Brotherhood and unity: ethnic diversity and economic performance in socialist Yugoslavia

Abstract Literature on economic consequences of ethnic diversity suggests that ethnic diversity impedes economic growth in dictatorships, while inclusive policies may foster economic benefits from diversity. This paper investigates the impact of ethnic diversity on municipal economic growth in socialist Yugoslavia, a distinctive context due to its dictatorial regime’s active promotion of ethnic inclusion. Utilizing novel estimations of economic performance for 498 municipalities across the census years 1961, 1971, and 1981, the analysis based on seemingly unrelated regressions model reveals that higher ethnic diversity, measured through an ethnic fractionalization index is associated with slower economic growth of Yugoslav municipalities. The study is the first quantitative assessment of the economic consequences of ethnic diversity in Yugoslavia and provides nuanced insights into the effectiveness of inclusive policies, suggesting that while such policies may foster economic benefits, they might not fully counteract the economic drawbacks of ethnic diversity under dictatorship and in an economy that is not primarily driven by market forces.