Abstract
While many studies stressed the importance of ethnic fractionalization on long-term economic growth, neither ethnic fractionalization always leads to ethnic conflict nor the intensity of conflict is constant over time. To address this potential bias, we construct an ethnic/racial tension index by using the number of US news articles that contain certain keywords. Utilizing this index we test the predictions of a simple theoretical model in a Markov Switching framework which allows to identify the impact of ethnic/racial tension in different states of the economy. Consistent with our theoretical predictions, results show that the magnitude of the impact of ethnic/racial tension is larger during low-growth periods.
Highlights
Many previous studies argue that ethnic fractionalization may affect long-term growth through various channels. Montalvo and Reynal-Querol (2005) suggest that rent-seeking behavior of various ethnic groups causes reduced investment, as well as an increase in public consumption. Alesina et al (1999) on the other hand show that ethnic heterogeneity leads to a decline in the production of public goods
One common feature of the aforementioned studies is the fact that they all proxy ethnic tension with either ethnic fractionalization, or ethnic polarization. They assume that ethnic tension is a time-invariant variable, and ignore the possibility that ethnic tension can change over time
Caselli and Coleman (2013) point out that ethnic conflict is by no means universal across ethnically heterogeneous societies: in many countries, ethnic groups coexist peacefully and the level of conflict is not constant over time
Summary
Many previous studies argue that ethnic fractionalization may affect long-term growth through various channels. Montalvo and Reynal-Querol (2005) suggest that rent-seeking behavior of various ethnic groups causes reduced investment, as well as an increase in public consumption. Alesina et al (1999) on the other hand show that ethnic heterogeneity leads to a decline in the production of public goods. Alesina et al (1999) on the other hand show that ethnic heterogeneity leads to a decline in the production of public goods. Another strand of literature contend that ethnic fractionalization may result with low quality of institutions (Easterly and Levine, 1997; Keefer and Knack, 2002; Easterly et al, 2006). One common feature of the aforementioned studies is the fact that they all proxy ethnic tension with either ethnic fractionalization, or ethnic polarization. We aim to assess how changes in ethnic/racial tension (over time) affect economic growth in the short-run.
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