Inequality, Ethnic Divisions, and Economic Growth

More social cohesion leads to better institutions, and better institutions in turn lead to higher growth. This is the conclusion in a recent paper by William Easterly, Jozef Ritzen and Michael Woolcock, Social Cohesion, Institutions, and Growth. Social cohesion is measured in terms of income distribution and in terms of ethnolinguistic fractionalization.


This remarkable graph above shows a dramatic increase in the rule of law when the middle 60% of the population gets about 50% of the income.


The more ethnic diversity, the worse for the rule of law. Ethnolinguistic Fractionalization (or Ethnic Heterogeneity) measures the probability that two randomly selected persons from a given country will not belong to the same ethnolinguistic group.

The more rule of law, the higher the per capita growth rate. Ethnically and economically divided societies do worse than united societies with high-quality institutions, measured here by the rule of law.


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