Ethnic Diversity in Motion: Understanding the Relationship between Dynamic Ethnic Fractionalization and Economic Growth

Abstract

Abstract The study explores the relationship between dynamic ethnic fractionalization and economic growth using a panel of 76 countries over four decades. This panel is the most extensive dataset on the topic to date. Results from the replication of previous approaches to the topic – both with time-invariant and dynamic ethnic diversity – underscore the importance of including the temporal component of ethnic diversity in an analysis of its effects on economic growth and challenge the prevalent assumption of constant ethnic diversity. In addition, we exploit the time variability of ethnic diversity by employing, for the first time, maximum likelihood dynamic panel data modeling – a rigorous methodological approach that enhances confidence in the conclusions. Our results show that ethnic diversity does not directly determine economic growth but rather influences other growth determinants, thereby impeding economic performance when the nation-state is the unit of observation. This sheds light on the contrasting conclusions observed in previous studies regarding the impact of ethnic diversity on economic performance. JEL classification: O11; J15