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While you CAN remove individual folders from the Favorites folders list in Outlook 2003 and thereby reduce the size it occupies….
Favorite Folders is available only in the Mail pane. The Favorite Folders pane cannot be removed, hidden, or resized. It is not possible to display Favorite Folders in other panes, such as Folder List.
..from Outlook help.
You CAN hide it by using the Folder list button at the bottom of the navigation pane, but when you switch from Mail view to Contact, for example, and back again…Favorite Folders shows up again until you again click on Folder List.