The USA is #85 on the ethnic diversity list.
Above us on that list include quite a number of countries that have world-average incarceration rates, including nations like Israel and Switzerland.
So while there may be some correlation, it cannot be the cause. Something else is doing that, and the WoD policy is it.
I don't consider either of those examples as "ethnically diverse" on a par with the US. Israel may be as racially diverse as the US, but has religion as the unifying principle. Switzerland is linguistically diverse, but not racially. I would want to see the actual list and the criteria basis used, because those two examples cause me to seriously doubt the validity.
I concur that the "War on Drugs" is a huge factor, but "diversity" isn't helping things.