Economics of Ethnic Peace: Lessons for Countries Like Sri Lanka

Ethnic tension is a dormant spark that awaits fuelling in multi-ethnic societies. It is all too well known how ethnic conflicts, once ignited, engulf and destroy peaceful lives, scar ethnic relationships over many generations and become hard to contain without mammoth efforts.

There is a large literature that focuses on ethnic conflicts and wars. There is, however, not much discussion on how to sustain ethnic peace partly because the countries that have ethnic peace just seem to take it for granted. It is important to note, however, that when ethnic peace breaks down and escalates into an ethnic war, the war may gain its own momentum and continue for reasons unrelated to the initial causes of the conflict. Even if such a war comes to an end through some interventions, there is no guarantee that lasting ethnic peace will emerge if the necessary conditions for peace are absent.

Our interest on this topic was generated by the experience of Malaysia and Sri Lanka which have practiced ethnic preference policies. Many countries, including developed ones, have put in place affirmative action plans to redress some disparities that were created by historical circumstances. If the outcome is not Pareto improving (i.e., make the targeted group better off without making other groups worse off) they become discriminatory.

Although Sri Lanka’s ethnic preference policies were mild relative to Malaysia and Sri Lanka had a head-start in terms of socio-economic development, Sri Lanka failed to sustain ethnic peace and got embroiled in a crippling separatist war that came to surface in 1983. Malaysia, on the other hand, has so far managed ethnic peace reasonably well. In fact, anyone predicting the ethnic future of the two countries would have predicted a more turbulent ethnic climate for Malaysia than that for Sri Lanka.

A careful examination of the policies and performance of the two countries point in the direction that it was the open economy that helped Malaysia move forward despite the constant presence of ethnic tension in the country, and it was the closed economy (import substitution) policies that paved the way for the ethnic conflict in Sri Lanka. Poverty and relative deprivation became a breeding ground for both communist and ethnic rebellions in Sri Lanka. Armed communist uprising in Sri Lanka occurred in 1971. This created precedence for the ethnic rebellion. Although Sri Lanka embarked on a private-sector driven open-economy policy in 1977 and repealed many discriminatory policies, it came too late for the country; the ethnic tension had already given way to the formation of rebellion groups.

Sustaining ethnic peace is a constant challenge that policy makers have to grapple with, even in developed countries. Getting good and strong leaders to set every thing right is a cry one could hear around the developing world. Since such a dream is far from reality in general, an important question to raise is: “is there a mechanism that will help improve the quality of the leaders and their governance, provide higher growth, and pave the way for ethnic peace.”

Openness to foreign trade and investment appears to be one such mechanism. Obviously this alone is not sufficient. As pointed out in the 2008 Growth Report by the Nobel Laureate Michael Spence good governance and political stability were very important contributors to the success stories in the report. The experience shows, however, that even the most promising leaders in closed economies have failed to bring about the changes they desired because of over-powering bureaucracies. The leaders who have succeeded in opening the economies have managed to create, perhaps slowly, more responsible bureaucracies. In other words, openness acts as a disciplining force on the government and bureaucracy. Once set in motion, openness appears to generate a sustaining feedback loop between government policies and the country’s socio-economic environment that will bring about economic growth and ethnic peace. Policy makers in this setting are more likely to implement socio-economic policies that harness ethnic peace and share the growth dividends.

It is also in the self interest of the government officials to pursue growth and peace enhancing policies because prosperity opens up avenues to enhance their own wealth accumulation through legal means instead of resorting to corruptive means that often happen in closed economies. As the economic well being improves across the ethnic groups, the opportunity cost of rebellious activities increases. Moreover, as the standard of living improves, the demand for democracy increases and the political institutions may become more and more democratic. This allows for increased political participation and, therefore, channeling grievances into non-confrontational forums. Overall, the probability of sustaining ethnic peace is likely to increase substantially in an open economy. In other words, the value the minority group attaches to political independence is likely to decrease substantially.

To assess these ideas further Nava Ravi Kumaran and I formulated an econometric model representing growth, quality of governance, and ethnic conflict as interdependent variables. To estimate the model we created a panel data set by collecting data on a number of relevant variables over 1980-2000 for 12 multi-ethnic developing countries. In this dataset we used a number of indices developed by others to represent variables such as openness, quality of governance, democracy, and ethno-linguistic fractionalization. In particular, the index of openness we used represent the legal and institutional framework that the policy makers have put in place to facilitate economic openness.

The results show, after controlling for the effect of a number of other variables, a strong and robust positive effect of openness on growth and quality of governance and a negative effect on ethnic conflict. While growth and quality of governance re-enforce each other they both reduce the probability of an ethnic conflict. In other words, as the economies become more and more open, it can create a self-sustaining feedback mechanism that uplift the income levels, improves the quality of governance and increases the probability of sustaining ethnic peace.

Concurring with the findings of others we also find that fragile democracies are not so conducive to sustaining ethnic peace. Authoritarian states and well developed democracies are better in doing this. This means that the political leaders of fragile democracies have to set their short-term petty politics aside and work out a national agenda of policies that needs to be adhered to regardless which party is in power.