Economic growth versus economic development, and the determinants of development
Economic Theory and Public Finance · Unit III, topics 1 and 2 · Topic 7 of 17 · 4 min read
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Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. Economic growth
Economic growth is a sustained increase in a country’s real national income or real per capita income over time. It is measured by the annual rate of growth of real GDP. Simon Kuznets defined modern economic growth as a sustained rise in per capita product accompanied by rising population and sweeping structural change.
The Harrod–Domar model gives the simplest relation: g = s / v, where s is the saving rate and v the capital–output ratio. With saving at 30 per cent of income and a capital–output ratio of 4, the economy grows at 7.5 per cent a year.
2. Economic development
Economic development is a process by which an economy’s real per capita income rises over a long period together with improvement in the quality of life: fall in poverty, unemployment and inequality, better health, education and housing, and a shift of the workforce from agriculture to industry and services.
- Schumpeter (The Theory of Economic Development, 1911): development is a discontinuous and spontaneous change in the channels of the circular flow brought about by innovation; growth is a gradual change through the increase in population and saving.
- Dudley Seers (1969): ask what has happened to poverty, unemployment and inequality. If all three have fallen, there has been development, even if growth is modest.
- Amartya Sen (Development as Freedom, 1999): development is the expansion of the real freedoms and capabilities people enjoy.
3. Growth and development distinguished
| Point | Economic growth | Economic development |
|---|---|---|
| Nature | Quantitative: more output | Qualitative and quantitative: better lives and structure |
| Scope | Narrow | Wide; includes growth |
| Measure | Rate of growth of real GDP or per capita income | HDI, poverty ratio, literacy, life expectancy, inequality |
| Time | Can be short-run | Long-run process |
| Structure | May leave structure unchanged | Implies structural change |
| Applies to | Usually discussed for developed countries | Usually discussed for developing countries |
| Possible without the other? | Yes: growth without development | Hardly; development needs growth |
Growth without development happens when the extra output goes to a few, when it comes from a single export enclave (oil, minerals) with no linkage to the rest of the economy, or when it is accompanied by rising unemployment. The UNDP’s Human Development Index, introduced in 1990 under Mahbub ul Haq, combines life expectancy, education and per capita income to capture development rather than growth.
4. Determinants of economic development
A. Economic factors
- Natural resources. Land, minerals, water, forests and climate set the base. They are necessary but not sufficient: Japan developed with few resources; some resource-rich countries have not.
- Capital formation. The rate of saving and investment in machines, plant and infrastructure. Nurkse regarded capital shortage as the core of underdevelopment.
- Capital–output ratio. A lower ratio (more output per unit of capital) means faster growth for the same investment.
- Technology and innovation. New methods raise productivity of every factor; Solow’s work showed that much of long-run growth comes from technical progress rather than more capital.
- Human capital. Education, skills and health raise labour productivity.
- Entrepreneurship. Schumpeter’s innovating entrepreneur combines resources in new ways.
- Population and labour force. A growing, young, educated population is an asset (demographic dividend); rapid growth with low skills is a drag.
- Size of the market. Specialisation is limited by the extent of the market (Adam Smith); small markets restrain investment.
- Foreign trade and capital. Exports earn foreign exchange; imports bring machines and technology; foreign investment supplements domestic saving.
- Structural change. Shift of labour from low-productivity agriculture to industry and services (Lewis’s model of development with unlimited supplies of labour, 1954).
B. Non-economic factors
- Political stability and good governance — rule of law, secure property rights, enforcement of contracts, low corruption.
- Social institutions and attitudes — attitudes to work, saving, risk and women’s participation; caste and rigid customs can restrict mobility.
- Administrative efficiency of the government machinery.
- Desire to develop — Arthur Lewis stressed the will to economise and to accumulate.
- Religious and cultural factors — Max Weber argued in The Protestant Ethic and the Spirit of Capitalism (1905) that values shape economic behaviour.
- International factors — peace, access to markets, terms of trade.
How this is examined
“Distinguish between Economic Growth and Economic Development and explain the factors determining economic development” (January 2026, 100-mark); “Explain the various determinant factors of economic development” (January 2026, 80-mark) and “Explain the important determinants of economic development” (June 2025). “Difference between economic growth and economic development” is a short note (August 2024). Use the table for the difference and the two-head list for determinants, with one line of explanation per factor.
Now try the real questions: Economic Theory and Public Finance past question papers.