This is a presentation based on a paper forthcoming in the South African Journal of Economics. Linguistic environment does produce economic impacts!

1. ETHNIC DIVERSITY, POLITICAL STABILITY,
AND PRODUCTIVE EFFICIENCY:
EMPIRICAL EVIDENCE
FROM THE AFRICAN COUNTRIES
March 20, 2013
Alexandre Repkine

2. ETHNIC DIVERSITY AND ECONOMIC PERFORMANCE
 The negative consequences of ethnic dive
rsity:
 Poor economic policies (Easterly and Levine, 19
97)
 Suboptimal social capital formation (Easterly, 20
01)
 Poor infrastructure and underprovision of
public goods (Collier and Gunning, 1999)
 Low economic growth, also due to inadequate
provision of public goods (Alesina and La Ferrar
a, 2005)

3. ETHNIC DIVERSITY AND ECONOMIC PERFORMANCE
 The positive side of ethnic diversity:
 Human capital created due to implicit contract
enforcement (Bates, 2000)
 Ethnic diversity fosters competition and survival
by analogy with biodiversity (Nettle and Romaine, 20
00)
 Ethnically diverse countries grow faster
(Cinyabuguma and Putterman, 2011)
 Ethnic diversity leads to higher productivity in ter
ms of a private (as opposed to public) good: Ales
ina and Ferrara, 2005

4. ETHNIC DIVERSITY, PUBLIC AND PRIVATE GOODS
 Ethnically diverse societies should find
themselves closer to the best-practice frontie
r
 The best-practice frontier may itself be
depressed or stagnating
 Hence no contradiction between Africa being
ethnically diverse and economically depresse
d

5. WORLD DISTRIBUTION OF LANGUAGES
Area Living languages Number of speakers
Count Percent Total Percen
t
Mean Median
Africa 2,146 30.2 789,138,977 12.7 367,726 27,000
America
s
1,060 14.9 51,109,910 0.8 48,217 1,170
Asia 2,304 32.4 3,742,996,641 60.0 1,624,565 12,000
Europe 284 4.0 1,646,624,761 26.4 5,797,975 63,100
Pacific 1,311 18.5 6,551,278 0.1 4,997 950
Totals 7,105 100.0 6,236,421,567 100.0 877,751 7,000Source: Ethnologue.com

6. ETHNIC DIVERSITY: NIGERIA
Nigeria
522 living languages
3 major language families
:
--Afroasiatic
--Nilo-Saharan
--Niger-Congo
88% (or 57%) ethnically
diverse
Population: 140 mn peopl
e

7. ENDOGENEITY ISSUES
 Institutional frameworks help alleviate ethnicit
y-based conflicts
 Democracy (Bluedorn, 2001; Collier, 2000)
 Ethniciy-based conflicts may worsen econom
ic environment
 Rent-seeking behavior (Mauro, 1995)
 Worse institutional quality (Alesina et al., 2003)

8. GENERAL CAUSALITY FRAMEWORK
Ethnic Diversit
y
Productive
Efficiency
Complementarity of skills
Demarginalizatio
n
policies
Social inclusion
Opportunity co
sts of ethnic co
nflict
Vested interests
Awareness of
oppression / rents
Political aspiration
s

9. ETHNICITY AND LANGUAGE
 Ethnicity is not identical with language
 Two ethnicities vs one language
 Irish and English
 Flemish and Dutch
 Same ethnicity vs two languages
 The murky world of dialects
 Spanish vs Catalan
 Japanese vs Ryukyu
 Our assumption: ethnicity = language
 Data issues

10. MEASURING ETHNIC DIVERSITY
 Greenberg (1956)
 Monolingual nonweighted index
 Minimum informational requirements
 Assumption of mutual non-intelligibility
 Portuguese and Spanish vs Hungarian and Spanish
 Afrikaans and Dutch
 Assumption of absence of polyglots
 Split personality nonweighted index
 Same idea, but each language speaker counted as a
separate personality:
n
i
isEDI
1
2
1
is Share of people speaking language
i

11. MEASURING ETHNIC DIVERSITY
 EDI varies between 0 and 1: from no diversit
y to very diverse
 However, the nonweighted index misses the
fact of mutual intelligibility between the two la
nguages
 Diversity may be overestimated
 The weighted version of ethnic diversity inde
x: n
i
n
j
ijji rssEDIW
1 1
1 is the measure of mutual
intelligibility
1,0ijr

12. COMPUTING ETHNIC DIVERSITY INDICES
 Ethnologue (Lewis, 2009) provides data on t
he number of speakers in different countries
 Ethnologue.com
 World Atlas of Language Structures: data on
142 language characteristics for
 Wals.info
 Dryer and Haspelmath (2011)
 Linguistic similarity computed as share of simi
lar characteristics
ijr
Mean Median St.Dev. Minimum Maximum
Unweighted 0.63 0.68 0.24 0.0007 0.95
Weighted 0.51 0.53 0.22 0.0003 0.88

13. ETHNIC DIVERSITY INDICES IN SAMPLE
Country Weighted Index of
Ethnic Diversity
(EDIW)
Unweighted Index of
Ethnic Diversity (EDI)
Algeria 30.00% 81.29%
Angola 30.86% 77.44%
Benin 84.39% 92.11%
Botswana 26.90% 56.41%
Burkina Faso 48.11% 60.05%
Burundi 32.12% 42.86%
Cameroon 47.15% 69.75%
Central African
Republic
55.43% 63.84%
Chad 40.42% 69.98%
Comoros 52.81% 70.08%
Congo, Democratic
Republic of
46.23% 58.54%
Congo, Republic of 58.73% 75.88%
Cote d’Ivoire 48.95% 59.72%
Djibouti 36.81% 53.25%
Egypt 35.21% 60.64%
Equatorial Guinea 65.15% 66.70%
Ethiopia 72.29% 86.08%
Gabon 64.83% 68.35%
Gambia 49.68% 61.54%
Ghana 62.97% 79.19%
Guinea 55.13% 58.84%
Country Weighted Index of
Ethnic Diversity
(EDIW)
Unweighted Index
of Ethnic
Diversity (EDI)
Guinea-Bissau 57.26% 70.67%
Kenya 43.98% 71.24%
Lesotho 8.88% 26.04%
Liberia 81.82% 91.45%
Madagascar 71.89% 71.94%
Malawi 40.20% 52.32%
Mali 78.02% 87.35%
Mauritius 15.09% 15.10%
Morocco 20.45% 46.26%
Mozambique 88.16% 93.19%
Namibia 68.62% 77.17%
Niger 55.19% 63.98%
Nigeria 57.23% 87.57%
Rwanda 0.03% 0.07%
Senegal 70.02% 76.68%
Seychelles 4.98% 6.67%
Sierra Leone 73.78% 82.12%
Somalia 33.81% 35.04%
South Africa 48.06% 86.83%
Sudan 36.63% 46.30%
Swaziland 11.80% 19.44%
Tanzania 75.07% 94.70%
Togo 82.56% 89.74%
Tunisia 49.86% 49.93%
Uganda 67.96% 92.78%
Zambia 78.66% 87.71%
Zimbabwe 49.88% 54.54%

14. EMPIRICAL FRAMEWORK
LAWPROPINCLHEDIWSTABLESTABLE ,,,,
Political stability affects productive efficiency
Ethnic diversity affects political stability in both direct and indirect ways:
STABLE = Political Stability
EDIW = weighted index of ethnic diversity
H = human capital
INCL = quality of policies for social inclusion
PROP = property rights protection
LAW = extent of the rule of law
STABLEEDIEffEff ,

15. QUANTITY AND QUALITY OF HUMAN CAPITAL
 Fedderke and Luiz (2008)
 Quality of human capital: e.g. teachers to pupils
 Political aspirations hypothesis: less stability
 Vested interests hypothesis: more stability
 Quantity of human capital: e.g. number of secon
dary school years
 Social inclusion hypothesis: more stability
 Potential Endogeneity
 Stable environment might influence e.g. opportunity costs
of ethnic conflict
 Modernization hypothesis
 Creative destruction hypothesis
 Two-stage instrumental estimation

16. ETHNIC DIVERSITY AND POLITICAL STABILITY:
TWO-STAGE INSTRUMENTAL ESTIMATION
 Political stability affects productive efficiency
 Ethnic diversity affects political stability along
with the other factors
 Two-way causality is possible, necessitating t
he two-stage estimation approach
itititit
itititit
XZY
XYSTABLE


210
210
exogenous controls: log initial GDP p
er capita, logs ethnic diversity and its s
quare
endogenous determinants of political
stability: educational variables, property
rights protection, rule of law, social inclusio
n policies
itX

itY

vector of instruments foritZ

itY

0ititZE 0itit STABLEZE 0itit ZYE

17. CHOOSING INSTRUMENTS
 World development indicators database
 Algorithm:
 Choose set of instruments (many)
 Run 2SLS estimations instrumenting elements of Y
 Instrument one element at a time (collinearity)
 Pick estimations satisfying the:
 Wu-Hausman exogeneity test
 Sargan’s (1958) test for overidentifying restrictions
 Run Cragg and Donald’s (1993) test of weak instruments on th
e remaining estimations
 Choose the one with the highest value of the minimum eigenvalue
statistic
 Prefer LIML to 2SLS in case this statistic is lower than either 2SLS r
elative bias at 5%, or 2SLS nominal 5% Wald’s test statistic

18. LIST OF INSTRUMENTS
Public spending on education, % GDP, log
Share of public education expenditure in total education expenditure, log
Share of government expenditure channeled into education, log
Share of public education expenditure on primary education, log
Share of public education expenditure channeled into secondary education, log
Secondary school starting age
Expenditure per student in secondary education as % of GDP per capita,log
Poverty headcount ratio at $1.5 a day, log
Gini coefficient, log
Ratio of young literate females to males, log
Population density, log
Dummy=1 if one of official languages is English, French, or Portuguese
Expenditure per student in primary education as % of GDP per capita,log
Expenditure per student in tertiary education as % of GDP per capita,log
Poverty headcount ratio at $1.5 a day, log
Gini coefficient, log
Employment to population ratio, ages 15 to 24, log
Population density, log

19. Estimation Method LIML 2SLS LIML LIML
Dependent Variable
Primary
Education
Quantity
Political
Stability
Secondary
Education
Quantity
Political
Stability
Social
Inclusion
Political
Stability
Property
Rights
Protection
Political
Stability
-.07
(-1.24)
0.37*
(2.04)
0.08
(0.95)
0.47**
(2.64)
0.10***
(4.37)
0.36*
(2.36)
-0.041
(-0.80)
0.57***
(2.94)
-0.001
(-0.19)
0.03
(1.17)
0.007
(0.72)
0.05*
(2.15)
0.01***
(4.76)
0.02
(1.09)
-.02**
(-3.05)
0.07**
(2.72)
Initial GDP per capita,
log
0.08***
(3.97)
-0.47***
(-6.73)
0.02
(0.68)
-0.56***
(-7.5)
0.07***
(9.42)
-0.53***
(-7.67)
0.09***
(5.24)
-0.78***
(-6.89)
Ln Primary Quantity 1.14**
(2.99)
Ln Secondary
Quantity
0.69***
(3.82)
Ln Social Inclusion 4.37***
(5.10)
Ln Property Rights 4.73***
(3.59)
EDIWln
2
ln EDIW
Political Stability and Its Determi
nants
1. Political stability positively associated with all determinants (naturally)
2. Vested interests : ethnic diversity positively associated with property rights
protection
3. Ethnic diversity is positively associated to political stability: evidence agains
t political aspirations, pro social inclusion and vested interests: causality is

20. Political Stability and Its Determi
nantsEstimation Method LIML 2SLS 2SLS LIML
Dependent Variable
Rule
of Law
Political
Stability
Tertiary
Education
Quantity
Political
Stability
Primary
Education
Quality
Political
Stability
Secondary
Education
Quality
Political
Stability
0.37***
(8.55)
0.37**
(2.81)
0.13
(1.26)
0.22
(1.10)
0.19***
(4.93)
0.36
(1.92)
-0.12*
(-2.25)
0.93***
(4.63)
0.04***
(8.11)
0.04*
(2.36)
0.02
(1.49)
.009
(0.36)
0.02***
(4.38)
0.04
(1.54)
-0.01
(-1.74)
.09***
(3.98)
Initial GDP per capita,
log
-.01
(-0.61)
-0.42***
(-7.45)
0.10*
(2.06)
-0.68***
(-6.85)
0.03**
(2.38)
-0.56***
(-6.05)
0.09***
( 4.34)
-.66***
(-9.14)
Ln LAW 3.15***
(6.64)
Ln Primary Quality 1.44**
(2.69)
Ln Tertiary Quantity 0.61***
(3.70)
Ln Secondary Quality 3.07***
(5.05)
EDIWln
2
ln EDIW
Ethnic diversity positively related to rule of law: vested interests hypothesis
Political aspirations hypothesis does not find support
Ethnic diversity negatively associated with quality of secondary education, bu
t this is the only negative effect we discover

21. STOCHASTIC FRONTIER FRAMEWORK
 Ethnic diversity found positively associated w
ith political stability even after controlling for
potential endogeneity
 Stability positively affects productive efficienc
y since it makes more certain investment
outcomes
 Aigner et al. (1997) and Battese and Coelli
(1995)

22. MODELING PRODUCTION EFFICIENCY
 Production is prone to inefficiency:
 Y is output, X is vector of inputs
 V is random deviation from best practice (e.g. bad
weather)
 U is always positive and measures inefficiency
 Inefficiency of each decision-making unit measured a
s follows:
 Penn World Table for data on output, population and i
nvestment flows
 Perpetual inventory method to compute capital stocks
itit UV
itit eXY
itU
e

23. EMPIRICAL ESTIMATION FRAMEWORK
 Translog specification of production function:
 Mean of inefficiency term U is a function of seve
ral determinants:
 Estimation of the production function AND the in
efficiency mean function is simultaneous
 Assumption of independent estimates of U not need
ed
 Omitted variable bias avoided (Wang and Schmidt,
2002)
ititititititititit UVYearLKLKLKY 65
2
4
2
3210 lnlnlnlnlnlnln
ititZiiit wZEDED lnlnln
2
210

24. MONOTONICITY OF PRODUCTION FUNCTION
 A strong point is made in Henningsen and
Henning (2009): Firm B is on the estimated frontie
r (“efficient”)
Firm A is estimated to be less
efficient than B
However, it produces the same
amount of output as A
This problem will not happen if th
e estimated frontier is regionally
monotonic

25. PROCEDURE FOR MONOTONIC ESTIMATION
1) Obtain unrestricted parameters of the
production function and efficiency mean
parameters
2) Adjust unrestricted parameters by solving
where is covariance matrix from unrestricted
estimation
3) Solve the stochastic frontier model
TtKiXY itit ..1,..1,0ˆ,
ˆˆˆminargˆ
0
000
0
ˆ
02
210
0
0
10
lnlnln
ˆ,ˆlnln
ititZii
itit
wZEDEDuE
XYY

26. ETHNIC DIVERSITY AND PRIMARY EDUCATION
Inefficiency Mean Unrestr. Adjusted Unrestr. Adjusted Unrestr. Adjusted Unrestr. Adjusted
-0.18
(-0.82)
-0.22
(-0.93)
-0.60
(-1.34)
-0.55
(-1.48)
-0.71
(-1.56)
-0.62
(-1.72)
-0.99*
(-2.06)
-0.89*
(-2.01)
-0.56**
(-3.02)
-0.57*
(-2.54)
-0.72**
(-2.80)
-0.67**
(-2.87)
-0.83**
(-2.88)
-0.78**
(-3.19)
-1.29***
(-3.38)
-1.23**
(-3.25)
-0.10
( -1.92)
-0.10
(-1.56)
-0.11*
(-2.21)
-0.10**
(-2.21)
-0.13*
(-2.27)
-0.12*
(-2.44)
-0.30**
(-2.81)
-0.29**
(-2.79)
-0.46*
(-2.31)
-0.46**
(-2.96)
-0.50**
(-2.62)
-0.48**
(-3.22)
-1.05*
(-2.09)
-0.98*
(-2.50)
-0.35
(-1.92)
-0.37*
(-2.36)
1.05
(1.87)
1.02
(1.93)
-0.57
(-1.27)
-0.53
(-1.54)
1.55*
(2.32)
1.52*
(2.38)
Mean efficiency 0.76 0.78 0.78 0.79 0.78 0.79 0.80
Log-likelihood -253.04 -257.57 -245.38 -247.96 -242.99 -234.22 -235.05
0.46**
( 3.04)
0.45***
(3.51)
0.66***
(5.32)
0.60***
(5.83)
0.68***
(5.46)
0.60***
(5.41)
0.71***
(8.41)
0.67***
(7.63)
0.16***
( 5.82)
0.16***
( 6.29)
0.22***
(3.29)
0.20***
(4.67)
0.23***
(3.36)
0.20***
(4.45)
0.25***
(4.15)
0.23***
(4.17)
Monotonicity, % obs 100% 100% 99.9% 100%
Quasi-concavity,
% obs
89.2% 88.8% 88.2% 87.8%
Observations 704 704 704 704 704 704 704 704
0
ln EDIW
2
ln EDIW
PRIMQNln
PRIMQLln
EDIWPRIMQN lnln
EDIWPRIMQL lnln
1. The direct effect of ethnic diversity on productive efficiency is
positive: complementarity of skills
2. Quantity of primary education increases production efficiency:
social inclusion
3. Quality of primary education per se is not linked strongly to efficiency,
but its interaction term is, suggesting some room for
political aspirations hypothesis

27. ETHNIC DIVERSITY AND SECONDARY,
TERTIARY EDUCATIONInefficiency Mean Unrestr. Adjusted Unrestr. Adjusted Unrestr. Adjusted Unrestr. Adjusted
-0.49
(-1.60)
-0.42
(-1.60)
NA NA NA NA -0.36
(-1.52)
-0.27
(-1.41)
-0.72***
(-3.53)
-0.67***
(-3.75)
-0.26***
(-4.68)
-0.26***
(-5.15)
-0.18*
(-1.97)
-0.18
(-1.92)
-0.63***
(-4.06)
-0.57***
(-4.40)
-0.11**
(-2.78)
-0.10**
(-3.04)
-0.04***
(-3.72)
-0.04***
(-3.90)
-0.06***
(-3.74)
-0.06***
(-5.54)
-0.10**
(-3.16)
-0.09***
(-3.44)
-0.37***
(-3.46)
-0.35***
(-4.13)
-0.25***
(-5.59)
-0.25***
(-7.40)
-0.14
( -1.72)
-0.12
(-1.79)
0.69***
(6.08)
0.69***
(6.28)
0.26
(1.16)
0.34*
(2.00)
0.206*
(2.40)
0.22**
(2.80)
-0.79*
(-2.52)
-0.66*
(-2.39)
-0.23*
(-2.37)
-0.20*
(-2.41)
0.04
(0.50)
0.05
(0.68)
Mean efficiency 0.76 0.77 0.78 0.78 0.79 0.81 0.75 0.75
Log-likelihood -238.67 -239.46 -218.60 -218.752 -213.00 -216.93 -230.79 -232.68
0.67***
(6.21)
0.61***
(6.65)
0.33*
(2.46)
0.33**
(2.84)
0.37
(1.84)
0.26
(1.89)
0.69***
(6.88)
0.60***
(6.78)
0.21***
(4.38)
0.19***
(5.57)
0.13***
(10.41)
0.13***
(10.98)
0.13***
(6.79)
0.12***
(10.27)
0.20***
(4.71)
0.17***
(6.25)
Monotonicity, % obs 100% 100% 100% 100%
Quasi-concavity,
% obs
88.4% 88.8% 99.9% 86.8%
Observations 704 704 704 704 704 704 704 704
0
ln EDIW
2
ln EDIW
SECQNln
SECQLln
EDIWSECQN lnln
EDIWSECQL lnln
TERTQNln
EDIWTERTQN lnln
1. Ethnic diversity positively associated with efficiency: complementarity
of skills
2. Quantity of secondary school education positively associated with
efficiency: social inclusion hypothesis
3. However, interaction SECQNxEDIW suggests political aspirations are at
work: more access to secondary education spurs political unrest
4. Quality of secondary education decreasing efficiency:
political aspirations again
5. Quantity of tertiary education increases efficiency: social inclusion

28. EFFICIENCY AND DETERMINANTS OF STABILITY
Inefficiency Mean (1) (2) (3) (4) (5) (6) (7)
-9.29*
(-1.97)
NA NA NA -1.57*
(-2.27)
NA -0.81*
(-2.25)
-18.9*
(-1.99)
-0.35***
(-6.32)
-0.34*** (-6.
06)
-0.32***
(-5.50)
-2.40**
(-2.7)
-0.34***
(-6.47)
-1.21**
(-2.73)
-9.9*
(-1.97)
-0.08***
(-6.02)
-0.07*** (-5.
92)
-0.07***
(-5.62)
-0.77*
(-2.4)
-0.06***
(-4.75)
-0.36*
(-2.22)
-0.30** (3.17)
-0.69***
(-6.40)
-0.67*** (-6.
09)
-0.64***
(-5.78)
-1.24***
(-3.74)
-0.66***
(-6.45)
-1.19*** (-4.
69)
-0.82***
(-3.96)
-0.71*** (-3.
41)
-0.73***
(-3.74)
0.51 (0.99) -0.33
(-1.07)
-1.20**
(-2.92)
0.60*** (2.98
)
0.61** (6.10
)
0.50* (2.35) 2.13***
(3.03)
0.65**
(3.28)
1.55** (3.17
)
-0.11*
(-2.43)
-0.13**
(-2.63)
-0.11
(-1.26)
-0.74*** (-3.
43)
-0.32***
(-3.87)
0.04
(0.44)
-0.36***
(-4.66)
Mean efficiency 0.89 0.75 0.76 0.76 0.84 0.76 0.83
Log-likelihood 39.55 29.60 31.70 32.58 49.43 37.09 64.17
0.84*** (11.69) 0.87*** (19.7
2)
0.87*** (19.
78)
0.86*** (18.9
7)
0.84***
(18.17)
0.85*** (15.3
3)
0.80***
(16.14)
Monotonicity, % obs 99.8% 100% 99.8% 99.8% 99.8% 99.8% 99.8%
Quasi-concavity,
% obs
94.8% 94.8% 94.8% 94.8% 94.8% 94.8% 94.8%
Observations 406 406 406 406 406 406 406
0
ln EDIW
2
ln EDIW
STABLEln
LAWln
PROPln
INCLln
SECQNln
SECQLln
PRIMQNln
PRIMQLln
TERTQNln
1. The direct effect of ethnic diversity on efficiency is conspicuous
2. Political stability expectedly associated with more efficient production
3. Law enforcement and property rights protection are predominantly sig
nificant with expected signs
4. Social inclusion comes out negatively associated with efficiency: one e
xplanation is social inclusion policies are diverting resources from produ
ctive activities
5. Educational quantity positively affects efficiency, while effects of
quality are insignificant

29. CONCLUSIONS
 Ethnic diversity affects productive performan
ce in both direct and indirect ways
 The indirect effects of ethnic diversity originat
e in its association with determinants of politi
cal stability and human capital formation
 3 hypothesis on indirect effects
 Social inclusion
 Political aspirations
 Vested interests

30. CONCLUSIONS
 Robust positive direct association between ethni
c diversity and productive efficiency: complemen
tarity of skills
 Robust positive association between ethnic dive
rsity and political stability
 Social inclusion and vested interests corroborated
 Political aspirations: some evidence, but mostly refut
ed
 Quantity of education associated with increased
efficiency, but not quality

31. PUZZLES
 Quality of social inclusion policies associate
d with increased stability, but less productiv
e efficiency
 Political aspirations hypothesis inapplicable for expla
nation purposes
 Provision of social inclusion policies crowds out prod
uctive resources (affirmative action, political correctn
ess etc)
 Direct effect of GDP per capita on stability is
negative
 Creative destruction (Aghion and Howitt, 1992)
 Modernization hypothesis (Fedderke and Luiz, 2008)

32. FUTURE RESEARCH
 Organizing business along ethnic lines
 Complementarity of skills would be more pronounced in truly
mixed businesses
 Agricultural sector provides a natural experiment environment
to test whether direct effects of ethnic diversity on productivit
y are smaller there
 Clustering and enclaves
 The stimulating effect of an ethnically diverse environment ma
y not be realized in case ethnicities form enclaves isolated fro
m each other
 Spatial econometrics approach is necessary to see whether
clustering actually neutralizes the positive effects of diversity
 Moran’s I as a measure of clustering
 Spatial regressions instead of conventional 2SLS or stochastic fronti
ers