After World War Two, people in Western democracies generally prospered compared to countries ruled by one-party systems or dictatorships. It was therefore assumed that free markets go hand in hand with democracy, and both together bring peace and prosperity. But applied to countries in the developing world, these principles have not always had the same results. According to a Harvard University study, by the mid-1990's, 35 major armed intrastate conflicts were under way around the world. Most analysts have looked for causes within countries in which they occurred. But some believe that ethnic and sectarian violence is also a result of global forces affecting domestic processes.

Amy Chua, a law professor at Yale University, says a market economy and democracy usually benefit a particular group of people within a state, causing the resentment of others. "Just to illustrate with Indonesia," she says, "free-market policies in Indonesia in the 1980's and 90's led to a grotesque situation in which Indonesia's tiny Chinese minority, only three percent of the population, controlled an astounding 70% of the private economy.?

Amy Chua says the introduction of democracy in Indonesia in 1998 was hailed with euphoria in the United States, but resulted in a violent backlash against both free markets and the successful Chinese minority. "Five thousand shops and homes of ethnic Chinese were burned and looted," she says. "Over 2,000 people died. A-hundred-and-fifty Chinese women were gang raped. And the politicians found that the best way to generate votes was to call for confiscation of Chinese assets and a people's economy that would really belong to the true Indonesians.?

The wealthiest Chinese left Indonesia, taking with them their money, which according to Amy Chua, plunged the country into an economic crisis from which it is still recovering. In her new book "World On Fire," Professor Chua writes that a market economy has enabled some groups, such as the Chinese in Southeast Asia, whites in Zimbabwe, Jews in post-communist Russia, Lebanese in Sierra Leone, and Indians in East Africa, to get control of a vast portion of a country's resources. These market-dominant minorities, as she calls them, often are resented as non-indigenous outsiders. Democracy, meanwhile, increases the political power of the impoverished majority. The result is heightened ethno-nationalism, which pits the poor majority against a hated market-dominant minority.

Professor Chua says worldwide the United States is considered a market- dominant group. "So again, like the Lebanese in West Africa or the Chinese in South East Asia, we are about four percent of the world's population," she says, "and yet we are seen everywhere as the principle engine and beneficiary of global capitalism, not to mention as the world's pre-eminent military and cultural power."

And this is why, says Professor Chua, the United States is the primary target of terrorist attacks.

John Richardson, professor of international development at Washington's American University agrees that globalization produces economic winners and losers. In countries where losers are young men who belong to different ethnic communities, violent conflicts are most likely.

"It's important when looking at conflict to ask who fights," Mr. Richardson says. "And the people who fight are young men typically, between the ages of 14 or 15 and 30. And then you look at the kind of unemployment that is created in many developing countries and in countries where it's possible to buy automatic weapons - guns that have been left over from the fall of the Soviet Union, for maybe $50 or $60 a piece."

But John Richardson says a free-market economy does not have to result in violence in multi-ethnic societies if the groups can compromise. He cites the South-Asian country of Malaysia as an example.

"In Malaysia, there was a recognition on the part of the Malay leadership that the Chinese community was the engine of economic growth," he says. "And so you could not just restructure the economy to give benefits to the politically powerful Malays, but a political compromise was worked out where - to oversimplify greatly - the economic power of the Chinese was recognized and the political power of the Malays was recognized. And each of them was willing to make some compromises to acknowledge the power of the other."

Professor Richardson says democracy can be a dangerous tool in the hands of ethnic majorities that are not willing to share political power. In colonial Sri Lanka, the Tamil minority prospered in the civil service and commerce thanks to its education and command of the English language. The Sinhalese majority was bitterly resentful and within ten years of independence formed political parties to take advantage of Sinhalese anger at Tamil power. These parties called for a Buddhist state in which only Sinhalese would be recognized as the national language. The nationalistic rhetoric in turn scared the Tamils into demanding their own separatist state.

"In Sri Lanka, one of the oldest democracies in developing countries, the majority population gained preponderant power through legitimate democratic processes, but then used that to discriminate against the minorities, to freeze them out of economic opportunities,? says Mr. Richardson. ?They would just say they were redressing past grievances and that brought on a 20-year civil war in which everybody has been made worse off."

So democracy has brought Sri Lanka neither peace nor prosperity, says Professor Richardson.

But democracy can moderate ethnic conflict if properly applied, says Michael Mandelbaum, author of "The Ideas That Conquered the World: Peace, Democracy and Free Markets in the 21st Century." He says free elections alone do not add up to democracy.

"Democracy has two parts and they are equally important," Mr. Mandelbaum says. "One part is popular sovereignty. That is free elections. But there is a second feature of democracy that is equally important, but not always recognized as such, and more difficult to establish. That second part of democracy is the rule of law and especially the protection of the rights of minorities.?

Michael Mandelbaum says a country that has free elections, but lacks the rule of law is not a true democracy. And this is often the case in the developing world. "But democracy properly understood," he says, "is the appropriate formula for a multi-ethnic country because it provides for the protection of the minority rights and also provides mechanisms for group differences to be worked through and ironed out peacefully."

Michael Mandelbaum says in countries where the rule of law protects minorities as well as majorities, democracy and free markets produce the same benefits as in the developed world.