Diversity without capacity? Coordination costs and the institutional limits of cultural pluralism in sustainable development

This study examines how cultural pluralism relates to development outcomes through coordination costs and whether state capacity conditions this relationship. Using panel data covering 70 countries during 2001–2023, the analysis combines the Dynamic Common Correlated Effects Mean Group estimator with a correlated-random-effects/Mundlak specification. The complementary approach accounts for cross-sectional dependence, dynamic adjustment, slope heterogeneity, and the time-invariant nature of ethnic fractionalization. Development is assessed through economic performance (GDP per capita), environmental pressure (CO2 emissions per capita), and social well-being (life expectancy). Coordination costs are measured using a composite institutional-friction index, while state capacity is proxied by government effectiveness. The results indicate that greater cultural pluralism is associated with higher coordination costs, but this relationship weakens as state capacity improves. Coordination costs are negatively associated with GDP per capita and life expectancy, demonstrating their adverse economic and social implications. They are also associated with lower CO2 emissions, suggesting an activity-contraction mechanism through which institutional frictions constrain investment, production, infrastructure provision, and energy consumption rather than generate a genuine environmental-sustainability benefit. State capacity is positively associated with economic and social outcomes, but its positive association with CO2 emissions indicates that administrative capability does not automatically deliver decarbonization. Overall, the findings reveal a conditional institutional pathway and an economic–social versus environmental trade-off. Governments should combine capable and inclusive institutions with environmental regulation, renewable-energy investment, energy efficiency, and low-carbon industrial policy.