Abstract

The relationship between ethnic heterogeneity and economic growth is complex. Empirical research working with cross-country data finds a negative, or statistically in- significant, relationship. However, research at the city level usually finds a positive relationship between diversity and wages/productivity. Generally, the trade-off be- tween the economic benefits of diversity and the costs of heterogeneity implies that the relationship between diversity and growth depends on the size of the area used as the unit of observation. In this paper we perform a systematic analysis of the effect of the size of geographical units on the relationship between ethnic diversity and growth. We find a positive relationship for small geographical areas and no effect for large areas and countries. There are potentially different mechanisms that can explain this result depending on the structure of the economy and its level of development. In the case of Africa, we argue that a possible explanation of the positive relationship between diversity and growth is the increase in trade at the boundaries between ethnic groups due to ethnic specialization.