Sociopolitical transition and economic performance: Theory and evidence

This dissertation studies how sociopolitical transformational process of a country affects its economic performance. It analyzes how social fractionalization and social integration determine the sociopolitical evolutionary process, which in turn affects the performance of the country's economy.;Chapter one develops a theoretical model setting up the relationship between social fractionalization and social integration on one hand and output per capita and economic growth on the other hand. In the model, social fragmentation breeds discriminatory practices regarding government redistribution thereby creating political tensions. This brings about inefficient allocation of resources away from production to struggle for political power in order to take control of government redistribution mechanism leading to poor economic outcomes. However, social integrative processes may correct this inefficiency over time depending on the degree of social fractionalization, the level of social distance between the social groups, etc. Even though the model predicts long-run convergence of growth rates and output per capita across countries, it shows possible prolonged divergence of these economic variables.;Chapter two tests the theoretical model for empirical evidence. It uses the 48 contiguous U.S. states as a case study. Panel data regression is employed to study the role racial integration as measured by the percentage of interracial marriages plays in the determination of income per capita across these states. I control for physical capital, human capital, tax burden, population growth rate and state-specific and time fixed effects. Possible problem of endogeneity is accounted for by using the number of decades the states have allowed interracial marriages by repealing their antimiscegenation laws (laws prohibiting interracial marriages) as instrument for interracial marriages for instrumental variable estimation. Additionally, in 1967 the U.S. Supreme Court overturned the antimiscegenation laws of the remaining 16 states that continued to have such laws. This is thus used as an exogenous event for difference-in-difference estimation. The results for these estimations techniques show that racial integration as measured by the levels of interracial marriages is a significant predictor of income per capita across the states in the U.S.;Chapter three examines the extent to which the large differences in foreign direct investment flows to countries in the developing world is explained by ethnic fractionalization. I find that ethnic fractionalization is a significant determinant of FDI inflows to developing countries.