Inequality, Human Capital Formation and theProcess of Development

Conventional wisdom about the relationship between income distribution and economicdevelopment has been subjected to dramatic transformations in the past century. Whileclassical economists advanced the hypothesis that inequality is beneficial for growth, theneoclassical paradigm dismissed the classical hypothesis and suggested that incomedistribution has limited role in the growth process. A metamorphosis in these perspectiveshas taken place in the past two decades. Theory and subsequent empirical evidence havedemonstrated that income distribution has a significant impact on human capital formationand the development process. In early stages of industrialization, as physical capitalaccumulation was a prime engine of growth, inequality enhanced the process of developmentby channeling resources towards individuals whose marginal propensity to save is higher. Inlater stages of development, however, as human capital has become a main engine ofgrowth, equality, in the presence of credit constraints, has stimulated human capital formationand growth. Moreover, unequal distribution of land has been a hurdle for economicdevelopment. While industrialists have had an incentive to support education policies thatfoster human capital formation, landowners, whose interests lay in the reduction of themobility of their labor force, have favored policies that deprived the masses of education....