Economic freedom, ethnic separatism, and ethnic conflict

Evan Osborne

The Journal of Developing Areas, Volume 44, Number 1, Fall 2010,pp. 367-381 (Article)

Published by Tennessee State University College of BusinessDOI: 10.1353/jda.0.0081

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ECONOMIC FREEDOM, ETHNIC

SEPARATISM, AND ETHNIC CONFLICT

Evan Osborne*

Wright State University and Soochow University, Taiwan

ABSTRACT

Ethnic conflict has not been tested using economic theory, except its most extreme forms –

violence and warfare. This paper adopts the newer economic approach to conflict to analyze ethnic

conflict more broadly defined. The analysis is able for the first time to derive equilibrium

discrimination by a dominant group and separatism by a weaker group. Consistent with the

predictions developed, cross-sectional instrumental-variables estimates and other evidence indicate

that government restrictions on commerce promote separatism and conflict and hamper trust.

Economic freedom is thus argued to be a key if thus far largely neglected force for ethnic

cooperation within states, consistent with the empirical findings for nation-state interactions.

JEL Classifications: D74, J15, J7

Keywords: Ethnic Conflict, Discrimination, Economic Freedom

Corresponding Author’s E-Mail Address: evan.osborne@wright.edu

INTRODUCTION

Despite its prominence as a source of human misery, ethnic conflict has not been studied

within the broader economic model of conflict established by Hirshleifer (1991a) and

Skaperdas (1992). Instead the default model in social science (Wrangham and Peterson,

1996) and sociobiology (Wilson, 1998) is that it is simply an intrinsic part of human

nature. We are after this view genetically prone to emphasizing, and creating if need be,

ethnic differences among one another, and fighting on that basis. If physical appearance

is similar, differences that may seem small to the outsider (e.g., between Tutsi and Hutu

or Japanese and Korean) can be magnified. If even that fails, native language or religion

will do. This essentialist tradition suggests that such conflict is largely unmanageable by

public policy. This problem is particularly acute in some developing countries, whose

people may have less in the way of common history to unite them, and which often

include large numbers of groups. Some of the most important work by economists on

ethnic diversity (e.g., Easterly and Levine, 1997) in fact focuses primarily on developing

economies.

But ethnic conflict is, while absent in few if any societies, actually not constant

across all. Rather, some places (even for a given level of ethnic variety) have more and

some less, and the degree of conflict can change over time. Conflict in some countries

involves mass killing, but in others is limited to ethnically based political parties or

voting patterns, or a preference for in-group trading networks. Even nominally

ideological differences arguably sometimes camouflage ethnic conflict, as when a 1950s

communist rebellion in Malaysia was largely carried out by ethnic Chinese. Of great

interest to policy makers is the historical evidence that the steps sometimes taken in

368

response to such conflict in developing countries – e.g., all-out civil war or dictatorial

rule – may be a cure worse than the disease.

But in the standard economic approach to conflict, the decision to fight is a

rational choice, to be weighed against cooperation. Such a model has never been applied

to ethnic conflict. In such an approach conflict is thought of differently. Discrimination,

for example, is not an asymmetric-information problem as in Fryer and Levitt (2004),

Barr and Oduro (2002) or Farmer and Terrell (1996), nor an expression of hostile

preferences in the Becker (1971) sense by the dominant group (Bertrand and

Mullinathan, 2004). Rather it, along with defensive reaction to it, is simply income

maximization in the presence of the potential for people of different groups to both

cooperate and fight with one another.

The paper also provides the first link between internal ethnic (or religious)

conflict and the much broader economic literature on conflict among nation-states. Since

Polachek (1992) there has been a growing literature (e.g., Dorussen, 2006) generally

favorably assessing the hypothesis that nations that trade more have an incentive to fight

less. The absence of analysis of the effect of freer economies on internal ethnic conflict

is a major gap in the economic literature on such conflict. Another innovation here is the

focus on something unexplored in any economic accounts of discrimination or ethnic

conflict, minority-group separatism in response to political discrimination. Much of the

labor literature on economic discrimination focuses on exogenous discrimination by a

more powerful group as the phenomenon of interest. Here, both the level of

discrimination and the nature of the weaker group’s response are endogenous. In

particular, the weaker group may in response to harsh terms of trade imposed on it by a

stronger group engage in economic separatism. Such secession provides an alternative to

cooperating with the dominant group on the latter’s oppressive terms.

Historically, such campaigns to promote in-group trading, particularly in

response to restrictions on economic opportunity imposed by ethnic majorities, are

common. This strain of thought was prominently espoused for black Americans by

individuals such as the Jamaican immigrant Marcus Garvey, and several states in Bolivia

with sizable populations of European descent have recently reacted to the policies of that

country’s central government, seen as dominated by indigenous-lineage Bolivians, with

separatist activism. Taken to extremes, groups can attempt to enforce such separatism

through violence against members of both the own and other groups. This type of

separatism – voluntary resort to ethnic autarky despite its obvious costs – has not been

studied, but is arguably a key component of the economic manifestations of ethnic

conflict, which Mueller (2004) argues is now more important across the world than

traditional nation-state conflict. To explain the former, Section 2 models ethnic conflict

in particular, Section 3 tests the model’s primary implications, and Section 4 provides a

concluding summary.

THEORETICAL PREDICTIONS OF A CONFLICT MODEL

Ethnic Conflict and Human Conflict Generally

Ethnic conflict is certainly human conflict in the economic sense, but is unique in one

central way. The canonical conflict models depict various social groups as dividing their

369

resources between fighting or jointly producing with other groups, with the division of

resources by each group among the two activities a function of differences among them

in these resource endowments combined with the fighting and joint-production

technologies. Ethnic conflict is different because groups are often readily identifiable

and thus have the possibility of trading only among themselves if the terms of interethnic

trading are too onerous. Through language, appearance or behavioral differences,

members of a group may be able to exclude outsiders from their trading networks. Such

groups may resort to such defensive separatism – production that occurs strictly within

the group – in response to redistributive measures imposed by more powerful groups. It

is thus helpful to alter the basic Hirshleifer (1991a) conflict model by assuming a

dominant group that chooses a tax which determines the division of jointly produced

income, and a subservient group responding by diverting some resources to separatist

production, accruing only to its members and invulnerable to taxation.

Technology and Resources

For simplicity’s sake assume that there are two groups. The groups themselves will be

decision-makers, which means that some subtleties of conflict/appropriation tradeoffs,

particularly free-riding (e.g., Baik, Kim and Na, 2001; Riaz and Shogren, 1995), will be

ignored. But such a simple model has the virtue of precise predictions, and has been used

previously in other studies of ethnic conflict (Montalvo and Reynal-Queroso, 2005a).

Group 1, the dominant group, is assumed to control the government of the country. The

approach can accommodate both a majority that dominates because of greater numbers

and a minority that controls the decision-making machinery, including the police, armed

forces, etc. (e.g., the Alawites in Syria). Similarly, the political decision-making process

in question can be democratic or not. Because of its dominance, Group 1 will be

assumed to be a Stackelberg leader, able to predict the reaction of the other group and to

optimize accordingly. Group 2, the subservient group, is thus the Stackelberg follower,

optimizing against the constraint of the rule set by Group 1.

Each group has a resource endowment, R1 and R2. Group 2 can contribute to a

joint production function which takes as inputs the resources contributed by the two

groups. Assume that this function is Cobb-Douglas with constant returns to scale, so that 1

21 LALY Jand 0 < α < 1. L1 and L2 are labor devoted to joint production by each

group.

Group 2 has unique access to a simple linear separatist production function,

22 bEY S . Its production choices are subject to a resource constraint that requires that

its combined efforts in separate and joint production not exceed its endowment:

222 RLE . (1)

The notion of conflict is thus different from that in much of the economic

literature, which relies on a contest success function descended from that in Tullock

(1980), married with some analogue of the joint production function here. Because the

separatist technology is unavailable to group 1, L1 = R1. Group 1 does have control over

370

a taxation rate, t, which it imposes on joint production. Group 2, as follower, takes t as

given and must then allocate its resources between separate and joint production.

Equilibrium

A key assumption of the model is that interethnic trading can be costlier than intra-group

trading, both because of language and cultural differences and general trading frictions

embedded in the economy overall. Let p denote the proportion of potential joint

production that actually occurs because these various matching costs are overcome. It

performs essentially the same function as the matching technology in the Rubinstein and

Wolinsky (1987) model of middlemen. Here, 1 – p measures to the extent to which

potential jointly produced income is eroded by cultural, legal and other frictions in

interethnic trade. A key manifestation of p is the overall level of economic freedom, with

more freedom making trading partners easier to find and trade with, hence raising p.

Both groups are assumed risk-neutral. The minority thus solves the problem

2

1

2212 1maxE

ERpARtbE

. (2)

Taking the first order condition yields the reaction curve for E2 as a function of t

and the parameters A, b, p and α:

2

1 11

L

pARtb

. (3)

Rearranging terms yields the effort devoted by the subservient group to joint

production:

1

12

11*

b

pAtRL . (4)

Other things equal, the subservient group devotes more to joint production as the

dominant group is wealthier (which raises the marginal product for Group 2 of joint

production at a given tax rate), the tax rate is lower, Group 2’s productivity relative to

that of Group 1 in joint production (1 – α) is higher, Group 2’s relative productivity in

separatist as opposed to joint production (A/b) is lower, and the retained income share (p)

is higher.

Given the reaction function (4), Group 1 must set the tax rate so as to maximize

its share of income. Substituting from (4), this problem is to

t b

pAttpAR

1

1

11max . (5)

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Taking the first-order condition yields

b

pA

b

pAttpAR

b

pAtpAR

11111121

1

1

1

(6)

which ultimately reduces to

*t . (7)

The dominant group thus increases its level of extraction as the joint production

function becomes more tilted toward the dominant group (in that α, the coefficient for L1

in the constant-returns production function, is higher). The economic interpretation is

that a higher value of α raises the marginal product in joint production for members of

group 2, thus reducing their sensitivity to higher t. When trade with the dominant group

is sufficiently enticing, that group is able to take a large share of whatever is produced

jointly.

Note that it will never be optimal to extract all joint production, i.e. to set t* = 1,

as long as the subservient group possesses any resources useful for joint production. In

actuality, minorities subject to dominance seldom if ever completely separate themselves

(or are separated by the dominant group) from joint production. Greeks and Armenians

in the Ottoman Empire were allowed to specialize in various middleman and other

trading activities, but subject to high and discriminatory taxation. In Sri Lanka under the

administration of the Sinhalese president Solomon Bandaranaike, the government did not

completely segregate Tamils but instead reserved some places (ever more over time) in

the universities for Sinhalese and required that the Sinhala language be used in

government. Particularly informative in that country’s history is the requirement that

communication with the government by businesses be carried out in Sinhala, an obvious

implied subsidy of Sinhalese ethnic identity or, alternatively, an implied tax on Tamils.

By the time Tamil was conceded as an official language in 1988 much of the damage was

done. In Russia, similarly, the government in 2007 prohibited immigrants, even legal

ones, from opening trading stalls for food and household items, but, in the words of The

New York Times, “not from jobs as porters or janitors.”1 All of these are ways to improve

the position of the dominant group by limiting but not ending the ability of the

subservient group to extract the gains from trade.

Substituting for t in (4) indicates that equilibrium joint production effort by

Group 2 is

1

2

12

1*

b

pARL . (8)

Substituting to obtain equilibrium jointly produced income yields

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1

2

1

1* 1

bRpAY J

. (9)

Income for the subservient group is thus

1

2

12

1

2

12

1111*

b

pARRb

bRpAY (10)

The first term is Group 2’s share of joint production, and the second is its

income from separatist production. Income for group 1, which comes exclusively from

joint production, is

1

2

1

1

1

1*

bRpAY . (11)

Further empirical implications

The ratio of jointly produced income accruing to Group 1 relative to that of Group 2,

Y1*/Y2

J*, is then simply α/(1 – α). Note that if each group were paid its marginal product,

this ratio would be

1

2

1 R

R

. This condition means that, absent the taxation and

reactive separatism of the model here, relative resource endowments for group 2 (i.e.,

R2/R1) work in the same direction in determining the relative distribution of joint

production as relative joint-production technology advantages for Group 1 (i.e., α) do.

The reason is that greater resource endowments for Group 2 raise the marginal product of

group 1 in joint production. But pay in the presence of the ability of the dominant group

to extract income lacks the potentially homeostatic properties of marginal-product

compensation.2 In the latter, advantages in the production technology for one group can

be offset by disadvantages in resource endowments. A subservient group with

sufficiently greater resources than those of the dominant group finds that its share of

jointly produced income is smaller with conflict than with marginal-product

compensation. This result is consistent with the widespread pattern of what Chua (2002)

calls “market-dominant minorities,” groups such as ethnic Indians in east Africa or ethnic

Chinese in Indonesia who are extremely wealthy but typically very disadvantaged by the

political process. The result is somewhat more complex than the standard result of

Hirshleifer (1991b), who found that the presence of a conflict success function typically

raises the relative advantage of the poorer group.

Critical too is the role of general government restraints on trade in promoting

conflict. There are two channels, both of which, by (8), increase separatism by the

subservient group. First, such classic wealth-destroying interventions as price distortions

373

and differential subsidy and taxation lower joint productivity, A, and make such joint

production less useful for the minority. Second, restrictions that make it more difficult to

find promising trade partners – regulations governing the opening and operation of

businesses, registering property, etc. – lower the expected return to interethnic trade,

which is presumably already relatively costly due to other interethnic transaction costs.

This can be thought of as lowering p. A key prediction is thus that more such

restrictions, by promoting lower productivity in joint production, should result in higher

rates of taxation and greater separatism. Like any other sort of conflict, ethnic conflict

increases when it is relatively more lucrative at the margin than the alternative, and

restraints on trade, along with linguistic and cultural frictions and the other factors

outlined above, bring this about.

EMPIRICAL TESTS

The amount of ethnic conflict

The first test is of the determinants of the amount of conflict. In all empirical tests the

data are cross-sectional, including (depending on available data) between 45 and 88

observations. The left-hand variable is the index of ethnic conflict constructed by

Vanhanen (1999). It measures on a 0-100 scale the extent of “the use of coercion” (p. 60)

on ethnic grounds, with tactics ranging from mere demonstrations and strikes to

interethnic war. His conclusion that “it does not seem possible to avoid the emergence of

ethnic conflict in ethnically divided societies, whereas it may be possible to mitigate

conflict by inventing social and political institutions that help to accommodate the

interests of different ethnic groups” (p. 66) is critical here. The question of interest is

whether facilitating opportunity for interethnic trade through free commerce is one such

“social institution.” The empirical ethnic-conflict literature, in contrast to the literature

on conflict among nation-states, never explores the opportunities for cooperative trade as

an alternative to politically mediated conflict. Rather, it is often concerned with such

essentialist questions as how ethnoreligious heterogeneity itself promotes conflict

(Blimes, 2006; Montalvo and Reynal-Quero, 2005b; Fox, 2003), or the proper design of

political structures (Saideman et al., 2002).

Essentialist theories of ethnic conflict require that the amount of ethnic conflict

is first and foremost a function of the distribution of the population among ethnic groups.

But the precise relation is not obvious. A society with only two groups, one consisting of

two-thirds of the population, may or may not have more potential conflict than one with

ten groups, each consisting of ten percent of the population. While the early approach in

the economic literature on ethnic conflict was to employ a Herfindahl index of ethnic

fractionalization such as that in Alesina (2003), Montalvo and Reynal-Quero (2005a)

have proposed an alternative measure they call polarization, which they contend is the

proper measure of potential social conflict. That measure is

n

i ij

ji ppZ1

24 . (12)

374

They argue that this measure, labeled ETHPOL, matches what Horowitz (1985)

argues is the true empirical relation between the number of groups and actual conflict. In

particular, conflict is not monotonically increasing in fractionalization per se. Rather, it

is unimodally distributed by fractionalization. 3

Very homogenous societies or societies

with very many groups of roughly equal size have little conflict. Those with intermediate

values, e.g. a single majority and a single but sizable minority, have more. Montalvo and

Reynal-Quero (2005a) find that ethnic conflict is, in contrast, monotonically increasing in

Z, which performs a critical function by measuring a country’s potential ethnic conflict,

deriving from its underlying demographics. For linguistic differences, which are not

subject to this solidarity effect, the linguistic Herfindahl fractionalization (LINGFRAC) of

Alesina (2003) is the proper measure of intergroup transaction costs, which the model

predicts should lower trade and thus increase conflict.

The measure of p is CONTROL, the ordinal ranking of the World Bank’s 2006

measure of the ease of doing business in a nation, which includes measures of the ease of

opening and closing a business, trading across national borders, and labor-market

rigidities. Thus, a higher value denotes less economic freedom (i.e., lower p), which

should produce more conflict. To control for the possibility that such restrictions are

caused by rather than cause ethnic conflict, instrumental variables are used, and the

results reported along with baseline OLS results throughout. The instruments used for

CONTROL are per capita GDP in 1990 and the country’s legal origin (British, French,

German or Scandinavian). The extent of procedural formalism – the number and rigidity

of formal legal rules – in court systems are similar to the formalism under study here, and

the legal origin serves as a useful instrument in that it moves significantly with

procedures and yet is not itself suggested by the model. This is the strategy of Djankov et

al. (2003) to avid simultaneity problems in their study of judicial efficiency around the

world. In addition, to avoid the potential simultaneity problem between the level of

ethnic conflict and contemporaneous per capita GDP (because societies with more

resources devoted to conflict will devote fewer resources to producing income), lagged

per capita GDP from 1990 is used as an additional instrument.

As for other variables, COMMOD is the percentage of the country’s GDP that

consists of foods, fuels or ore production, from the World Bank’s World Development

Indicators for 2002. It controls for the natural-resource curse (e.g., Collier and Hoeffler,

1998), in which natural-resource endowments independently promote conflict in general, if not necessarily ethnic conflict in particular. Dorussen (2006) also finds that

commodity trade does not dampen interstate conflict in the way trade in other goods and

services does, which also suggests the necessity of including an economy’s commodity

orientation in any test of in-state ethnic conflict.

Two political variables suggested by the model and other research are also

included. POLRIGHTS is the widely used Freedom House measure of political

competition. It does not follow directly from the model, but other literature suggests its

importance both in ameliorating (Fraenkel and Grofman, 2004; Reynal-Quero, 2002;

Collier, 2001; Bluedom, 2001) and enhancing (Chua, 2002; Kaplan, 2000) ethnic

conflict. In addition, the federalism measure (a 1-5 variable, with a higher number

indicating more centralization) of Gerring and Thacker (2004) is used (FED). If the

classic Tiebout (1956) argument for federalism as a tool to facilitate preference-based

self-sorting via jurisdictional competition can be applied to group-specific goods

375

(whether a universal public good, as in the Tiebout analysis, or sectarian ones, such as

tax-funded instruction in a particular ethnic group’s native language), more decentralized

systems may promote less conflict. Osborne (2000) argues that centralization increases

nonviolent ethnic conflict in particular.

The results are reported in Table 1. Economic freedom is in both the OLS and

IV specifications associated with less conflict and discrimination. Consistent with the

essentialist tradition, ETHPOL is associated with more. In addition, linguistic

fractionalization promotes conflict, as would be expected if it increases the transaction

costs of interethnic trade. The political-structure variables are not significant. The

results suggest that while underlying ethnic polarization does promote conflict,

substantial state intervention in the economy can further promote it by lowering the

relative return to cooperation, and that economic freedom may trump political structure

as a tool to lower such conflict.

TABLE 1. ETHNIC CONFLICT AND DISCRIMINATION

Dependent variable: Vanhanen (1999) ethnic conflict measure

IV OLS

Variable

CONSTANT 2.678347 1.098049

(.44) (.18)

CONTROL .0968346* .0636404*

(1.73) (1.69)

ETHPOL 13.70531** 16.35108**

(2.03) (2.49)

COMMOD -.1212044* -.094069

(-1.81) (-1.59)

POLRIGHTS .1599641 .3530805

(.14) (.34)

FED -1.053967 -.5436712

(-.93) (-.49)

LINGFRAC 18.30199*** 17.92922***

(3.20) (3.21)

N: 83 88

R2: .3163 .3060

F: 5.92*** 5.95***

Notes: * denotes statistical significance at the ten-percent level.

** denotes statistical significance at the five-percent level.

*** denotes statistical significance at the one-percent level.

Values in parentheses are t statistics.

Separatism and Trust

The testing of another relationship, between separatism (i.e., E2*) and the model’s

exogenous factors, requires a measure of either actual or desired self-segregation in trade

376

by members of subsidiary ethnic groups. A proxy for this quantity is available from the

World Values Survey, employing the most recent surveys conducted for each

participating state between 1999 and 2004. One variable measures the proportion of

people who, unprompted, answer “members of a different race” generically or particular

ethnic and religious groups in response to a question as to what sort of people they would

not like to have as neighbors. The question thus measures a desire to separate, at least in

residential decisions. Table 2 uses the same right-hand variables as the regression in

Table 1, with a logistic transformation of the WVS measure as the left-hand variable.

CONTROL is again significant in the predicted direction, while underlying ethnic

polarization ceases to be after accounting for government control over the economy.

TABLE 2. AVERSION TO NEIGHBORS OF A DIFFERENT GROUP

Dependent variable: Desire to avoid neighbors of other groups

IV OLS

Variable

CONSTANT -2.456021*** -2.404266***

(-4.48) (-4.62)

CONTROL .0149681** .0115321***

(2.64) (3.32)

ETHPOL - .8871426 -.9182216

(-1.48) (-1.59)

COMMOD -.010626* -.009418*

(-1.83) (-1.74)

POLRIGHTS .0178778 .0771167

(.14) (.73)

FED .0461163 .032794

(.48) (.36)

LINGFRAC .2906779 .3607319

(0.59) (0.36)

N: 45 47

R2: .3621 .3731

F: 3.17** 3.97***

Notes: * denotes statistical significance at the ten-percent level.

** denotes statistical significance at the five-percent level.

*** denotes statistical significance at the one-percent level.

Values in parentheses are t statistics.

A way to test the opposite of separatism, i.e. economic integration (L2*), is

available from the Minorities at Risk dataset of the Center for International Development

and Conflict Management at the University of Maryland. It includes a measure of the

extent to which minorities were concentrated in a geographic base, and is available for

two years – 1960 and 1990. It measures on a 1-3 scale the proportion of group members

who lived in the geographic base – under 50, 50-75 or over 75 percent. A higher number

thus denotes more concentration. With only 29 observations available caution is

warranted, but the correlation between this measure in 1990 and average annual real per

capita economic growth over the 1965-1995 interval, derived from the Barro/Lee dataset,

is -.2608 (p < 0.07) for instances in which there was not already high integration (with at

377

least 75 percent outside of the base area) in 1960. This provides some evidence that

growth provides an inducement for migration, which is arguably a precursor to fuller

social integration.

Finally, consider the concept of trust, which has been heavily emphasized in

recent years in work on growth. A rapidly growing literature depicts its absence as an

impediment to growth because of a resulting inability to overcome moral-hazard

problems in exchange (Zak and Knack, 2001; Knack and Keefer, 1997; Beugelsdijk, de

Groot and Van Schaik, 2004). Some work (Putnam, 2007; Easterly, Ritzen and

Woolcock, 2006; Alesina and La Ferrara, 2002; Knack and Keefer, 1997) makes the

essentialist argument that ethnic diversity itself harms trust. Easterly, Ritzen and

Woolcock in particular find that bad economic policy and political instability cause low

growth, and that ethnic fractionalization causes bad economic policy, in part through low

trust levels between different groups. The strength of this result is subject to question, in

that the measures of fractionalization rely heavily on Soviet estimates for various

countries from the early 1960s. Putnam (2007) finds that diversity harms trust and

social-capital formation, but asserts nonetheless that it is on balance beneficial to the U.S.

in particular. Conversely, Berggren and Jordahl (2006) find that lack of economic

freedom harms trust, but fail to take account of ethnic diversity, which the

aforementioned literature emphasizes.

To test whether diversity harms trust after accounting for barriers to trade, I

employ as a dependent variable the country’s answer to another question from the World

Values Survey (TRUST), which asks whether people in general can be trusted. The

dependent variable is again a logistic transformation of the proportion of the country’s

population answering “Yes.” Note that this is not a measure of trust of members of other

ethnic groups, but overall. But the argument in the work cited above is that diversity

harms such overall trust. The results of regressing TRUST on the previous set of right-

hand variables are reported in Table 3. CONTROL is statistically significant in the

predicted direction in the OLS and IV specifications, while ETHPOL is not. This

suggests that diversity does not erode trust once the freedom to trade has been

standardized for, a critical modification to earlier work. The research cited above that

argues that more ethnically heterogeneous populations have less trust fails to standardize

for economic freedom, while the Berggren and Jordahl (2006) finding that illiberal

economic policy harms trust fails to standardize for underlying diversity. Once both are

accounted for, more economic freedom promotes more trust. The findings here thus

reinforce work by Collier (2000) and Arcand (2000) that, contrary to Putnam (2007),

diversity per se need not automatically corrode trust.

378

TABLE 3. TRUST OF OTHERS

Dependent variable: People in general can be trusted

IV OLS

Variable

CONSTANT -.2033285 -.3247596

(-.42) (-.71)

CONTROL -.0126371** -.0087171***

(-2.63) (-2.82)

ETHPOL -.6827357 -.6185718

(-1.31) (-1.24)

COMMOD .0023101 .0010873

(.46) (.23)

POLRIGHTS .0442124 -.0013003

(.40) (-.14)

FED .0107437 .022394

(.13) (.28)

LINGFRAC .1567673 .1137372

(.37) (.28)

N: 47 49

R2: .2819 .2993

F: 2.85** 2.99**

Notes: ** denotes statistical significance at the five-percent level.

*** denotes statistical significance at the one-percent level.

Values in parentheses are t statistics.

CONCLUSION

Economic theory suggests that ethnic conflict should increase when the incentive for

ethnic cooperation decreases. The findings here support that proposition, with important

implications for the role of economic freedom in minimizing ethnic conflict and

separatism, albeit one widely known in the literature on trade and interstate conflict.

When economic freedom is greater people cooperate more, fight less and trust one

another more. Ethnic heterogeneity as such is not the problem; the difficulty of

transacting across ethnic lines is. Internal free trade may be an extremely important, if

thus far unemphasized, policy tool for helping groups to cooperate in potentially

ethnically divided societies. This is a critical finding both for countries with existing

ethnic-conflict problems and, in an age of global migration, for countries where ethnic

heterogeneity is rapidly increasing.

379

ENDNOTES

* I would like to thank participants in the Minorities at Risk Project during the 2007 International

Studies Association meetings, the staff of MAR, and Ted Gurr in particular for helpful comments.

1. Andrew E. Kramer, “Markets Suffer as Russians Ban Immigrant Vendors,” The New York

Times, April 14, 2007.

2. Potential, in that when one group has advantages both in marginal productivity and in joint

production and resources, marginal-product compensation actually results in more inequality (albeit

with potentially higher absolute income) than production with conflict. But when each group has

an advantage in one area, marginal-product compensation results in more equality.

3 . Both the use of the state to promote purely tribal interests and the inadequacy of

fractionalization as a measure of potential conflict were known to Adam Smith, who wrote in The

Wealth of Nations that “[t]he interested and active zeal of religious teachers can be dangerous and

troublesome only where there is, either but one sect tolerated in the society, or where the whole of a

large society is divided into two or three great sects; the teachers of each acting by concert, and

under a regular discipline and coordination. But that zeal must be altogether innocent where the

society is divided into two or three hundred, or perhaps into as many thousand small sects, of which

no one could be considerable enough to disturb the public tranquility.” (Smith, 1976 [1776]), p. 314

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