Ethnic Identities, Public Spending and Political Regimes

by Sugata Ghosh, Brunel University and Anirban Mitra, University of Kent. Discussion paper KDPE 1907, June 2019.

Non-technical summary:

Discrimination against minorities – ethnic, religious, linguistic, etc. – is a serious concern worldwide. Such systematic exclusion of segments of the population is damaging not only
from a normative perspective – there are potential economic inefficiencies arising out of
this. The role of political institutions in determining various economic outcomes has
received much attention in the recent years. Typically, democracies are perceived to be
superior to non-democracies on many dimensions; particularly, on the allocation of public
spending (see e.g., Tavares and Wacziarg (2001), Deacon (2009), Acemoglu et al. (2014)).

So can the issue of discrimination against minorities be mitigated by superior
institutional structures like democracy? In other words, is discrimination necessarily
lower under democracies as opposed to dictatorships? Can one pin down
which factors
might condition the degree of discrimination under different political regimes? In
particular, how does the presence of a dominant ethnic group affect discrimination under
various political regimes? In this paper, we put forward a tractable theory to answer such
questions.

We analyse the above questions within the context of the framework introduced in
Acemoglu and Robinson (2006). In our model, political leaders (democratically elected or
not) decide on the allocation of spending on different types of public goods: a general
public good and an ethnically-targetable public good which benefits the majority ethnic
group while imposing a cost on the other minorities. They also decide on the tax rate on
incomes which provides the budget for the provision of these goods. The society consist of
individuals with different ethnic identities and varying levels of income.

We show that, under democracy, lower ethnic dominance leads to greater provision of the
general public good while higher dominance implies higher provision of the ethnically targetable good. Interestingly, the opposite relation obtains under dictatorship. This implies that political regime changes can favour or disfavour minorities based on the ambient level of ethnic dominance.

In our setup, the extent of appropriation of the tax revenues is an endogenous choice
variable for the dictator. This allows us to document the relationship between ethnic
dominance and this level of appropriation by the dictator. Our results provide a rationale
– based on the size of the dominant ethnic group – for why one observes a different
pattern
of discrimination and not just a different level of public spending in dictatorships as
opposed to democracies.

Our theory can be used to interpret certain historical events like the changing nature of
Hutu-Tutsi relations in Rwanda, the treatment of Chinese Indonesians during and after
the Suharto regime and more recently the issue of persecution of the Rohingya
community in Myanmar. Each of these scenarios when viewed through the lens of our
model appear to be consistent with the model’s predictions.

You can download the complete paper here.