The political economy of ethnicity

The paper investigates the effects of ethnic diversity on economic performance and the risk of violent conflict. Diversity has various detrimental microeconomic effects, tending to reduce public sector performance, increase patronage, and lower the level of trust among individuals. However, whether diversity adversely affects overall economic growth depends upon the political environment. Diversity is highly damaging to growth in the context of limited political rights, but is not damaging in democracies. The same relationship holds for the satisfactory performance of World Bank projects: in diverse societies, the risk of project failure is nearly doubled by the absence of political rights. There is a relationship between ethnic diversity and the risk of violent conflict, but it is non-monotonic. Those societies most at risk are the ones in the middle of the range of ethnic diversity. Highly diverse societies, such as are typical of Africa, are actually even safer than homogenous societies. A democratic Africa can thus reap the benefits which ethnic diversity provides in terms of a reduced risk of violence, while avoiding the potential costs of reduced growth. Both income levels and political rights are also important influences on the risk of violent conflict, and of its escalation into full civil war. Once a society has reached full scale civil war the balance of influences appears to change. The persistence of conflict, and the sustainability of a settlement, are more dependent upon ethnic composition and less dependent upon income and political rights, than are the initiation and escalation of violence. Hence, some peace settlements may need to change borders so as to increase (or reduce) the ethnic diversity of the state.