Previous studies have found strong institutional effects of corruption and lack of rule of law on economic growth. Easterly and Levine found direct and indirect effects of ethnic diversity on economic growth. I find that institutional factors interact with ethnic diversity, as they affect 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. To put it another way, poor institutions have an even more adverse effect on growth and policy when ethnic diversity is high. Conversely, 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 fractionalization. Ethnically diverse nations that wish to endure in peace and prosperity must build good institutions.
ASJC Scopus subject areas
- Economics and Econometrics