We examine the impact of ethnic polarization on the likelihood of social conflict. Using a well-accepted data set, we test for the role of economic institutions and their impact on social polarization. Our results show that while stronger institutions do decrease the probability of war, contrary to expectations, they have no impact on the effect of racial and ethnic polarization. Economic institutions do help increase the business and commercial interaction amongst people, but do not reduce the psychological underpinnings of the feeling of otherness.
Keywords: Ethnic cohesion, fractionalization, polarization.
JEL Code: D74
Ethnic conflicts, civil wars, uprisings and rebellions cause serious damage to life and liberty, stability and prosperity to economies all over the world. There is practically no place across the globe which is devoid of this scourge. From 1945 2000 there were approximately 25 interstate wars with 3.3 million casualties. Within the same time frame there were about 130 civil conflicts with casualty numbers crossing 17 million, or about 5 times higher than inter-country wars. They produce devastating results for the economies. Industries and social infrastructure is destroyed. Civil conflict creates massive population displacement, killing economic growth. Hence the academic world is paying more attention to its inception, causes, determinants and duration.
Historically, studying the nexus between ethnicity and conflict has been the purview of political science and sociology. These disciplines have studied this phenomenon in the context that rebellion is caused by grievance and pent up frustration due to the lack of political representation. Social differences such as religion, ethnicity and place of origin could possibly draw sharp cleavages amongst people and be the root causes of the problem. In these studies, the reasoning or rationale for civil conflict lies along the lines of social motive and not economic returns.
The economics profession has only lately entered this area of research, delving into the economic aspects of conflict. Economics as a discipline had this correlation spelt out long ago by Karl Marx who emphasized class struggle and the hostility between the haves and have-nots as resulting in conflict in an attempt to level the economic playing field. Later Amartya Sen remarked that there was indeed a close association between economic inequality and rebellion. Thus were sown the economic seeds for this study, but academic interest in this area came lately for economists.
Recently though, there has been a surge of interest in the economic literature, both pertaining to the role of ethnic diversity in civil conflict as well as the role of institutions on economic growth. Inspite of devoting a lot of theoretical and empirical effort on this fundamental social malaise the empirical highway linking ethnic diversity to conflict is missing and at best sketchy, and sometimes outright contradictory to one another.
We wish to apply some of the insights of the institutional growth literature to the civil conflict question. Specifically we examine the role of economic institutions on the likelihood of civil war both directly (as a measure of opportunity cost) and indirectly (as a means of bringing different ethnic groupscloser together.) We find that institutional strength reduces the overall probability of civil war without impacting the marginal effect of diversity.
This study is sub-divided into 6 sections. In section 2 we do an intensive and chronological write-up of the literature as it stands today. We think this is important because of the diverse schools of thought relating to this problem, the use and application of a smorgasbord of formulations and variables and the differing outcomes based on time and place of study. In section 3 we start with the standard theoretical model(s) and then extend it to our use of a continuous (as opposed to the standard discrete) measure of distance between the different ethnic groups. In section 4 we describe the data sources. Section 5 discusses the econometric methodology, our results and the robustness checks, followed by our concluding remarks in section 6.
Early belief for civil conflicts was ethnic and religious diversity among the population of a country, i.e., more pluralistic the society greater were the chances of a social conflagration. But the research did not support this view, finding that the link between ethnic or religious diversity and civil conflict was weak or non-existent. Another proposal was that the open political differences due to democracy would result in greater attention to grievances in the political arena, and hence less conflict. But this did not hold true either. To the contrary, conflicts are less prevalent in dictatorships and suppressed societies.
We start with the seminal work by Horowitz , who claimed that the relationship between ethnic diversity and ethnic conflict is non-monotonic, with the probability of conflict being low for both highly homogeneous and also highly heterogeneous (with many small minorities) societies. The economics literature started with the search for a proper and acceptable measure of ethnic divergence or ethnic division.
The first viable candidate was the fractionalization index. It is a measure of how people within a society are considered different based on factors such as history, religion, culture, economic strata, and political connections. The fractionalization index is constructed by applying the Herfindahl-Hirschman industry concentration index to ethnic population shares. In empirical work, ethnic fractionalization has not proven to be a causal factor in conflicts.
In a seminal piece of work Esteban and Ray  define and layout the theoretical underpinnings of the concept of polarization as an alternative measure of diversity. Ethnic polarization is a measure that achieves its maximum in a situation where there are two powerful groups (one majority and the other a significant minority). In this kind of scenario, there are significant differences between the two large groups, but simultaneously a lot of cohesion and homogeneity within the group. Thus it is easier to lead a group along a common line based on herd behavior. Conflict duration also tends to increase in polarized cases since it is difficult to make one party concede defeat, as they know that it means losing the winners pie completely. This new measure of ethnic diversity is gaining traction in the research literature.
The current empirical evidence is that social, cultural, religious, ethnic and historical differences are lesser reasons or determinants of conflict than economic opportunity and greed. Economic resources (proxied by the capacity to finance and recruit rebels), diaspora financing, opportunity cost of joining the insurgency (proxied by job opportunities) are more valid reasons for the genesis of conflicts. Thus the distinction between the political versus the economic reasoning for rebellion is motive (grievance) versus greed (profit) opportunities.
We order the studies using various (and divergent) factors in causing and sustaining conflicts. Then we will discuss a few of the very noteworthy works which rule the roost in this context. Among the early works, Grossman  reasons profits from looting as the root economic cause of rebellion, while Angoustures and Pascal  emphasize the role played by "diaspora financed rebellion." The African continent is a stand out case study in conflicts, which has resulted in it recording negative growth for most of its life. It is dubbed "Africa's growth tragedy," and the gamut of reasons run from poor government and administration to political instability and poor public policy. According to Easterly and Levine , the root cause of the tragedy is ethnic diversity.
In Collier and Hoeffler  the authors develop an econometric model based on the economic rationale of opportunity cost of civil war, but their emphasis is on the initiation / outbreak of conflict. They reason that the net effect of natural resources on rebellion is non-monotonic. It means that little natural resources may not be profitable enough to induce rebellion, while an abundance of the same may help develop a strong government and military, and thus dissuade...