by Antonio Avalos

olitical instability, poor provision of public goods, and growth-retarding policies may all mirror one national characteristic: ethnic fragmentation. Controversy persists over the links between ethnicity and economic performance, but recent evidence has been accumulating in favor of a connection that might not be a direct causal relationship, but nonetheless is an important interaction between societies and their economies. Today, more than 40 percent of all nations have at least six distinct ethnic populations. A challenging question remains: Is ethnic diversity an economic disadvantage?

There are at least two ways to explain how ethnic diversity might relate to economic performance. Some theories argue that societies comprising dissimilar groups tend to have less stability in their institutions that create social balance and authoritative equilibrium. And because preferences differ among varying ethnic groups, public goods—which are typically one-size-fits-all—are prone to bring less overall satisfaction. These factors increase social welfare costs and divert resources from the private sector.

There is evidence to support this notion. According to a variable that measures the probability that two individuals in a country belong to different ethnic groups, nine of the ten most ethnically fragmented societies in the world are located in Africa, where, historically, violence and social unrest have been more abundant. On the other hand, six of the ten most homogeneous nations are high-income countries.

The second explanation focuses on investment. Income inequality, which tends to be higher in fragmented societies, raises social discontent and increases the probability of social disorder, crime, and widespread violence. Such conditions clearly threaten property rights and create an environment of uncertainty that suppresses investment and economic growth.

Although the evidence is not conclusive, it clearly suggests that ethnic diversity can be a drag on economic performance. The U.S. has avoided the pitfalls of ethnic diversity by creating and replenishing equitable political and social institutions. Other ethnically diverse societies may have to find ways to create social harmony—especially by establishing fair, impartial government institutions— before they can realistically expect sustainable economic growth.

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