Abstract
The influence of ethnic diversity on public policy has assumed increasing attention in Europe during a period of rapid globalisation in the post-colonial era. Given the growing trend in public opinion against multiculturalism, it is particularly important to implement policies that are based on substantive evidence rather than a priori judgement. This paper argues that ethnic diversity and representation of minorities may affect public spending differently. Evidence using recent data from local governments in London suggests that greater ethnic diversity may lower (have no effect on) productive (unproductive) public spending, while greater minority representation may increase productive public spending, especially in more ethnically fractionalised communities. Further, the net effect of diversity on productive public spending is positive. These results are robust to alternative specifications, and therefore have potentially powerful policy implications.