tests, even as they are less than definitive due to the nature of the test, yield results favorable to the validity of the instruments.

<Table 10 here>

# **6. Final Remarks**

The findings of this paper suggest that the conflicting results in the literature on inequality of outcomes and economic growth can be attributed to the omission of an important variable – what really matters is inequality of opportunities and not of outcomes. A recent paper (Marrero and Rodriguez, 2013) finds evidence in favor of this hypothesis using a measure of inequality of opportunity that is derived from a decomposition of income. Our innovation is to apply a measure of educational opportunities that incorporates inequality between “types” or circumstance groups, using theories from economic history to instrument for this type of inequality. We argue that our measure of inequality of opportunity is a better fit for structural inequality than the Gini index of income, and the results seem to support this argument.

Consistent with the hypothesis of the literature, our paper supports the prediction that agricultural endowments – specifically the relative abundance land suitable for wheat to that suitable for sugarcane – predict unequal educational opportunities and this, in turn, predicts development outcomes. After controlling for the measures for unequal opportunity we construct, the Gini index that measures income inequality has no explanatory power. We test the robustness of our results using different country samples and sources of data, measures of opportunity and development outcomes, and controlling for the effects of other variables that have been shown in earlier literature to influence economic development. For almost all cases, our results remain statistically and economically significant.

Although the IV approach using cross-country data may not be the best identification strategy to establish causality, the results in this paper support a well-defined a priori hypothesis at the individual and aggregate levels, whereby unequal educational opportunities hinder development. The validity of the instrument, the wheat-sugar land ratio or the share of tropical land, both of which have been used in past literature, is typically a subject of debate in work such as ours. The evidence we offer on the instrument satisfying the condition of the exclusion restriction, which is the failure to reject the overidentifying restrictions in the system, is subject to important caveats about the power of such tests. In spite of these tests being less than definitive by their very nature, we find it encouraging that they fail to find evidence of the wheat–sugar land ratio having any effect on underdevelopment other than its effect through the opportunity variables defined on the basis of PISA test scores. The tests also fail to find evidence that the share of tropical land has any effect on underdevelopment other than through equality of opportunity, measured by timely completion of sixth grade from household survey data.

Future research could focus on disentangling the effects of higher coverage of opportunities (the level) from pure inequality of opportunities (which is independent of the level), which is not possible in the model we estimate. A related question to examine will be whether the relative importance of reducing inequality or increasing coverage is related to the existing level of opportunities in a society or the level of development. It is possible to argue, for example, that inequality in educational opportunity is relevant for development only after a country reaches a certain threshold level of education and/or income level.

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