# **1. Introduction**

Do unequal opportunities among different members or groups in a society hinder economic and social development? Using recently developed distributional measures of opportunity, this paper studies the relationship between opportunities for a country’s citizens and its development outcomes.

For years scholars have discussed whether the way wealth is distributed has an impact on the level of economic development of society as well as the quality of its institutions. Aided by increasing availability of data on income inequality, many researchers have studied this relationship empirically. The relationship is however complicated by the notion that inequality of outcomes can be thought of as combining elements of “good” and “bad” inequality (World Bank, 2005). “Good” inequality is the one traced to differences in effort or talent, which drives investment and competition that play a key role to increase productivity. “Bad” inequality is the one caused as a consequence of some individuals not having basic opportunities to develop their human potential, due to circumstances beyond their control. If this were true, one could argue that _net_ of the effect of opportunities, inequality of outcomes can even be good for economic development. In other words, once the effect of “bad” inequality is accounted for, inequality of outcomes could drive competition and efficiency, and encourage economic growth.

In this paper we argue that most of the existing empirical studies have been missing an important variable – given that the theoretical link between inequality and development is based on the concept of unequal opportunities rather than unequal outcomes. We present results that appear to confirm this hypothesis – once we account for the effect of unequal opportunities, inequality of outcomes does not appear to play any role in hindering economic development.

The World Development Report 2006 on Equity and Development (World Bank, 2005) focused on equality of opportunity and concluded that institutions and policies that promote a level playing field, where all members of society have similar chances to become socially active, politically influential, and economically productive, contribute to sustainable growth and development. However, as there were no indicators that could be computed for a large number of countries with the data that were available, there was no rigorous empirical evidence to show that higher equality of opportunity causes social and economic development at the country level. The WDR 2006 was followed by several World Bank reports measuring equality of opportunity for different countries and regions. These analytical studies developed several indicators to measure how countries rank in terms of distribution of opportunities among groups in each society.

Whether there is a causal link between inequality of opportunity in a country and its overall level of development remains an open question that has been examined only to a limited extent in existing literature. This paper intends to make a contribution to this literature, by using the recently developed measures of opportunities to investigate the causal link between (the level and distribution of) opportunities and development outcomes, such as gross domestic product per capita and institutional quality. It examines the extent to which empirical evidence supports a hypothesis that relates historical factors to the distribution of opportunities, in explaining a country’s development trajectory. The hypothesis, drawn from seminal literature on the history of economic development of nations, is based on the idea that factor endowments at the outset of history influenced the type of human capital institutions 2