The More, the Merrier- Cultural Diversity and the Economy

Cultural Diversity

One of the most important relations every economist tries to understand is the effect that the cultural diversity of a nation has on its economic growth. The very fact that strong opinion says that the same Indian economy that had been stagnating for the first fifty years of the 20th century began to grow at a respectable rate after the cultural boom of the 1980s and went on to become one of the fastest growing economies in the world by the end of the century says a lot about the way culture has helped the Indian economy grow.

A study had created a hundred year trend in India, between 1900 and 1950. The study finds that the Indian economy grew on an annual average rate of 0.8%. However, the population of India also grew at the same rate in that time period. Due to this, it was clear that the net growth in income per capita was negligent, making the Indian economic growth stagnant. But, considering the post-Independence rate, economic growth grew to 3.5% between 1950 and 1980, while the rate of population growth increased to 2.2%. With no improvement in the cultural diversity of Indian Society since the pre-Independence era, this was a mournful net effect on income. It was only after the 1980s that the study found that a wave of liberalization caused the annual growth rate to increase to 5.6%, and gradually went to 6.2% by the 1990s, as diversity was on the rise.

Cultural diversity is independently one of the largest factors that propels the progress of a nation, as well as the development of our own personality as we begin understanding our world, and the emotional and intellectual horizons of the people around us, elaborated by the former General Secretary of the Communist Party of China, Hu Jintao who said “Diversity in the world is a basic characteristic of human society, and also the key condition for a lively and dynamic world as we see today.”

While understanding the benefits that cultural diversity has on the economy, it is clear that this unique blend of different communities gives rise to an abundant pool of skill, competency and experiences, which in turn creates organizational cooperation for the combined efforts of these communities, leading to better outcomes for society at large. Economic growth and development soon inspires the judicial and effective utilization of the nation’s natural resources, leading to technological innovation and the development of human capital. A new study suggests that countries with high levels of diversity are better able to adapt new technologies and ideas. So, the diverse societal norms, customs, and ethics within a nation can nurture technological innovation, the diffusion of new ideas, and thus, the production of a greater variety of goods and services Geographic proximity and cultural diversity, as well as the society’s ability to adapt to these different cultures, religions, and sexual orientations has a major role to play in economic growth.

But the issue that economists face is whether the diversity also has a lop sided effect in creating coordination problems between the various different communities as there may be an absence of connections between the society and the groupings of some members of that society, which can also adversely affect social relations and interpersonal trust between the communities. They argue that diverse populations may also tend to flock to certain locations because they are either rich already or are fast becoming that way.

While this is a viable issue, another pertinent study by economists Quamrul Ashraf and Oded Galor answers the questions raised by these issues as it clearly states what the nature of this relation is and how it forms a rather well suited nexus. The study stated that the connection between taking in and fully understanding different types of cultures and the actual diffusion of these cultures has played a significant role in giving rise to differential patterns of economic development across the globe. The study found that homogeneity slowed down this development.

The study used the example of the Industrial Revolution when Europe and most of the Western Nations had a rate of economic development that was far beyond the rest of the world. They found that the major reason this had happened was because they had a relative openness to other cultures and communities as compared to the other parts of the world which created an economic ascendance.

So, while the nations that were less culturally diverse, and thus more isolated benefited from enhanced assimilation, lower cultural diversity, and more intense accumulation of society-specific human capital, which permitted them to flourish in the agricultural stage of development, with more coordination within their own borders and within their community, the lack of cultural diffusion created homogeneity and rigidity, in terms of their acceptance of newer kinds of communities with cultures far different from their own, which diminished the ability of these societies to adapt to a new technology and new methods, thereby making it far more difficult for these nations to begin the onset of their industrialization and the overall development of their economy.

Thus, even when talking about immigrant fueled cultural diversity, when migrants move from one nation to another, they in turn take a new and varied set of skills, experiences and ideas, which improves the nation’s ability to adapt to new technological innovation, which then leads to economic growth. But, there is the obvious issue of increased heterogeneity which creates a lack of coordination, with possible communication barriers affecting a smooth work flow. But if nations can develop a greater openness to immigration, it will create much larger economic benefits arising from an increased range of skills and ideas. However, because of how dynamic the phenomenon of cultural diversity is, it becomes difficult to understand where the fine line between benefit and burden lies, as that becomes difficult to define. Thus, it is clear that of all the differentiating characteristic in a community like race, traditions and language, we don’t yet know which characteristic identity is truly economically important which makes this subject open to new research constantly.

-Contributed by Dylan Sharma

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