Ethnic Diversity, Historical Economic Exchange, and Development: Evidence from Andean Peru

Is ethnic diversity good or bad for economic development? Most studies find corrosive effects. This paper shows that historical exposure to economic exchange can mitigate these effects in the long run. I collect data from a natural experiment of Peru's colonial history: the forced resettlement of native populations in the sixteenth century. Where the resettlement concentrated ethnically diverse populations with a history of internal crop exchange, contemporary populations perform better systematically. Additional evidence suggests that prior experience with mutually beneficial crop exchange shaped more open attitudes toward out-group members. Economic complementarities helped sustain long-run, market-oriented cooperation and local trade.