Growth and development are not the same
Economic growth is an increase in real GDP: the economy makes more goods and services. We usually show it as a percentage each year.
Economic development is an improvement in people's lives. It includes health, education, freedom, fair sharing of income and a clean environment.
Growth can help development, because it pays for schools and hospitals. But growth can also come with pollution, unequal income or long working hours. Industrialisation moved many people from farms to factories and raised incomes, but it also brought crowded cities and dirty air.
Key difference
Growth is about quantity (how much). Development is about quality (how well people live).
Measuring development: HDI and other indicators
The Human Development Index (HDI) is published by the United Nations. It has three parts:
- Health: life expectancy at birth.
- Education: mean years of schooling (adults) and expected years of schooling (children).
- Income: gross national income (GNI) per person, at purchasing power parity (PPP).
Each part becomes an index from 0 to 1: index = (actual − minimum) ÷ (maximum − minimum). For income we use logarithms, because an extra $1,000 matters more to a poor person than to a rich one. HDI is the geometric mean: the cube root of the three indices multiplied together. So a very low score in one part pulls HDI down a lot.
Limits of HDI
HDI ignores inequality, the environment, freedom and the informal economy. Other measures help: the inequality-adjusted HDI, the Multidimensional Poverty Index, the Gini coefficient, and simple indicators like infant mortality, access to clean water and the share of workers in farming.
Barriers to development
Many things can block development:
- Low savings and investment: little money for machines and roads.
- Weak infrastructure: no reliable power, transport or internet.
- Corruption and weak institutions: people will not invest if property and contracts are not safe.
- Dependence on primary products: crop and mineral prices swing a lot.
- Debt: interest payments use money that could go to schools.
- Fast population growth and poor health: income is shared by more people; sick workers produce less.
- Conflict and capital flight: war destroys capital; savers send money abroad.
The resource curse
Rich oil or mineral deposits can bring money, but sometimes they lead to corruption, conflict, a strong currency that hurts other exports, and neglect of education. Careful use (for example a savings fund) can avoid this.
Strategies: market-led, state-led and mixed
Market-led strategies trust markets: trade liberalisation (lower tariffs), inviting foreign direct investment (FDI), privatisation, floating exchange rates and microfinance (small loans to start small businesses). India's 1991 reforms are an example of economic liberalisation.
State-led (interventionist) strategies use government: building infrastructure, spending on education and health, protecting young industries for a time, and using foreign aid well.
Most fast-growing economies used a mix. Governments also adapt social policies as the economy changes: pensions, unemployment support, health insurance and job training help people who lose out.
A simple growth model
The Harrod–Domar model says growth rate g = s ÷ v, where s is the savings rate and v is the capital-output ratio (how much capital is needed for one unit of output). Saving 24% with v = 4 gives 6% growth. It shows why savings matter, but it ignores skills, technology and institutions.
Global forces, globalisation and international organisations
Globalisation links economies through trade, investment, people and ideas. It brings bigger markets, new technology and cheaper goods. It also brings challenges: competition can close local firms, money can flow out quickly in a crisis, and inequality can rise.
Technology can help poor regions leapfrog (mobile phones, mobile money), but automation can remove low-skill jobs.
Demographic change: when birth rates fall, a country may enjoy a large working-age population (a demographic dividend). Later, an ageing population needs more pensions and health care.
Political responses to global markets include trade deals, tariffs, regional blocs, rules on capital flows and support for workers.
International organisations: the World Bank lends for projects; the IMF lends in balance-of-payments crises, often with conditions; the WTO sets trade rules; UN bodies set goals such as the Sustainable Development Goals. Supranational bodies, such as a customs union, can make rules that member countries must follow.
Try it: compare two places
Pick two places you know (two states, two cities or two countries). Look up life expectancy, mean years of schooling and income per person. Put them into the HDI sliders in step 2. Which pillar pulls each one down most? What one policy would you choose to raise it?
Key formulas and definitions
- Growth rate (%) = (real GDP this year − real GDP last year) ÷ real GDP last year × 100
- Dimension index = (actual − minimum) ÷ (maximum − minimum)
- Income index = (ln income − ln 100) ÷ (ln 75,000 − ln 100)
- HDI = ∛(health index × education index × income index)
- Harrod–Domar: g = s ÷ v
- Real GDP per person = real GDP ÷ population
Worked examples
1. Real GDP rises from 800 billion to 840 billion. Find the growth rate.
Change = 40 billion. Growth = 40 ÷ 800 × 100 = 5%.
2. Life expectancy is 72 years. Minimum 20, maximum 85. Find the health index.
(72 − 20) ÷ (85 − 20) = 52 ÷ 65 = 0.80.
3. Health index 0.80, education index 0.60, income index 0.70. Find HDI.
Product = 0.80 × 0.60 × 0.70 = 0.336. Cube root of 0.336 ≈ 0.695. HDI ≈ 0.70 (medium-high border).
4. A country saves 30% of income and v = 5. What growth does Harrod–Domar predict? What if v falls to 3?
g = 30 ÷ 5 = 6%. With v = 3, g = 30 ÷ 3 = 10%. Using capital more efficiently raises growth.
5. GDP grows 4% a year but population grows 3% a year. Roughly how fast does GDP per person grow?
About 4 − 3 = 1% a year. Growth is slow per person even though total GDP rises.
6. Country A has high GDP per person but low HDI. Give two likely reasons.
Income may be very unequal (a few people hold most of it), and little is spent on health and schools; for example, oil wealth not shared (resource curse).
Common mistakes
- Thinking GDP growth always means development. Growth can rise while health, education or equality stay poor.
- Taking the simple average for HDI. HDI uses the geometric mean (cube root of the product).
- Forgetting to use real (inflation-adjusted) GDP and per-person figures when comparing.
- Saying natural resources always help. They can cause the resource curse if badly managed.