Development, Segregation and Nationalism

Abstract: We investigate to what degree segregation and nationalism have economic causes. We suggest a mechanism through which a decline in the relative price of staple goods, a common feature of economic development, causes producers to switch to the production of more capital-intensive goods. To finance this production switch, producers pool capital in local clubs, such as cooperatives. In the presence of communication costs, the segregation of clubs between ethnic groups can become attractive. Additionally, majority ethnicities may have an incentive to use nationalism as a barrier to club membership by the minority ethnicity. This incentive is stronger if ethnic heterogeneity coincides with economic inequality. We show how this pattern offers a historically plausible explanation for the rise of grassroots nationalism and segregation in Europe before the First World War. This theory is econometrically supported by evidence on ethnic segregation and national conflict in Prussian Poland. The results explain why economic development may lead to ethnicity becoming more important.