Can Institutions Resolve Ethnic Conflict?

Abstract

High-quality institutions-reflected in such factors as rule of law, bureaucratic quality, freedom from government expropriation, and freedom from government repudiation of contracts-mitigate the adverse economic effects of ethnic fractionalization identified by Easterly and Levine (1997) and others. Ethnic diversity has a more adverse effect on economic policy and growth when a government's institutions are poor. But poor institutions have an even more adverse effect on growth and policy when ethnic diversity is high. In countries where the institutions are good enough, however, ethnic diversity does not lessen growth or worsen economic policies. Good institutions also reduce the risk of wars and genocides that might otherwise result from ethnic fractionalization. However, these forms of violence are not the channel through which ethnic fragmentation and its interaction with institutions affect economic growth. Ethnically diverse nations that want to endure in peace and prosperity must build good institutions.