Diversity, Discrimination and Diplomacy: The Political Economy of International Trade in Multi-Ethnic Societies

Research on the effects of ethnic diversity has been mostly concentrated on domestic politics. This paper examines the role of ethnicity in international economics by studying the effect of ethnic diversity on foreign trade. The effect of ethnicity is contingent on political institutions. When the governing group has incentives to harm other groups through discrimination or competition for power, there is a negative effect on both import and export. The effect is lower in hierarchical ranked ethnic systems in which the power of the governing group is secure. This finding also highlights a gap in research on the effect of democracy on trade as ethnic political competition is included as democratic in the indexes of democracy and therefore the results are biased downward. While democracy per se had no significant effect in the data, subtracting periods of ethnic politics from periods of democracy made the effect of democracy more precise and significant.