IMF Working Papers

This paper explores the relationship between the degree of division or fractionalization of a country’s population (along ethnolinguistic and religious dimensions) and both political instability and government consumption, using a neoclassical growth model. The principal idea is that greater fractionalization, proxying for the degree of conflict in society, leads to political instability, which in turn leads to higher government consumption aimed at placating the opposition. There is also a feedback mechanism whereby the higher consumption leads to less instability as government consumption reduces the risk of losing office. Empirical evidence based on panel estimation supports this hypothesis.