Economic Growth and Economic Development

Readers Question: “Economic growth is a necessary but not sufficient precondition for economic development.” – discuss

Economic growth is an increase in Real GDP. It means the national income / national output is increasing. With higher GDP, there is, ceteris paribus, an improvement in economic welfare. Higher GDP means an increase in national output / income / expenditure. Higher real GDP per capita means on average people should have greater purchasing power. Higher incomes could be a key factor in enabling people in developing economies to have a better standard of living (e.g. better diet, housing e.t.c) Without an increase in real GDP; there are always going to be limitations to economic development.

However, economic development implies an increase in economic welfare. Here economic welfare comprises many elements other than just income and output. Economic welfare is concerned with issues such as:

Absolute Poverty. Do people have sufficient resources to maintain healthy diet and basics of life such as shelter? Economic growth may be essential to enable higher incomes for people to be able to buy more food. However, economic growth doesn’t necessarily improve everyone’s living standards. Economic growth could bypass the poorest sections of society because they don’t have the ability to take part. A key issue is whether the benefits of economic growth are equitably distributed amongst different groups of society.

Education standards. e.g. literacy rates. Economic growth may enable more money to be spent on education. However, there is no guarantee that the proceeds of growth will be used to improve education standards. There is often a weak correlation between GDP and literacy rates.

Health Care Standards. Environmental Protection. Economic growth can actually harm the environment and people’s living standards. If growth is caused by cutting down trees, it could actually harm economic development in the long term.

Transport / Infrastructure.

Economic development would require improvements in infrastructure and transport. This may be important for regions which may be cut off from the main areas of economic growth.

Environmental Standards.

Economic growth which causes increased pollution can actually damage living standards and hold back economic development.

Conclusion

Economic growth can definitely help economic development e.g. creating more money for

  • Public services like education / health care
  • Improving incomes so people can have better living standards.

However, it depends on the nature of economic growth.

  • Are the proceeds of growth used to improve living standards?
  • Does everyone benefit from the higher GDP or are the proceeds kept by a small %?
  • Might be useful to use statistics like the Human Development Index which look at real GDP, but also education and health care indexes.
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By on March 5th, 2013

One thought on “Economic Growth and Economic Development

  1. Is the decline in mortgage lending during the credit crisis giving rise to a decline in the issue of life insurance seeing as it is usually used by banks and other such mortgage lenders as collateral?

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