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Research and Scholarship

Does social diversity impede sound economic management?

Higher rates of corruption, nepotism, delayed reforms and other maladies in some societies have existed in poor countries with diverse cultures that were historically split up by colonial powers. At least that was the presumption from previous academic work about poor nations with high levels of social and cultural diversity

Assistant Professor Krishna Vadlamannati, UCD School of Politics and International Relations has studied the work of social scientists and economists who argue that diversity is the most important cause of economic slowdown or development in some countries, especially developing ones.

His recently published paper “Does social diversity impede sound economic management? An empirical analysis, 1980 – 2012”, written in collaboration with Professor Indra de Soysa, Norwegian University of Science and Technology, deflates the established theories around the impact of diversity on sound economies. Furthermore, it questions established thought that history for some countries, particularly ones born through colonialisation in Asia and Africa, sets their destiny where in fact other factors such as diversity in languages and cultures can have a strong or positive influence on a nation’s future.

The research, using several ways to measure diversity, estimated the effects of diversity on economic growth and economic freedom, often seen as measures of whether economic governance is good. It looked at factors from 115 countries during the years 1980-2012. The complex method of assessing economic growth and economic freedom involved examining policies and how these existed alongside cultural and ethnic diversity in countries.

These policies included expenditure and tax reforms; property rights and legal reforms; trade reforms; reforms related to access to sound money; labour, business and credit reforms. Assistant Professor Vadlamannati explained the significance of his recent paper: “We argue and find some empirical evidence that countries which are ethnically and culturally diverse societies actually perform better in managing the economy, so perhaps there is stronger economic growth.

In other words, highly ethnically and culturally diverse societies even have better economic governance than a society that is largely dominated by one culture.”

Previous research pointed to impediments to growth and sound economic management stemming from clashes of varying interest groups, tribes or peoples, particularly in African nations.

The Assistant Professor continues “A classic example is sub-Saharan Africa where they pointed to conflicts over distribution of power, resources among different tribes and ethnic groups. Previous economists have tried to say it is social diversity which has resulted in economic mismanagement.”

“If that is true, how can you explain a highly diverse society like Botswana, which is a great success story in sub-Saharan Africa and Ghana in recent years? And you look at South Asia and you have India doing really well, Sri Lanka and also to countries in Latin America, like Chile. So if these socially diverse nations are successful and do manage economies well, why is that?

Assistant Professor Vadlamannati responds: “It has got to do with the political institutions. Perhaps Botswana is more democratic than Burundi? Ultimately what really matters are reforms which push economic growth.” Those reforms were often delayed, he said, as has been evident in his own native India. “Different groups have different interests and preferences,” added the UCD academic.

Political institutions with strong checks and balances in those countries often succeeded as opposed to arbitrary powers of one group. “Democracy helps, it gives a platform for different interest groups, ethnically diverse groups to bring their interests and grievances to the table and discuss. In the long run, diversity enables social cooperation between various groups and helps overcome collective actions,” he says. The paper first looked at the impact of cultural diversity on economic growth using the rate of growth of per capita income or a person’s average income in countries.

This backed previous research about the negative impact of social diversity for countries. But the research’s second aspect was more important and assessed if the impact of diversity on growth, was conditional on something else in those same countries. This involved matching and assessing cultural, ethnic diversity and linguistic diversity with measures of economic freedom, as earlier described.

A resulting conclusion was that diversity actually benefits society in the long run which is conditional upon economic freedom, he explained: “Diversity actually acts as a checks and balances against counteracting any single group amassing too much power at the expense of institutions, political and economic ones.” It also counters any one ethnic group dominating at the expense of minorities, he said.

What we are saying is that history does matter, but only to a certain extent. Other factors are really important. Diversity is actually good, as what we show in our research is that growth promoting institutions are far more likely in heterogeneous countries.

The research, explained Assistant Professor Vadlamannati, feeds into the debate around the influx of refugees into Europe and fears around migrants in recent years. “Our findings go to the root of this question of multi-culturalism or diversity being bad for society.” Benefits in the long term outweighed short term problems from diversity, said the UCD academic, including addressing demographic or ageing concerns for EU economies. “So accepting refugees or immigrants will be positive for economic growth in the medium to long term but will have certain (fiscal) costs in the short term.” Lastly, this research has helped debunk some previous research that poor countries with colonial pasts are destined for failure.

An example of this is the differences between Madagascar and Mauritius, according to Assistant Professor Vadiamannati, both of which were ruled by Britain. “What we are saying is that history does matter, but only to a certain extent. Other factors are really important. Diversity is actually good, as what we show in our research is that growth promoting institutions are far more likely in heterogeneous countries.”

Assistant Professor Krishna Vadlamannati was in conversation with Juno McEnroe, political reporter with the Irish Examiner

This article first appeared in the Autumn 2017 edition of UCD Today

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