Economic Development vs Economic Growth

While I have called this blog “Growth Economics”, economic development is the higher order concept to economic growth. This is because economic development moves beyond the growth of Gross domestic Product (GDP) to include improvements across many areas of a complex system and can encompasses economic, social and environmental outcomes.

I would therefore like to cover economic development and how is it measured as the first blog. Essentially the purpose of this blog is to act a learning journal; and to capture and share all of the fantastic things that I read and learn regarding economic growth and development theory and practice. Later I will explore other factors have an impact, direct or indirect economic development.

Economic growth is narrow concept of the two and generally refers to the growth of economic output from one period to the next. Economic growth is usually measured by a country’s GDP “the monetary value of all the finished goods and services produced within a country’s borders in a specific time period” (Investopdedia, N.D). However, there are various problems with applying a narrow view of growth and using GDP the primary indicator. This is because as growth becomes quantifiable in terms of current market prices and only the value of the final good or service is measured leading to many shortcomings (Hans Economics, 2012).

For example, GDP does not:

  • measure inputs, intermediaries or good and services that pass through unofficial markets;
  • consider whether the good or services is in demand, of high value or innovative (thereby replacing old products);
  • GDP does not measure non-market activities that benefit society as a whole such as raising a child, leisure time or public-sector services and government spending (e.g education and health);
  • discount economic activities that do not directly raise the wealth of individual (e.g defence spending), production that leads to negative externalities or where production is increased are produced in response to a negative situation such as a cyclone (Investopedia, N.Da); and
  • measure individual wealth, the distribution of wealth or the long-run impact of wealth generation (Sachs, 2015).

Economic development is a much broader concept that is concerned about the standard of living and the wellbeing of individuals, as well as the prosperity and future potential of the whole system. The IEDC (N.D) describes economic development “as a process that influences growth and restructuring of an economy to enhance the economic wellbeing of a community.” The World Bank Group (2017) refers local economic development as the “economic capacity of a local area to improve its economic future and the quality of life for all. It is a process by which public, business and nongovernmental sector partners work collectively to create better conditions for economic growth and employment generation”.

The pathway to economic development involves many different ingredients and will be different for different communities and therefore each community must address different factors according to their advantages, constraints and barriers. Amongst many others, economic development moves beyond simple indicators such as GDP to include: how well income is distributed (Gini coefficient); participation rates; environmental sustainability; political stability and good governance; how well educated and healthy people are; innovation rates; and how happy people are.

For a more comprehensive list of indicators, the World Bank Group have a comprehensive list on their site here.

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