Ethnic segregation and spatial inequality

For the last few years one of my PhD students, Mohana Mondal, has been looking into ethnic segregation in Auckland (see this earlier post on some of her work). I've also maintained an interest in income inequality. So, I was really interested to read this 2017 article by Roberto Ezcurra (Universidad Publica de Navarra) and Andres Rodriguez-Pose (London School of Economics), published in the Journal of Economic Geography (ungated earlier version here), which links those two ideas. Specifically, Ezcurra and Rodriguez-Pose look at whether ethnic segregation (the concentrate of different ethnic groups within a country) matters for spatial inequality (income inequality between regions or areas of a country).

They use data on a cross-section of 71 countries where they have regional-level data on ethnic groups and region-level GDP per capita. After controlling for various factors known to affect spatial inequality such as the average size of regions, the degree of ethnic fractionalisation of the population (which is basically a measure of how many different ethnic groups there are in a country), the stage of economic development, trade openness, country size and whether a country is a transition country, they find that:

The coefficient of the index of ethnic segregation... is in all cases positive and statistically significant at the 1% level. This implies that more ethnically segregated countries have on average higher levels of spatial inequality...

This holds both for a basic regression specification, but also for an instrumental variables regression, where they attempt to demonstrate a causal effect of ethnic segregation on spatial inequality (as an instrument, they use segregation predicted using the ethnic composition of neighbouring countries). They also show that their results are robust to using alternative measures of segregation and inequality.

Ezcurra and Rodriguez-Pose then go on to investigate potential transmission channels that might explain this relationship. They find that:

...once political decentralisation and government quality are controlled for, the coefficient of the index of ethnic segregation still remains positive, but its effect on spatial inequality is statistically significant only at the 10% level... While not conclusive, these findings suggest the possibility that political decentralisation and government quality could be possible transmission channels linking ethnic segregation and spatial inequality.

The argument is that countries with more ethnic segregation are more likely to decentralise authority to their regions, which increases inequality between the regions.

This is a nice paper, but there are a couple of aspects of the research where some further work is needed. First, this research was based only on cross-sectional data. I would like to see some analysis that included a time dimension before I would conclude definitively that this relationship is causal. Second, the instrumental variables analysis seems fine on the surface, but only until you read this bit:

...the instrument used in the article predicts zero segregation for island countries...

It's pretty difficult to defend an instrument that results in such a wildly off-the-mark prediction. Certainly, you wouldn't want to predict zero ethnic segregation in New Zealand or Australia. I wouldn't expect an alternative conception of the instrument to change the results by a lot, but I think it is worth exploring. So, while this article is interesting, there is definitely more research required in this area.