Inequality (and inequity) is, in my opinion, one of the most important problems to face when dealing with development.Inequality in developing countries is high and persistent (for a summary of the effects of inequality on development, don't miss the WDR 2006).
In the face of higher inequality you need more economic growth to make people out of poverty. At the same time, inequality is associated to political instability and social unrest, which diminishes the interest of potential investors (remember, there is important lack of capital in these countries!) and therefore hinders economic growth. Finally, those without resources are usually unable to access capital markets, having a pernicious overall effect in the economic capabilities of a country.
One of the most important reasons for the persistence of inequality lies in the power the economic and political elites (normally the same or closely tied) have to prevent the great majority of the population from benefiting from economic growth. Formal and informal institutions are the way to achieve it.
The strategy of the elites in LDCs consists in keeping the share of the cake, instead of trying to make it bigger.
In a recent report titled: The Next 4 billion, the World Bank has estimated the market power of the 4 billion people in the world living in relative poverty. They represent an awesome $5 trillion market (an important cake!) with an amazing potential. However, there exists important barriers for these people to take advantage of this potential.
If I were hired as consultant for the elites, I would tell them to invest more on the poor, that is, open the political space, pay more taxes (to preferably invest in education, health and infrastructure) and work for the development of an efficient state and public administration.
It is like Germany with the rest of European countries during the creation and development of the European Union. Why have they -the Germans, I mean- been financing the development of the rest of countries in the Eurozone? Guess, and if you don't find the answer ask AEG, BMW, Bayer, Mercedes, Porsche, BASF, Siemens, and many others... now they have a 455 million people market to sell their products!
Another case of irrationality? It must be the case that shellfish doesn't consider variables related to time.
