In this paper, we analyze the growth effects of historical and biological
ancestry, diversity and financial development in transition economies. We show
that the common indicators of ethnolinguistic fractionalization, state history
and genetic distance yield significant results and to some extent transform
the impact of finance on growth in East-Central Europe and the former Soviet
Union. Deep ethnolinguistic cleavages produce insignificant results, whereas
at intermediate and lower levels of aggregation diversity is likely to
significantly improve the effect of finance on growth. Similarly to finer
ethnolinguistic cleavages, genetic distance from the United States also
favorably increases the relevance of financial development for growth.
However, state history as a proxy for long-run ancestral exposure to
institutions, political organization and centralization reinforces the
negative growth effect of financial development. We argue that financial
development is inclined to resolve problems arising from coordination failures
and absence of trust in diverse societies by easing liquidity constraints and
offering incentives for entrepreneurship to minority groups. In contrast, long
state history is likely to generate extractive institutions that facilitate
the provision of soft budget constraints. Genetic distance from the United
States induces higher reliance on continental rather than Anglo-Saxon
financing practices, and therefore increases dependence on banks rather than
bonds or equity for external liquidity purposes
