Historical events have persitent effects on contemporary economic development. This paper studies a natural experiment of ethnic segregation. In its colonial foundation, the city of Guadalajara, Mexico, was divided into two kinds of settlements: one for the Spaniards and one for the Indigenous population. The divide was enforced by the institution of Republica de Indios. Using a census from 1821, the paper shows that colonial neighborhoods with a previous República de Indios status had higher ethnic fractionalization. Using a Fuzzy Regression Discontinuity, the paper provides evidence that the ethnic fractionalization of 1821 explains contemporary wealth at the neighborhood level. Mechanisms of persistence are subprovision of public goods and cultural traits. The historical development hypothesis holds within a spatially compact area.