# **1. Introduction**

The relationship between inequality and long-term economic development has been a subject of considerable debate in the economic literature. The issue has become all the more salient at a time when the political economy discourse in several parts of the world is dominated by widespread perceptions of rising inequality, diminishing opportunity for economic mobility (through, for example, jobs) and the apparent inability or unwillingness on the part of incumbents in power to do much about it through public policy. As important as this issue is, empirical evidence on the topic has been disappointingly ambiguous: there are almost as many empirical papers that find inequality to have a positive effect on growth as there are that find the effect to be harmful. The reason for this ambiguity has been variously attributed to inadequate data quality, inconsistent nature of inequality measures, incomparability of the econometric methods used or the set of countries and their stages of economic development (Erhhart, 2009).

Recently, there have been a number of efforts to examine if the empirical ambiguity in the relationship between inequality and growth has been due to the fact that the measure of inequality that is often used in the analysis is a composite of two different types of inequality, with (arguably) opposing effects on growth. In particular, a country where a large share of the overall inequality is associated with inequality of _opportunity_ , namely inequality arising due to differing circumstances at birth (such as parental background, gender and ethnicity), is likely to have different constraints on growth than a country where inequality of _effort_ dominates.<sup>2</sup> In the former, high inequality is likely to perpetuate over time, trapping entire segments of the population in a cycle of low income and opportunities across generations, thereby retarding growth.

While empirical work on this front is still at a nascent stage, some emerging evidence suggests that such inequality has an adverse impact on aggregate growth and economic development. Marrero and Rodriquez (2013), using state-level data on the United States, find a negative relationship between inequality of opportunity and economic growth. Inequality of opportunity in education among children seems to have a negative impact on the level of economic development in a cross-country setting (Molina and others 2012). _Inequality_ in health, proxied by the gradient in child mortality over mothers’ education groups, has a significant negative impact on economic growth, possibly explained by how health inequality affects average labor productivity (Grimm, 2011).<sup>3</sup> Findings from several micro-level studies help corroborate this aggregate relationship. There is strong evidence linking interventions to equalize opportunities earlier in life to better outcomes in adult life, and

> 2 Effort constitutes choices that are within the individual’s responsibility and for which society holds him/her responsible. Examples are schooling and labor supply decisions.

> 3 Measured this way, the proxy for health inequality, in effect, measures inequality of opportunity since mother’s education is a strong proxy for socio-economic circumstances of a child. The paper uses a cross-national panel data set of 62 low and middle-income countries between 1985 and 2007. A reduction in health inequality, equivalent to a 5 percent reduction in the mortality rate of children (under-5 years of age) born to mothers with a low education level, is estimated to lead to an almost 8 percent increase in GDP per capita after a period of 10 years. Impact of health inequality on labor productivity is identified as a possible channel. Microeconomic evidence suggests that labor productivity rises with health but at a decreasing rate (see, for example, Thomas and Strauss, 1997), which would imply that a more unequal distribution of health would result in lower average productivity and therefore, lower economic growth.

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