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Differences Between Economic Growth and Economic Development

Check the key differences between economic growth and development, their definitions and factors. Learn how these concepts shape prosperity and societal well-being.
authorImageCa Narayan11 Oct, 2024
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Differences Between Economic Growth and Economic Development

Economics is a complex domain with significant influence on our global landscape. It is crucial in ascertaining the prosperity, welfare, and prospects within societies and individuals. Two frequently employed terms in economics are "economic growth" and "economic development."

While they may appear synonymous, they refer to different notions, each carrying different meanings for a country's advancement. This article will delve into the distinctions between economic growth and development, their definitions, benchmarks, influencing factors, and instances from the real world.

What is Economic Growth?

Economic growth refers to an economy's ability to produce more goods and services over time. This increase can be seen in the economy's expanding production possibilities, meaning it can produce more overall, pushing the production possibilities frontier (PPF) higher. According to the Inter-American Development Bank, economic growth is the long-term increase in products and income per person. This growth makes an economy—whether national, regional, or global—more prosperous. While economic growth focuses on the rise in output quantitatively, economic development is a broader concept. It includes not only quantitative growth in output or national income but also qualitative improvements, such as changes in social attitudes and cultural practices.

Factors Fueling Economic Growth

Investment in Physical Capital: Allocating resources to physical assets such as infrastructure, factories, and technology can impact production and bolster economic expansion. The development of these assets is pivotal for growth and involves investments in endeavors like constructing roads, bridges, and ports. These initiatives not only facilitate the movement of goods but also generate employment opportunities and stimulate economic activity. Innovation and the adoption of technologies also contribute to heightened productivity, a critical element for economic growth. Technological Advancements: Progress in technology has played a significant role in driving economic growth over recent decades. Developments like the internet, mobile technology, and automation have revolutionized various sectors by enhancing efficiency and global competitiveness. Consequently, economies that embrace progress tend to experience growth. Labor Force Expansion: Expanding the labor force through population growth or increased workforce participation can contribute to increased production levels. The size and skill level of a country's labor force are factors in determining growth. Nations, with growing populations and educated workforces equipped with skills are better positioned to meet the demands of an ever-evolving global economy.

What is Economic Development?

Economic development broadly refers to sustainable progress achieved through social, cultural, political, and economic changes that drive material improvement. It goes beyond mere economic growth, encompassing a lasting enhancement in society's overall well-being. This broader concept includes shifts in resource availability, capital formation rates, population size and composition, technological advancements, skills development, efficiency, and the structure of institutions and organizations. These changes aim to meet larger goals, such as promoting fairer income distribution, increasing employment opportunities, and reducing poverty.

Factors Influencing Economic Development

Let’s explore these key factors:

Capital Formation: Capital accumulation plays a decisive role in economic development. A country must save a high proportion of its income to invest in productive activities. Foreign aid can be risky, so self-reliance in capital formation is essential. Lack of capital is a significant obstacle to growth, and no developmental plan can succeed without adequate capital supply. Natural Resources: Abundance of natural resources is essential for economic growth. Factors such as land area, soil quality, forest wealth, rivers, minerals, oil resources, and climate influence development. However, natural resources alone are not sufficient, their effective utilization matters. Some countries with rich resources remain underdeveloped due to economic backwardness and technological limitations. Human Resources (Labor Productivity): Education and skill levels significantly impact labor productivity. Literacy and numeracy are crucial for transitioning from manual labor to higher-tech industries. Countries with good education systems have opportunities for growth in service sectors like IT and call centers. Inward Investment: Attracting foreign direct investment (FDI) can lead to significant development. Multinational companies contribute capital and technology to the host economy. Newly industrialized countries (NICs) have benefited from substantial inward investment. Political Stability and Law Enforcement: Political stability encourages investment by reducing risks. Protection of private property rights is crucial for attracting firms to invest in developing economies. Prolonged civil unrest or military conflict hinders development by drying up investment resources. Macroeconomic Stability: Low inflation rates and exchange rate stability promote investment and development. Rapid currency devaluation can lead to capital flight and hinder growth. Labor Mobility: The ability of labor to transition from agriculture to more productive sectors (e.g., manufacturing) affects development. Foreign Aid: Targeted aid can improve infrastructure and living standards. It is essential for economies with low savings and capital investment. Culture of Entrepreneurship: A supportive environment for entrepreneurship fosters economic growth. Countries that encourage innovation and risk-taking tend to develop faster. Technology Development: Technological advancements drive productivity gains and innovation. Access to modern technology enhances economic development. Social Overheads: Investments in education, healthcare, sanitation, and other social services contribute to overall well-being and development.

Differences Between Economic Growth and Economic Development

Let us look into the most significant points of difference between economic growth and economic development from the following table:

Relationship Between Economic Growth and Economic Development
Economic Growth Economic Development

Definition

It refers to the increase in the monetary growth of a nation in a particular period. It refers to the overall development of the quality of life in a nation, which includes economic growth.

Span of Concept

It is a narrower concept than that of economic development. It is a broader concept than that of economic growth.

Scope

It is a uni-dimensional approach that deals with the economic growth of a nation. It is a multi-dimensional approach that looks into the income as well as the quality of life of a nation.

Term

Short-term process Long-term process

Measurement

Quantitative Both quantitative and qualitative

Applicable to

Developed economies Developing economies

Government Support

It is an automatic process that may or may not require intervention from the government It requires intervention from the government as all the developmental policies are formed by the government

Kind of changes expected

Quantitative changes Quantitative as well as qualitative changes

Examples

GDP, GNP HDI, per capita Income, industrial development
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Economic Growth and Economic Development FAQs

How does foreign direct investment (FDI) impact growth and development?

FDI can stimulate economic growth by injecting capital, technology, and expertise. However, its impact on development depends on whether it leads to sustainable job creation and technology transfer.

Can a country achieve development without addressing income inequality?

While economic growth may reduce poverty, development requires targeted efforts to bridge income gaps. Policies promoting equitable distribution of resources are essential.

What’s the role of education in economic development?

Education is a cornerstone of development. It enhances human capital, fosters innovation, and empowers individuals to contribute effectively to society.

How do corruption levels differ between growth-focused and development-oriented countries?

Countries emphasizing development often prioritize anti-corruption measures, as corruption undermines institutions, hinders investment, and perpetuates inequality.

Why is infrastructure crucial for both growth and development?

Infrastructure (roads, bridges, utilities) facilitates economic activities, supports growth by connecting regions, and enhances overall living conditions for development.
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