Can Ethnic Diversity Explain the Varying Effects of Regional Trade Agreements?

Abstract: In response to the recent stagnation of global economic integration, a large part of world trade today transpires within the boundaries of regional trade agreements (RTAs). However, trade effects are heterogeneous both across and within RTAs - a phenomenon not fully understood. Since the end of the Cold War, researchers have studied the role of ethnic diversity in explaining low economic development, especially in Sub-Saharan Africa. Despite many possible theoretical mechanisms, as well as a strong connection between international trade and development policy, the link between diversity and trade has not been previously analysed empirically. In this paper, I evaluate the relationship between preferential trading opportunities, ethnic diversity, and trade flows for a large sample of bilaterally trading economies over the period 1988 to 2008 using the fixed effects Poisson-Pseudo-Maximum-Likelihood (PPML) estimator, looking at both static and cumulative effects. I find that the correlation between RTAs and trade flows seems to vary non-monotonically with the level of ethnic diversity. Hence, it is not predominantly a large number of different ethnic groups that presents an obstacle to export performance, but the tension created when a society approaches a situation with two equally sized, competing, ethnic groups. More- over, the export of manufactured goods is particularly restricted in such, ethnically polarised, economies. A number of sensitivity analyses suggests that the results are fairly robust to sample and specification changes.