Inequality does cause strongunderdevelopmentstrong insights from a new.pdf

Inequality does cause underdevelopment: insights from a new instrument William Easterly New York University 1 October 2006 Abstract: Consistent with the provocative hypothesis of Engerman and Sokoloff (1997, 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 approach to 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. 1 I am grateful to Sergio Kurlat and Julia Schwenkenberg for research assistance and to the editor, an anonymous referee, Daron Acemoglu, Michael Kremer, Ross Levine, Martin Ravallion, and participants in the NBER Summer Institute Workshop on Income Distribution, New York University, the University of Maryland, Boston University, Cornell University, the University of Texas, Stanford University and Johns Hopkins University for helpful comments. Contact information: email: William.Easterly@NYU.edu 2 “No society can surely be flourishing and hap