Ethnic cohesion and development

Ethnic fragmentation is defined as the probability that two randomly selected people in a country will belong to two different ethnic groups (such as Baloch or Pashtun).

Sovereign nation states can be viewed as natural (homogeneous ethnicity) or constructed (many ethnicities). Most low and low-middle-income countries (L/LMICs) are constructed nations because of their colonial history. While departing, colonial powers hastily determined the borders of nations with little regard for ethnic integrity. The resultant ethnic fragmentation often leads to conflict caused by competition for resources amongst ethnic groups, which dooms former colonies to ethnic strife. The impact of this ethnic fragmentation on social and economic development can be explored through the lens of New Institutional Economics (NIE).

So, what is NIE? In a nutshell, it is an economic framework that explores the interaction of institutions and the economy. By ‘institutions’ NIE economists refer to governmental bodies that deliver rule of law, determine property rights, and handle contract enforcement. These institutions are meant to constrain predatory behaviour and facilitate market-based economic transactions.

While the institutions mentioned above facilitate a market economy, NIE economists are also concerned with inclusion, which allows institutions to tap into the productive potential of the majority of a nation’s population. For example, enforcing anti-trust legislation is important to block predation and enable small businesses to become market players on a level playing field. Fairly and widely available credit serves the same purpose. In the political realm, inclusive institutions are necessary to facilitate broad-based and fair political participation.

Given the market orientation of NIE, this framework has been incorporated into the World Bank and IMF’s advocacy of ‘good governance’ reforms in L/LMICs. In this sense, NIE has reshaped thinking and policy in international development. However, there are several problems with the simplistic adoption of NIE as a development policy agenda.

First, establishing inclusive economic and political institutions is difficult since those with vested interests resist change, striving to preserve the status quos from which they benefit, as acknowledged by Douglas North, a key contributor to NIE.

Second, NIE policies must acknowledge the importance of the past in the evolution of participatory and stable institutions. More specifically, they acknowledge the central role that culture -- based on religion and geography -- plays in the delivery of the above-mentioned institutions. These institutions evolved in England and were adopted by nations in the West that shared similar cultures. Since L/LMICs are culturally different from high-income countries (HICs), their paths to creating inclusive institutions must necessarily differ from simplistic ‘good governance’ prescriptions.

A more important gap in the NIE development economics narrative, and one critical for this essay, is that the framework implicitly assumes ethnic homogeneity, which is not the case in constructed nations. As noted, natural nations have a built-in advantage in attaining national cohesion and social and economic development. Nations not characterized by ethnic homogeneity must overcome ethnic strife by adopting institutional innovations to attain national cohesion.

In constructed nations rife with poverty, political entrepreneurs can exploit ethnic cleavages and exacerbate political instability, thereby undermining social and economic development. Worse still, such cleavages, when not fairly addressed, present an opportunity to malign external forces (eg Balochistan). It is no surprise then that political scientists and economists have empirically established that ethnic fragmentation leads to conflict and that it undermines social and economic progress.

Low-middle-income natural nations with low ethnic diversity, such as Bangladesh, are more willing to invest in inclusive institutions since the beneficiaries are more likely to be ‘people like us’ rather than ‘the other’. Natural nations appear to act in a more unified way - as though there is a ‘collective will’ to develop.

A comparative analysis of Bangladesh and Pakistan presents itself as a near-natural experiment to empirically explore this hypothesis. Bangladesh and Pakistan were two provinces (East and West Pakistan) of one country until 1971 when Bangladesh declared its independence after a liberation struggle.

Bangladesh has one dominant ethnicity (98 per cent Bengalis), whereas Pakistan has six notable ethnic groups. It is now well known that Bangladesh defied all expectations that it would remain a ‘basket case’. At the time of its independence in 1971, East Pakistan lagged far behind West Pakistan in all social and economic indicators. Five decades later, Bangladesh far exceeds Pakistan in all social and economic indicators.

Constructed L/LMICs like Pakistan need to invest in institutions that address horizontal inequities that result from ethnic fractionalization. The premise here is that the prime trigger for social and economic progress is national cohesion and that addressing horizontal inequities creates a sense of social justice in the population that enables institutions to harness the productive potential of the population.

While the starting point for leaders in L/LMICs to promote national cohesion is horizontal equity, ignoring vertical equity (across classes) is risky even in HICs with evolved institutions. Such inequities present political entrepreneurs with a cleavage to exploit, as was done by Donald Trump in the US. While evolved institutions can constrain the harm done by cynical exploitation of social cleavages, politics can become dysfunctional even in HICs.

Thus, the policy lesson is that sustainable national cohesion -- a necessary condition for social and economic progress -- can only be built on a broad-based foundation of social justice, which includes both horizontal and vertical equity.

Botswana, Ghana, and Tanzania are good case studies of countries that engaged in institutional innovation to attain ethnic harmony. In Pakistan’s case, institutions legislated and enacted by political governments, such as the Council of Common Interests, National Finance Commission, and National Economic Council and Devolution have made a notable start at promoting ethnic harmony.

As evident from the ethnic unrest in Balochistan, however, much more needs to be done before Pakistan can attain the ethnic harmony necessary to harness the full potential of its 235 million people.

This essay is based on research done by the writer for ‘Ethnicity and Development ‘(Routledge: 2024).

The writer is a US-based economist and a former executive director

of SDPI.