Much research has considered the effects of ethnic, linguistic, and religious diversity on a variety of country-level economic, financial, and business outcomes such as the strength of economic, legal, and financial markets and the quality government services and institutions. While these studies generally conclude that ethnic and linguistic diversity harms the quality of government institutions and markets and slows economic growth and development, the results regarding the impact of religious diversity on such outcomes is not as conclusive as some studies find no significant effect and others find a negative relationship. In regard to ethnic diversity, it is theorized that the differences in value systems and social norms across ethnic groups can foster distrust and skepticism, which leads to less social cohesion and unity. It is further argued that a socially cohesive and collaborative population is needed to undertake large nation-building activities such as developing high quality economic, financial, and legal systems and institutions. Linguistic diversity can arguably exacerbate problems associated with social cohesion as linguistic differences often create communication barriers, which further divide groups and weaken unity. In reference to religious diversity, researchers such as Huntington (1996), Landes (1998), and Inglehart and Baker (2000) suggest that a society’s attitude towards ambition, diligence, and work ethic should impact several economic outcomes and many of these values are fundamental to various organized religions. Studies such as Barro and McCleary (2003) and Annett (2001) have found a negative effect of religious diversity on economic growth; however, in a cross country study, Alesina et al. (2003) found no significant relationship between economic growth and religious diversity.
Using a large cross-country data set, this study considers the joint impact of ethnic, linguistic, and religious diversity on a variety of economic, financial, and social indicators. A cluster analysis is used to group countries by their similarities in ethnic, linguistic, and religious diversity measures into distinct clusters. Each cluster contains a group of countries that are most similar to each other in regard to all three diversity measures. The clusters are then tested for differences in several indicators such as the degree of economic freedom, economic development, civil liberties, political rights, democracy, corruption, globalization, and human development, among others. The cluster analysis contributes to the literature by allowing for the impact of all three measures of diversity to be considered collectively rather than individually. The results highlight significant and interesting differences in average values of the indicators across the three clusters.
Alesina, A., Easterly, W., Kurlat, S., & Wacziarg, R. (2003). “Fractionalization”, Journal of Economic Growth, 8: 155-194.
Barro, R., and McCleary, R. (2003), ‘Religion and Economic Growth’, NBER Working paper W9682.
Huntington, S. (1996) The Clash of Civilizations and the Remaking of the World Order. New York: Simon & Schuster.
Inglehart, R., and Baker, W. (2000), “Modernization, Cultural Change, and the Persistence of Traditional Values.” American Sociological Review 65: 19-51.
Landes, D. (1998), The Wealth and Poverty of Nations, New York, Norton
