We look at how ethnic diversity influences economic productivity and consider the possibility of serious social conflict. The article consistently proves the assumption that, while there is a link between ethnic diversity and the risk of violent conflict, this link is not rigid. Societies that suffer from the highest risk of conflict generally occupy the middle position on the ethnic diversity scale. Ethnic diversity is fraught with a number of possible macroeconomic risks, which often leads to cutting down on the government’s involvement in the economy and promoting protectionism practices. The level of trust among the people decreases as well. We have uncovered a number of salient sustainable mechanisms that have been highly likely to make the economy of ethnically divided societies perform worse than that of more homogenous societies. Furthermore, ethic diversity may decrease the per capita income due to the rise of distrust and, consequently, higher charges for certain transaction. On the other hand, political institutions have more power in societies that are more subject to potential ethnic diversity risks than in homogeneous societies. Democracy has the potential to almost fully compensate for the economic losses that may result from the high level of ethnic diversity. We have determined that more diverse societies are much safer than more homogeneous societies. While the correlation between diversity and conflict is non-linear, the importance of political institutions for peace and economic growth is stable. Democracy offers an efficient way of negating the potentially harmful impact that ethnic diversity may have on economic growth, and a higher level of diversity even makes society safer than its homogenous counterparts. Supporting or creating extreme ethnic diversity may well be our best hope for peace. In societies that are going through civil wars, becoming a very ethnically diverse federation may have more effect than economic development, provided that the resulting society is a democracy.

ethnicity, political economy, ethnic heterogeneity, conflict