basic, like how ethnic identity is defined, to more complex problems, such as effectively quantifying outcomes like ‘sound economic policies.’ Wherever you stand on this debate, the economics of diversity is a vast and thought provoking field, with its research having important policy implications for developing countries.

 

[1] Easterly, W & Levine, R 1997, ‘Africa’s Growth Tragedy: Policies and Ethnic Divisions’, The Quarterly Journal of Economics, vol. 112, no. 4, pp. 1203–1250, doi: https://doi.org/10.1162/003355300555466.

[2] Ibid.

[3] Alesina, A., Devleeschauwer, A., Easterly, W. et al. 2003, ‘Fractionalization, Journal of Economic Growth vol. 8, no. 4, pp. 155-194, doi: https://doi.org/10.1023/A:1024471506938.

[4] Fisher, M, ‘A revealing map of the world’s most and least ethnically diverse countries’, The Washington Post, viewed, 25 May 2018, https://www.washingtonpost.com/news/worldviews/wp/2013/05/16/a-revealing-map-of-the-worlds-most-and-least-ethnically-diverse-countries/?utm_term=.be3a0e76d66.

[5] de Soysa, I & Vadlamannati, K 2017, ‘Does social diversity impede sound economic management? An empirical analysis, 1980–2012’, Social Science Research, vol. 62, pp. 272-290, doi: https://doi.org/10.1016/j.ssresearch.2016.08.012.

[6] Bove, V & Elia, L 2017, ‘Migration, Diversity, and Economic Growth’, World Development, vol. 89, pp. 227-239, doi: https://doi.org/10.1016/j.worlddev.2016.08.012.

Image: geralt

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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