Economic Growth and Development

Economic growth is a sustained increase in national income. Taking the differences in population into consideration, it is reflected in the growth of per-capita income (national income + total population).

Although there may be year-to-year fluctuations or short-term variations in the growth of national income, there has to be a continuous growth in national income in the long run for it to qualify as economic growth.

Economic development includes not only economic growth but also various other economic changes that improve the quality of life or standard of living of people in a country.

If with economic growth, a country experiences various economic changes such as reduction in poverty and unemployment, reduction in income and wealth inequality, increase in literacy rate, improvement in health and hygiene, decrease in population growth, improvement in environmental standards, etc. that improve the quality of life then that is economic development.

Such economic changes that are conducive to improvements in standards of living of people are necessary for economic development. Otherwise, standard of living may not improve in-spite of economic growth. It may happen that with economic growth, the rich get richer while the poor get poorer if the fruits of growth are snatched by the richer sections of the society.

Economic development is a much broader concept than economic growth. It not only includes economic growth but also various other economic changes that bring about improvement in the standard of living of people or quality of life.

Determinants of Economic Development

The process of economic development is influenced by a number of economic as well as non-economic factors.

1. Natural Resources

The availability of natural resources facilitate and accelerate economic growth and economic development. It is believed that quality and quantity of natural resources affect the rate of growth.

2. Human Resources

Another important determinant of economic development is the quantity and quality of human resources or the population. Other things being equal, educated and technically qualified manpower helps in achieving higher growth rate. On the other hand illiterate and unskilled population retards economic growth.

3. Capital Formation

Stock of capital goods is crucial for rapid economic growth. For increasing the stock of capital, rate of savings must be high. The savings must be invested. Given the rate of savings and investment the rate of growth will depend upon capital output ratio. If the domestic savings are not sufficient government can seek external assistance to increase capital formation and growth rate in developing countries.

4. Technology

Technology can play an important role in the economic development. Technological progress depends upon continuous research and development. Through technological progress a nation may overcome other constraints such as scarcity of natural resources and low productivity. Developed economies invest in its human capital.

Besides these economic factors many other non-economic factors such as (i) caste system, (ii) family type, (iii) racial factors, and (iv) government policies also affect the rate of growth and economic development. It is very difficult to measure economic development and to give one index of economic development.

The most commonly used index of economic development i.e. increase in per capita income suffers from a serious drawback. This index does not take into account the consumption of natural resources and environmental degradation such as the smoke from the industries or the pollution caused by various industrial waste and by-products in the air and water resources.

The cutting of forest and selling of timber will earn income and will be considered an economic activity and the income added in the national income statistics but the harm caused by deforestation will not be shown as a negative entry in the national accounts statistics. The economist are seriously working on preparation of some new index that may account for these environment costs to the society and can be used as a welfare index of the society.

Difference Between Economic Development and Economic Growth

Economic growth is a short-term measure and generally refers to year to year rise in national and per capita income in real terms. But the income index does not take into account the distributional aspects of national income. Income approach does not take into account the unproductive and dysfunction growth and productive and socially useful growth.

Economic development on the other hand is a long term measure over a long period. The economic development refers to overall rise in standard of living and a better quality of life. Besides income index some non-income indices are also taken into account. These are high life expectancy at birth, low infant mortality and high rate of literacy. An improvement in these non-income indices imply that the quality of life has also improved.

Some important institutions like UNESCO and ILO include the basic needs approach such as availability of food, clothing and shelter, availability of drinking water, sanitation and public transport facilities good health and education as an index of economic development. The objective of development is meeting the needs of the vast masses of population.

The United Nations Development Programmes emphasises on Human Development Index (HDI) that is based on per capita income, educational attainment and life expectancy. Thus it is a composite index of economic and social indicators. The economic development, therefore, is a much wider term to capture over all improvement in the quality of life of people.