Ethnic and Religious Diversity, Income Inequality and Economic Development in the Early 20th Century Hungary: The Efficiency of Private Good Production and Public Good Provision = Az Etnikai és Vallási Diverzitás, a Jövedelemegyenlőtlenségek és a Gazdasági Fejlettség Kapcsolata a 20. Század Eleji Magyarországon: A Magánjószágok Termelése a Közjavak Előállítása

Abstract

This paper attempts to establish a connection between ethnic and religious diversity and several economic indicators using settlement-level data from early 20th century Hungary, using econometric techniques. Ethnic diversity was measured by two indicators: fractionalization and polarization. The following was tested in the paper: ethnic diversity is positively related to the production of private goods, and negatively to the provision of public goods. In the data, a positive association was found between ethnic fractionalization and both outcome variables, somewhat contradicting earlier findings. The relationship between ethnic fractionalization and polarization was also tested. Here, for a given level of fractionalization, polarization was found to have a detrimental effect on all outcomes. The effect of religious diversity was also studied in the paper, the coefficient of which was also determined to be positive and significant. When using literacy rate as the dependent variable, ethnic fractionalization had a negative effect for a given level of religious fractionalization. The results cannot be interpreted as causal, since despite efforts, migration-caused endogeneity between diversity and development could not be ruled out.