Economic growth is the continuous change in aggregate production over time [ 1 ]. Economic development is the persistent increase in the well-being of a population [ 2 ]. Without economic growth, there is no economic development, and vice versa.

Table of Contents

What is economic growth

economic growth is defined as the capacity of an economy to produce more and more goods and services. It can be expressed as an expansion of the production possibilities of the economy, that is to say, that the economy can produce more of everything or, what is the same, its production possibilities frontier (PPF) moves outwards, and after its increase, the economy can produce more of everything. For example, for an economy that was initially at point A of production (15 units of Y and 25 units of X), economic growth means that it could move to point B (20 units of output Y and 30 units of output of X). B is outside the initial boundary. Thus, in the production possibilities frontier model, growth is represented as a shift of the frontier outward,(Krugman and Wells, p.25)

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Economic growth – Production possibilities frontier. Source: Krugman and Wells, p.25

The Inter-American Development Bank [ 3 ] defines it as follows: Economic growth is the increase in product and income per person in the long term. Growth is the process by which an economy (national, regional, or world economy) becomes wealthier.

Kusnetz [ 4 ] put it simply: It is a sustained increase in product per capita or per worker.

In the three videos that make up the following playlist (23 minutes), you will be able to observe how economic growth is generated and how the frontier of production possibilities is widened.

What is economic development?

Economic development can be generically defined as sustainable growth from three points of view: economic, social, and environmental. Such qualified growth has various implications:

  • The quantitative dimension: development implies a quantitative increase in product-income-expenditure flows per inhabitant.
  • The relative dimension: the measurement of the development of a country takes into account its population and the level reached by other countries.
  • The dynamic dimension: development is not just a state (situation), but primarily a process.
  • The temporal dimension: development is a self-sustaining process, which not only makes possible the present dynamism, but also its continuity in the future.
  • The social dimension: development is a solidary growth (solidarity not only intragenerational but also intergenerational).
  • The environmental dimension: development is sustainable growth from the point of view of natural resources and environmental balance.

Source: De Tomás, et.al, p.68

In the following video, Dr. Mirtha Muñiz presents the theories of economic development in a pleasant lesson of just over 30 minutes.

Relationship between economic growth and economic Development

The two topics are quite broad and their relationship is very deep. Below is just a small introduction through a brief bibliographical review.

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Zermeño (pp.27-29) defines growth and economic development and outlines the relationship between them as follows:

Growth means the increase in production that a country registers over time. Development studies the growth of an economic system over a long period, incorporating the transformations that occur in that horizon: the productive structure, technology, institutions, social and political relations that affect the economy, and the patterns of product distribution. Therefore, in the long term, growth implies development, since transformations occur in the system. Over a long period, there is no growth without development.

Development is also applied as a concept of economic policy loaded with social and moral content. It is developed as the objective of a country, of a society, of a group. Development is a goal, which generally means an advance in social welfare. Thus, economic growth is only development based on greater well-being, if it is equitable, if it is modernizing and at the same time a promoter of social progress if it is sustainable if it finally means human development, understood as progress towards the full realization of everybody. This concept of development is the one generally proposed by governments, multilateral organizations dedicated to development, non-governmental organizations that set objectives of social progress, political parties, etc.

We then distinguish development as a real process of change in an economic system -specifically the capitalist one- that does not necessarily lead to greater equity or social welfare, and development as a social and political objective that must meet certain standards. In the first case, long-term growth necessarily implies development; In the second case, growth is not equal to development. For it to be developed, it has to meet certain previously defined requirements and norms that are usually of sustainability and equity, and social welfare.

In development studies and the elaboration of plans, both concepts are confused. For example, the fundamental meaning of development for the so-called underdeveloped or developing countries is the explanation of this situation of relative backwardness and the conditions and policies that must be practiced to take the step towards development, considering that this implies greater social welfare. That is the study of what is is harmonized with the proposal of what should be, since a condition for a development proposal to be viable is that it be based on an objective diagnosis of the situation. To achieve what should be, we have to recognize what is. The word objective here acquires its double meaning of future and reality.

De Tomás, et.al (pp.68-71) raise the various dimensions of economic development and their relationship with economic growth:

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A first quantitative (and limited) approximation to the concept of economic development takes into account certain magnitudes that express the intensity of macroeconomic flows. Development implies the expansion and real intensification of the flows of product, income, and expenditure per inhabitant (it has, therefore, a reference to the population, the ultimate recipient of the functioning of the economic system). It is usually measured through magnitudes such as per capita product, per capita income, or per capita spending, expressed in purchasing power parities (to eliminate the effect of heterogeneous price levels in different countries).

However, the concept of development, like the concept of wealth or poverty, has a characteristic of relativity. For example, in studies on income distribution, based on a poverty threshold, established in terms of percentage concerning an average level of product, income, or expenditure per inhabitant, the number of poor is quantified. In the same way, it can be said that development is a relative concept.

The countries are underdeveloped in the development achieved by the most advanced countries. Based on average indicators of product, income, or expenditure per inhabitant of a group of countries (considered developed), a threshold is established from which a delimiting criterion of development is established (for example, 75% or 90% of GDP). /inhabitant, expressed in purchasing power parities). In this regard, it is possible to speak of a country developing if it undergoes a process of real convergence concerning the level established as a threshold. The real divergence would express the opposite: backwardness or underdevelopment.

A first condition, which makes it possible to overcome this quantitative and simplistic vision of development, establishes durability over time and self-impulse. Development is a type of growth with the following qualifications:

  • sustainable character over time: development is long-term growth.
  • endogenous character (self-propelled), that is, based mainly on own resources.

Both characteristics (endurance and self-impulse) are related: development is perpetuated over time because it is self-impulsed. That is, development generates conditions that make possible its own continuity over time. Development is contrary to dependency, but it is not autarky (self-sufficiency), it requires external relations (not asymmetric). Endogenous (self-propelled) growth requires structural changes:

  • change of the productive sectors by the evolution of the demands of people and companies (goods for individual and collective consumption and capital goods), demands that change over time due to technical change, and people’s preferences.
  • technical change, since the excessive dependence on technology (measurable through various ratios), questions the sustainability of growth.
  • capitalization (private and public), that is, the continuous renewal and improvement of the productive capital (human, technological, equipment, etc.) of the companies and the public capital (infrastructures and public goods). The durability of economic growth requires continuous investments that improve the productive efficiency and competitiveness of companies.
  • flexibility and competition in the markets is also a condition for efficiency in the allocation of resources. A developed economy is a dynamic economy that reallocates resources in flexible and competitive markets.
  • qualified labor supply, based on structural and technological change, and a flexible labor market, which reallocates work based on sectoral change and changes in demand.
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Development, being sustained growth, also requires macroeconomic stability, that is, the non-existence of serious and persistent macroeconomic imbalances, which are reflected in high inflation, excessive public deficit, and high external deficit. This requires that there be no excessive differences between spending and output (excess spending), between saving and investment (saving shortfalls), and between exports and imports (current external deficit). Significant macroeconomic imbalances generate behaviors in variables such as prices, wages, interest rates, and exchange rates that slow down or prevent the continuity of economic growth.

Economic development requires sustainability from a social point of view, that is, growth makes possible progress in social cohesion, understood as:

  • equal opportunities (education, culture),
  • the reduction of social discrimination (sex, race, ideas),
  • the least economic inequality (employment, income, wealth),
  • the reduction of social exclusion (poverty, marginalization).

Consequently, development is growth that makes equal opportunities possible, with a labor market that does not discriminate (based on sex, race, or ideas), that creates employment (raises the activity rate, reduces the unemployment rate). and decreases the number of poor and excluded.

Finally, development is sustainable growth from the point of view of natural resources and the environment, according to their present and future availability. Therefore, it is a growth that does not seriously deteriorate the natural environment, that takes into account that natural resources are scarce, they do not have zero cost. For this reason, development demands the action of public institutions that incorporate environmental costs into the price and incentive system and the principle that “whoever pollutes pays”, avoiding the environmental deterioration that is spontaneously generated by the functioning of the markets and the policies themselves. sectors (agriculture, fishing, energy, industry, transport, cities, etc.).

Grades

[1] Blanchard, Olivier and Perez, Daniel. Macroeconomics: Economic Theory and Policy with Applications to Latin America, Prentice Hall, 2000. 

[2] Salguero Cubides, Jorge. Approaches to some theories regarding regional development, 2006. p.2

[3] The economy in the long term, p.7 

[4] Kuznets, Simon. Modern Economic Growth: Rate, Structure, and Spread, Yale University Press, 1966, p.1. ↑ Back

Bibliography

  • By Tomás Morales, Susana; Vaquero Lafuente, Esther and Valle López Javier. Europe Day: Present and Future of the European Union, Comillas Pontifical University, 2003.
  • Krugman, Paul R. and Wells, Robin. Macroeconomics: Introduction to Economics, Editorial Reverté, 2007.
  • Zermeno, Felipe. Lessons in economic development, Plaza and Valdés Editores, 2004.