Ethnic conflict is a tragic constant of human history. How does it affect a nation’s economy? Can it be resolved by institutions? This study by the World Bank examines the connection between ethnic conflict and economic development and argues that the quality of institutions is a key fact in the equation.
From the Balkans to Central Africa to Indonesia to Nigeria, ethnic conflict is still very much in the news today. Ethnic conflict has a peaceful political dimension as well as the more publicised violent dimension. Recent economics literature has studied the effects of ethnic conflict on economic development. High quality institutions, such as rule of law, bureaucratic quality, freedom from government expropriation, and freedom from government repudiation of contracts, mitigate the adverse economic consequences of ethnic fractionalisation. In countries with sufficiently good institutions, ethnic diversity does not lower growth or worsen economic policies. High quality institutions also lessen war casualties on national territory and lessen the probability of genocide for a given amount of ethnic fractionalisation. However, these forms of violence are not the channel through which ethnic fragmentation and its interaction with institutions affect economic growth.
There are strong institutional effects of corruption and lack of rule of law on economic growth. Furthermore, there are direct and indirect effects of ethnic diversity on economic growth. Institutional factors interact with ethnic diversity to the extent that they determine whether ethnic conflict is destructive or is contained by the rules of the game.
- Ethnic diversity has a more adverse effect on economic policy and growth when institutions are poor.
- Poor institutions have an even more adverse effect on growth and policy when ethnic diversity is high.
- In countries with sufficiently good institutions, ethnic diversity does not lower growth or worsen economic policies.
- Good institutions also lower the risk of wars and genocides that might otherwise result from ethnic fractionalisation.
Ethnically diverse nations that wish to endure in peace and prosperity must build good institutions. This is a promising area for future research. It may be that the ‘institutions’ variable is a proxy for more general legal safeguards for ethnic minorities.
- Economists should do more case studies of successful and unsuccessful examples of ethnic groups co-existing within nations.
- The study of oppression of one ethnic group by another is a rich area for further investigation.
- What conditions facilitate or prevent oppression? How much does the answer depend on initial inequality between ethnic groups? How much does the answer depend on the definition of ethnicity?
- The study of ethnically-based war and genocide is also a fruitful area for further research.
- What can we learn from the abundant historical data about the possible economic or social determinants of ethnic war and genocide? What more can governments do to finally bring the sad history of ethnic conflicts to an end?
