Inequality Does Cause Underdevelopment
CGD Working Paper No. 1
31 Pages Posted: 24 Jan 2006
Date Written: December 2005
Consistent with the provocative hypothesis of Engerman and Sokoloff 1997 and Sokoloff and Engerman 2000, this paper confirms with cross-country data that agricultural endowments predict inequality and inequality predicts development. The use of agricultural endowments - specifically the abundance of land suitable for growing wheat relative to that suitable for growing sugarcane - as an instrument for inequality is this paper's attempt to address problems of measurement and endogeneity of inequality. The paper finds inequality also affects other development outcomes - institutions and schooling - which the literature has emphasized as mechanisms by which higher inequality lowers per capita income. It tests the inequality hypothesis for development, institutional quality and schooling against other recent hypotheses in the literature. While finding some evidence consistent with other development fundamentals, the paper finds high inequality to independently be a large and statistically significant barrier to prosperity, good quality institutions, and high schooling.
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