Thursday, November 19, 2009

Are ethnic differences across nations relevant?

It is well know that ethno-liguistic diversity is bad for the development of an economy, for example because it leads to leaders favoring their ethnicity, thus members of an ethnicity only vote for their own, and the political and economic process only is about rent seeking. I am exaggerate, but in some countries this unfortunately close to the truth. The negative impact of ethno-linguistic diversity has been shown over and over in cross-country regressions.

Could ethno-liguistic similarity across countries also matter? For one, one could imagine that it could foster closer ties and thus lower trade barriers, which is good for development. It is also likely to has spurred fewer interethnic wars, thus leading to more trust that is necessary for commerce. On the other hand, civil unrest can spill over to a country with ethnic or linguistic affinity. In any case, before this can be studied, one needs a good measure of ethno-linguistic similarity.

Olaf de Groot delivers this by measuring the percentage of shared identity characteristics of two individuals randomly drawn from two different populations. And using this measure to study conflict spillovers, it appears to be a very good predictor. Let's see whether this measure will be useful for other studies.

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