Another Misadventure of Economists in the Tropics? Social Diversity, Cohesion, and Economic Development

Abstract

Several prominent economists have recently argued that ethnic and other forms of social diversity lead to economic failure. Apparently, serious social frictions caused by diverse preferences do not create conditions for the development of endogenous institutions that enhance good economic policies. Others, however, have shown that diversity reduces transaction costs within and between groups absent good public institutions, because of within-group social capital and ingroup policing in repeated dealings across groups. High diversity also reduces mass mobilization and forces consensus: ethnic diversity acts as a barrier against the concentration of absolute power. Using several measures of ethnic diversity, this study demonstrates that diversity and cultural difference reduce serious social frictions measured as the repression of political dissent. This study also finds that higher social diversity directly predicts higher levels of economic freedom, a proxy often used to gauge the market-friendliness of a country, the endogenous conditions often associated with economic success. The same results are true when a measure of the control of corruption is used. The results show that diversity enhances, not retards, the prospects for development and reduces social frictions. It may very well be that discourses of conflict, particularly the discourses of blame and recrimination based on ethnic ties where economic failure is apparent, is mistaken as the cause rather than the byproduct of crises, mistakenly attributed to historical conditions that have generated artificial borders. Empirically, diversity seems to foster, not displace, the preconditions for development.