Ethnoeconomics

DONNA HARRIS
University of Oxford, United Kingdom

Economics has traditionally been perceived as a discipline that studies an individual’s

optimal choice under constraints, typically abstracting away from the social context.
However, economics today has become a much broader field, incorporating social and
psychological factors into the analysis of decision making. This entry considers two lev-
els of analysis of ethnoeconomics: a macrolevel analysis, which focuses on the relation-
ship between ethnic diversity and economic development, and a microlevel analysis,
which examines the impacts of ethnicity on individual economic decisions. The entry
concludes with a discussion on the policy implications of ethnoeconomics.

Ethnicity and economic development

At a macro level, economists usually view ethnic diversity as an obstacle to economic

growth and development. Within a single ethnic group, shared group membership and
social bonds are important resources for an individual’s material and social wellbe-
ing. Coethnics can help each other in hard times, share food, and exchange gifts, all
of which lead to increased welfare and positive economic outcomes. In societies with
multiple groups, however, such cooperative behaviors are less likely to extend outside
one’s own group. In this case, within-group cooperation may lead to ingroup favoritism
and/or outgroup discrimination, particularly when groups have to compete for limited
resources.
Consequently, ethnic diversity can hinder governments’ ability to deliver public
goods and to create incentives for growth-reducing policies. Motivated by Africa’s
growth tragedy and its considerable ethnic diversity, Easterly and Levine (1997) have
shown that high levels of ethnic diversity are strongly linked to high black-market
activity, poor financial development, low provision of infrastructure, and low levels of
education. According to their analysis, countries with higher levels of ethnic diversity
have gross domestic product growth rates that are on average 2 percent lower than
those of less diverse countries. At the local level, when ethnic divisions are salient,
communities are likely to view each other as rivals for scarce resources. Since ethnic
groups see each other as competitors rather than collaborators, they are less willing
to work with one another, resulting in collective-action problems and hindering local
development.
Moreover, corruption is likely to be more prevalent in ethnically diverse societies.
Uncoordinated government officials from different ethnic groups may each pursue a
rent-seeking strategy without taking into account the effect of their actions on the other

The International Encyclopedia of Anthropology. Edited by Hilary Callan.

© 2018 John Wiley & Sons, Ltd. Published 2018 by John Wiley & Sons, Ltd.
DOI: 10.1002/9781118924396.wbiea1833
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groups. This problem is alleviated only if checks and balances exist, enabling each group
a veto over the other groups’ rent appropriation. However, ethnically diverse societies
are less likely to have the kind of political institutions that create effective checks and
balances (i.e., democratic institutions and rule of law).
A different approach to tackling the negative effects of ethnic diversity may be to
reduce the friction between different ethnic groups. A natural field experiment study
(Roth and Sumarto 2015) in Indonesia shows that it may be possible to increase toler-
ance toward people from different ethnic groups through an indoctrination program
that emphasizes the unity of different ethnic and religious groups.
Measures of ethnicity and ethnic diversity vary across studies. Currently, there is
no consensus regarding the basis on which ethnicity or ethnic diversity should be
measured—for example, whether it should be based on cultural practices or shared
language. Economists typically use various measures of ethnolinguistic fragmentation
to quantify ethnic diversity, while anthropologists may construct a combined measure
of shared values, cultural practices, and language based on specific characteristics of
the society of interest.

Social identity and individual decisions

At a micro level, ethnicity is considered a type of social identity. People identify with
their ethnic group, which, in part, defines who they are and influences their decisions.
Different ethnic groups have different prevailing norms, and these norms specify how
people should behave and treat each other. People who share the same ethnic group
adopt common social norms to signal ingroup cooperation while differentiating them-
selves from those in other groups. Individuals can choose the ethnic group(s) with
which they most identify, and their choice of ethnic affiliation can affect their economic
outcomes, such as educational attainment and employment opportunities.
There is overwhelming experimental evidence for the importance of ethnic identity
in economic decisions and behaviors. It has been shown that people behave differently
when they are “primed” or reminded of their ethnic identity. For example, people per-
form worse on a cognitive test if they are reminded of their inferior ethnic background
and they are less trusting toward people from a different ethnic group. They also con-
tribute less to a public good and are less cooperative when they interact with people
from different ethnic groups. These findings help to explain why societies with multiple
ethnic groups are likely to be less developed.

Policy implications of ethnoeconomics

Ethnic tension has become one of the most serious economic, political, and social prob-
lems in today’s world. Policy makers and politicians are struggling to find solutions
to ethnicity-related issues, such as how best to manage the influx of immigrants from
countries suffering from ethnic conflict and civil wars; how to resolve violence and
antagonism between different ethnic and religious groups living in the same country;
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and how to tackle the widespread radicalization and extremist ideologies arising among
certain ethnic groups. Research on ethnoeconomics will play a vital role in identifying
appropriate policy measures to tackle these issues. Since it is not possible to convert
multiethnic states into homogeneous ethnic states or to restrict immigration without
political repercussions (as well as a potential negative impact on long-term economic
growth), efforts could be directed toward reducing ethnic tension and increasing inter-
actions between different ethnic groups, which, in turn, would increase interethnic and
interreligious tolerance. This can be done through the education system by providing
students with opportunities to learn about and understand different cultures and the
values of people from different ethnic groups; through sports and other social activities;
and by increasing the political participation of minority ethnic groups. Cooperation and
trust are likely to be improved when the quantity and quality of interaction between
members of different ethnic groups increase. The greater the frequency of interethnic
interaction, the more likely people will view others as less dissimilar or as the “outgroup”
and the more likely that common social norms of cooperation and reciprocity will be
developed.

SEE ALSO: Caste; Economic Anthropology; Ethnicity in Anthropology; Ethnicity,

Multiculturalism, and Transnationalism; Gender, Nationalism, and Ethnicity; Geno-
cide; Nationalism; Self-Sufficiency; Violence, Structural and Interpersonal; Violence
and Warfare

REFERENCES AND FURTHER READING

Akerlof, George A., and Rachel E. Kranton. 2000. “Economics and Identity.” Quarterly Journal
of Economics 115 (3): 715–53.
Akerlof, George A., and Rachel E. Kranton. 2010. Identity Economics. Princeton: Princeton Uni-
versity Press.
Alesina, Roberto, and Dani Rodrik. 1994. “Distributive Politics and Economic Growth.” Quar-
terly Journal of Economics 109: 465–90.
Bates, Robert H. 2000. “Ethnicity and Development in Africa: A Reappraisal.” American Eco-
nomic Review 90 (2): 131–34.
Cheeseman, Nicholas, David M. Anderson, and Andrea Scheibler. 2013. Routledge Handbook of
African Politics. Oxford: Routledge.
Easterly, William, and Ross Levine. 1997. “Africa’s Growth Tragedy: Policies and Ethnic Divi-
sions.” Quarterly Journal of Economics 112 (4): 1203–50.
Henrich, Joseph, Robert Boyd, Samuel Bowles, Colin Camerer, Ernst Fehr, and Herbert Gintis.
2004. Foundations of Human Sociality: Economic Experiments and Ethnographic Evidence from
Fifteen Small-Scale Societies. Oxford: Oxford University Press.
Roth, Christopher, and Sudarno Sumarto. 2015. “Does Education Increase Interethnic and Inter-
religious Tolerance? Evidence from a Natural Experiment.” MPRA Paper No. 64558. Accessed
February 27, 2017, http://mpra.ub.uni-muenchen.de/64558.