Ethnic diversity and strongeconomicstrong development.pdf

Journal of Development Economics 76 (2005) 293– 323 /locate/econbase Ethnic diversity and economic development Jose G. Montalvoa,*, Marta Reynal-Querolb aDepartment of Economics, Universitat Pompeu Fabra and IVIE, C/ Ramon Trias Fargas 25–27, Barcelona 08005, Spain b The World Bank and IAE, Barcelona, Spain Received 1 January 2002; accepted 1 January 2004 Abstract This paper analyzes the role that different indices and dimensions of ethnicity play in the process of economic development. Firstly, we discuss the advantages and disadvantages of alternative data sources for the construction of indices of religious and ethnic heterogeneity. Secondly, we compare the index of fractionalization and the index of polarization. We argue that an index of the family of discrete polarization measures is the adequate indicator to measure potential conflict. We find that ethnic (religious) polarization has a large and negative effect on economic development through the reduction of investment and the increase of government consumption and the probability of a civil conflict. D 2004 Published by Elsevier B.V. JEL classification: O11; Z12; O55 Keywords: Polarization indices; Conflict; Religious and ethnic diversity; Economic growth 1. Introduction In recent years, there has been increasing interest in the economic consequences of ethnic heterogeneity. In many situations, ethnic polarization generates conflicts that could eventually lead to political instability and civil wars (CW), with long-lasting economic effects. In other cases, the potential conflict represented by an ethnically polarized society * Corresponding author. Tel.: +34 93 5422509; fax: +34 93