Internal Borders: Ethnic-Based Market Segmentation in Malawi

Ethnic diversity is associated with poorer economic development, but why? I argue that market segmentation is one mechanism linking diversity to economic underdevelopment: when ethnic groups are geographically segregated and trust is concentrated within groups, markets will be tend to be segmented along ethnic lines. I evaluate this argument using maize price data from seventy Malawian markets over 14 years and combine it with census data on the spatial distribution of ethnic groups. I find that maize price differences-a key indicator of market segmentation-are indeed larger for ethnically dissimilar markets, even after taking sub-national administrative borders geographic barriers, and climatic differences into account. These statistical findings are complemented by interview data from farmers and traders in three markets across Malawi, which highlight the centrality of trust in small-scale maize trading, as well as a preference for coethnic trading partners. Together, these findings suggest that ethnic diversity, and ethnoregional segregation in particular, can have a negative impact on market integration, an important driver of food security and long-term economic development.