Economic Benefits of Ethnolinguistic Diversity: Implications for ...

According to Alesina and La Ferrara (2004), there is one more important factor, which is left out from the model, that may significantly influence the relationship between ethnic diversity and economic outcomes. The missing factor is the type of institutions. Alesina and La Ferrara argued after Collier (2001) that certain types of institutions may be more conducive to ethnic harmony than others and should thus be taken into account when evaluating the impact of ethnic diversity.

Alesina and La Ferrara (2004) conducted an empirical cross-country analysis to examine the impacts of the level of income and institutions on the relationship between ethnic diversity and economic performance. The results of their empirical examination showed that, overall, the observed impact of ethnic diversity on growth across countries is negative. However, the analysis demonstrated that the level of income and the existence of democratic institutions mitigate the negative impact of ethnic diversity. The punch line is that rich democracies are more capable of productively handling ethnic diversity. They wrote, “it seems important to take into account that, whatever the mechanisms relating ethnic diversity to economic growth, channeling diversity toward productive uses may require a particular set of ‘rules of the game’ ” (p. 11).

Alesina and La Ferrara (2004) presented some results of their studies on ethnic diversity and population growth in the U.S. counties, which are in line with their cross-country results. In the analysis of the U.S. counties, the fractionalization has a negative effect of population growth in initially poor counties and a less negative (or even positive) effect for initially richer counties. According to the authors, the results from the counties are very important in corroborating the cross-country evidence because they were obtained from a setting where institutional and political differences are smaller than in the case of cross-country analysis.

It is noteworthy that despite the change in the approach and the recognition of potential benefits associated with ethnic diversity by Alesina and La Ferrara (2004), the authors did not offer much different policy implications than the ones suggested in the previous study of Alesina and Spolaore (2003). One would expect that, in the wake of acknowledging the potential benefits of diversity, the authors would support the existence of multiethnic states.