Ethnic Divisions and Production in Firms - Kenya Working Paper

As practitioners of development and peacebuilding, we usually develop a rule of thumb: "ethnic divisions as a predictor of ...." conflict, lack of trust, implementation inefficiencies, mis-allocation of resources, corruption, [put your own experience/pet theory here]. On the other hand we tend to be very aspirational/principled about diversity and how everybody should be included. Hjort's paper "Ethnic Divisions and Production in Firms",in a way, addresses this issue from a business management/productivity in Kenya standpoint.

Abstract

"A body of literature suggests that ethnic heterogeneity limits economic growth. This paper

provides microeconometric evidence on the direct effect of ethnic divisions on productivity. In team production at a plant in Kenya, an upstream worker supplies and distributes flowers to two downstream workers who assemble them into bunches. The plant uses an essentially random rotation process to assign workers to positions, leading to three types of teams: (a) ethnically homogeneous teams, and teams in which (b) one or (c) both downstream workers belong to a tribe in rivalry with the upstream worker's tribe. I find strong evidence that upstream workers undersupply non-coethnic downstream workers (vertical discrimination) and shift flowers from non-coethnic to coethnic downstream workers (horizontal discrimination), at the cost of lower own pay and total output. A period of ethnic conflict following Kenya's 2007 election led to a sharp increase in discrimination. In response, the plant began paying the two downstream workers for their combined output (team pay). This led to a modest output reduction in (a) and (c) teams (as predicted by standard incentive models) but an increase in output in (b) teams, and overall. Workers' behavior before conflict, during conflict, and under team pay is predicted by a model of taste-based discrimination. My findings suggest that inter-ethnic rivalries lower allocative efficiency in the private sector, that the economic costs of ethnic diversity vary with the political environment, and that in high-cost environments firms are forced to adopt "second best" policies to limit discrimination distortions."

Overall, ethnic divisions do reduce productivity both before and during active conflict through discrimination (as measured by output, not by perceptions or declared attitudes). Team design/task allocation does have a impact on the level of decreased productivity in comparison with a fully homogeneous team. Active conflict (in this case the 2007-08 election violence in Kenya) increases the discrimination (although we could have guessed that) but also the discrimination continues afterwards (a certain level of persistence). The firm's "solution" is to switch from individual productivity pay to group pay, a "second-best" option in terms of productivity in comparison to full segregation; but probably a good idea in terms of context, perception and business sustainability.

Implications for our work? Principled diversity without a good institutional design can have very inefficient outcomes (as we have seen, power sharing can be also a predictor of violence). In cases where we are working with divided ethnicities, special attention is required on the incentives to discriminate or not (i.e. group gains vs individual, payment on results rather than functions, etc..). This not only applies to the 'beneficiaries', but may also need to have a hard look inside our own operations and teams; as we tend to operate with HR manuals and processes that have a high personal responsibility component (in the study, the shop managers were not even aware of the extent of productivity differences!)

The author is careful to note that ethnic division, in this case, is a political construct, where an Bantu group (Luhya) alligns with a Nilotic group (Luo), in opposition to another Bantu group (Kikuyu).

HT to Chris Blattman