On the Role of Democracy in the Ethnicity-Growth Relationship: Theory and Evidence

We study the relationship between ethnic diversity and economic performance and, in particular, focus on economic growth under democracy and dictatorship. We build a theory which emphasizes the public spending channel, and show that the relationship between public spending and ethnic diversity is qualitatively different under the two regimes. Our model also delivers that if the dictator is sufficiently corrupt, then growth is bound to be higher under a democracy irrespective of the degree of ethnicity. We then consider a panel of the most and least ethnically diverse nations and address potential endogeneity problems. Our empirical results robustly show that democracy has a significantly positive effect on growth, irrespective of the degree of ethnicity. We also show that the marginal effect of ethnicity on growth in the presence of democracy is always positive, irrespective of the type of estimator used. Finally, we establish that the negative marginal impact of increases in ethnicity can always be overcome by democracy.