Abstract
How do social divisions affect the benefits of agglomeration? While the clustering of people can enhance productivity through social interactions, social divisions such as ethnic segregation and tension may limit these gains. To answer this question, I leverage an ethnic-based resettlement program that forcibly relocated 600,000 rural Chinese into compact villages in 1950s British Malaya. I find that, decades later, areas with higher resettlement had persistently higher population densities and concentrations of Chinese, driven by both the program’s direct impact and internal migration. Moreover, these areas were wealthier, more industrialized, and exhibited greater labor market specialization. However, the economic benefits primarily accrued to the Chinese population, while other ethnic groups saw only marginal gains when geographically integrated with the Chinese and working in non-agricultural sectors. To assess the overall impact of the program, I estimate a quantitative spatial model that allows agglomeration externalities to vary by sector and ethnic composition. While the resettlement increased aggregate output, the gains were insufficient to offset the welfare losses from the program’s coercive nature.

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