Cultural Diversity a Barrier to Riches?

Using a theory based gravity equation, we first show that cultural dissimilarity dampens bilateral import flows between countries. What is more, this paper is the first attempt to examine Huntington's the Clash of Civilizations hypothesis from an economic standpoint. We provide evidence that the impact of cultural heterogeneity on trade flows is far more accentuated in the post-Cold War period than during the Cold War. In the post-Cold War period, two countries that belong to different civilizations have 40% lower import flows than those of the same civilization, whereas this effect is insignificant during the Cold War. Alternatively, taking ethnicity as another measure of culture, in the post-Cold War epoch, import flows of a country pair with different majority ethnicities are 51% lower than those sharing the same heritage, whereas this negative effect is a lower 27% in the Cold War era. In addition, we document that the differential impact of cultural dissimilarity over time can be explained by the Cold War ideological blocs, under which ideology suppresses cultural differences, and hence, cultural differences come to the forefront as a trade barrier only after the demise of ideological rivalries.