More than income
Definition
Economic growth: a rise in real output, usually measured by the change in real GDP or real GDP per head.
Economic development: a sustained, broad rise in living standards, welfare and freedoms, of which growth is only one part.
- Economies are classified by their level of development, which is broader than income alone.
- Classification rests on two related but distinct ideas, growth and development, so both must be understood.
- A country's level of development places it on a spectrum from developing to developed, judged on income and wider welfare.
Growth versus development
- Growth measures the size of output, so it captures the quantity of goods and services produced.
- Development adds health, education, housing and the quality of life, so it captures how those incomes are used.
- It also covers freedom of choice and reduced vulnerability and inequality.
- Growth can occur with little development if the gains are narrow or unevenly shared, so the two do not always move together.
Example
- An oil discovery in a country such as Nigeria can raise GDP sharply while schooling and health barely improve.
- The revenue often flows to a narrow group, so headline growth outpaces development for the wider population.
- Development requires those higher incomes to widen welfare and opportunity across society.
Categories by development
- Developed economies
- High income per head, advanced infrastructure and mostly service-based output, for example the UK or Japan.
- Emerging or newly industrialised economies
- Rapid industrialisation and rising incomes with a growing manufacturing base, for example China or India.
- Developing and least developed economies
- Low income per head, heavy reliance on primary products and weaker institutions, for example many sub-Saharan economies.
Note
- These categories are a spectrum, not fixed boxes, and countries move between them over time, as South Korea did.
- Developing economies differ widely from one another and should not be treated as identical.
What the classification rests on
- Income per head gives a first, broad ranking of economies.
- Non-income indicators such as life expectancy and literacy add a welfare dimension.
- Composite indices such as the Human Development Index combine income with health and education.
- Structural features such as sector composition and urbanisation also signal the level of development.
Exam technique
- Define growth and development separately before comparing them.
- State the category and support it with both an income and a non-income indicator.
- Note that classification is a spectrum, so avoid treating all developing economies alike.
Common Mistake
- Do not treat growth and development as synonyms.
- Do not assume every developing country shares identical characteristics.
Self review
- How does economic growth differ from economic development?
- Name the three broad categories of economy by level of development.
- Give one income and one non-income basis used to classify economies.
- Why can growth occur without development?
