Ethnic Diversity, Property Rights, and Natural Resources


Countries rich in natural resources constitute both development failures and successes depending on their underlying socioeconomic fundamentals. Recent empirical evidence and theoretical work provide support to a resource curse hypothesis based on ethnic fractionalization; rivaling ethnic groups engaging in resource rent-seeking weaken property rights and erode institutional quality reducing hence long-term growth. On another front, there is increasing empirical evidence suggesting that ethnic heterogeneity based on polarization rather than fractionalization is a stronger deterrent of economic growth. In this paper, we explore the interlinkages between natural resource abundance and both measures of ethnic heterogeneity. In a two-simultaneous equation system, we assess the effects of fractionalization and polarization on institutions, and thereof on growth, both directly as well as interacted with our resource abundance proxy. We find that while ethnic fractionalization has a direct negative impact on the effectiveness of property rights, polarization affects institutions only in a resource-rich context. We find that resource wealth lowers income in ethnically polarized rather than fractionalized countries, a result robust to different specifications adopted, as well as when controlling for the direct impacts of fractionalization and polarization on growth. Keywords:

The Developing Economies