Friday April 25, 2014 Full Website »

How Diversity Leads to Economic Growth

How Diversity Leads to Economic Growth
Reuters

Economic growth and development has long been seen to turn on natural resources, technological innovation and human capital.  But a growing number of studies, including my own research, suggest that geographic proximity and cultural diversity—a place’s openness to different cultures, religions, sexual orientations—also play key roles in economic growth.

Skeptics counter that diversity is an artifact of economic development rather than a contributor. They argue that diverse populations flock to certain locations because they are either rich already or are fast becoming that way.

An important new study by economists Quamrul Ashraf of Williams College and Oded Galor of Brown University should help put many of the skeptics' claims to rest. "Cultural Diversity, Geographical Isolation and the Origin of the Wealth of Nations," recently released as a working paper by the National Bureau of Economic Research, charts the role of geographic isolation, proximity and cultural diversity on economic development from pre-industrial times to the modern era.

It finds that "the interplay between cultural assimilation and cultural diffusion have played a significant role in giving rise to differential patterns of economic development across the globe." To put it in plain English: diversity spurs economic development and homogeneity slows it down.

Ashraf and Galor examine the "Great Divergence" in economic development. During the Industrial Revolution, Europe and the New World developed a rate of economic development that far outpaced the rest of the world. "The gap in per capita GDP between the richest regions of the world and the poorest increased from a modest 3 to 1 ratio in 1820," they note, "to an astounding 18 to 1 ratio in 2000."

Many of the most important economists, sociologists, geographers and other social scientists have grappled with the factors that shaped this great leap in economic development. Max Weber famously attributed this divergence to the "Protestant ethic," which emphasized thrift and hard work, propelling entrepreneurship and productivity improvements. Other classic studies attributed the West’s rise to distinctive cultural norms and values which favor individual effort, freedom and the spirit of enterprise.

Still others suggest that its institutions hold the key. In their classic The Rise of the Western World, Douglas North and Robert Thomas argued that the institutions that arose under the aegis of democratic capitalism, turning as they did on respect for individual property rights, enhanced the rate of technological innovation and economic development. Jared Diamond’s Guns, Germs, and Steel put geography front and center, attributing the West’s economic vibrancy to the serendipitous advantages of easy access to raw materials, abundant rainfall, temperate climate and lower disease burden.

Ashraf and Galor acknowledge these factors but argue that what really propelled Europe and the New World's economic ascendance was their relative openness to other cultures, which they measure in terms of greater or lesser geographical isolation. To get at this they develop a "Geographical Isolation Index," based on the travel time to 139 Old World capital cities. They use this measure to gauge two things. The first is the effect of geographic isolation on cultural diversity. The second looks at the effects of geographic isolation on the level of economic development from the 19th century until 1960.  

Their findings overwhelmingly suggest that cultural diversity and geographic openness matter significantly to economic development across the board. They draw three major conclusions:

  • First, geographic isolation served a positive role in pre-industrial times (aka the agricultural stage of development). But it turns substantially negative as industrialization kicks in. "Societies that were geographically less vulnerable to cultural diffusion benefited from enhanced assimilation, lower cultural diversity, and more intense accumulation of society-specific human capital, which permitted them to flourish in the technological paradigm that characterized the agricultural stage of development," they write. "However, the lack of cultural diffusion and its manifestation in cultural homogeneity and rigidity diminished the ability of these societies to adapt to a new technological paradigm, thereby delaying the onset of their industrialization and, thus, their take-off to a state of sustained economic growth."
  • Second, societies that were geographically isolated all the way back in pre-industrial times continue to be less culturally diverse today.
  • Third and most significantly, they found that cultural diversity has a positive impact on economic development in the process of industrialization, from its inception through modern times.  

It’s time for diversity’s skeptics and naysayers to get over their hang-ups. The evidence is mounting that geographical openness and cultural diversity and tolerance are not by-products but key drivers of economic progress. Proximity, openness and diversity operate alongside technological innovation and human capital as the key engines of economic prosperity. Indeed, one might even go so far as to suggest that they provide the motive force of intellectual, technological, and artistic evolution.

Photo credit: Jon Nazca/Reuters

Richard Florida is Co-Founder and Editor at Large at The Atlantic Cities. He's also a Senior Editor at The Atlantic, Director of the Martin Prosperity Institute at the University of Toronto's Rotman School of Management, and Global Research Professor at New York University. He is a frequent speaker to communities, business and professional organizations, and founder of the Creative Class Group, whose current client list can be found here. All posts »

Join the Discussion