Inequality Matters for Development

Abstract Economic development is inherently uneven, proceeding through sequenced imbalances across sectors, skill groups, and regions. Following Ray (2010), this paper adopts an imbalance framework as its organizing lens, arguing that “balanced growth" is an inadequate abstraction for economies undergoing processes of structural transformation. We show that development strategies — from dual-economy transitions to modern industrial policy — rely on steering these productive disequilibria. However, when social mobility is constrained by institutional barriers and market imperfections, transitional disparities risk hardening into persistent interpersonal inequality. Drawing on micro-level evidence, we document how such entrenchment can distort the allocation of land, capital, and human talent, erode social tolerance through what Hirschman defined as a "tunnel effect", the observation that rising inequality is broadly tolerated so long as it signals viable prospects for upward mobility, but becomes politically explosive once those prospects fade, and facilitate elite capture of political institutions. The evidence reviewed suggests that leaving these distributional dynamics unmanaged carries a tangible cost: the necessary imbalances of structural transformation may fail to drive broad-based reallocation and instead settle into growth-constraining distortions.