A STUDY OF CULTURAL DIVERSITY ON ECONOMIC GROWTH IN EUROPE

Abstract

This paper seeks to define the relationship between cultural diversity and economic growth. I made use of the Historical Index of Ethnic Fractionalisation dataset produced by the EUI research data in 2019. This paper focuses on 39 European countries for a time period of 1993 to 2013. To account for endogeneity in cultural diversity, the paper uses the instrumental variable approach to find causality between cultural diversity and economic growth, using civil liberties and length of rail lines as combined instruments with both country and yearly fixed effects. It has been found that 0.1 higher cultural diversity significantly increases economic growth by 0.0946%. In addition, cultural diversity has a bigger positive impact in lower income, non-EU members countries. The results hold general implications for Singapore, where the effect of cultural diversity may not be as impactful.