The paper deals with the political economy of inequality in the distribution of consumption expenditure in the Arab region. It argues that the relevant concept of development for dealing with political economy issues is that of development as freedom. Within such concept the paper looks at the nature of the Arab social contracts that prevailed in the region since independence and up to the mid-1980s. It argues that the core nature of these contracts was re-distributional and that their cumulative achievement was the current moderate degree of inequality enjoyed by the Arab region compared to the world. However, there is preliminary evidence of a rising degree of inequality in the Arab region, most likely due to the economic reform policies pursued by a number of countries in the region. This trend raises a number of concerns from a political economy perspective including the implication of the tolerance towards increasing inequality during the early stages of development, and development disasters; inequality traps in terms of the interplay of socio-political and economic inequalities; and equality of opportunity. Policies required for dealing with such implications are reviewed and found to be equivalent to the type of policies that were pursued by the Arab countries prior to their succumbing to neo-liberal policy packages of the 1980s and 1990s.