Inequality Does Cause Underdevelopment: New Evidence

40 Pages Posted: 12 Jul 2007 Last revised: 29 Sep 2009

See all articles by William Easterly

William Easterly

New York University - Department of Economics

Date Written: June 1, 2002

Abstract

This paper argues that the conflicting results in the voluminous recent literature on inequality and growth are missing the big picture on inequality and long-run economic development. Consistent with the provocative hypothesis of Engerman and Sokoloff 1997 and Sokoloff and Engerman 2000, this paper confirms with cross-country data that commodity endowments predict the middle class share of income and the middle class share predicts development. The use of commodity endowments as instruments for middle class share addresses problems of measurement and endogeneity of inequality. The paper tests the mechanisms - institutions, redistributive policies, and schooling - by which the literature has argued that a higher middle class share raises per capita income. It tests the inequality hypothesis for institutional quality, redistributive policies, and schooling against other recent hypotheses in the literature. I subject the results to testing for over-identifying restrictions, reverse causality, and other checks for robustness. While finding some evidence consistent with other development fundamentals, the paper finds high inequality to independently be a large and statistically significant barrier to developing the mechanisms by which prosperity is achieved.

Suggested Citation

Easterly, William, Inequality Does Cause Underdevelopment: New Evidence (June 1, 2002). Center for Global Development Working Paper No. 1. Available at SSRN: https://ssrn.com/abstract=999973 or http://dx.doi.org/10.2139/ssrn.999973

William Easterly (Contact Author)

New York University - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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