The Mail Navigation Pane has a Favorite Folders list at the top of the pane. If you don't see the Favorites section, you may be using the Folder list view. You can switch back to the mail folder by clicking the Mail button at the bottom of the pane or by pressing Ctrl+1.
If you are using Outlook 2010 and the Mail module and don't see the Favorites list, you have it closed.
In Outlook 2007, the Favorite Folders section can be collapsed but not closed. Click the triangle to collapse it, click again to expand.
In Outlook 2003, you're stuck with the Favorite Folders open. It can't be closed; it can't be collapsed.
In Outlook 2010, you can close the Favorite Folders.
Switch to the View ribbon and expand the Navigation pane button, selecting Favorites button to toggle between on and off.