latter simply considers the position of people along the income or earnings ladder, while ignoring their characteristics. Yet, horizontal inequality clearly matters for economic growth, as is evident from recent literature on gender inequality and economic development, or from the discussion of the role of ethnic fragmentation in explaining cross-country differences in growth rates in the developing world and, in particular, in sub-Saharan Africa 2.5. The demand side The theoretical literature on development tends to emphasize the supply side of the economy and the availability of productive resources as the factor limiting growth. This maybe justified in aggregate terms, but it must be recognized that the structure of demand may affect both the sectoral structure of the production side and the overall growth rate of the economy. Not all goods are traded with the rest of the world, and foreign demand may impose constraints on the development of national economies, either through the volume or, more likely, the price of exports. If this is the case, then domestic demand and, therefore, the income distribution, which determines the size of aggregate demand and its composition by type of goods, have a role to play. For example, China’s outward oriented development strategy is affected by the slowing down of demand in developed countries; reorienting this strategy toward the domestic market may require appropriate measures to betaken on the income distribution front. Oddly enough, the literature that links inequality and development through the consumption channel is somewhat limited. A major paper was that by Murphy et al. . Even though abundantly cited, few researchers seem to have followed in their footsteps. The basic idea in their paper is both simple and powerful. Ina developing economy that exports some basic commodity, an unequal distribution of the income derived from that commodity generates a limited demand for manufactured mass consumption goods because only a minority of the population can afford to buy such goods. If there are economies of scale in the production of those goods, domestic producers would be unable to compete with imports without heavy protection, which would make the goods more expensive and further limit the demand. In contrast, a more equal distribution of export revenue would expand the demand and possibly allow domestic producers to take advantage of scale economies in the production of these goods. Thus, industrialization maybe incompatible with an initial specialization in the export of natural resources or raw agricultural products and a high degree of inequality in the distribution of the resulting income. Of course, such an argument applies to an economy of a size above some minimum for economies of scale to be relevant. It also requires frictions in foreign markets. With no transport costs and no trade barriers of any kind, demand would never be a constraint in the industrialization of the economy. On gender, seethe recent survey by Kabeer and Natali , and on ethnic fractiona- lization, see Alesina and La Ferrara .