Does social diversity impede sound economic management? An empirical analysis, 1980-2012

Several celebrated scholars argue that diverse preferences and coordination failure due to ethnic and cultural diversity hamper the social cohesion necessary for good economic management, leading to development failure. Using several measures of diversity, we find that higher levels of ethno-linguistic and cultural fractionalization are conditioned positively on higher economic growth by an index of economic freedom, which is often heralded as a good measure of sound economic management. High diversity in turn is associated with higher levels of economic freedom. We do not find any evidence to suggest that high diversity hampers change towards greater economic freedom and institutions supporting liberal policies. The effect of diversity, moreover, is conditioned positively by higher democracy. Our results raise serious doubt about the centrality of social diversity for explaining economic failure, nor is there evidence to suggest that autocratic measures are required under conditions of social diversity to implement growth-promoting policies. This is good news because history and culture seem to matter less than rational agency for ensuring sound economic management.