Ethnic Diversity and Economic Performance (A J W Eliana La Ferrara) 2005

Journal of Economic Literature
Vol. XLIII (September 2005), pp. 762-800
Ethnic Diversity and

Economic Performance
ALBERTO ALESINA and ELIANA LA FERRARA*
We survey and assess the literature on the positive and negative effects of ethnic
diversity on economic policies and outcomes. Our focus is on communities of differ-
ent size and organizational structure, such as countries, cities in developed countries,
and villages and groups in developing countries. We also consider the endogenous
formation of political jurisdictions and highlight several open issues in need of fur-
ther research, in particular the endogenous formation of ethnic identity and the
measurement of ethnic diversity.
1. Introduction The potential costs of diversity are fairly

evident. Conflict of preferences, racism, and
Newthe
York and Los Angeles are among
two most troubled American cities prejudices often lead to policies that are at
in terms of racial relations; at the same time the same time odious and counterproductive
for society as a whole. The oppression of
they are constant producers of innovation in
the arts and business. The United States minorities may lead to political unrest or
even civil wars. But a diverse ethnic mix also
itself is an economically successful melting
brings about variety in abilities, experiences,
pot, but many of its social problems are
and cultures that may be productive and
related to racial and ethnic cleavages. The
may lead to innovation and creativity. In
"tragedy of Africa" is, according to many,
what follows, we try to highlight the trade-
largely a result of ethnic conflict, which is
off between the benefits of "diversity" and
indeed pervasive in many parts of the
the costs of heterogeneity of preferences in a
developing world. So, what are the pros and
diverse multiethnic society.
cons of "diversity," being that racial, ethnic,
In order to bring more evidence to bear
religious, or linguistic?
on this question, we plan to examine jointly
* Alesina: Harvard University. La Ferrara: Bocconitwo strands of the literature that have pro-
University . We thank Roger Gordon, David Laitin, John
McMillan, and two anonymous referees for very usefulceeded in a parallel way: one on cross-coun-
try
comments. Angelo Mele provided excellent research comparisons and one on local
assistance. Alesina is grateful to the NSF for financial
communities. The latter is itself split into
support through a grant to the NBER. This paper is part
two subareas with little communication
of the Polarization and Conflict Project CIT-2-CT-
between the two, namely the public
2004-506084 funded by the European Commission-DG and
urban economics literature on U.S. cities
Research Sixth Framework Programme. This article
reflects only the authors' views and the Community is not
on
liable for any use that may be made of the information the one hand, and the development lit-
contained therein. erature that focuses on groups and local
762
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Alesina and La Ferrara: Ethnic Diversity and Economic Performance 763
communities on the other. Within both effect is that the productivity benefits of skill
complementarities are realized only when
strands of the literature, one approach takes
the size and number of jurisdictions (coun- the production process is sufficiently diversi-
fied, as in advanced economies. Another-
tries or localities) as given and studies the
effects of different degrees of diversity possibly
on complementary-explanation is
quality of government, economic policies, that richer societies have developed institu-
tional features that allow them to better
growth, unrest, crime, civil wars, etc. A sec-
ond and less developed approach focuses on cope with the conflict element intrinsic in
the fact that the number, size, and shape diversity
of and isolate or moderate its negative
effects. From the micro to the macro level,
jurisdictions (countries or localities) is itself
endogenous, namely determined by the in fact, the importance of adequate "rules of
interaction of individuals and groups. the game" to manage diversity is stressed by
So, is diversity "good" or "bad"? all disciplines.1
Fragmented societies are often more proneBefore going any further, we need to clar-
to poor policy management and pose more ify three points. First, we are aware that
politico-economic challenges than homoge- American cities are very different from
nous ones; it is easy to find rather volumi- African villages, but we believe that high-
nous evidence on this point. However, to the lighting similarities and differences in the
extent that not all diverse societies are a fail-
findings may shed some light on the ques-
ure but in fact some work much better than tion at hand, for instance how different lev-
others, and in fact rather well, it is important els of development and different types of
to understand why and how. We propose a racial, linguistic, or religious conflict play out
simple theoretical framework in which the in the political economy of various parts of
skills of individuals from different ethnic the world. Also, comparing microeconomic
groups are complementary in the produc- effects at the team level with macroeconom-
tion process for a private good, implying that ic effects at the country or city level is useful
more diversity translates into increased pro- to get an idea on the mechanisms underlying
ductivity. On the other hand, individual util- the economic effects of diversity.
ity also depends on the consumption of a Second we need to clarify what we, and
shared public good and, since different eth- the literature which we review, mean by var-
nic groups may have different preferences ious terms like diversity, fractionalization,
on the type of public good to provide, ethnicity, race, etc. The empirical literature
increased diversity lowers the utility from on cross-country studies has typically used
public good consumption. The size of the various measure of ethno-linguistic fraction-
public sector and the number of ethnic alization. An "ethno-linguistic group" (often
groups are determined by the trade-off referred for brevity as "ethnic group") is
between these two forces. We verify the identified by a language only in some cases
consistency of this theory using repeated and in other cases by language and skin colori
cross-sectional data on countries and locali- or other physically attributes; a variety of
ties in the United States and we find that,
1 For a series of case studies on work teams supporting
while ceteris paribus increases in ethnic the notion that diverse groups function better when inter-
diversity are associated with lower growth group dynamics and allocation rules have been targeted to
rates, the interaction between diversity and minimize the conflict between minority and majority
members, see Susan Jackson and Marian Ruderman
the income level of the community under (1996) and Thomas Kochan, Katerina Bezrukova, Robin
study is positive. This suggests that ethnic Ely, Jackson, Aparna Joshi, Karen Jehn, Jonathan Leonard,
David Levine, and David Thomas (2002). For a more
diversity can be beneficial (or at least less
macroeconomic survey on the interplay between ethnicity
detrimental) at higher levels of develop- and institutions in the rational choice literature, see
ment. One potential explanation for this Andreas Kyriacou (2005).

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764 Journal of Economic Literature, Vol. XLIII (September 2005)
indexes have been suggested and we will dis- To put it differently, we do not review in any
cuss below similarity and differences. In the detail the literature linking fractionalization
context of the literature on American cities, to civil wars or the literature on the effects of
racial groups are identified with the Census wars (civil or otherwise) on the economy.
definition of "race," based on five categories: However boundaries are never neatly
(1) white, (2) black, (3) American Indian, defined, and judgment calls are often neces-
Eskimo, Aleutian, (4) Asian, Pacific Islander, sary about which paper or issues fall on
and (5) other (including Hispanic). Some which side of the boundary. We tried our
studies also look at "ancestry" or ethnic ori- best, but we readily plead guilty of making
gin, most often defined in this context as the judgment calls that may reflect our uneven
country of birth of the American individual knowledge of the literature.
(for in stance, Western European, Eastern We proceed in the following way. In sec-
European, Indian, etc.). In the development tion 2, we discuss the theoretical underpin-
literature on village communities, diversity is nings of the relationship between ethnic
measured with reference to language/ethnic diversity and economic performance. We
group and more seldom through member- also sketch a simple model, which has no
ship in different clans or tribes. We will use pretence of being innovative but illustrates
the terms "fractionalization" and "diversity" clearly the pros and cons of ethnic frag-
when we want to be generic and not refer to mentation and sets the stage for the discus-
any particular type of identifying character- sion of the literature (mostly empirical) that
istics of the groups; we will use ethnic, racial, follows. Section 3 discusses the effects of
religious fragmentation, and diversity when ethnic and racial fragmentation in various
we want to be more specific. With the term types of communities holding the number
"diverse society" (or city or country) we and size of communities as exogenous. We
mean a nonhomogenous place. The term examine evidence collected on three types
fractionalization, on the other hand, will be of communities: social groups, localities,
directly related to a specific measure of and nations. Section 4 discusses the ques-
number and size of groups: specifically, a tion of endogenous formation of groups,
more fractionalized place is one in which the localities, and nations. Section 5 concludes
probability the two randomly drawn individ- by discussing several open questions in this
uals belong to the same group is lower. In area of research. The last section draws
surveying the existing literature, we do not some tentative conclusions and policy
touch on the question of what identifies an implications.
ethnic group and we take the classifications
2. Theories on Diversity
adopted by the authors as given. We briefly
discuss the issue of how ethnic identity is The goal of this section is to briefly high-
defined in section 5, although we are aware light some basic economic forces underlying
that this topic would deserve a much more in the relationship between ethnic diversity
depth treatment (which however goes and economic performance. We begin by
beyond the scope of the present article). trying to offer a coherent picture of the
Finally, and this is the third point, when microfoundations for this relationship. We
reviewing a broad strand of the literature at then move to an analysis of the impact of
the intersection of economics, political sci- diversity on public policies and productivity
ence, sociology, and history, it is important to through a simple model.
set some boundaries. We limit ourselves to
2.1 Some "Microfoundations"
"direct" economic effects of diversity; we
leave aside indirect effects that may go First diversity can affect economic choices
through civil wars, crime, revolutions, etc.by directly entering individual preferences.

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Early work on social identity theory has proposed by James Fearon and David Laitin
established that patterns of intergroup (1996) to explain interethnic cooperation.
behavior can be understood considering that Using a social matching model, they show
individuals may attribute positive utility to that cooperation amongst different ethnic
the well being of members of their own groups can arise through either of two chan-
group and negative utility to that of mem- nels. The first, which they label "spiral"
bers of other groups (see e.g., Henri Tajfel, equilibrium, occurs when conflict between
Michael Billig, Robert Bundy, and Claude individuals is expected to spiral to the whole
Flament 1971). A recent formalization of group and the fear of this induces coopera-
this concept is the analysis of group partici- tion on the equilibrium path. The second,
pation by Alesina and La Ferrara (2000), labeled "group-policing" equilibrium, is one
where the population is heterogeneous and in which deviations by members of other
individual utility from joining a group ethnic groups are ignored and each group
depends positively on the share of group sanctions deviations by its own members.
members of one's own type and negatively Finally, an interesting application of the
on the share of different types.2 "strategic" role of diversity concerns the
Second, diversity can affect economic out- incentives to innovate through individual ini-
comes by influencing the strategies of indi- tiative. Two recent studies shed light on this
viduals. Even when individuals have no taste point. Eli Berman (2000) uses a club good
for or against homogeneity, it may be opti- model with social interactions to argue that
mal from an efficiency point of view to trans- small communities can ensure the loyalty of
act preferentially with members of one's own their members by "taxing" activities outside
type if there are market imperfections. For the club (e.g., innovations). Tanguy Bernard,
example, Avner Greif (1993) argues that Alain de Janvry, and Elisabeth Sadoulet
traders in Medieval times formed coalitions (2004) also study a context in which local
along ethnic lines in order to monitor agents communities try to restrain innovations by
by exchanging information on their oppor- subgroups, but once enough diversity exists
tunistic behavior. Ethnic affiliation helped within a local community, "differentiating
sustain a reputation mechanism in the pres- organizations" may actually emerge.3
ence of asymmetric information. But strate- Finally, diversity may enter the production
gies can be conditional on one's ethnic function. People differ in their productive
skills and, more fundamentally, in the way
identity also in the presence of perfect infor-
mation. La Ferrara (2003a) shows that, when they interpret problems and use their cogni-
contracts cannot be legally enforced (and tive abilities to solve them. This can be con-
therefore have to be "self-enforcing"), mem- sidered the origin of the relationship
bership in ethnic groups allows an enlarge- between individual heterogeneity and inno-
ment of the set of cooperative strategies that vation or productivity. An elegant formaliza-
can be supported. The reason is that both tion of this concept is provided by Lu Hong
punishment and reciprocity can be directed and Scott Page (1998), who prove two key
not only at the individual but to other mem- results on this point. First, a group of "cogni-
bers of his/her group. A similar reasoning is tively diverse" problem solvers can find opti-
mal solutions to difficult problems; second,
2 A "business counterpart" of the preference element in
diversity may be seen in the theories of "customer dis- 3 Note that all these studies indicate a role for ethnic
crimination." According to these theories, businesses diversity in facilitating the enforcement of informal con-
whose employees reflect the ethnic mix of the communi- tracts, but this role becomes less and less important as
ties in which they operate perform better than those who more transactions are mediated through the market, i.e.,
do not, as customer satisfaction increases from interacting as the level of economic development of the society
with service providers similar to themselves. increases. We return to this issue below.

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under certain conditions, a more diverse performance, and generally find a positive
group of people with limited abilities can effect of racial and gender diversity on cre-
outperform a more homogeneous group of ativity and task completion. For example,
high-ability problem solvers. The intuition is O'Reilly, Williams, and Sigal Barsade (1997)
that an individual's likelihood of improving analyze thirty-two project teams and find
decisions depends more on her having a dif- that more diversity leads to more conflict
ferent perspective from other group mem- and less communication, but controlling for
bers than on her own high expected score. At the latter it also leads to higher productivity.
a more applied level, Alesina, Enrico The few existing studies carried on real
Spolaore, and Romain Wacziarg (2000) organizations offer a more complex picture.
employ a Dixit-Stiglitz production structure Summarizing the findings of their recent
where more variety of "intermediate inputs," research projects, Kochan et al. (2002) argue
that can be interpreted as more variety of that no significant direct relationship
individual skills, increases total output. between diversity and team performance
Andrea Prat (2002) raises related points in emerges unless the specific organizational
the context of team theory. In teams where context and policies are accounted for. The
jobs are complementary, homogeneity has importance of the organizational context to
positive effects and the other way around. minimize conflict within the group is also
Gianmarco Ottaviano and Giovanni Peri highlighted in a model by Michelle
(2003) also investigate the pros of diversity Garfinkel
in (2004). She considers a setting in
production. Diversity and related amenities which individuals compete in a winner-take-
affect the value of land, which enters the all market. The formation of groups reduces
production function. These models, howev- conflict over the resource compared to the
case in which all individuals compete with
er, do not identify a trade-off in the produc-
tion function since more heterogeneity each is other, but it also adds another dimen-
always better than less. The costs of hetero-
sion of rivalry within the groups, as members
geneity are outside the production function.need to agree on how to distribute the
Edward Lazear (1999a, 1999b) also discuss-
resource between themselves. The availabil-
es how different skills in a production unitity of institutional mechanisms to solve the
"within group" allocation more or less easily
may increase overall productivity. He identi-
fies a trade-off between the productive ben-than the "between groups" one is a crucial
efits of diversity and the possible costs that
factor in understanding the role of diversity
may arise due to difficult communication in teams.
between people with different languages,

culture, etc. Purely from the point of view2.2
of Costs and Benefits of Diversity: A
maximization of productivity, there is an Simple Model
optimal degree of heterogeneity that is iden-
2.2.1 Private Goods, Public Goods, and
tified by the optimal point of this trade-off
Diversity
given also the nature of the production unit
and its technology. This trade-off alsoWe provide here a simple model that
helps to clarify the pros and cons of ethnic
emerges from a number of recent studies on
organization performance, surveyed among diversity and offers a useful perspective for a
others by Jackson and Ruderman (1996),
review of the empirical literature. Consider
Katherine Williams and Charles O'Reilly
a community, say a country, with K different
(1998), and Orlando Richard, Kochan, and
types of individuals, for a total population of
Amy McMillan-Capehart (2002). The major-
N individuals. For simplicity, every group
has the same size s= N/K. Output produced
ity of these studies rely on laboratory experi-
ments to test the link between diversity andin the country is given by:

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
(1) Y=Nf(x;K), where t is the income tax rate. Suppose that

a benevolent government can choose the
where x is the fixed amount of input, say
tax rate, for given number of types. The
labor, equal for every person and type. We
problem is:
assume that fx> 0, fxx<0, where subscripts
denote partial derivatives. If variety in max N[u(c) + v(g,K)]
production is "good," then we have
fK> 0, fyK<0. This is the simplest possible s.t. Nc + g = Nf(x,K)
way of capturing a benefit from variety in g = tNf(x,K).
production, since per capita income is
The first order condition that defines an
increasing in the number of different types
in the population. We also assume comple- interior solution for this problem is:6
mentarity, i.e., f> 0.4
Output can be either consumed privately (4) Nvg(tNf(x,K);K) =uc((1-t)f(x,K)).
or used to produce a public good, g. This equation implies that the marginal ben-
Individual utility is separable in the private efit of taxation in terms of production of pub-
and public good and is given by: lic good (LHS) has to be equal to the
(2) U'=u(c,) +v(g,K), marginal cost of taxation in terms of reduc-
tion of private consumption (RHS).
where uc>O,Ucc<O, vg>0,v ,<0. We also Distortionary taxes on, say, the labor supply
assume vK< 0, v,< 0 and vgK< 0, implying would not change the basic message.
that the enjoyment of the public good is
Standard applications of the implicit function
decreasing with the number of types in the
theorem lead to the following result:
population. These preferences can be
rationalized in two ways. One is that sharing (5) sign{dt/dKl}= sign{tNwvg",f
a public good implies contacts between peo-
ple, and contacts across types produce nega- +NvgK - (1- t)uccfK)
tive utility, as in Alesina and La Ferrara Note that we are holding N constant to
(2000). A different rationalization follows
isolate the effects of more fragmentation
Alesina and Spolaore (1997). They distin- without changing total population size.
guish between different kinds of public While the sign of (5) is generally uncertain,
goods in a context where the public good dt/dK<O as long as vgK is large enough in
chosen is the one preferred by the median absolute value. The intuition for this condi-
voter. The larger the number of types in the tion is clear: as long as the marginal benefit
population, the larger the average distance of public consumption goes down substan-
between each type and the median one that tially with an increase in ethnic fragmenta-
chooses the public good.5 tion, then a larger K means that the social
The budget constraint implies: planner will choose a smaller size of the pub-
(3) g=tNf(x,K), lic good in favor of more private good. The
only force working against this effect is the
4 This can be considered a reduced form simplification decreasing marginal utility of the private
of a production function with a variety of inputs a la
good. In what follows, we refer to the case
Dixit-Stiglitz as used by Alesina, Spolaore, and Wacziarg
where dt/dK<0 as our "benchmark" case.
(2000). While we could derive our results using the fully
specified Dixit-Stiglitz production function, we find it This benchmark implies that, as a country
more useful for the reader to offer a simpler work horse
model. becomes more ethnically fragmented, it may
5 In Alesina and Spolaore (1997), there are multiple
kinds of public goods to be supplied with fixed quantities.
More generally, both the type and the quantity of public 6 Note that the second order condition is always satis-
goods could change. fied under our assumptions.

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become more productive but it will choose envelope theorem establish, under fairly
to have a smaller size of government general conditions, the following:9
(remember that t = g/Y, thus t represents the
Remark 1 If fxK is positive and sufficiently
size of government). More generally, private
large, then dK/dx > 0.
consumption will increase but public con-
sumption will decrease. This is an empirical A higher level of per capita input raises
implication which we shall test below.T the benefits of variety and increases the opti-
Another application of the implicit function mal number of groups if the cross partial fXK
theorem leads to the following result: is large enough. In this case, as the level of
individual output increases, the productivity
(6) sign{dt/dx} = sign{tN2vg- (1-t)ucc1. gains from variety go up as well, so the ben-
Note that if dt/dx <0, then, a fortiori, efit from more ethnic fragmentation are
dt/dK<O0 in expression (5). However one increasing with the level of per capita out-
could have dt/dx > 0 and dt/dK<0, i.e., it is put. This is an empirically plausible implica-
tion: the benefits of skill differentiation are
perfectly possible that the size of govern-
ment is increasing with the level of individ- likely to be more relevant in more advanced
ual productivity x, and thus in GDP, but and complex societies.
decreasing in fragmentation. 2.2.2 On the Number of Jurisdictions
We next allow the social planner to choose
The same theoretical framework can be
not only the level of taxation but also the
optimal number of types, K, again holding extended to analyze the optimal number of
the size of the country constant. The first jurisdictions, along the lines of Alesina and
order condition for an interior solution with Spolaore (1997, 2003).10 We can think of the
respect to K is: optimal size of a jurisdiction (say a country)
as emerging from the trade-off between the
benefits from variety and the costs of het-
(7) uc(.)(1-t)fK+ vg(.)tNfK -VK(.)
and the second order conditions are satis- erogeneity. In the language of our model
fied. Condition (7) equalizes the marginal above, we could think of a social planner
benefit of letting in an additional group in choosing the size of the country with the
terms of increased productivity and tax rev- goal of maximizing total welfare subject to
the trade-off between benefits and costs of
enues (LHS) to the marginal cost of having
one more groups to share the public good heterogeneity. The larger the (positive)
with (RHS).8 effect of variety in production and the lower
An interesting comparative statics exer- the utility costs of heterogeneity, the larger
cise regards the effect of an increase in the size of the jurisdiction chosen by the
x (individual level of input/productivity) social planner. More specifically, imagine
on the optimal number of groups. 9 Intuitively, these conditions require that the indirect
Straightforward algebraic computations effects of a change in t caused by a change in K do not
applying the implicit function and the override the direct effect of a change in x on K. Details are
provided in a theoretical appendix available from the
authors upon request.
7 Note of course that if f,<0, then income per capita 10 For an earlier contribution on endogenous jurisdic-
would go down as fragmentation increases and the allocations which is however not as focused on diversity of pref-
tion of this lower total output between private and public erences, see David Friedman (1977). Also, the literature
consumption would depend on the marginal benefits of on the size of nations has some connection with "club the-
the two. ory" (see in particular James Buchanan and Roger Faith
8 Note that if there were no benefits in production from 1987). However, there are two key differences. One is that
variety (fK< 0), then the solution would be at a corner with club theory generally does not consider the geographic dis-
the minimum number of groups, possibly 1, that is, a fully tribution of club members; second, club theory empha-
homogeneous society. The first order condition for the sizes the issue of congestion which is absent from the size
choice of t is of course unchanged. of nations literature.

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that each place specializes in the production reproduced by the "market" without a social
of an intermediate good and assume that planner, a question explored in depth by
crossing the boundaries of political jurisdic- Alesina and Spolaore (2003). In general, the
tions is costly. Then the more beneficial is answer is negative and the equilibrium size
variety in production, the more efficient is to of jurisdictions varies as a function of the
employ many different intermediate goods type of political institutions and rules avail-
and the larger the total border crossing able to change borders, a set of issues that
costs. Should we then expect larger coun- we do not pursue here.12
tries to be more productive because they The same ideas about endogenous border
have more variety? The answer depends on formation can be applied to subnational gov-
the structure of international trade. Trade ernments; this is in fact the goal of Alesina,
flows are generally hampered by country Reza Baqir, and Caroline Hoxby (2004) who
borders even when the trade regime is free extend the Alesina-Spolaore framework and
and without explicit policy-induced barri- adapt it to localities with a special reference
ers.11 With severe trade restrictions, the size to the United States. They produce a model
of a country would be very important for in which the number of localities depends on
productivity; on the other hand with free the distribution of different groups and their
trade countries can be small, enjoy the ben- density in various geographical areas; once
efit of homogeneity as far as public goods again the key is the trade-off between
provision is concerned but take advantage of economies of scale, heterogeneity of prefer-
diversity in production (and consumption) ences, and in this case mediated by density of
by means of international trade. One impli- the population. The traditional literature on
cation of this is that the effects of the size of jurisdiction formation in the United States is
countries on economic success is mediated overwhelmingly focused on differences in
by the extent of freedom of trade, a result
income, with the rich trying to isolate them-
empirically supported by Peter Katzensteinselves from the poor.13 We do not review this
(1985), Ronald Rogowski (1987), Alberto literature, and we focus instead on the much
Ades and Edward Glaeser (1995), Alesina,
more limited empirical literature that con-
Spolaore, and Wacziarg (2000), andcentrates on jurisdiction formation based
Francisco Alcala and Antonio Ciccone upon racial and ethnic cleavages.
(2004), amongst others. Note that some
2.2.3 Summing Up the Implications of the
diversity in a country may favor trade as well.
Theory
For instance, a certain ethnic minority in
country A can be a "link" with a country TheBpotential benefits of heterogeneity
come from variety in production. The costs
where that ethnic group is a majority, there-
fore facilitating trade between A and B. The
come from the inability to agree on com-
extent to which ethnic and cultural relations
mon public goods and public policies. One
facilitate trade and more generally econom-
testable implication is that more heteroge-
ic integration is well established; see for
neous societies may exhibit higher produc-
instance Samuel Huntington (1998) for an
tivity in private goods but lower taxation and
informal discussion and James Rauch
(2001), and Rauch and Alessandra Casella
12 Under certain conditions, Alesina and Spolaore
(2001, 2003) for models and empirical(2003)
evi- show that, when borders are decided by majority
voting, in equilibrium countries may be "too small"
dence. An important question is underbecause
what the benefits of size are not fully internalized by
conditions the optimal solution would be voter.
the median
13 Important references include Dennis Epple and
11A large literature has documented this fact; see Thomas Romer (1991) and Stephen Calabrese, Glenn
Alesina, Robert Barro, and Silvana Tenreyro (2002) for a Cassidy, and Epple (2002) who also provide a good review
review and some new results. of the previous literature.

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
lower provision of public goods (in relative that ethnic fragmentation is less disruptive
terms). The benefits in production from in democracies because minorities feel rep-
variety in skills are more likely to be rele- resented. Alesina and Glaeser (2004) discuss
vant for more advanced societies. While in at length how, in the United States, propor-
poor economies ethnic diversity may not be tional representation both at the federal
beneficial from the point of view of produc- level and at the local level was opposed in
tivity, it may be so in rich ones. The more the nineteenth and early twentieth century
unwilling to share public goods or resources precisely on the ground that it would allow
are the different groups, the smaller the size more representation of blacks, something
of jurisdictions.1'The larger the benefits in that would not please the white majority.
production from variety, the larger the size. More generally, the type of political institu-
If variety in production can be achieved tion is endogenous to the nature of inter-
without sharing public goods, different group conflict, a point made in theory and
groups will want to create smaller jurisdic- also tested by Philippe Aghion, Alesina, and
tions to take advantage of homogeneity in Francesco Trebbi (2004a). First of all, if a
the enjoyment of the public good. group is politically dominant, it may impose
a type of government that restricts freedom
2.2.4 What Is Not in the Model
of the minority. On the other hand, a more
fractionalized society in which no group is
Many important aspects are missing in
dominant may end up with a constitution
this model, but a few in particular are worth
especially careful to defend the rights of
pausing upon. First, we have not modeled minorities.
explicitly the possible benefits of informa-
tion diffusion and enforcement of contracts The third missing aspect in the model is
that, while pure public goods may be lower in
related to ethnic diversity. These mecha-
more fragmented communities, the amount
nisms are probably most likely to be impor-
of publicly provided "private" goods--espe-
tant for developing countries or the poorer
cially those that can be targeted to specific
regions of middle income countries with
groups-may be larger. We can then have a
very rudimentary forms of market institu-
positive correlation between fragmentation
tions and legal enforcement. Marcel
and ethnically based patronage.'15
Fafchamps (2004) discusses a variety of
Finally, in the model an increase in diver-
models of the pros and cons of ethnically
sity would simply lead to smaller jurisdic-
based economic networks as way to substi-
tions. In practice this process may be
tute for "western style" markets, and reviews
peaceful or not, leading to violent civil wars.
much evidence with specific reference to
several Sub-Saharan African countries in This is an important topic that we do not
investigate directly here; we refer the reader
Africa. We will return on this point below.
to Fearon and Laitin (2003), Fearon (2002),
Second, the model is institution free so we
and the references cited therein.
cannot address the question of the interac-
tion between political institutions and diver- 3. The Consequences of Fragmentation
sity. Certain types of institutions may be In this section, we review the main contri-
more conducive to harmony than others.
butions that have linked ethnic fragmenta-
Paul Collier (2000, 2001) for instance argues
tion to economic outcomes, going from the
more aggregate level (country level frag-
14 In principle, various ethnic groups could segregate mentation and performance) to the more
within the same jurisdiction and use different public micro level, i.e., local jurisdictions (cities,
goods. However, segregation is often imperfect, may entail
other costs, and some public goods are by nature jurisdic- 15 See Alesina, Baqir, and Easterly (2000) for some
tion wide. evidence on this point on U.S. cities.

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
districts) down to the level of small groups and Sylviane Guillaumont Jeanneney (2000)
(schools, associations, cooperatives). due to problems of data missingness.17
3.1 Countries Despite the criticisms, subsequent estimates
have taken Easterly and Levine's results as a
3.1.1 Effects on Productivity and Income
benchmark, and have confirmed them.
Level
Using the updated data set of Alesina,
Economists have started to pay attentionDevleeschauwer, Easterly, Sergio
Arnaud
Kurlat, and Wacziarg (2003), we now test
to the effects of racial fragmentation across
whether the negative correlation between
countries at least since a paper by William
Easterly and Ross Levine (1997) who arguedethnic fragmentation and growth holds irre-
spective of the level of economic develop-
that, ceteris paribus, more racially fragment-
ment
ed countries grow less and that this factor is or, as our model suggests, is mitigated
a major determinant of Africa's poor eco-benefits of heterogeneity for pro-
when the
ductivity are taken into account.
nomic performance.16 Several subsequent
Measurement and data issues are discussed
papers confirmed these results in the context
of cross-country growth regressions. In their in section 5.2. A brief description of
below
overview of Africa's problems, Collier the anddata is contained in the appendix. For
Jan Gunning (1999) also place much empha- it is enough to note that Alesina et al.
now
sis on ethno-linguistic fractionalization (2003)
(cou- construct two indices with the same
pled with low political rights) as a major structure as above but using two different
(although closely related) characterizations
explanation for the lack of social capital, pro-
ductive public goods, and other growth of groups. One is more comprehensive, is
enhancing policies. labeled ELF, and extends the Easterly and
Easterly and Levine's paper, and much Levine
of index by differentiating groups that
may speak the same language but have dif-
the literature that followed, used as a meas-
ure of fragmentation the probability that ferent ethnicity based upon certain physical
two randomly drawn individuals fromcharacteristics.
the A striking example would be
unit of observation (say, country) belong blacks
to and whites in the United States, or
various ethnic groups in Latin America all
two different groups. Their ethno-linguistic
fractionalization (ELF) measure is a speaking the same language, often that of a
Herfindahl-based index defined as follows: former colonizer.18 The second index relies
exclusively on language spoken.
(8) ELF= 1- s, i
Table 1 shows some standard growth
where si is the share of group i over the total regressions adopting the baseline specification
of the population. This index represents the of Alesina et al. (2003). The dependent vari-
probability that two randomly drawn individ- able is the growth rate of GDP per capita
uals from the population belong to different from 1960 to 2000 and we use a SUR method
ethnic groups. The source used by Easterly in four ten-year periods. The first two
and Levine to construct the ethno-linguistic columns use the more comprehensive index
groups is the Atlas Narodov Mira, originally of fractionalization (which we label ELF),
compiled by Soviet researchers. Apart from 17 Arcand, Guillaumont, and Guillaumont Jeanneney
issues of measurement (to which we return (2000) note that African countries constitute only 27 of the
below), the robustness of Easterly and 172 observations in Easterly and Levine's main regression,
and highlight the potential sample selection bias generat-
Levine's results has been called into question ed by the fact that the data is missing precisely for those
by Jean-Louis Arcand, Patrick Guillaumont, countries (in Africa) that have experienced slower growth.
18 In fact, several countries in Latin America appear as
16 An early and never published paper by David Canning more fractionalized compared to Easterly and Levine's
and Marianne Fay (1993) used ethnic fractionalization as an classification using this more comprehensive index. See
instrument for growth. Alesina et al. (2003) for more details.

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
while columns 3 and 4 use the one based effects at lower levels of income. In two out
solely on language. Columns 1 and 3 show of
a four regressions, this effect is strongly
baseline regression with very few controls:
statistically significant.
regional dummies, initial income, andCollier (2000) argues that fractionalization
schooling. Columns 2 and 4 include addi-
has negative effects on growth and productiv-
ity only in nondemocratic regimes, while
tional controls, such as measures of political
democracies manage to cope better with eth-
stability and quality of policy. One may argue
(and in fact we explore this point below) that
nic diversity. This is an important result worth
the effect of fractionalization on growth mayexploring further. It is well known that per
go through exactly these variables; thereforecapita GDP and democracy are positively cor-
by controlling for these variables one may related: richer countries are more democrat-
underestimate the effects of fractionalization
ic. From a statistical point of view, this high
on growth. Overall, table 1 shows consider-
correlation makes it quite difficult to disen-
tangle the effects of democracy from the
able support for the negative effects of frac-
tionalization on growth.19 In terms of effects of the level of income on any depend-
magnitude, the estimates in column 1 sug- ent variable that might be affected by either
one or both.20 Table 3 considers the effects of
gest that, ceteris paribus, going from perfect
homogeneity to maximum heterogeneity the interaction of ethnic and language frac-
tionalization with the Gastil index of democ-
(i.e., increasing ELF from 0 to 1) would
reduce a country's growth rate by 2 percent-racy. This index is decreasing in the level of
age points per year. Increasing ethnic frac- democracy so the expected sign on the inter-
tionalization by one standard deviation wouldaction with fractionalization is negative. The
reduce growth by 0.6 percentage points per estimates in table 3 are consistent with
Collier's findings that fraction-alization has
year. These are quite sizeable effects. All the
other controls have signs consistent with theless negative effects in democracies.
vast literature on growth. Table 4 uses the two basic specifications to
An important question is whether or not try and disentangle the effects of income and
democracy. Since we are adding several vari-
these negative effects from ethnic fraction-
alization on growth depend on the level ofables with interactions, we use the simpler
income or other features of society. In the
specification. Overall, the effect of income
model of section 2, we showed that, under seems more robust and more precisely esti-
reasonable conditions on technology, frac- mated than the effect of democracy.
However, these results have to be taken cau-
tionalization may have positive (or less neg-
tiously given the high correlation between
ative) effects on output at higher levels of
democracy and GDP per capita.
development. Table 2 adds to all the regres-
sions of table 1 an interaction term between The punch line is that rich democracies are
fractionalization and GDP per capita. In all
more capable of "handling" productively eth-
nic diversity. Note, however, that as argued
four regressions, the interaction of initial
above, the variable "democracy" may be
GDP per capita and fractionalization has
the expected (positive) sign, suggesting that
endogenous to ethnic diversity. It may be the
indeed fractionalization has more negative case that racially fragmented societies that
choose democratic institutions are also those
19 These results are very similar to those reported by
Alesina et al. (2003). The only difference is that they use
both a linear and a quadratic term for initial per capita20 This is a well known and common stumbling block
income. We use only the linear one because belowfor weanybody who has tried to estimate empirically the costs
explore interactions of the initial level of income and
with
benefit of democracy on economic variables, a vast lit-
erature that we do not review here; see Jose Tavares and
other variables and we want to keep a simpler specifica-
Wacziarg (2001) for one of the most recent and careful
tion. In any case results with a quadratic term for initial
income are very similar for our variables of interest. contributions.

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TABLE 1
FRACTIONALIZATION AND LONG-RUN GROWTH
(DEPENDENT VARIABLE IS GROWTH OF PER CAPITA GDP)
ETHNIC LANGUAGE
Variable 1 2 3 4
Dummy for the 1960s 0.059 0.153 0.065 0.156

(3.357) (5.144) (3.563) (5.248)
Dummy for the 1970s 0.057 0.158 0.062 0.161
(3.093) (5.222) (3.280) (5.333)
Dummy for the 1980s 0.036 0.141 0.042 0.145
(1.940) (4.601) (2.213) (4.725)
Dummy for Sub-Saharian
Africa -0.008 -0.016 -0.009 -0.014
(-1.630) (2.853) (-2.026) (-2.595)
Dummy for Latin America
and the Caribbean -0.016 -0.011 -0.019 -0.018
(-4.458) (-2.923) (-5.252) (-4.201)
Log of initial income -0.004 -0.018 -0.004 -0.018
(-1.499) (-3.767) (-1.660) (-3.724)
Log of schooling 0.012 0.005 0.011 0.008
(2.767) (1.092) (2.627) (1.669)
Assassinations -21.342 -13.988
(2.212) (-1.010)
Financial Depth 0.012 0.010
(1.798) (1.652)
Black Market premium -0.021 -0.022
(4.738) (-4.953)
Fiscal Surplus/GDP (0.128) 0.132
3.369 (3.474)
Log of telephones per worker
(0.006) 0.004
2.078 (1.488)
Fractionalization -0.020 -0.014 -0.019 -0.021
(-3.005) (-1.795) (-2.979) (-2.881)
No of Observations 82; 88; 94 40; 69; 66 82; 86; 92 39; 68; 65

R-squared .23; .17; .35 .32; .43; 54 .21; .21; .30 .36; .47; .52
(t-statistics in parentheses)
Estimated using Seemingly Unrelated Regressions: a separate regression for each te
in which ethnic cleavages are lessquality. He finds that the negative effect of
deep and/or
the power distribution of groupsethnic
is such that
diversity is significantly mitigated by
none can impose a nondemocratic the rule.
presence of "good" institutions and the
Related to the issue of how marginal democracyeffect of ethnic diversity at the
interacts with ethnic conflict and with the maximum level of institutional development
level of development is the role played by is actually zero. Again, the institutional vari-
institutions in general. Easterly (2001) con- ables used as explanatory factors are likely
structs an index of institutional quality not exogenous and more work needs to be
aggregating Stephen Knack and Philip done to assess the marginal impact of insti-
Keefer's (1995) data on contract repudiation, tutional arrangements. Nonetheless, it
expropriation, rule of law, and bureaucratic seems important to take into account that,

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
TABLE 2
FRACTIONALIZATION AND LONG-RUN GROWTH
ETHNIC LANGUAGE
Variable 1 2 3 4
Dummy for the 1960s 0.064 0.220 0.098 0.253

(2.522) (5.116) (3.910) (6.827)
Dummy for the 1970s 0.061 0.226 0.096 0.260
(2.369) (5.179) (3.735) (6.897)
Dummy for the 1980s 0.041 0.209 0.077 0.245
(1.542) (4.757) (2.951) (6.411)
Africa -0.007 -0.014 -0.007 -0.011
(-1.574) (-2.479) (-1.478) (-2.138)
(-4.386) (-3.233) (-5.517) (-4.787)
(-1.297) (-4.253) (-2.420) (-5.523)
Log of schooling 0.012 0.006 0.011 0.009
(2.775) (1.112) (2.599) (1.966)
(-2.311) (-1.303)
(1.649) (1.385)
(-4.736) (-4.729)
Fiscal Surplus/GDP 0.136 0.146
(3.618) (4.048)
0.007 0.005
(2.532) (1.969)
(-0.655) (-2.319) (-1.851) (-4.382)
Fractionalization * log of
initial income 0.001 0.015 0.008 0.025
(0.227) (2.084) (1.279) (3.977)

R-squared .23; .18; .35 .27; .48; .55 .22; .25; .28 .36; .55; .56
Estimated using Seemingly Unrelated Regressions: a separate regression for each ten year p
whatever the mechanisms relatingsupply ethnictrue public goods should be lowe

more ethnically fragmented societies. T
diversity to economic growth, channeling
diversity toward productive uses mayempirical
require literature has focused more on
"quality" than on the "quantity" of pub
a particular set of "rules of the game."
goods partly because of data availability
3.1.2 Effects on Public Policies
order to carefully test the implication of t
An important prediction of the model
model on the quantity of public goods pr
sion, one
sketched in section 2 is that the propensity to would need aggregate measure

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
TABLE 3
FRACTIONALIZATION, DEMOCRACY AND LONG-RUN GROWTH
ETHNIC LANGUAGE
Variable 1 2 3 4
Dummy for the 1960s 0.059 0.153 0.073 0.159

(3.290) (5.090) (3.897) (5.331)
Dummy for the 1970s 0.056 0.155 0.069 0.162
(2.869) (4.983) (3.418) (5.220)
Dummy for the 1980s 0.035 0.137 0.050 0.146
(1.790) (4.358) (2.420) (4.632)
Africa -0.008 -0.014 -0.006 -0.010
(-1.628) (-2.493) (-1.371) (-1.805)
(-4.521) (-3.017) (-5.324) (-4.087)
(-1.619) (-3.933) (-2.274) (-4.029)
Log of schooling 0.012 0.007 0.013 0.010
(2.842) (1.351) (3.108) (1.959)
(-2.423) (-1.045)
(1.951) (1.897)
(-4.828) (-5.169)
Fiscal Surplus/GDP 0.117 0.131
(3.060) (3.520)
0.006 0.004
(2.185) (1.610)
(-1.856) (-0.233) (-2.187) (-0.877)
Democracy 0.001 0.003 0.002 0.002
(0.867) (1.833) (1.390) (2.064)
Fractionalization *
Democracy -0.002 -0.005 -0.003 -0.005
(-1.230) (-1.871) (-1.885) (-2.489)

R-squared .23; .19; .34 .33; .46; .53 .21; .26; .27 .35; .52; .52
Estimated using Seemingly Unrelated Regressions: a separate regression for each ten
(1999) and Alesina et al. (2003) show tha

the various components of the government
budget for a relatively large group of coun-
nic fragmentation is negatively correlate
tries. These data are notoriously of poor qual-
measures of infrastructure quality, li
ity and not disaggregated enough. andTherefore
school attainment and positively co
edcautiously.
results in this area have to be taken with infant mortality. These corre
Rafael La Porta, Florencio are
Lopez-de-
very strong in regressions without
Silanes, Andrei Shleifer, and Robert Vishny
per capita (that may be endogenous to

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
TABLE 4
FRACTIONALIZATION, DEMOCRACY AND LONG-RUN GROWTH
ETHNIC LANGUAGE
Variable 1 3
Dummy for the 1960s 0.118 0.138

(4.689) (5.593)
Dummy for the 1970s 0.115 0.135
(4.356) (5.197)
Dummy for the 1980s 0.096 0.117
(3.562) (4.426)
Africa -0.005 -0.003
(-1.053) (-0.668)
and the Caribbean -0.017 -0.020
(-4.793) (-5.267)
Log of initial income -0.012 -0.014
(-3.398) (-4.247)
Log of schooling 0.012 0.012
(2.878) (2.979)
Fractionalization -0.149 -0.170
(-3.510) (-4.135)
Fractionalization * log of
initial income 0.017 0.020
(3.233) (3.769)
Democracy 0.001 0.001
(0.665) (1.228)
Fractionalization *
Democracy -0.002 -0.003
(-1.067) (-1.944)
No of Observations 82; 87; 93 80; 85; 90

R-squared .21; .33; .30 .20; .39; .25
Estimated using Seemingly Unrelated Regressions: a separat
for
fragmentation). They lose instance,
some argue
of their that l
signif-
leaston
icance in regressions where as the
important.
right hand
side one controls for GDP An
per interesting
capita.21 In related
any q
the size
case, neither of these studies of public
argues transfer
that eth-
lic only
nic fragmentation is the goods. Forof
cause a large
"poor sam
Alesina,
quality of government": Glaeser, and
La Porta et Bruce Sacerdote
al. (1999),
(2001) show an inverse relationship between
21 Another variable that is correlated with racial frag-
the size of government social spending and
mentation is "latitude" and this high correlation makes it
transfers relative to GDP on the one hand,
sometimes difficult to disentangle the two effects sepa-
rately, although it is unclear why latitude per se (leaving and ethnic fractionalization on the other.
aside its possible effects on GDP per capita) should affect One explanation is that altruism does not
public policies. Often both variables (latitude and frag-
mentation) used together are insignificant while they are
travel well across ethnic lines. Relating this
significant if used separately. point to the model above, one can view

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
redistributive policies as a "public good" in a 1960 to 1990. Their only finding concerning
society that values equality as a public bene- racial composition is that population growth
fit. On this point, a comparison between is positively correlated with racial segrega-
United States and Europe seems especially tion in cities with large non-white commu-
suggestive. In the United States, welfare nities. This result suggests that growth is
spending and redistributive policies are higher when racial interaction is lower
much smaller than in Europe, consistent because of segregation. A suggestive inter-
with the fact that the United States is much pretation of this result that goes back to our
more racially and ethnically diverse than model may be that racial fractionalization
most countries in Continental Europe, a with segregation may allow for diversity in
point explored in much detail by Alesina and production and lower interaction in public
Glaeser (2004). One implication of this good consumption and social activity. Jordan
analysis is that, to the extent that Western Rappaport (1999) also studies population
European countries will become more eth- growth in cities and counties in the United
nically fragmented, their welfare systems States. He controls for many more determi-
will be under stress. nants of counties' characteristics and ameni-
ties and he finds that more racially
3.2 American Localities: Counties and fragmented counties grow less in terms of
Cities population.
In tables 5 and 6, we present some results
3.2.1 Effects on Productivity and Income
Level on population growth in counties that are in
line with our cross-country results. For the
American localities are an ideal setting to reason discussed above, we follow the liter-
study the effects of ethnic fragmentation ature in using population growth as our
because we have many observations anddependent variable. Table 5 reproduces for
excellent data, compared, say, to cross-coun-counties instead of cities and for a different
try data. Glaeser, Scheinkman, and Shleifer sample (1970-2000) the basic specification
(1995) have examined the growth of U.S. of Glaeser, Scheinkman, and Shleifer
cities using a similar structure to cross-coun- (1995). We do not find any effect of frac-
try growth regressions. They argue that thetionalization on population growth. In table
most appropriate measure of growth to use 6, we add an interaction of initial per capita
in this case is population growth. They note income level and fractionalization and we
that income growth is a natural measure forexperiment with different samples, noting
cross-country growth regressions because that we do not have data on income per
labor is relatively immobile across countries. capita before 1970. Broadly speaking, the
Instead, within the United States, the high results are consistent with the cross-country
mobility of individuals suggests that popula-results: we find that fractionalization has a
tion growth is the correct measure to use tonegative effect on population growth in ini-
capture areas and cities that are becoming tially poor counties and a less negative (or
increasingly more attractive economically even positive) effect for initially richer
and as a place to live in. As Olivier counties. This result significantly corrobo-
Blanchard and Lawrence Katz (1992) have rates the cross-country evidence in a setting
noted, migration within the United States where institutional and political differences
responds strongly and relatively quickly to should be definitely lower than across
income opportunities. countries.
Glaeser, Scheinkman, and Shleifer (1995) Two recent papers have looked directly
do not find any effect of racial fragmenta- at the productivity enhancing effects of
tion on the growth of cities in the sample diversity in American cities. Ottaviano and

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TABLE 5
FRACTIONALIZATION AND POPULATION GROWTH IN U.S. COUNTIES
(DEPENDENT VARIABLE IS GROWTH IN LOG OF POPULATION 1970-2000)
Variable 1 2 3 4
Intercept -0.088 0.902 -0.088 0.906

(-1.600) -18.66 (-1.600) (18.690)
Log of population 1970 0.034 -0.034 0.033 -0.036
(5.610) (-6.860) (5.170) (-6.910) -
Income per capita 1970(a) .095 -0.071 0.100 -0.068
(6.300) (-5.630) (6.360) (-5.290)
Growth in log of population
1960-1970 1.619 1.620
(44.730) (44.740)
Northeast -0.396 -0.273 -0.396 -0.271
(-12.480) (-10.960) (-12.410) (-10.800)
Central -0.413 -0.318 -0.413 -0.316
(-19.740) (-19.330) (-19.610) (-19.080)
South -0.115 -0.137 -0.116 -0.143
(-5.220) (-7.930) (-5.010) (-7.890)
Fractionalization 1960 0.019 0.042
(0.370) (1.080)
No of Observations 3133 3120 3120 3120

Adj. R-squared .17 .50 .18 .50
(a) Coefficient multiplied by 103.
Peri (2003) use causality

data on is however
rents unclear. Further
andwork,wage
U.S. cities and find that U.S. born individ- possibly using firm and plant level data,
uals living in more "culturally diverse" would be useful in this area.
cities in their terminology (i.e., cities with a In subsequent work, Ottaviano and Peri
larger share of foreign born people) pay (2004) find that the wage of white indi-
higher rents than those living in more viduals, after controlling for various other
homogeneous cities. In other words, diver- determinants, are higher in more diverse
sity seems to have positive "amenitycities where diversity is measured with index
effects" on production and consumption. based on main language spoken at home.
Their findings are robust to instrumenting They interpret this result as an indication of
the share of foreign born people with the higher productivity with diversity. A possible
distance from the closest "port of entry" criticism of this finding is that cities in which
into the United States. Along similar lines, the language spoken at home is not English
Richard Florida (2002a, 2002b) argues that may be cities of recent immigration and
amenities and diversity in U.S. cities immigrants may be attracted to faster grow-
attracts human capital. He constructs ing cities. While they try to correct for this
indices of heterogeneity of a place that are problem of reverse causation, it is not clear
not directly related to ethnicity but involve that there is a way of doing it convincingly.
proportions of gay households, diversity of
night life, etc. and finds that places that
score higher in these indices have also A very large literature in political science
higher human capital. The direction of and sociology examines the role of race in

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
TABLE 6
FRACTIONALIZATION, INCOME AND POPULATION GROWTH IN COUNTIES
(DEPENDENT VARIABLE IS GROWTH IN LOG OF POPULATION 1970-2000)
growth 1960-2000 growth 1970-2000 growth 1970-2000 growth 1980-2000

Variable 1 2 3 4 5 6 7 8
Intercept -0.221 0.679 0.043 1.026 -0.096 0.974 -0.397 -0.229

(-2.500) (7.170) (0.660) (18.360) (-1.450) (16.930) (-9.550) (-7.160)
Log of population 1960 0.019 -0.038
(2.250) (-4.510)
Log of population 1970 0.029 -0.039 0.038 -0.036
(4.560) (-7.470) (6.020) (-6.710)
Log of population 1980 0.051 0.019
(13.630) (6.900)
Income per capita 1970(a) 0.216 0.049 0.059 -0.105 0.086 -0.094
(8.810) (1.940) (3.060) (-6.790) (4.440) (-6.000)
Income per capita 1980(a) 0.028 0.003
(5.100) (0.740)
1950-1960 0.965
(20.880)
1960-1970 1.618 1.622
(44.830) (44.720)
1970-1980 1.060
(52.880)
Northeast -0.378 -0.236 -0.385 -0.261 -0.405 -0.269 -0.253 -0.017
(-9.110) (-5.990) (-12.030) (-10.390) (-12.63) (-10.6
Central -0.446 -0.369 -0.410 -0.314 -0.420 -0.317 -0.252 -0.040
(-16.360) (-14.260) (-19.530) (-18.990) (-19.87) (-1
South -0.085 -0.048 -0.130 -0.155 -0.101 -0.138 -0.067 -0.028
(-2.500) (-1.670) (-5.530) (-8.490) (-4.410) (-7.720) (-4.990) (-2.890)
Fractionalization 1960 -0.727 -0.906 -0.581 -0.505
(-3.270) (-4.280) (-3.380) (-3.770)
Fractionalization 1960 *
Income per capita 1970(a) 0.415 0.471 0.297 0.271
(3.950) (4.690) (3.650) (4.270)
Fractionalization 1970 -0.130 -0.335
(-0.770) (-2.520)
Income per capita 1970(a) 0.001 0.151

(0.020) (2.410)
Fractionalization 1980 0.068 0.015
(0.670) (0.190)
Income per capita 1980(a) -0.033 0.025

(-1.970) (1.740)
No of Observations 3120 3102 3120 3120 3133 3120 3137 3133

Adj. R-squared .19 .29 .18 .50 .18 .50 .20 .58
(a) Coefficient multiplied by 103.

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the history of public policies in American older citizens were less inclined to spend on
cities (for a recent contribution, see Nancy public goods that benefit younger genera-
Burns 1994 and the references cited there- tions when these generations belong dispro-
in). Several papers within the economics lit- portionately to a different race. Using
erature have argued that public good historical data on U.S. states, Claudia
provision is lower and/or less efficient in Goldin and Katz (1999) find a similar role
more racially fragmented American cities, for heterogeneity, be it ethnic, racial, reli-
results which are consistent with those gious, or economic. La Ferrara and Angelo
obtained in cross-country samples and Mele in (2003) investigate the relationship
many ways follow similar procedures that between racial segregation and spending on
involve cross cities (rather than cross-coun-
public education across U.S. cities. Jacob
try) regressions. Alesina, Baqir, and
Vigdor (2004) finds that the greater a com-
Easterly (1999, 2000) show that, in more
munity's racial heterogeneity, the lower its
rate of response to the 2000 Census form.
fragmented cities, the provision of "produc-
Response is interpreted as a local public
tive" public goods (roads, hospitals, schools,
etc.) is lower, while the types of expendi-good in that the amount of federal funds
tures that more closely resembles transfersallocated to the community depend on its
targeted to ethnic and racial groups are response rate. Alesina and La Ferrara
larger. In particular, spending on roads,(2002) also show how redistributive policies
are deeply affected by racial politics. In
schools, and other public goods are smaller
more racially fragmented communities,
in racially fragmented cities. Preferences
people are less willing to redistribute
over roads are likely to be different if dif-
income because the white majority feels
ferent racial groups are located in different
parts of the city and preferences over that redistributive flows would favor a racial
minority. Survey evidence suggests that
schools are certainly ethnically sensitive.
Instead, spending on public employment those
is respondents who express attitudes
larger in more ethnically fragmented cities,less favorable to racial integration are also
more averse to government intervention on
a result consistent with a use of public jobs
redistributive matters. Erzo Luttmer (2001)
with ethnically or racially motivated patron-
finds that respondents in surveys show more
age. Interestingly, they find that racial divi-
support for welfare policies as the share of
sions have stronger effects than ethnic ones
population of the same race of the respon-
(where ethnicity is identified with country
dent increases in his/her community.
of origin), a result consistent with evidence
discussed in the next section on the One of the reasons why public policies in
endogenous formation of localities inracially
the fragmented communities are worse
United States. is that social capital is lower. Two key
A particularly important type of local aspects of social capital are participation in
public good is public education. James social activities or groups and trust.22 Using
Poterba (1997) finds that in U.S. states, gov- data from the General Social Survey,
ernment per child spending on K-12 educa- Alesina and La Ferrara (2000) provide evi-
tion decreases with the fraction of the dence that, in American cities, individuals
population aged 65 and above, and that this of different races are less willing to partici-
effect is strengthened when the difference pate in social activities in racially mixed
between the fraction of nonwhite popula- communities. There are two non mutually
tion aged 5-17 and the fraction nonwhite
aged 65 or more is included among the con- 22 For survey on the relationship between ethnic diver-
trols. This suggests an interplay of demo- sity and social capital, see Dora Costa and Matthew Kahn
graphic and racial composition effects, as(2003a).if

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exclusive explanations. One is that mem- possible that, to the extent that a to
bers of different racially identified groups white city is very diverse in terms of
have different preferences on what a group guage spoken at home, the language-ba
should do or how it should be run, and the diversity index can overestimate het
other is that there is a cost in sharing a geneity compared to the race-based
group with different races simply because The choice of the notion of cultural diver-
of aversion to racial mixing. Alesina and La sity to be used is ultimately a matter of con-
Ferrara (2002) show that, in American text and of the particular problem to be
cities, individuals living in more racially analyzed.
fragmented communities have a lower
propensity to trust other people, while they 3.3 Village Communities in Developing
do not exhibit lower levels of trust toward Countries
institutions. Similar results were later
3.3.1 Effects on Productivity
obtained by Costa and Kahn (2003b).
Interestingly, all these authors also show
A particularly relevant setting in which to
that income inequality reduces participa-
study the productivity effects of ethnic diver-
tion and social capital but the effectsity
of is that of developing economies. The
racial conflict seems stronger. reason is that a large share of economic
Experimental evidence on trust and partic- transactions occurs outside the boundaries
ipation included in Glaeser, David Laibson, of the formal sector and need to be support-
Jose Scheinkman, and Christine Soutter ed by enforcement schemes similar to those
(2000) is also consistent with these results: described in section 2.1. Although direct
even in experimental settings and amongst empirical evidence is seldom available, a
a relatively homogeneous group of individ- number of recent studies on developing
uals (in terms of education), trust does notcountries allow to draw preliminary infer-
travel well across racial lines. ence on the impact of diversity on produc-
In summary, looking at U.S. cities, there tivity and economic performance at the
seem to be two empirically relevant types micro level.
of diversity. One is ethnic fractionalization, Manufacturing firms in Africa have been
where ethnic groups are defined according studied by several authors. Arne Bigsten,
to the five Census categories (White; Peter Kimuyu, and Karl Lundvall (2000) use
Black; American Indian-Eskimo-Aleutian; a data set on Kenyan firms in the food, wood,
Asian-Pacific Islander; and Hispanics). textile, and metal industries and examine
This type of fractionalization seems to be what factors account for the choice of going
associated with poor public policies, low formal and for the degree of economic effi-
trust, and low city growth. On the other ciency. They find that kinship and communi-
hand, there are measures of cultural diver- ty ties among entrepreneurs of Asian origin
sity based on language, life style, and atti- reduce the barriers to entry in the formal
tudes. These measures seem to besector, so that even after accounting for
associated with a positive evaluation of in education, "African" firms are
differences
amenities and higher productivity.much
The more
two likely to be informal at start-
sets of results are not contradictory
up.23 In addition to the advantage that the
because the two indices of diversity are
very imperfectly correlated. Most notably,
an index based on language does not 23 The distinction
distin- between the Asian and the African
business
guish between whites and blacks and, community
in in Kenya goes back to the colonial
period, when the British organization rested upon a three-
this sense, may underestimate diversity
tier society in
in which traders and businessmen of Indian
racially heterogeneous cities. But origin
it isoccupied
also an intermediate position.

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"formal status" gives to Asian-managed firms African descent" (p. 368). This author, going
(e.g., in terms of access to formal credit), beyond some of his previous work, tries to
Asian firms are shown to be more capital identify whether this amounts to active dis-
intensive and more productive.24 crimination due to the lack of connection
Fafchamps (2000) focuses on the relation- with appropriate networks. At least for
ship between ethnicity and access to credit Zimbabwe and Kenya, he finds that this is
for manufacturing firms in Kenya and indeed the case for black and female entre-
Zimbabwe and finds that, after controlling preneurs. Interestingly, the same author
for observable firm characteristics (e.g., finds virtually no effects of ethnically based
size) African firms are not discriminated networks on agricultural trade (chapter 19),
against in the allocation of bank overdraft a result that leads to be cautious about blan-
and formal loans. The way in which ethnici- ket generalizations across all Africa and all
ty seems to make a difference is by offering trades on the role of ethnic networks.
network relationships that improve access to Despite their focus on employer-level eth-
supplier credit. This in turn affects produc- nicity as opposed to ethnic fractionalization,
tivity and allows firms to remain in the mar- the above studies potentially bear interesting
ket in the presence of negative shocks, as a implications for the relationship between
common way to absorb cash flow variations ethnic diversity at the community level and
is to delay payments to suppliers. The rela- firm performance. In fact, for a given level of
tionship between trade credit and produc- credit supply, the greater the number of eth-
tivity is further explored by Raymond nic groups in the business community, the
Fisman (1999, 2003), who shows that entre- lower the chances that supplier credit is allo-
preneurs of Asian and European origin are cated efficiently if the criterion is purely eth-
more likely to obtain supplier credit, and nic affiliation, which can ultimately harm
that firms that do not have access to suppli- economic productivity.25
er credit have a higher probability of facing An explicit focus on ethnic heterogeneity
inventory shortages and have lower rates of and economic performance is in the study by
capacity utilization. La Ferrara (2002b). She uses an original
Fafchamps (2004) reviews more broadly data set on production cooperatives in the
the evidence on the effects of ethnic net- informal settlements of Nairobi and has
works on economic performance and on the information on all members of the surveyed
allocation of credit in several African coun- groups, which allows her to construct exact
tries. He identifies two effects, one positive measures of group composition in terms of
and one negative. On the one hand, ethni- income, education, age, and ethnicity. She
cally based networks can provide insurance, finds that ethnicity matters for gaining
facilitate transactions, increase trust, and access to group resources, especially in the
simply substitute for rudimental market form of cheap loans: members who share the
institutions. On the other hand, the same same ethnicity as the chairperson are 20 to 25
networks may lead to bias against various percentage points more likely to borrow from
groups. For instance, Fafchamps finds "the the group or from other members. Ethnic
presence of an ethnic bias in trade credit heterogeneity also seems to influence the
usage amongst manufacturing firms in Sub- organization of production: members of
Saharan Africa. The direction of the bias is more ethnically heterogeneous groups are
generally detrimental to entrepreneurs of less likely to specialize in different tasks and
24 Further evidence on the relationship between ethnic

networks and access to credit in the Kenyan manufactur-25 This obviously depends on the way in which network
structure endogenously responds to the ethnic composition
ing sector is provided by Tyler Biggs, Mayank Raturi, and
Pradeep Srivastava (2002). of the community, a point we address in section 4.3.

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more likely to all do the same job. Prima Finally, although very limited evidence
facie, this seems in contrast with the exists on the subject, ethnic diversity can
assumption of positive complementarities in also have an impact on agricultural produc-
production among different ethnic groups, tivity in developing countries. A recent study
which we made in our theoretical frame- by Karen Macours (2003) suggests that
work. However, the difficulty of allocatinginformal enforcement of property rights in
different tasks across different groups in thethe land market creates incentives for rental
particular context of La Ferrara's study transactions to remain within ethnic groups.
stems from the governance structure of the In turn, in a highly fragmented environment,
groups, and on the lack of transparent allo-the exclusion of minority groups leads to
cation rules that characterizes most of the ethnic conflict, further weakening property
groups under study. For example, ethnically rights and reinforcing segmentation.
fragmented groups more often adopt remu-
neration schemes in which every worker gets
the same fixed amount, rather than being Most of the literature on group hetero-
paid on the basis of the amount of work put geneity and collective action in small com-
in. These choices on division of labor and munities has focused on the role of income
wage structure may be due to the relativeinequality as opposed to ethnic or racial het-
difficulty of reaching consensus onerogeneity. The focus of that literature,
"unequal" task allocations and remunerationexemplified by Mancur Olson's (1965) semi-
schemes in ethnically heterogeneous groups. nal contribution, has been on the relation-
In this case, the consequences of ethnic ship between inequality in the shares of the
benefits from the commonly provided good
diversity on differential access to inputs get
reinforced by its impact on within-firm that accrue to different types and their
organization of production. Viewed in thisincentives to contribute.26 However, the
light, our hypothesis that the beneficial extent to which this literature can be gener-
effects of diversity are stronger in more eco-alized to the impact of ethnic diversity is lim-
ited, and requires a context in which types
nomically advanced societies is actually fully
compatible with these findings. (e.g., ethnic groups) matter for public good
A recent application to lending groups is provision only through their contributing
provided by Dean Karlan (2003). He uses capacity, and a mapping between inequality
data on members of a Peruvian micro and ethnic fractionalization can be traced.
A recent literature, however, has looked
finance organization and exploits the ran-
dom selection of people into groups tospecifically
esti- at the role of ethnic hetero-
mate the effect of group composition on with a particular emphasis on pub-
geneity
repayment performance. He finds lic that
good provision in poor communities. An
members of more "homogeneous" groups, example is the study by Cagla Okten and
both in terms of geographical proximityUna
and Okonkwo-Osili (2004), who use micro
of cultural affiliation, are more likely tolevel
savedata from Indonesia to estimate how
and to repay their loans. Interestingly,ethnic
"cul- diversity affects monetary and time
tural" homogeneity is measured through a
contributions to community organizations.
score attributed by enumerators toThey eachpropose three ways in which ethnic
respondent on the basis of his/her language,
diversity can affect voluntary contributions:
(1) diverse communities may have more
dress, and hair style. These findings suggest
that monitoring and enforcement within difficulty in defining common policies as
groups are easier the greater the social
affinity among their members, as argued in a
26 For survey of this topic with a specific emphasis on
section 2.1. economic inequality, see La Ferrara (2003b).

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
their preferences diverge; (2) transaction government, which generated a set of social-
costs are higher in more diverse communi- ly and ethnically heterogeneous villages
ties, e.g., because of lower effectiveness of (treatment) to be compared with nonreset-
informal enforcement mechanisms; and (3) tied communities (control). From the results
an altruistic orientation to contribute to of her trust game, Barr concludes that the
one's own ethnic group. Their empirical
lower propensity to trust of resettled vil-
results suggest that increased ethnic het-
lagers is due not to differences in altruism or
erogeneity decreases both contributions intosocially transmitted norms, but to the
local community organizations, and the lower density of kinship ties. Again, this is
prevalence itself of such organizations. Adi
consistent with the hypothesis that informal
Brender (2004) finds similar results for
enforcement does not travel well across kin-
Israel.27 ship (and a fortiori ethnic) lines.
Edward Miguel and Mary Gugerty (2004) Finally, Jeff Dayton-Johnson (2000) and
also investigate the mechanisms through Asim Khwaja (2000) look at more production-
which ethnic heterogeneity may harm public oriented collective activities. The former uses
good provision. In particular, they focus on data on Mexican irrigation projects and finds
the role played by social sanctions. As we that canal maintenance is worse the more
argued in section 2, in environments with unequal is the distribution of land and the
weak legal enforcement, most informal trans- higher is "social" heterogeneity, proxied by the
actions rely on the availability of "self-enforc- number of different farming communities
ing" mechanisms related to repeated represented in the same maintenance unit.
interaction and reputation, as well as on the Khwaja (2000) uses data on community-main-
imposition of social sanctions. Miguel and tained infrastructure projects in Northern
Gugerty assume that such sanctions are more Pakistan, the complexity of which ranges from
effective if imposed within ethnic groups simple irrigation channels to sophisticated
than between groups. They test this hypothe- electricity units. Again, he finds that "social"
sis using data on 337 primary schools in rural heterogeneity-measured as the fragmenta-
Kenya. In addition to information on students tion into different clans, political, and religious
and teachers, their data contains school com- groups-is negatively associated with project
mittee records which report the threat or maintenance. An interesting difference
application of sanctions and the fund raising between Khwaja's work and the other existing
activities of the school. They find that local studies is its focus on institutional design. In
ethnic diversity is negatively correlated to fact, he finds that good task design can poten-
school funding and to the quality of school tially compensate for fragmentation in allow-
facilities. According to their estimates, mov- ing heterogeneous communities to succeed in
ing from complete homogeneity to complete collective action. This parallels the findings of
heterogeneity would reduce average local the literature on organization behavior
funding by about 20 percent. described in section 2.1.
An insight into the motivations underlying
the failures of collective action in heteroge- 4. Ethnic Fragmentation and
neous communities is offered by the recent Endogenous Community Formation
work of Abigail Barr (2003). She conducted
field experiments in Zimbabwe exploiting In this section, we discuss how fragmenta-
the resettlement policies promoted by the tion affects not just the economic policies and
performance of given communities, but the
27 This author also discusses the effect of ethnic minor-
formation and composition of the relevant
communities.
ity's control of municipalities and finds that it is associated In other words, what happens
for poorer tax collection. when community size and/or composition

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
can be simultaneously determined with the "economic" point of view (our production of
policies? private goods in the simple model above),
4.1 Countries trade makes economic size "larger." On the
other hand, since countries can retain their
independence while trading, they do not
A line of research by Alesina and Spolaore
(1997, 2003), Alesina, Spolaore, and
have to share common public policies on
Wacziarg (2000), and Spolaore and Wacziarg which there are differences of opinions. In
(2002) emphasizes the role of racial conflict ethnically diverse societies, then, increased
as a determinant of the number and size of economic integration should make it more
countries. The argument is as follows. The likely that conflicts are resolved with break-
size of a country emerges from a trade-off down of countries. Some insights on this
between the benefits of scale (broadly issue can be gathered from the political sci-
defined) and the cost of heterogeneity of ence literature on partition as a solution to
preferences in the population. Benefits of ethnic civil war, supported among others by
size include economies of scale in the pro- Chaim Kaufmann (1996, 1998). A critical
duction of some public goods, internaliza- assessment of the view that separation is the
tion of policy externalities, the size of the best solution for civil wars generated by eth-
market, defense and protection from foreign nic conflict is provided by Nicholas
aggression, and regional insurance schemes. Sambanis (2000), who uses a cross sectional
The costs of heterogeneity arise because, in data set of all civil wars since 1944 and esti-
large and diverse countries, individuals with mates the probability of partition as a func-
different preferences have to share common tion of the type of civil war (ethnic/religious
as opposed to ideological) and of several
policies so the average utility of these poli-
cies is decreasing with heterogeneity. socioeconomic factors, among which ethnic
Empirically, racial fragmentation is often heterogeneity of the population.
associated with differences in preferences, The relationship between ethnic hetero-
so racial cleavages are a major determinant geneity and the likelihood of country break-
of the determination of borders, secessions, downs is also mediated by the role of natural
and various centrifugal forces.28 resources, and this is a particularly relevant
A potentially testable implication of this issue for developing countries. Natural
approach is that, as the benefits of size resource discoveries tend to be located in
diminish, then it becomes more likely that remote areas at the periphery of a country, as
countries can split into more homogenous resources more centrally located have likely
smaller political entities. One building bloc been discovered already. It is often the case
of this argument is of course that openness that people living in peripheral areas have
to trade is particularly beneficial for small ethnic identities that do not coincide with
countries. Results by Ades and Glaeser the majority of the country as a whole. The
(1999), Alesina, Spolaore, and Wacziarg availability of new natural resources makes
(2000), and Alcala and Ciccone (2004) sug- these regions more economically viable on
gest that, as freedom of trade increases, the their own and therefore increases pressure
benefit of size for economic growth dimin- for separation or autonomy.29
ishes. In a completely autarkic world, the In addition to economies of scale, another
political size of a country also determines its
benefit of country size is defense and pro-
economic size; in a world of free trade they
tection from aggressions, so as the world
become more disjoint. That is, from an becomes more peaceful one should observe
28 Patrick Bolton and Gerard Roland (1997) explore
centrifugal forces. Alesina and Spolaore
how income differences and redistribution may lead to
break down of countries. 29 We are grateful to a referee for suggesting this point.

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
(2003) discuss historical evidence, arguing from the poor to escape from redistributive
that this implication is consistent with the data policies and the poor want to be close to the
concerning the evolution of country size, rich to gain from redistribution. Until
international trade, and threats of conflicts. recently, virtually all the economic literature
Recently, the collapse of the Soviet Union, by on jurisdiction formation in urban econom-
reducing the threat of and East-West conflict, ics was based on this income conflict. That
has certainly facilitated political separatism in is, if the wealthy want to segregate away
Eastern Europe. Huntington (1998) notes from the poor, the number of communities
how the end of the Cold War allowed the should increase as income inequality
realignment of peoples into countries that bet- increases.30
ter reflected homogenous "civilizations." In On the other hand, a vast body of socio-
most cases, this movement meant breakdown logical literature has emphasized the impor-
of countries and in a few cases movement tance of racial divides in the formation and
toward reunification. organization of American cities. Alesina,
Finally, an important issue is the relation- Baqir, and Hoxby (2004) provide a model of
ship between ethnic heterogeneity, country formation of political jurisdictions that
formation, and democracy. Alesina and expands upon the models of country forma-
Spolaore (2003) discuss the effect of authori-tion described above. Again, the formation
tarian systems on measured racial, linguistic, of local jurisdictions emerges from a trade-
or religious fragmentation and country size.off between the benefits of scale and the
Dictators prefer large countries for several costs of racial heterogeneity. These authors
reasons. One is that they can extract rentslook both at recent evidence and at historical
from larger populations, another one is thatevidence on the formation and breakdown of
they can support with size their bellicose atti- school districts, special districts, and cities.
tudes. Historically, one of the main problems In particular, they consider the Great
of dictators has been to repress ethnic conflict Migration of African Americans from the
in an attempt to create artificially homoge- South to some areas of the North to support
neous countries-an issue to which we return the war industries during the two world
below when we discuss the endogeneity of the wars. They examine how the pattern of juris-
notion of fragmentation. In fact, dictators diction formation differs in counties where
often use racial hatred to create support for the immigration of blacks occurred and in
the dominance of one group over others, a those in which it did not, confirming the
result consistent with models and empirical result that the desire for racial homogeneity
evidence by Glaeser (2002). One of the impli- was the driving force in the formation of
cations of this artificial repression of diversity localities. The trade-off between economies
is that centrifugal forces typically explode of scale and racial heterogeneity tends to be
when dictators fall, as happened for example larger in magnitude and more robust empir-
in the Soviet Union, Spain, Yugoslavia, and ically than the trade-off between economies
Iraq. Fearon (1998) provides an insightful of scale and income heterogeneity.
game theoretic model of civil wars that follow An important issue is how different
the collapse of dictators. dimensions of heterogeneity interact to
4.2 Cities determine jurisdiction formation. In a
recent paper, Rajiv Sethi and Rohini
Somanathan (2004) propose a model in
A very large literature based on the cele-
brated Tiebout (1956) model has discussed
the formation and organization of jurisdic-30 For an excellent recent contribution in this line that
tions based upon a very simple but powerful
also summarizes much of the earlier work, see Calabrese,
idea. The rich want to isolate themselves Cassidy, and Epple (2002).

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
which individuals care both about the racial formation of clubs, networks, and coalitions
composition of their communities and about that provide economic benefits to their
its wealth, and in which races differ in members (see the volume by Gabrielle
income. They show that it is crucial to con- Demange and Myrna Wooders 2005 for a
sider the interplay between preferences on survey and a collection of results). Within
interracial interactions and income differen- this literature, it is possible to isolate the
tials between races in order to understand role of players' heterogeneity as a determi-
patterns of residential location (i.e., segrega- nant of group formation. For example,
tion). An application of their framework to Bryan Ellickson, Birgit Grodal, Scotchmer,
jurisdiction formation would enrich existing and William Zame (1999) propose a general
theories in interesting ways. equilibrium framework in which agents are
Heterogeneity can also affect jurisdiction heterogeneous and can sort into different
formation through the choice of the "admis-clubs, and the equilibrium number and
sion rule" into the jurisdiction. Phillipe composition of the groups is determined
Jehiel and Suzanne Scotchmer (2001) pro-endogenously to clear the market for club
vide a model in which agents are heteroge- memberships. Another formulation by Igal
neous in their taste for a public good and the Milchtaich and Eyal Winter (2002) focuses
choice of the admission rule into the juris- specifically on the effects of endogenous
diction is endogenous. They consider differ- group formation for the composition of the
ent possible admissions rules (free mobility, groups and in particular on the conditions
majority vote, unanimity, and conditional on under which the resulting equilibrium is
demand) and ask which partition is stable for one with segregation. Starting from the
each given rule. While not directly applied assumption that individuals prefer to associ-
to the issue of ethnic heterogeneity, their ate with others similar to themselves,
theoretical framework seems useful for a Milchtaich and Winter study the "stable"
research agenda in which changes in ethnic partitions of society into groups and show
diversity do not automatically translate intoone crucial element is whether people min-
break down or consolidation of jurisdictions,imize the "average distance" from other
but can be mediated through an endogenousgroup members or the "distance from the
choice of specific rules of the game. Thisaverage" group member.31
seems a promising avenue of research for In recent work, Debraj Ray and Rajiv
the future. Vohra (1999, 2001) study coalition formation
and public good provision in a setting where
4.3 Groups and Clubs
agents have complete information and can
Compared to the literature on countrywrite binding agreements. They focus on
size and jurisdiction formation, the econom-coalition formation as a potential source of
ics literature on the role of ethnic diversityinefficiency and show that only in some cases
in the endogenous formation of socialfull cooperation (efficient public good provi-
groups is significantly smaller. The tradition- sion) emerges as the equilibrium; in other
al approach within economics has been one cases, several coalitions coexist in equilibri-
in which groups were seen as "clubs" into um and the level of public good provided is
which individuals could self-select and with-inefficient.
in which they would interact. The benefits
from consumption depended on the charac- 31 Note that while in order to calculate the "average dis-
teristics of other members of the club tance" one needs to know the identity of each and every
(hence on group composition), mostly member
in of the group, a "distance from the average"
approach only requires knowledge of the representative
terms of income. More recently, a game-
individual within the group. Which assumption is more
theoretic literature has developed onrealistic
the depends on the situation under study.

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
Alesina and La Ferrara (2000) focus on the spirit of the literature on country and juris-
role of ethnic heterogeneity in a setting in diction formation surveyed above.
which individuals can choose whether to join
groups or not, and derive the equilibrium
5. Open Questions
composition of the groups as a function of the
degree of ethnic heterogeneity in the society In this section, we highlight the main
as a whole. In particular, they study under questions that in our opinion need to be
what conditions increased heterogeneity in addressed to get a better understanding of
the population leads to less aggregate partici- how much and why ethnic diversity matters
pation in groups, even when individuals can for economic outcomes. The first is the
sort into multiple homogeneous groups. Using endogeneity of ethnic diversity; the second is
survey data for the United States, they find how diversity should be measured.
that participation in socioeconomic groups is
negatively affected by local indexes of racial 5.1 The Endogeneity of Diversity
fractionalization and heterogeneity in ethnic
All the work surveyed above shares the
origin. Thanks to the availability of direct indi-
assumption that ethnic groups are "objective
vidual responses on questions regarding racial
categories" into which individuals can be
mixing, they can test the effects on different
classified, and that such classification is
subgroups of the population and the find that
commonly shared and exogenous. However,
the negative effect of racial fragmentation on
the validity of this assumption can be called
participation only holds for people relatively
into question on several grounds. First, peo-
averse to racial mixing.
ple may not agree on what are the relevant
A similar question is addressed by La
ethnic groups into which they are supposed
Ferrara (2002a) in the context of developing
countries. The model here focuses on the to "classify" others, i.e., the boundaries of
these groups may not be objectively known
relationship between heterogeneity and
to all. Secondly, even under the most con-
group participation in the presence of dif-
ferent admission rules. Under one rule, ventional definition of cultural category
(ethnic, linguistic, or religious), the latter
labeled "open access," anyone can join the
may not be determined independently of
group provided he or she pays the cost;
another rule instead allows the members of economic and policy choices at a given point
in time. This can occur both because politi-
the group to exclude someone by majority
vote. La Ferrara shows that an increase in cal leaders may actively pursue policies that
influence (historically, often reduce) ethnic
heterogeneity has an ambiguous effect both
diversity, and because citizens may "choose"
on group composition and on aggregate lev-
their identity differently in response to
els of participation, and that the type of
political and economic conditions.
access rule is key in determining what cate-
gories are represented in the group.5.1.1 What Makes Ethnicity Identifiable?
Empirical findings from informal groups in
rural Tanzania are consistent with the pre- Underlying most research undertaken so
dictions of the theory. A more general treat- far is the assumption that people's ethnicity is
ment of group formation and decision rules,easily identifiable and can be used to con-
but without a focus on ethnic diversity, canstruct categories of "homogeneous" individu-
be found in the survey by Demange (2005).als. Indeed, the supposedly "objective" nature
This author also places the argument in theand visibility of ethnic identity is often advo-
context of a trade-off between the benefits cated as the primary reason why economic or
of size (increasing returns) and the costs of political conflict may organize around ethnic
increased preference diversity, much in the lines even when the underlying preferences

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
are not intrinsically about ethnicity. For subjects managed to "pass" as members of
example, Francesco Caselli and Wilbur other groups 45 percent of the time.33
Coleman (2002) state that "ethnicity allows Among the factors influencing a person's
groups fighting over resources to enforce ability to correctly identify others were his or
membership in the respective coalitions. her own exposure to other ethnic groups and
Without the distinguishing marks of ethnici- the level of information about those groups.
ty, these coalitions would be porous and sub- Secondly, individuals' choice of their
ject to infiltration."32 Fearon (1999) argues own ethnic identity may not be unrespon-
that using ethnicity as a criterion for the allo- sive to the economic environment.34 In
cation of "pork" is a way for those who win India, a well known phenomenon, known
elections to prevent losers from entering the as "Sanskritization" since the early work of
winning coalition. Several recent contribu- Mysore Srinivas (1966), denotes the efforts
tions, however, have started to challenge this of lower caste members to raise their social
assumption. status by adopting the practices and lan-
First of all, individuals' ability to correctly guage of upper castes. Using a simple
classify others into a given ethnic category model, Francis Bloch and Vijavendra Rao
may not be taken for granted. Donald (2001) show that, in societies where the
Horowitz (2001) and Macartan Humphreys, minority group suffers from statistical dis-
Daniel Posner, and Jeremy Weinstein (2002) crimination, social assimilation can occur
report evidence from case studies in Sri as minority members adopt the behavior of
Lanka, Burundi, and Ethiopia, where identi- the dominant group to signal high produc-
fying members from different ethnic groups tivity to potential employers. An alternative
was at times difficult despite the fact that formulation of a similar phenomenon is
local conflicts were revolving around ethnic provided by Laitin (1998) using a Schelling
roots. In those cases, the possibility to fake tipping model. He argues that, as countries
one's accent or to dress in a particular way become richer, there may be a tendency for
made it impossible to recognize people's lower income ethnic groups to mimic and
ethnic origin even for their local counter- assimilate with higher income groups. This
parts. In a recent paper, Humphreys and "ethnic mimicking" by lower status ethnic
Habaye Mohamed (2002) compare the groups decreases the social costs of hetero-
experiences of Mali and Senegal in terms of geneity in rich economies and, thus, con-
the ability to identify specific ethnic groups tributes to explain why ethnic diversity
leading separatist movements. They argue appears to be more costly in poorer coun-
that the fact that the Tuaregs and Maures in tries (see our econometric results above).
Mali were relatively "white" compared to In the context of data collection, self
the rest of the population led to a polariza- reported racial classifications may be part-
tion of forces and to escalating communal ly endogenous to government policies.
violence. On the other hand, ethnic violence Users of Census data know how sometimes
toward the Diola minority group has been questions about ethnic affiliation can be a
limited by the difficulty of identifying them. politically charged issue. For example, if the
Finally, James Habyarimana, Humphreys, government is known to favor (or hinder) a
Posner, and Weinstein (2004) conducted an given ethnic group, people may have an
experiment on undergraduate students in
the United States recruited from seven dif-
33 The ethnic categories in their sample were: African
ferent ethnic groups and found that their American, Arab, Asian, Caucasian, Indian, Persian/Iranian,
and Latino.
34 Among earlier contributions highlighting the respon-
siveness of ethnic identities to political and economic incen-
32 Caselli and Coleman (2002), p. 1. tives, see Anderson (1983) and Horowitz (1985).

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
incentive to report (or not report) them- Tumbukas-were partitioned so that

selves as part of that group.35 How empiri- approximately two thirds of each group
cally important this "tyranny of the Census" remained in Malawi and the rest in Zambia.
is remains to be seen. Coming from an identical cultural back-
While the notion of endogenous ethnic ground, the evolution over time of the rela-
identity is becoming increasingly popular tionship between the two ethnic groups in
among social scientists, to our knowledge the each country can be presumed to be the
only attempt at formalizing it in the context result of the difference in economic and
of an economic model is the recent work by political institutions. In particular, since
Caselli and Coleman (2002). In their model, their division, the Chewas and the
resources are allocated based on the ethnic Tumbukas have been political allies in
composition of the society and individuals Zambia and adversaries in Malawi. Posner
can choose their identity strategically, i.e., suggests that the explanation for this differ-
can switch ethnicity by paying a cost. The ence lies in the relative size of each group
greater the "physical" or cultural distance compared to the relevant country's popula-
among the groups, the greater this cost. As tion. While in Malawi both groups repre-
we shall see below, this formalization also has sent a large fraction of the country's
important implications for building relevant population, hence they can compete for
measures of ethnic diversity. power at the national level, in Zambia they
are a minority compared to other ethnic
5.1.2 Why Are Some Ethnic Differences groups and they often ally as an "Eastern"
Perceived as "Salient"? coalition against the remaining political
forces. This example powerfully suggests
While ethnic diversity is often associated that there is nothing intrinsic to physical dif-
with poor politico-economic outcomes, as ferences or to the content of cultural tradi-
discussed above, it is not always the case. tions that should make a given ethnic divide
Also, while in some cases ethnic conflict "salient" or not: rather, it is the structure of
explodes in violent civil wars, in many domestic political and economic competi-
other cases it does not.36 Why do ethnic or tion that shapes potential ethnic divisions
cultural differences matter in some cases into meaningful realities.
and not in others? As a matter of fact, even within a given
Posner (2004b) offers an interesting "nat-institutional structure, the salience of ethnic
ural experiment" originating from the arbi- divisions can change over time as a response
trary drawing of the border between politico-economic incentives. Alesina et
to
Zambia and Malawi. When the border al. (2003) discuss the example of Somalia,
which
between the two countries was drawn, twountil the onset of the 1991 civil war
ethnic groups-the Chewas andwas the
considered an ethnically homogeneous
country because 85 percent of the popula-
35 Steven Wilkinson (2002) discusses two interesting tion was Somali. The war shifted the relevant
examples in this respect. One is from a Bohemian town
dimension of ethnic cleavage to that of
where about a third of the respondents who had declared
to be "Germans" in the 1910 Census switched to "Czech" "clans," and individual self-identification to
in 1921 to avoid discrimination. The second is from the groups changed in a way that made the
Indian state of Punjab, where in the 1961 Census the frac-
country more "ethnically" fragmented.
tion of Punjabi speakers dropped by over 20 percentage
points because many Hindu Punjabi speakers who wanted Fearon (2003) argues that the only way to
to block the attempts of a Sikh movement to partition the really measure ethnic fragmentation is to get
state declared themselves as speaking Hindi.
the salient issue "right," that is to identify
36 For example, Fearon and Laitin (1996) argue that com-
pared to the degree of ethnic fragmentation in the African correctly for every country what the salient
continent, the actual occurrence of conflicts is small. divisions are.

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Finally, individual socioeconomic back- migration to develop the war industry in the
ground can be an important factor in deter- early twentieth century as an instance of pre-
mining ethnic identification. Using the determined local ethnic composition. In a
Afrobarometer surveys collected in the early cross-country setting, endogeneity of ethnic
2000s in nine Sub-Saharan African democra- differences due to geographic mobility is less
cies, Alicia Bannon, Miguel, and Posner likely to be relevant, except possibly as a
(2004) estimate the likelihood that an individ- result of diasporas following civil wars.
ual will identify him/herself primarily in eth- The nature of the geographic landscape
nic terms. According to their estimates, this may also influence mobility and the ethnic
likelihood increases with the individual's edu-
composition of various countries. However,
cation, with the occupation in nontraditional note that borders are only in part a prede-
sectors, and with exposure to political mobi- termined geographic feature, as in general
lization. in other words, ethnic identification they are chosen by a combination of political
is not the result of backwardness. These forces in motion. For instance, after the
authors also find a negative relationship First World War the superpowers of Britain,
between ethnic diversity and ethnic salience,France, and the United States met in
which they interpret as evidence against the Versailles and redrew the world borders in
maintained assumption that ethnic divisions ways that only partially reflected the goal of
are more salient in more diverse societies. ethnic homogeneity; they were much more
While this is certainly a reasonable interpre-interested in grabbing for their empires and
tation, it is also possible that respondents totheir allies as much territory as possible. The
surveys tend to underreport the importance failures of the border arrangement in
of the ethnic factor in context where ethnicityVersailles are still responsible for many of
is a particularly sensitive issue.37 today's conflicts.38
Finally, a more general concern related to
5.1.3 Mobility and Ethnic Diversity
the geographical coverage of ethnic diversity
Even if one were ready to accept the def- measures relates to what statistical geogra-
inition of ethnic groups as objective cate- phers call the "modifiable area unit prob-
gories with exogenous borders, we should lem." This term, introduced by Stan
worry about the potential endogeneity of Openshaw and Peter Taylor (1979), is associ-
ethnic diversity measures as a result of indi- ated with the distortions that may arise when
vidual mobility. Consider for example U.S. individual level data are aggregated into
cities. Changes over time in the economic somewhat arbitrary geographical units (e.g.,
growth of different metropolitan areas have census tracts).39 These authors showed that
induced massive flows of migration that have the sign of the correlation between two vari-
sensibly altered some cities' ethnic composi- ables could change with the spatial definition
tion. Local economic policies have alsoused, which potentially undermines the valid-
played a role: the structure of public poli- ity of empirical analyses in which the unit of
cies, such as education spending, is such thataggregation does not have a clear social or
the racial or ethnic composition of a given political justification. It is conceivable,
area can also shift over time as a result of however, that the severity of this problem
policy changes. An empirical solution to thiswill diminish as Geographical Information
issue is provided for example by Alesina,
Baqir, and Hoxby (2004), who use historical
evidence on the pattern of South-North 38 For an insightful discussion of these issues and more
generally of the Treaty of Versailles, see Margaret
McMillan (2003).
37 A similar problem, for example, has been noted in 39 For a survey of the literature on this problem, see
the reliability of survey-based perceptions of corruption. Geoff Dudley (1991).

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Systems software and computational tools to what the theory would want and the dis-
become increasingly available. advantage of having to make judgment calls
(or adopt others' judgment calls) about what
5.2 Measuring Ethnic Diversity
the "relevant list" is. The sources used by
5.2.1 What Dimension of Heterogeneity? Fearon (2003) are carefully described in his
How to classify ethnic groups is a difficult paper, but an especially useful one to identi-
and politically charged issue. While for the fy "salient" cases of ethnic conflict is Ted
United States the Census Bureau provides a Gurr (1996) who classifies minorities at risk
classification in five major groups which is in many countries around the world.
fairly broadly accepted, similar classifica- Alesina et al. (2003) identify language
tions for other countries are more problem- groups as well as ethnic groups that are
atic. Individuals differ in skin color, defined by other characteristics, such as skin
color.41 The correlation between their more
language, origin of birth, religion: in some
countries language is the key dividing line, in comprehensive ELF index and the one
others it is skin color. What dimension based purely on language is between 0.6 and
should one use? Can ethnicity be measured0.7, depending on the period and sample of
in a multidimensional way? countries used. An interesting example of
the differences between the two indices is
The raw data originally used by Easterly
and Levine (1997) come from the Atlas Latin America. In this region, the language
Narodov Mira, a compilation of ethno-lin-index shows more homogeneity because the
language
guistic groups present in 1960 based on his- of the former colonizers (Spanish,
torical linguistic origin. A first weaknessPortuguese,
of English) is often spoken by
most, but the index based on skin color or
this data is that linguistic heterogeneity does
ethnic origin (say black, mulattos, white,
not necessarily coincide with ethnic hetero-
geneity.40 For instance, most Latin mestizos, Indian, etc.) shows more hetero-
American countries are relatively homoge- geneity. The correlation between the
nous in terms of language but less so in Alesina et al. (2003) measure of ethnic frag-
mentation
terms of "ethnicity" or "race." Fearon (2003) and Fearon's (2003) is about 0.76.
It
and Alesina et al. (2003) have compiled var- is therefore quite high, considering the
different criteria of construction.
ious measures of ethnic heterogeneity which
A second weakness of the Atlas Narodov
try to tackle the fact that the difference
Mira
amongst groups manifests itself in different has to do with the way in which the
various
ways in different places. The two classifica- groups were formed. Posner (2004a)
tions are constructed differently. Alesinaargues
et that the Atlas data suffers from a
al. (2003) do not take a stand on what char-"grouping problem" at two different levels.
On the one hand, many groups are aggregat-
acteristics (ethnicity, language, or religion)
are more salient, and adopt the country ed into a single category while they are dis-
breakdown suggested by original sources, tinct political actors-even enemies-at the
national
mainly the Encyclopedia Britannica (see the level. The most striking example of
appendix for more details). Fearon (2003)
instead tries to construct a list of "relevant" 41 An innovative approach to the use of information
such as skin color can be found in recent work by Hugo
ethnic groups which "depends on what peo-
Nopo, Jaime Saavedra, and Maximo Torero (2002). They
ple in the country identify as the most social- use survey data in which every respondent is assigned a
ly relevant ethnic groupings" (p. 198). This score from 1 to 10 for each of the four main racial groups
in Peru: White, Indigenous, Black, and Asian. This way
approach has the advantage of being closer
heterogeneity can be measured through a multidimen-
40 Another issue is that multilingualism makes linguis-sional index of "racial intensity." It should be explored to
tic fractionalization less salient, a point emphasized by what extent it is feasible, and profitable, to move in this
Laitin (2000). direction.

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i and La Ferrara: Ethnic Diversity and Economic Performance 793

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they are in the fragmentation index and to an part of the preposition. As for the produc-
extent in the polarization index.43 tivity effects of diversity, the picture is com-
Alternatively, one may want to assign plex. It is somehow easy to point to
weights to the distance between groups. Two economic failures of fractionalized soci-
theoretical contributions that axiomatize eties, but this is not a general phenomenon.
measures of diversity based on the "dissimi-Rich democratic societies work well with
diversity, in the case of the United States
larity" of the categories under consideration
are those by Martin L. Weitzman (1992) and very well in terms of growth and productiv-
by Walter Bossert, Prasanta K. Pattanaik, ity. Even within the developing world, sim-
and Yongsheng Xu (2003). To our knowl- ilar levels of ethnic diversity are associated
edge, however, these measures have not yet with very different degrees of conflict and
been implemented in empirical analysis, and interethnic cooperation. Useful theoretical
the only applications containing proxies forprogress would incorporate in a model like
the distance among groups are of a more this more realistic institutional features that
heuristic nature. For example, Laitin (2000)would distinguish cases in which the econ-
and Fearon (2003) use measures of distanceomy manages to actually take advantage
between languages to measure how different more or less well of the potential benefits of
linguistic groups are in several countries. variety in production.
Caselli and Coleman (2002) stress the What are the policy implications of all of
importance of ethnic distance in theory and the above? The issue is quite difficult and
in work in progress are trying to measure it, politically charged and it is relevant in at
using surveys of anthropologists. Another least two areas: immigration policies and
dimension of distance is income: for exam- local policies that may increase or decrease
ple, two ethnic groups are especially far racial integration. The implication of pro-
apart if their average income is also very dis- moting racial homogeneity is unappealing
tant. This is an approach followed by work in and probably incorrect both in the short and
progress by Aghion, Alesina, and Trebbi in the long run. Laitin (1994) provides an
(2004b) for U.S. cities. Bossert, Conchita interesting example concerning language in
D'Ambrosio, and La Ferrara (2005) propose Ghana. After independence, this country
a generalized index of fractionalization tak- faced the question of which language to
ing into account precisely the distance adopt as the official one. Using English had
among ethnic groups. the advantage of being understood by most
and of not favoring one ethnic group over
another. On the other hand, it was the lan-
6. Conclusions and Policy Implications
guage of a colonizer. Laitin argues that a
solution with multiple languages may domi-
We proposed a model in which public
nate that of a single homogenous language.
good provisions was lower in fragmented
The benefit of homogeneity had to be trad-
societies while productivity may be posi-
ed off against other considerations (national
tively related to variety. Is the evidence
pride, ethnic balance, etc.).44 On the other
consistent with it? We certainly found over-
hand, peaceful separation and country
whelming evidence supporting the first
breakdown may be perfectly reasonable
43 In the formula for RQ, the deviation of each group

from the maximum polarization share of 0.5 is weighted by 44 For a recent application to language diversity in the
the group's own share. However, underlying that formula European Union and a measure of the "disenfranchise-
is the assumption that the "distance" between each groupment" that would arise from a reduction in the number of
(continuous, as originally conceived by Esteban and RayEU working languages, see Victor Ginsburgh, Ignacio
1994) is discrete and it is the same. Ortuno-Ortin, and Shlomo Weber (forthcoming).

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solutions to racial or cultural diversity. indeed power sharing may well be the result
Globalization also has important implica- of preexisting attitudes toward interethnic
tions for ethnic politics. To the extent that cooperation. Aghion, Alesina, and Trebbi
small countries can prosper in a world of (2004a) in fact report that racial and ethnic
free trade, then peaceful separatism of cer- fractionalization are empirically inversely
tain minorities should not be viewed as related to forms of consociativism and
widespread proportional representation.46
threatening, at least from an economic point
of view. As far as domestic social policy isThe issue of multiethnicity is especially
concerned, the question is to what extentrelevant for current Europe. In fact, while
the United States has been a melting pot
favoring racial mixing (say with affirmative
action) promotes harmony, an issue that
throughout most of its history, Western
would require an entirely separate paper.
European countries have been much more
The starting point would be Arend Lijphart'sethnically homogeneous. However, with the
(1977) seminal contribution that provides opening
a of borders within the European
notion of power sharing denoted as "conso- Union and its expansion to the East, in addi-
ciational democracy." The key features of tion to increasing migration from Africa and
this type of democracy should be a coalitionother neighboring areas, members countries
government in which "all significant seg- of the European Union will become less and
less homogeneous; in fact the issue of multi-
ments of the plural society" are represented,
ethnicity will be one of the major challenges
with a proportionality system, a mutual veto,
and a federalist structure.45 He highlights for Europe in the near future.
the conditions under which power sharing is With this survey, we have tried to assess
likely to succeed, namely, a relative balance
the costs and benefits of ethnic fragmenta-
of power and economic equality among the tion and the policy issues arising in diverse
societies. In a more and more integrated
different groups. Most importantly, he argues
world, the question of how different people
that different groups are most likely to find
an agreement when they have to face exter- can peacefully interact is the critical problem
nal threats. This makes power sharing for the next many decades.
schemes difficult to implement and ultimate-
ly unstable in some developing countries
Appendix
(e.g., Africa) where most threats to the state
come from within. Among recent examples
The data we use in this paper come from
of power sharing agreements that have failed
Alesina et al. (2003). The authors use the
due to internal conflicts are those of Angola
Encyclopedia Britannica (2001). The variable
and Rwanda. On the other hand, South
"language" that underlies the fractionalization
Africa and Somaliland have managed to suc-
index based on it, refers to "the shares of lan-
cessfully implement consociationalist
guages spoken as mother language based
schemes. Ian S. Spears (2002) reports that, in
upon national census data." Other sources for
addition to the presence of an "external"
language data are the CIA World Factbook
threat (Mogadishu), in the case of
(which however is available for only a smaller
Somaliland a deeply rooted tradition of
power sharing among the elders of local clans
may have contributed to the viability of such
46 Note that while proportional representation and
schemes. However, this calls into question
consociationalist schemes may diffuse racial tension, their
the effectiveness of power sharing as a means
presence is also empirically associated with difficulties in
pursuing adequate fiscal policies, larger budget deficits,
of generating interethnic cooperation:
and macroeconomic policy instability. For extensive
empirical evidence, see Torsten Persson and Guido
45 Lijphart (1977), p. 25. Tabellini (2003).

85.240.80.124 on Thu, 14 Mar 2024 21:40:51 +00:00
set of countries) and the Ethnologue project of Urban Economics, 48(2): 219-41.
Alesina, Alberto, Reza Baqir, and Caroline Hoxby
that lists approximately 6,800 languages. 2004. "Political Jurisdictions in Heterogeneous
Alesina et al. (2003) report that fractional- Communities." Journal of Political Economy, 112(2):
348-96.
ization for languages based upon these
Alesina, Alberto, Robert J. Barro, and Silvana
alternative sources are highly correlated with
Tenreyro. 2002. "Optimal Currency Areas," in NBER
Encyclopedia Britannica. Macroeconomics Annual 2002. Mark Gertler and
The variable ethnic fractionalization com- Kenneth Rogoff, eds. Cambridge: MIT Press,
301-55.
bines the language variable above with other Alesina, Alberto, Arnaud Devleeschauwer, William
information about racial characteristics (nor- Easterly, Sergio Kurlat, and Romain Wacziarg. 2003.
mally skin color). Groups were classified as "Fractionalization." Journal of Economic Growth,
8(2): 155-94.
different if they spoke a different language Alesina, Alberto, and Edward L. Glaeser. 2004.
and/or had different physical characteristics. Fighting Poverty in the US and Europe: A World of
Sources for physical differences were the Difference. Oxford and New York: Oxford University
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Encyclopedia Britannica, CIA Factbook Alesina, Alberto, Edward Glaeser, and Bruce
(2000) for twenty-five countries, David Sacerdote. 2001. "Why Doesn't the United States
Levinson (1998) for twenty-three countries, Have a European-Style Welfare State?" Brookings
Papers on Economic Activity, 2: 187-254.
and Minority Rights Group International Alesina, Alberto, and Eliana La Ferrara. 2000.
(1997) for thirteen cases. The rule used for "Participation in Heterogeneous Communities."
data collection was: "if two or more sources Quarterly Journal of Economics, 115(3): 847-904.
for the index of ethnic fractionalization were Alesina, Alberto, and Eliana La Ferrara. 2002. "Who
Trusts Others?" Journal of Public Economics, 85(2):
identical to the third decimal point, we used 207-34.
these sources (the recorded source in this Alesina, Alberto, and Enrico Spolaore. 1997. "On the
Number and Size of Nations." Quarterly Journal of
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Alesina, Alberto, Enrico Spolaore, and Romain
ethnic groups covered the largest share of Wacziarg. 2000. "Economic Integration and Political
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countries, and is available on the web. Alesina, Alberto, and Romain Wacziarg. 1998.
"Openness, Country Size and Government." Journal
of Public Economics, 69(3): 305-21.
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Ethnic Diversity and Economic Performance (A J W Eliana La Ferrara) 2005

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Journal of Economic Literature

Vol. XLIII (September 2005), pp. 762-800

Ethnic Diversity and

ALBERTO ALESINA and ELIANA LA FERRARA*

1. Introduction The potential costs of diversity are fairly

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between people with different languages,

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(1) Y=Nf(x;K), where t is the income tax rate. Suppose that

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Dummy for the 1960s 0.059 0.153 0.065 0.156

No of Observations 82; 88; 94 40; 69; 66 82; 86; 92 39; 68; 65

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Dummy for the 1960s 0.064 0.220 0.098 0.253

No of Observations 82; 88; 94 40; 69; 66 80; 86; 92 39; 68; 65

whatever the mechanisms relatingsupply ethnictrue public goods should be lowe

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Dummy for the 1960s 0.059 0.153 0.073 0.159

No of Observations 82; 87; 93 40; 69; 66 80; 85; 90 39; 68; 65

(1999) and Alesina et al. (2003) show tha

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Dummy for the 1960s 0.118 0.138

No of Observations 82; 87; 93 80; 85; 90

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Intercept -0.088 0.902 -0.088 0.906

No of Observations 3133 3120 3120 3120

Peri (2003) use causality

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growth 1960-2000 growth 1970-2000 growth 1970-2000 growth 1980-2000

Intercept -0.221 0.679 0.043 1.026 -0.096 0.974 -0.397 -0.229

Income per capita 1970(a) 0.001 0.151

Income per capita 1980(a) -0.033 0.025

No of Observations 3120 3102 3120 3120 3133 3120 3137 3133

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24 Further evidence on the relationship between ethnic

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incentive to report (or not report) them- Tumbukas-were partitioned so that

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43 In the formula for RQ, the deviation of each group

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