Difference between economic growth and economic development

Whereas economic growth means change in GDP over a time period, economic development is the expansion of national capital stock primarily by modernizing all economic activities using technology.

economic growth and economic development
economic growth and economic development
economic growth and economic development

The concept of economic growth and economic development

Here's how to distinguish between economic growth and economic development. Economic growth is a concept which refers to the change in the GDP (Gross domestic product) of a country compared to the previous quarter or year. Economic development, on the other hand, is the expansion of the national wealth/capital stock of a developing country primarily by modernizing all economic activities using technology. Economic development is when a low-income country undergoes a process of gradual accumulation and growth of national capital over a time-span.

 

The concept of economic growth and development is pertinent in the context of low and lower-middle income counties such as the Sub Saharan African countries and South Asian nations, for example India, Bangladesh, Pakistan, Nepal, Myanmmar. These low income countries usually have low life expectancy, weak labour force, poor health care, high birth rates, extreme income inequality, and gross inequity in income distribution. They are further characterized by a weak private sector, high poverty levels, inflation, bloated government expenditure and government corruption. Although not all such nations lack natural resource, most of them lack productivity and size in human capital and capital goods machines. As such, human development remains a problem. In addition, these countries usually experience a demographic transition, have low literacy rate, resulting in the lack of growth in real national income and low average income.

Economic development results in poverty reduction, human development and a complete transformation in living standards.

It is ideal for a developing nation to pursue a balanced regional development with economic power spread across the country, creating ample employment opportunities all around. However, local economic development will be driven by factors related to the level of economic activity and the presence of innovative entrepreneurs.

 

Developed countries such as the USA, Australia, Japan and others score high on human development index whereas poor countries perform worse. A successful economic policy is required to attain sustainable development and inclusive growth in these countries but it proved elusive so far. The concept of economic development elevates in its applicability and scope within the subject of low income countries and emerging market. However, the terms economic growth and development gain importance within the context of both developed country and developing country.

Link between economic growth and economic development

The national capital stock and economic growth are interlinked in the follower manner and through the concept of Capital-income. First, Capital-income ratio is a simple accounting notion that indicates a country’s aggregate net national wealth stock in market prices as a proportion of its annual national income (also compiled in market prices at the end of a year).

Capital-income = net national wealth stock / net national income (both values complied in market prices at the end of an year)

 

Capital-income ratio is linked to savings rate and national income growth rate—a purely accounting construction—in the following manner.

 

Capital-income ratio = s / g

 

The above equation is an accounting design that is true in the long term. High economic growth (real GDP growth) driven by high savings rate can push Capital-income to higher levels swiftly. Whereas ‘g’ is economic growth, a developing nation’s leap from a low Capital-income (~100%) to high (>400%) over a period indicates economic development. Population growth also comes into the picture here since economic growth is composed of population growth and per capita income growth. Both real growth in economic output and population growth factor into economic growth of a nation.

Understanding National Wealth

First, we need to look into a particular type of classification of a nation's wealth stock or capital stock to understand the meaning of economic development.

The national capital stock of a country can be classified capital into these four types:

1) Housing capital

2) Public infrastructure capital

3) non-Industrial business capital

4) Heavy Industry business capital.

 

Economic development in developing countries can be achieved through the following two routes. Economic development through the industrialization route involves the process of industrialization and modernization. The economy is transformed during this process, driven by investment in resource and innovation. The accumulation of Heavy Industry business capital represents the process of industrialization, wherein the resource and technology is acquired and assimilated helping the modernization process of the country. South Korea, Taiwan, and China have expanded investment and national wealth, grew their national incomes by many times, through this route of economic development.

 

Economic development through the non-industrial route involves modernization alone. Modernization of developing countries through this route is achieved on the back of the industrialization (and therefore the heavy industry) of foreign nations, wherein technology (in the form of heavy industry machinery and equipment) is imported. The economy of Chile belongs to this category. Other examples include Botswana, UAE, and New Zealand. The difference between economic growth and development rests on change or transformation in economic activity and the timespan for the same.