Economic Growth and Development

Economic Development.
Economic development may be defined in terms of increase in national income or per capita income.
According to G M Meier “Economic development is process, whereby the real per capita income of a
country increases over long period of time”. Per capita gross national income is used to measure the
overall economic well-being of a population.

It is not necessary that the increase in real national income or per capita income may increase the real
standard of living of masses. It is possible that as per capita income increases, the gap between the
poor and the rich may increase, i.e, the rich may become richer and masses inequality of income
increases. In the post-World War II period, many developing nations reached their economic growth
targets but the levels of living of the masses of people remained for the most part unchanged. It
signaled something was very wrong with this narrow definition of development. Hence economic
development is the process by which poverty, backwardness, inequality, unemployment, etc. is
reduced.

Growth versus Development

Economic growth is referred to the increase of per capita real gross domestic product over a period of time.
Real GDP is a quantitative concept since it involves increased productive capacity in an economy, which
leads to rising national output, incomes and living standards over time.

Economic growth can occur from two main factors:

1. The increased use of resources such as land, labour, capital and entrepreneurial resources due
to improvements in technology.
2. The increased productivity of existing resources use through increased labour and capital
productivity.

Mrs Ursula Hicks has explained the differences between growth and development. The problem of
underdeveloped countries is concerned with the development of unused resources while those of
advanced countries are related to growth.
Economic growth is an automatic process where as development is the outcome of conscious and
deliberate effort of the states to solve the problem of underdeveloped countries.

According to Kindle Berger,” economic growth means more output and economic development
implies more output and changes in the technical and institutional arrangements, by which it is
produced”. This definition implies that growth is synonymous with higher output, higher income,
higher employment etc. Development on the other hand, implies not only higher output, but alos the
changes (technical, institutional, fiscal, monetary etc.) which help in raising the level of output.
Kndle Berger adds that growth focuses on height or weight, while development draws attention to the
change in functional capacity
Economic development is a qualitative process and refers to structural change of economic and social
infrastructure in an economy, which allows an increase in the standard of living in a nation’s
population.

Economic development is a broader concept than economic growth. Development reflects social and
economic progress and requires economic growth. According to Amarthya Sen, development is about
creating freedom for people and removing obstacles to greater freedom

Growth is a vital and necessary condition for development, but it is not a sufficient condition as it
cannot guarantee development.
According to Kindle Berger,” economic growth means more output and economic development
implies more output and changes in the technical and institutional arrangements, by which it is
produced”.
Difference between Economic Growth and Economic Development
Economic Growth Economic Development

Growth deals with increases in the economy's

Deals with structural changes in the economy
output
Growth relates to a gradual increase in GDP
consumption, government spending, Development relates to growth of human capital
indexes and quality of life
investment, net exports

Changes in income, saving and investment

Increase in the real output of goods and services,
income, savings, investment etc. along with changes in socio-economic structure of.

Qualitative-HDI, gender- related index (GDI),

Quantitative increase in real GDP.
Human poverty index (HPI), literacy rate etc.

Brings qualitative and quantitative changes in the

Brings quantitative changes in the economy
economy

Growth is a narrow concept Normative concept

Growth can be attained without Development is possible without attaining

development. growth.
Development outcome of conscious and
Growth is an automatic process
deliberate effort of the states
Development is the problem of
Growth is the problem of developed countries
underdeveloped countries

According to Prof.Schumpeter, development is a discontinuous and spontaneous change in the

stationary state, while growth is a gradual and steady change in the long run.
According to Dr. Bright Singh “Economic development is a multi-dimensional phenomenon, it
 involves not only increase in money income, but also improvement in real habits, education, public
health, and greater leisure and in fact all the social and economic circumstances that makes for a
fuller and happier life. On the contrary, in case of economic growth, here is increase in national
income alone. Amartya Sen points out: “economic growth is one aspect of the process of economic
development.”
Thus economic growth is related to a quantitative sustained increase in the national income or output.
On the other hand, economic development is a wider concept than economic growth. “It is taken to
mean growth plus change”. But it is difficult to imagine development without economic growth.
Development is not possible in the absence of increase per capita output.
In brief, growth has quantitative significant while development has qualitative significance.
In sum, growth and development complement each other. There can be no sustained economic
growth without extensive changes through the economy and it is difficult to see how there could be
any substantial development without any increase in the economy’s ability to produce welfare-
enhancing goods and services.
Measurement of Economic Development
There are various methods for measuring economic development. These measures have been
given below.

1) Gross Domestic Product

Gross domestic product (GDP) is the most popular and simple method of measuring economic
development of a country. An increase in GDP or output over a number of years shows ‘economic
growth’ or decrease in national income or output over a number of years shows 'negative growth'
national income. Countries with high real GDP are considered developed countries and countries with
lower real GDP are considered underdeveloped countries.
2) Per Capita Income.
Another popular measure of economic development is per capita real income of the economy over a
period of time. Economists have defined economic development in terms of an increase in per capita
real income or output.
Per capita real income = Real national income
Population
A higher per capita real income may be considered as an index of higher level of economic
development and a lower per capita real income may be considered an index of lower level of economic
development.

Per capita income is not a good indication of a country’s development is that it does not account for
improving the longevity of human life nor the quality of the environment such as pollution,
environmental degradation, health, education, etc. An increase in PCI may not raise the real standard of
living of the masses. Looking at PCI one can not assure about the equitable distribution of income.

The real PCI fails to take in to account problems associated with basic needs like nutrition, health,
sanitation, housing, water and education. The improvement in living standard by providing basic needs
cannot be measured by increase in real PCI. The real PCI estimates fail to measure adequately changes
in output due to changes in the price level.
3) Physical Quality of Life Index
The Physical Quality of Life Index was developed for the Overseas Development Council in the
1979 by Morris David Morris. The Physical Quality of Life Index (PQLI) is composite index to
measure the quality of life or well-being of a country. The PQLI is the average of three indices such as
basic literacy rate index, infant mortality index, and life expectancy index. PQLI ranges between 1 to
100 and 1 represent the worst performance and 100 as the best performance by any country. If the index
is rising over the period, it means that physical quality of life is improving.

PQLI = (Literacy index + Infant Mortality index + Life Expectancy index)

3

4) The Human Development Index (HDI)

The HDI was introduced by the United Nations Development Programme (UNDP) in 1990. HDI was
devised and launched by Pakistani economist Mahbub ul Haq, followed by Indian economist Amarthya
Sen in 1990. Every year, UNDP publishes Human Development Report, in which it provides current data
on HDI of all the 189 countries in the world.
HDI is a composite multidimensional index. The HDI has three components- long and
healthy life, education and decent standard of living. It is the geometric mean of three
indices such as life expectancy index, education index and GNI index

The components of HDI

1. Longevity, measured by life expectancy at birth

2. Knowledge, measured by expected years of schooling and mean years schooling
3. Standard of living, measured by real GNI per capita (PPP US$).
HDI is the geometric mean of three indices such as life expectancy index (LEI), education
index (EI) and GNI index (GI).

HDI = (LEI.EI.GI)1/3

On the basis of HDI values, countries are classified into four groups, namely,
a) Very high human development countries with HDI 0.80 and above
b) High human development countries with HDI 0.70 - 0.799
c) Medium human development countries with HDI 0.550 to 0.699
d) Low human development countries with HDI value below 0.550.

5) Human Poverty Index (HPI)

HPI is an indication of the standard of living in a country, developed by the United Nations (UN) and
was first reported as part of the Human Development Report in 1997. It was considered to better reflect
the extent of deprivation in developed countries. The HPI concentrates on the deprivation in the three
essential elements of human life already reflected in the HDI: longevity , knowledge and a decent
standard of living. Human Development Report 2009 used the following variables for calculating HPI:
probability at birth of not surviving to age 40 ; adult literacy rate; and unweigthed average of population
without sustainable access to an improved water source and children under weight for age.
 Gender Development Index
Gender Development Index is the ratio of female to male HDI values. In GDI, HDI values are estimated
separately for women and men. The aim of Gender- Development Index is to supplement a gender-
sensitive dimension to the Human Development Index (HDI). It addresses gender-gaps in life
expectancy, education, and incomes. The closer the ratio is to 1, the smaller the gap between women
and men. If there is no gender inequality in a country, its GDI coincides with its HDI.

The Gender Development Index (GDI) measures gender inequalities in achievement in the following
three basic dimensions of human development:
o Health: Measured by female and male life expectancy at birth
o Education: Measured by female and male expected years of schooling for children and female and male
mean years of schooling for adults aged 25 years and older
o Command over economic resources: Measured by female and male estimated earned income per capita.
1. Indicators of GDI are the following:
Life expectancy at birth
2. Expected years of schooling and mean years of schooling for adults aged 25 and older
3. Estimated earned income: To calculate estimated earned incomes, the share of the wage bill is
calculated for female and male separately.
HDIf = HDI = (LEIf. EIf. GNIf) 1/3
HDIm = HDI = (LEIm. EIm. GNIm) 1/3
GDI is simply the ratio of female HDI value to male HDI value: GDI =

6) Multidimensional Poverty Index

MPI captures the multiple deprivations that people in developing countries face in their health,
education and standard of living. The MPI shows both the incidence of non-income multidimensional
poverty and its intensity. Based on deprivation scores, people are classified as multidimensionally poor,
in severe multidimensional poverty or vulnerable to multidimensional poverty. MPI captures three key
dimensions: health, education and standard of living, comprising 10 indicators. People who experience
deprivation in at least one third of these weighted indicators fall into the category of multidimensionally
poor.
Indicators of Multi-dimensional Poverty (MPI)
Dimensions of Poverty Indicators
Nutrition
Health
Child mortality
Years of schooling
Education
School attendance
 Cooking Fuel
Sanitation
Drinking Water
Standard of living
Electricity
Housing
Assets
The MPI value is the product of multidimensional poverty headcount ratio and intensity of poverty
MPI = H. A
H = Proportion of multidimensionally poor people in the population

A = Intensity of poverty (Average deprivation score of the poor people)

Problems of Growth

There was much debate on using income as a measure of growth and development. The general belief
is that a rise in per capita income is supposed to contribute an increase in the standard of living of the
people. There was a time, when Kuwait’s per capita income was the highest in the world, yet the
standard of living of an average citizen of Kuwait was less than that of an American. It means that the
growth in GDP or per capita income need not produce any improvement in the standard of living of
laymen, instead, a small proportion of the population may be the beneficiaries of the growth rate. What
are the issues for treating income as a measure of growth?

It is quite often observed in the many parts of world that economic growth can be rapid without the
improvement in the quality of life. In other words, per capita increase in GDP only benefits a small
section of minority population and rest of the vast majority of population deprived from the fruits of
increased GDP. It led to concentration of wealth in few hands and stark inequality.

Economic growth is quite often considered to be an essential part of development. What matters is the
composition of national income, to what uses it is put, its distribution among beneficiaries.

In measuring economic growth, the national income is a quite inadequate measure of human
development for several reasons. It counts only goods and services that are exchanged for money, and
does not account the large amount of work done inside family, mainly by women, and work done
voluntarily for children.

Growth leads to greater inequality because growth benefits the richer most because they own assets and
have the best-paid jobs. Growth rarely delivers its benefits evenly. So the issue of distribution of the
fruits of the growth process becomes first important limitation of process of economic growth.

Economic growth will cause a lot of environmental problems. During economic growth, more
production and increase in the emission of carbon which then causes the air pollution.
Growth is not often transformed to development. In spite of growth, economies pass through educated
unemployment, inequality and poverty.

If the state is more growth specific, it may give priority to the growth indicators like, income, output,
productivity, saving, investment, etc and may not show interest in improving development. Increase in
the growth indicators may not yield improvement in development indicators. Some others argue that
growth is essential for development and development is the output of growth. A state can draft viable
policy for development provided, it has bright growth indicators. The state can invest more on
education and health if only, the state performs high growth and earn good returns from productive
sectors.
On the other hand, if the state is more development-specific, quality of life improves despite low level
of growth indicators. Highly skilled human resource will be a great channel to boost development
indicators and later labour and capital productivity may increase and this leads to improvement in
growth indicators.