Ethnically homogeneous commercial elites in developing countries

ETHNICALLY HOMOGENEOUS COMMERCIAL ELITES IN DEVELOPING COUNTRIES*

I. INTRODUCTION

Historically, one of the central concerns of law and development scholars has been whether and how legal institutions transplanted from developed countries should be adapted to reflect the distinctive social and economic features of developing countries. In this Article, this tradition is continued by focusing on one distinctive characteristic of many developing countries: ethnic minority dominance of the economy, or at least large sectors of it. Recently, Amy Chua suggested that this phenomenon has significant, yet under-appreciated, implications for the design of legal institutions in developing countries.2

This analysis is intended to reflect and contribute to broader debates over paradigms of economic development and their implications for institutional design. Within the last decade, a major paradigm shift has occurred in the thinking of international economic agencies, economists, and others concerned with theories of development. This paradigm shift contains two elements. First, there is a greater reliance on domestic and international private markets as the drivers of economic development, rather than on the dirigiste development policies that have often prevailed in the past. Second, notwithstanding the contraction of some of the functions of the state envisaged by the first element, the paradigm shift contains an enhanced concern with the quality of public-sector governance institutions. This new perspective is often referred to as New Institutional Economics.3

party enforcement mechanisms.5 Information flows amongst kin and family, reputation effects, and informal group sanctions support nonsimultaneous exchanges within ethnic groups but at the expense of foregone potentially mutually beneficial exchanges among a much larger network of trading partners for whom these conditions do not hold.6

The normative claim advanced by New Institutional Economics is that developing countries ought to reduce their inhabitants' reliance upon highly personalized exchanges.7 Underlying this claim is the notion that a society that foregoes the potential gains from mutually beneficial transactions with a wider range of trading partners limits the extent of the available market and the possible division of labor and specialization in much the same way that protectionist trade policies constrain the exploitation of comparative advantage internationally.8 The relevant policy prescriptions entail major political, bureaucratic, and legal reforms that are designed both to facilitate and support non-personalized contracting among a much wider array of potential trading partners. Of course, such reforms will also presumably reduce the advantages that flow from restricting trade to members of one's own ethnic group. Consequently, institutional reforms should reduce the economic dominance of ethnic groups that currently benefit economically from their superior abilities to engage in non-simultaneous exchange.9

economically dominant ethnic minorities seems to be treated as a mere symptom of the more fundamental problem of institutional underdevelopment-a symptom likely to disappear once institutional reforms designed to facilitate free contracting by private actors are adopted. In Chua's view, however, in many contexts "marketization"-defined as including but not being limited to the "contractualization" of economic activity-is likely to perpetuate and often increase the economic dominance of certain ethnic minorities.11 Meanwhile, political liberalization, in particular the adoption of democratic political regimes, is likely to exacerbate ethnic conflicts by pitting a politically powerful but impoverished "indigenous" majority against an economically dominant ethnic minority. Chua argues that the prevailing intellectual paradigm-- the so-called "Washington consensus"-advocates both marketization and democratization, and, as a result, is fundamentally misguided because, in the context of many developing countries, democracy can proceed only while in deep tension with markets.12

ated majorities through market regulation are preferable to either of the other two likely outcomes. Chua concludes that this is true even though these policies from an economic perspective are often rejected by economists as inefficient forms of market intervention.15

This Article's analysis of the phenomenon of ethnically homogeneous commercial elites critically examines both the positive and the normative components of the claims put forward by Chua and proponents of the New Institutional Economics. This Article asserts that deficiencies in formal institutions are not the sole, and may not even be the primary, reason why economically dominant ethnic minorities have been and will continue to be observed in developing countries. In other words, there is considerable merit in Chua's claim that this phenomenon might persist under free market conditions. However, this Article questions Chua's conclusion that the appropriate response to this insight is to craft institutions or policies that restrict the market activities of the dominant group.16

Part II of this Article defines the term "economic dominance" and discusses the factors that cause a group to become economically dominant. In Part II, we note that although there are many ways in which an ethnic group can be defined as economically dominant, it is common to define economic dominance in terms of levels of entrepreneurship. Part III shows that historically a diverse set of factors has contributed to the emergence of ethnic disparities in entrepreneurship and presents various possible explanations for why, regardless of the reasons behind its emergence, a particular group's dominance might persist under market conditions. Part IV evaluates the policy prescriptions associated with both New Institutional Economics and Chua's `ethno-political' analysis in terms of their likely impact upon the factors that contribute to the persistence of this phenomenon. Part V critically examines policies that entail investing significant amounts of public resources in institutions designed to alter the composition of the entrepreneurial class in the context of a developing country. Part VI concludes the Article.

II. THE PHENOMENON

By some accounts, the phenomenon of economically dominant ethnic minorities is pervasive in the developing world.17 According to Chua the list of dominant minority groups includes: ethnic Chinese in Southeast Asia; Ceylon Tamils in Sri Lanka; whites and South Asians in East Africa; (East) Indians in Fiji and Guyana; whites in Zimbabwe and South Africa; the Tutsi in Rwanda and Burundi; Ibos in Nigeria; Lebanese in francophone West Africa, the Dominican Republic, Haiti, Jamaica and Trinidad; "taller, lighter-skinned, Spanish-blooded aristocrats" in Bolivia, Mexico, Peru, and most Central American Countries; Russian-speaking groups in Kazakhstan, Uzbekistan, Turkmenistan, and Kyrgyzstan; and various minorities in particular Indian states such as the South Indians in Maharashtra, the coastal Andhras in Telangana, and the Bengali in Assam.18

The factors that cause a group to qualify as economically dominant are not always clear. Sometimes, dominance is defined in terms of levels of income, educational achievement, or representation in the professions. Economic dominance, however, is also widely understood as a function of levels of entrepreneurship, such as levels of ownership and control of commercial enterprises. For instance, Chua illustrates the economic dominance of ethnic Chinese in Southeast Asia as follows:

in Malaysia, despite discriminatory laws aimed at limiting their clout." In the Philippines, the ostensibly "aggressive" Chinese (only about two percent of the population) reportedly control almost forty percent of the corporate economy, including the country's four major airlines.19

Although levels of entrepreneurship are often correlated with other possible measures of economic dominance, there is no necessary connection. Groups that are dominant in terms of entrepreneurship may have relatively low levels of income, may include large numbers of impoverished members, and may be under-represented in other sectors, such as the public service. For instance, the perception that Indians in Fiji are economically dominant is based in large part upon the fact that Indian entrepreneurs are dominant in several of the most visible sectors of the economy, including retailing, public service, and sugar production.20 However, income differentials between Indians and indigenous Fijian's are "insignificant." Moreover, "apart from the fact that [indigenous] Fijians own almost ninety percent of the land, the vast bulk of the remaining wealth in the country is in the hands of the big Australian corporations," and "the overwhelming majority of Indians are poor rural farmers with few material belongings".21

III. EXPLAINING DIFFERENCES IN ENTREPRENEURSHIP

dominant minorities have risen to prominence from relatively humble beginnings.25 For example, the ancestors of most Indians in Fiji26 and Indians in East Africa 27 were brought to those countries in the colonial era as coolies or indentured laborers. Consequently, it is difficult to make any generalizations about the factors that caused the phenomenon of economically dominant ethnic minorities to emerge. However, the following discussion identifies several factors that could contribute to the persistence of the phenomenon under free market conditions.

A. Differences in Individual Preferences and Abilities

Over the course of the past century, an impressive array of social theorists has attempted to explain differences in the economic behaviour of ethnic groups by reference to innate differences in personal characteristics that have been referred to as values, beliefs, attitudes, preferences, tastes, or abilities. These personal characteristics tend to determine the behavior of individuals by influencing both the goals towards which their actions are directed and their abilities to achieve those goals. Common characteristics among the majority of the members of an ethnic group constitute the group's culture.

work over leisure and saving over consumption are significant." Yet another group of scholars has emphasized that most economic activity involves cooperation, and they have suggested that social skills are a critical determinant of economic performance.31 These social skills include: honesty; trustworthiness; the ability to motivate cooperation in others; and, perhaps more controversially, an ability to be authoritative.32

It is also recognized that attitudes towards the acquisition of skills required to engage in entrepreneurship may be as important as attitudes towards entrepreneurial activities themselves.33 Consequently, cultural traits, such as the willingness to spend time and money on education, as opposed to consumption or leisure, are claimed to be determinants of future entrepreneurial success.34 Similarly, a preference for certain types of education may be significant.35

businessmen in Malaysia were much more likely than non-Malay Muslim businessmen to regard employment in the public sector as more prestigious than engaging in commercial activity.37 In Fiji, it is claimed that native Fijians who are accustomed to a subsistence lifestyle do not display the same levels of acquisitiveness, individualism, and competitiveness as members of other ethnic groups on the island.38 Throughout sub-Saharan Africa the relatively small scale of African-owned enterprises is sometimes explained by the fact that African entrepreneurs do not trust other Africans, either within or outside their firms.39 It is also claimed that African entrepreneurs are hampered by their predilection for engaging in conspicuous consumption rather than reinvesting profits in their businesses.40 By contrast, until recently, it was claimed that the economic success of the ethnic Chinese in Southeast Asia could be attributed to Confucian values, including diligence, "respect for superiors, high rates of savings.... repression of personal need or claims," and willingness to invest in education, and, in particular, education in science, engineering, and mathematics.41

B. Invidious Discrimination

1. Discrimination in favor of the minority group

Certain forms of invidious discrimination may, if they are prevalent in a society, help to perpetuate the economic dominance of an ethnic minority. Becker is well known for his insight that invidious discrimination causes potential contractors to avoid a certain number of economically beneficial transactions and therefore may reduce the money incomes of both those who discriminate and those who are discriminated against.42 However, Becker's theoretical model also showed that widespread discrimination frequently reduces the income of one ethnic group by more than that of another.43 The intuition underlying this result is that discrimination may cause one group to forgo a larger number of advantageous exchanges. Therefore, Becker's analysis is consistent with the notion that, under certain conditions, invidious discrimination may reduce the aggregate money income of members of an economically dominant ethnic minority by less than it reduces the aggregate income of the group that is a numerical majority. This raises the possibility that inter-ethnic disparities in wealth and income can be attributed to invidious discrimination in favor of the advantaged group.

example, his analysis suggests that discrimination may increase the relative income of an ethnic group that is a numerical minority as long as it has a sufficiently large economic majority. Becker's analysis also implies that in an open economy, discrimination may increase the relative income of an ethnic group that is a numerical minority within one country but is a numerical and economic majority within a broader geographic area. Finally, Becker's analysis can probably be extended to show that invidious discrimination may reduce the relative income of a group that is a numerical majority if its members prefer to contract with members of the minority, i.e., they discriminate against their own kind. In each of these cases, the intuition behind the predicted result is that invidious discrimination causes the numerical majority within a country to forgo or be denied a relatively large number of advantageous transactions, suffering relatively large losses in income.

Becker also argued that market forces tend to mitigate the impact of some forms of invidious discrimination.46 In a competitive market, actors with relatively strong tastes for discrimination against either customers or employees from certain ethnic groups will tend to lose market share to firms that have relatively weak tastes for discrimination. This is because actors with relatively weak tastes for discrimination will be able to produce any given quantity of output at a lower price. Even in a market that is not competitive, actors with relatively weak tastes for discrimination against customers or employees will be able to earn greater profits from any given enterprise. Consequently, actors with relatively strong tastes for discrimination will have an incentive to transfer their enterprises to those with relatively weak tastes.

note that market forces do not tend to eliminate forms of discrimination that generate positive utility for those who discriminate, i.e., those who derive satisfaction from subordinating and humiliating members of certain ethnic groups or those who will be punished by third parties if they fail to discriminate.48 Therefore, as a theoretical matter, it is quite possible that an economically dominant ethnic group might owe its position to the fact that members of society invidiously discriminate in its favor.

There is a fair amount of anecdotal evidence that in many countries, members of the economically dominant minority group dislike personal interactions with members of other ethnic groups. For example, in East Africa, there have historically been complaints that South Asian shopkeepers are rude to and cheat customers from other ethnic groups.49 Similar observations have been made about South Asians in Fiji50 and Lebanese in the Caribbean.51 It would however, be mildly surprising if invidious discrimination against consumers were prevalent in any country where a minority group has traditionally been represented disproportionately in retailing. Historically, retailing has been fairly competitive and has required a relatively large amount of personal interaction with customers from other ethnic groups. Thus, it is reasonable to assume that individuals with relatively strong tastes for discrimination would be at a competitive disadvantage in retailing.52

taste for discrimination.54 Moreover, in many countries the minority group is so small relative to the population as a whole that, at least according to Becker's analysis, it would suffer the most harm if it dicriminated invidiously against other groups.55 Ultimately, therefore, there is little conclusive evidence that invidious discrimination in contracting-as opposed to other areas of social interaction-is preva lent in many of the countries with which we are concerned. South Africa, with its infamous record of legislated racial discrimination, may be the exception.

2. Discrimination against the minority group

One of the most remarkable features of the economic accomplishments of the East Indians in Fiji and East Africa is the fact that many of their ancestors were indentured laborers. In other words, when they initially entered Fiji and East Africa, East Indians typically did so at or near the bottom of the socioeconomic ladder; they were not economically dominant. Accordingly, if Becker's analysis is correct, it is implausible that invidious discrimination in favor of East Indians played a significant role in enabling them to achieve economic success. In fact, it is likely that when East Indians initially entered Fiji and East Africa, any significant invidious discrimination would have been directed against them rather than in their favor.

trated in entrepreneurial or professional activities. It is important to note, however, that this theory alone does not explain why members of the group being discriminated against would earn relatively high pecuniary returns from the activities in which they are concentrated. Nonetheless, this hypothesis may explain the occupational choices of not only East Indians in Fiji, East Africa, and other areas, but also groups such as the European Jews.56

The possibility that discrimination against a group might contribute to its economic success has important implications for the design of preferential policies, which amount to a form of state-sponsored discrimination against certain groups. These implications are discussed at greater length in Part IV of this Article.

C. Social Capital

Differential economic performance among ethnic groups may also be explained by variations in groups' social, cultural, and linguistic characteristics, which may lead to variations across groups in the efficacy of economic activity.57 Group characteristics that have such functional attributes are often referred to collectively as `social capital'.58

more trustworthy than outsiders if group norms discourage opportunistic behaviour within the group.

The extent to which a group has an incentive to exploit its social capital will depend upon the relative efficacy of using social capital, as opposed to other techniques, to obtain goods and services. For example, whether a group has an incentive to discriminate against non-members in contracting will depend upon factors such as: (1) the efficiency with which inter-group social networks transmit information, as compared to formal screening mechanisms like credit bureaus; (2) the magnitude of inter-group cultural and linguistic differences; (3) the relative trustworthiness of members of other groups, taking into account the effectiveness of the judicial system; and, (4) the availability of trading partners inside, as compared to outside, of the group. These considerations have led scholars to predict that social capital will play a particularly important role in the commercial behavior of small groups whose members are very different from those of other groups in society.61 It also seems reasonable to expect social capital to play a particularly important role in facilitating complex medium or longterm contracting that involves non-simultaneous performance, as opposed to simple simultaneous exchanges in which there is less scope for opportunistic behavior.

tically in contractual relationships with other members of the group because it will raise the costs of being informally sanctioned for opportunism by exclusion from intra-group trade. Consequently, discrimination against a group may operate to reduce the level of opportunistic behaviour that its members expect when they contract with other members of the same group. The policy implications of this insight will be addressed in Part IV of this Article.

If one ethnic group is relatively well endowed with social capital, its members will incur lower contracting costs and thus, presumably, higher profits than members of groups that are less well endowed. These savings on contracting costs can be characterized as the returns on the group's social capital. Furthermore, regardless of a group's relative endowments of social capital, a minority group that is already economically dominant may tend to maintain its position if it attempts to exploit its social capital by discriminating against outsiders. In other words, if the members of ethnic trading networks tend to be relatively large, wealthy, and well-established entrepreneurs, smaller, poorer outsiders will be harmed significantly if they are denied the opportunity to obtain credit or engage in cooperative ventures with members of the network. The potential gains from trade among relatively poor outsiders may be low relative to the gains from trade with members of the wealthier minority group.

The existence of ethnically based "trading networks" among Chinese in Southeast Asia and South Asians in East Africa has been well documented.63 Members of these networks are reported to assess the trustworthiness of contracting partners through factors such as kinship; dialect; or common origin in a clan, caste, village, or even a country.64 The stronger the familial, social, cultural, and linguistic ties between individuals, the more trustworthy they find one another.65 Because these ties transcend national boundaries, ethnic trading networks are often international in scope.66

as "maddeningly impenetrable" to outsiders.68 At the same time, there is no particular indication that the members of those networks discriminate when engaging in simultaneous exchanges such as typical retail transactions (in which no credit is extended to the consumer). This is consistent with the hypothesis that ethnically based trading networks have emerged primarily to help their members minimize the risk of opportunistic behaviour.

There is also some evidence that in societies where there is an ethnically homogeneous commercial elite, members of the disadvantaged group possess relatively little social capital. For instance, a number of observers have commented on the low levels of trust among African entrepreneurs.69 Similar claims have been made about the relative inability of Malays to engage in cooperative economic activity.70 D. Increasing Returns to Scale

Where productive activity is characterized by increasing returns to scale, the first producers to attain the level of output at which increasing returns begin will obtain a potentially insurmountable advantage over other producers. If, for some reason, the producers who initially achieve high levels of output are concentrated in one particular ethnic group, the presence of increasing returns to scale will lead to the perpetuation and even enhancement of the group's dominance.

obtain these goods and services at a lower average cost than smallet firms.74

Another potentially significant fact is that the regulatory environment is extremely complex in many developing countries.75 Large, established firms may have an advantage in negotiating thickets of regulation because of their experience and because they can spread the fixed costs of establishing and maintaining political contacts over a larger stream of revenue. 76

Deficiencies in the institutions required to support a free market also play a role in generating increasing returns to scale. For example, factors including: (1) poor accounting standards and weak formal mechanisms for screening firms, and (2) enforcing contracts tend to make it costly for firms to obtain external financing. In such an environment, large, established firms are likely to be able to obtain financing for their projects more easily than smaller firms because larger firms typically generate larger internal cashflows, which may be used to finance new projects. Large firms also have more assets suitable for use as collateral than small firms. Where mechanisms for enforcing contracts are weak and information flows are poor, established firms, both large and small, will also have an advantage in obtaining capital and other inputs because they can establish a reputation for honest dealing. Under these conditions, moreover, consumers are likely to have limited information about product quality and little recourse against firms that sell unsatisfactory products. Consequently, in these circumstances, firms with established brand names and reputations will tend to have an advantage in product markets.

The notion that increasing returns to scale are prevalent in developing economies is consistent with the well-known fact that large business groups dominate many developing economies. There is also evidence in some developing countries that affiliation with very large business groups boosts the profitability of firms.77

E. Self-Reinforcing Characteristics of the Phenomenon

group under free market conditions. It is also worth noting, however, that there may be important inter-relationships between these causal factors. There appear to be certain conditions under which the operation of one factor might reinforce or even trigger the operation of another factor. In this sense, the tendency of minority groups to dominate economic activity in developing countries may be a selfreinforcing phenomenon.78

The most obvious example of this self-reinforcing characteristic of the phenomenon is the way in which increasing returns to scale might reinforce the effects of some other factor that may have caused the initial disparities in groups' performance. For instance, disparities caused by differentials in preferences or abilities, historical discrimination, or the presence of social networks may allow one group to take an early lead in providing a particular good or service. The advantage may easily be sustained for a long period of time if production in the society is characterized by increasing returns to scale. Furthermore, since most of the increasing returns to scale identified above are correlated with the overall scale of a firm's activities, as opposed to only the scale of its activity in any one market, firms may be able leverage dominance in one market into dominance in a number of other markets.

lions of this kind may not be corrected by market forces. Invidious discrimination could, in turn, cause differentials in abilities or preferences for entrepreneurial activity to emerge. For instance, Sunstein suggests that victims of discrimination attempt to minimize cognitive dissonance by adjusting their aspirations to reflect their opportunities.83 Meanwhile, a number of scholars have suggested that victims of discrimination might rationally refrain from investing in the acquisition of human capital if they believe that discrimination will make it difficult for them to recoup their investment.84

One can even speculate about other ways in which ethnic stratification in economic activity might be self-reinforcing. For example, the absence of inter-group social networks might allow inaccurate beliefs about members of other groups to emerge and persist and so contribute to invidious discrimination.85 Alternatively, if one posits that people generally prefer to socialize with individuals of equal economic status, it is possible that initial disparities in achievement will create or reinforce ethnically based social networks.

Whether or not all these self-reinforcing effects will manifest themselves in any given society is unclear. To give just one example, members of disadvantaged groups may respond to expected discrimination by striving to over-achieve or by increasing their investments in the acquisition of objectively verifiable skills. Nevertheless, there is clearly a significant possibility that the phenomenon of ethnic disparities in entrepreneurship may be both causally over-determined and selfreinforcing. The next Part outlines the policy implications of this observation and examines the claim that institutional reforms are likely to substantially reduce the prevalence of ethnic disparities in entrepreneurship.

IV. POLICY IMPLICATIONS

that these factors will not necessarily be eliminated by the institutional reforms advocated by proponents of the New Institutional Economics. There is no doubt that fostering certain institutions may address some of the causes of ethnic stratification. For instance, improving formal mechanisms for screening potential trading partners and enforcing contracts is one way of encouraging established firms to trade with members of disadvantaged groups and reducing returns to the higher social capital of dominant groups. This implies that states should invest in supporting institutions, such as credit bureaus and civil courts, as well as agencies charged with setting accounting standards and training accountants. It also seems likely that these and other types of institutional reforms will remove some sources of increasing returns to scale. States may also be able to reduce the prevalence of increasing returns to scale, thereby reducing the fixed costs of doing business, by providing reliable infrastructure and social services and cutting red tape. Finally, to the extent that institutional reforms enhance competition and reduce barriers to entry, they may also reduce the extent of invidious discrimination.

tutes for the collective goods that are typically provided by ethnically defined groups.

This analysis of the causes of ethnic disparities in entrepreneurship also sheds light on the difficulties entailed in crafting corrective policies. For example, increased public expenditures upon education and training for disadvantaged groups may help enhance access to entrepreneurial and other economic opportunities. However, these policies may have little impact on patterns of entrepreneurship if `learning by doing' is the most important method of acquiring entrepreneurial ability, or if invidious discrimination, preferences, or low endowments of social capital continue to limit a group's rate of entrepreneurship. Meanwhile, more direct efforts to increase levels of entrepreneurship might have perverse effects. For instance, preferential policies may tend to induce members of disfavored groups to concentrate their activities in sectors in which the policies are least effective. Alternatively, such policies may enhance levels of social capital within disfavored groups, making them more effective competitors in both economic and political markets.89

V. NORMATIVE CONSIDERATIONS

A. How Important is the Ethnic Composition of the Commercial Elite?

In most developing countries, a strong case can be made for policies designed to reduce the ethnic disparities in wealth and income, which might be perpetuated and perhaps even exacerbated by market forces. However, many discussions of inter-ethnic differentials in economic achievement focus on differences in levels of entrepreneurship, not differences of income or wealth. Whether the social welfare function attaches significant weight to efficiency, social justice, conflict reduction, or some combination of these factors, there is little justification for directing significant state resources toward attempting to alter the ethnic composition of a developing society's entrepreneurial class.

disparities in entrepreneurship. For instance, if ethnic disparities can be attributed to mistaken beliefs about groups' productive abilities, poor legal institutions, or the absence of physical infrastructure, some form of corrective state action might be efficient. However, it will be inefficient to remove disparities in entrepreneurship that are attributable to significant differences in productive abilities and preferences. In these circumstances, corrective state action seems to imply inducing a number of individuals to do things that they either would prefer not to do or are not particularly good at completing. It is difficult to see how, at least in the short term, this can be a Pareto-superior choice. It is also not obvious that the resulting situation will be efficient according to the Kaldor-Hicks definition.90

It is also unconvincing that, at least in the context of a developing country, social justice demands a focus on the elimination of ethnic disparities in entrepreneurship. It is true that persistent ethnic disparities in the control over productive resources imply a certain form of inequality of opportunity. This is particularly true of disparities that originated in blatant invidious discrimination on the part of authoritarian colonial or post-colonial rulers. Moreover, even in cases where ethnic disparities in economic performance may be best explained by differences in preferences or abilities, these differences can plausibly be regarded as the products of historical and social contingencies, rather than essential personal characteristics for which individuals are to be appropriately held responsible. Consequently, one should not be willing to assume that disparities traceable to differences in preferences or abilities are tolerable in a just society.

but this does not do anything for the remaining members of the group. It seems that the most effective way to create a meaningful increase in the autonomy of a significant proportion of a group's members is to refrain from focusing on disparities in entrepreneurship and instead strive to reduce disparities (ethnic and otherwise) in access to a broader range of economic opportunities. In particular, developing states should focus on opportunities to engage in fulfilling employment. Furthermore, to the extent that developing states do attempt to reduce disparities in entrepreneurship, these states should focus their efforts on the types of entrepreneurial opportunities that are most likely to be exploited by the greatest number of people. These efforts include micro-, small-, and medium-sized enterprises owned by members of disadvantaged ethnic groups.

Some might claim that regardless of whether it can be reconciled with the dictates of efficiency and conventional notions of distributive justice, policies designed to reduce disparities in entrepreneurship might be justified as attempts to avoid generating dangerous levels of resentment among members of relatively non-entrepreneurial groups in a society.91 The difficulty with this claim is that it is unclear whether there is a causal connection between dominance in entrepreneurial activities per se and levels of inter-ethnic resentment and conflict.92

significant levels of violence.94 Second, in some of the cases where dominant entrepreneurial minorities have been the targets of violence, the minority's economic status appears to have been of secondary importance. In Uganda for example, Asians' economic dominance through much of the Twentieth century bred enormous levels of resentment and prompted both colonial and post-colonial authorities to take increasingly drastic steps to attempt to Africanize the economy. Idi Amin's decision to expel the Asians, in August 1972, was clearly intended to capitalize on those tensions. However, Amin's drastic action was mainly inspired by his need to divert popular attention from the economic problems caused by his expansion of the armed forces; the Asians were already being driven out by discriminatory economic policies instituted by Amin's predecessor.95 This suggests that any minority group, whether economically dominant or not, could have suffered a similar fate. Similarly, though perhaps more controversially, it has been suggested that recent conflicts in Indonesia,96 Rwanda,97 and Burundi originated in factors other than economic disparities between rival ethnic groups. Taken together, these cases illustrate that persecution of entrepreneurial ethnic minorities may be unaffected by whether the state has implemented preferential policies in favor of disadvantaged groups.

or ancient hatreds.100 Others attribute conflict to the machinations of elites who instigate ethnic conflict in their quest for power.101 Under either view, current social conditions play little or no role in influencing the likelihood of ethnic conflict. Similarly, Kuran has recently emphasized that a significant level of ethnification is generally a prerequisite to conflict and that levels of ethnification can fluctuate rapidly and unpredictably in response to relatively small changes in external circumstances.102 The relevant changes might include events such as economic crises (that increase the importance of reliance upon kin-groups), notorious crimes, or political campaigns. Under this view, reducing inequalities in entrepreneurship may have little effect on the likelihood that a society will experience ethnic conflict since it will not eliminate the risk that an increase in levels of ethnification-initiated by some sudden shock-will escalate into conflict.

There are, of course, some theorists who claim that conflict is at least partly motivated by disparities in entrepreneurship. For example, Bonacich has suggested that entrepreneurial elites are likely to be the targets of hostility and violence from business rivals, exploited customers, and workers resenting the minority for paying low wages."'3 However, Horowitz claims in his preeminent text that while there is some evidence that business rivals tend to be hostile toward elite minority groups, there is little evidence that hostility on the part of either customers or workers has played a significant role in ethnic conflict involving entrepreneurial minorities.104

status. However, the importance of this particular indicator is uncertain since it is not clear that status-seeking groups that are thwarted in their attempts to dominate entrepreneurial activity will necessarily turn to violence, particularly if they are not disadvantaged in other areas of economic activity and are able to achieve success in politics and public administration.106

In light of the uncertainty surrounding the role that disparities in entrepreneurship play in generating ethnic conflict, it is difficult to accept that policies designed to alter the composition of the entrepreneurial class of a society are worthwhile in the context of many developing states. As Roe notes, when it is uncertain which of two policies is the most likely to generate conflict, but one is preferable in terms of both equity and efficiency, it seems appropriate to select the one that is more equitable and efficient.107

B. Pragmatic Egalitarianism

Generally speaking, states in developing countries with ethnically homogeneous elites should focus their efforts primarily toward redistributing the wealth generated by elites rather than attempting to alter their composition. This redistribution would generally take the form of in-kind transfers of goods and services, which are better provided by public rather than through private institutions, including: healthcare, education, infrastructure, and personal security. However, ethnically targeted programs, such as those providing preferential treatment in employment and access to higher education, can also be justified on both egalitarian and economic grounds, particularly in cases where existing economic disparities can be attributed to historical or ongoing invidious discrimination.

nature are only feasible in a society that has the economic resources to underwrite them. In this respect, developing states should not deny the formidable and mounting evidence that market-oriented developing states generate substantially higher levels of economic growth than developing states that assign markets a highly constrained role.108 This explains our relatively conventional preference for redistributive policies that operate outside of, and alongside, markets rather than redistributive policies designed to displace or severely constrain market functions. It is also important to acknowledge that designing and implementing redistributive policies in a non-corrupt and cost-effective manner requires significant amounts of institutional capital. Institutional capital may be broadly defined to include not just the quality of a country's legal system, but also the country's capacity to administer revenue-raising and expenditure instruments.

VI. CONCLUSION

This Article is skeptical of the claims by the proponents of the so-called New Institutional Economics that personalized contracting and ethnic occupational segregation are solely or primarily the result of weak institutions, particularly legal institutions.110 As a result, it is unlikely that these phenomena will be effectively redressed and contractual opportunity sets expanded solely or primarily by institutional reforms focussed on better legal protection of private property rights and effective enforcement of contracts. Chua makes a credible claim in arguing that, in some societies, members of one ethnic group are likely to dominate commercial activity under free market conditions.111 However, this Article goes even further than Chua and suggests that ethnic disparities in entrepreneurship are likely to persist in the face of fairly significant levels of state intervention.

This Article agrees with Chua's basic premise that extreme and enduring disparities in income and wealth in developing countries (and perhaps all countries), particularly when they are highly correlated with ethnic differences, are politically destabilizing.112 Such disparities are also unjust and are likely to have negative feedback effects on the efficient functioning of the economy. However, it is important to emphasize that disproportionate representation of minorities in entrepreneurial activities is not an appropriate index of those disparities.

programs. There is little justification, however, for dedicating substantial amounts of government resources to programs that define their objectives in terms of altering the ethnic composition of the commercial elite.

Ultimately, this approach draws on the insights of both the New Institutional Economics and Chua's ethno-political analysis. While it is of critical importance to enhance the institutional capital of many developing countries, institutional reforms will not be sufficient to eliminate the significant and troubling inter-ethnic disparities in economic opportunity and achievement evident in many countries. At the same time, enhancing prospects for equitable and politically sustainable economic growth does not entail abandoning New Institutional Economics and its attention to the institutional underpinnings of free markets. Rather, the New Institutional Economics paradigm can be enriched by an appropriate emphasis on general redistributive (social investment) policies, limited and moderate ethnically targeted redistributive policies, and an enhanced emphasis on developing institutional capacity to effectuate such policies.

* Earlier versions of this paper were presented at the Canadian Law and Economics Association Tenth John M. Olin Annual Conference and at the University of Toronto Faculty of Law's 1998 Fall Reunion and Faculty Retreat. We are grateful to participants in those events for their helpful comments and to Kerry Rittich, Robert Wai, and Arthur Ripstein for helpful discussions. We are also grateful to Nora Flood and Sara Seck for research assistance.

KEVIN DAVIS,** MICHAEL J. TREBILCOOK,*** AND BRADLEY HEYS****

** Assistant Professor, Faculty of Law, University of Toronto.

*** University Professor, Faculty of Law, University of Toronto.

**** J.D./Ph. D. Candidate, Faculty of Law, University of Toronto.

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