NPI: The Cost of Diversity

Edwin S. Rubenstein and the Staff of NPI (PDF):

Putnam is hardly the first learned man to weigh in on the culture-trust relationship. An overwhelming anti-diversity consensus, backed by data quantifying the negative impact of diversity on economic development, is found among serious scholars:

There are scholars who have assessed empirically the influence of cultural diversity on economic development. The primary argument—which can be traced to Aristotle—suggests that diverse states are more susceptible to development-inhibiting internal strife than their homogeneous counterparts are…. Following Tocqueville (1873), Duetsch (1953), and Banks and Textor (1963), Adelman and Morris (1967) gather the data for 74 less developed countries from 1957 to 1962 and rank each country on a 10-point ordinal scale of diversity. Their results, based on factor analysis, support their hypothesis: homogeneous countries typically had higher growth rates. Haug (1967) finds a negative correlation between per capita GNP and cultural diversity based on the data of 114 countries in 1963. Reynolds (1985) compares 37 less developed countries from 1950 to 1980 and, again, indicates that cultural diversity results in lower growth rates. He suggests that this may be due to a sense of alienation among peoples. In other words, reaching a consensus on policies favorable to economic development, especially for the long run, may be difficult when groups have different interpretations of the past and different goals for the future. 25

Culture includes learned patterns of behavior, socially acquired traditions, ways of thinking and acting, attitudes, values and morals. Culture standardizes relationships by allowing people to make reasonably confident assumptions about the reactions of those with whom they interact. There are many dimensions of culture, but race, religion, ethnicity and language are the principal sources of diversity.

When societies are multicultural, the ethnocentric differences of race, religion, ethnicity and language often lead to enmity. Even if different groups live together peacefully, the lack of a common language and common norms reduces cooperation and increases the cost of economic transactions.

Economist Gerald W. Scully summarizes the benefits of mono- as opposed to multi-cultural societies in a 1995 paper:

Cultural relativism has made the study of the role of culture in human controversial. But there is little disagreement that intergroup enmity is widespread in culturally heterogeneous societies. 26

Free markets, private property, rule of law and eventually representative democracy and universal suffrage arose in culturally homogeneous Western societies where all members of society had equal rights to compete in the marketplace. On the other hand, culturally heterogeneous societies are less likely to adopt the institutions of liberty. Since control of economic resources is essential to political control, dominant cultural groups structure economic institutions to serve their self-interest. And when private property and economic rights are allocated along cultural lines, economic inefficiency is inevitable and societies are less prosperous. 27