What’s the difference between development and economic growth? Professor and former Costa Rican congressman, Ottón Solís, tackles this complex question and highlights the evolution between the two in growth economics over time. He examines why GDP growth doesn’t often correlate with the quality of life in many countries, and how embracing new definitions of this critical term can transform the lives of millions around the world.
Economic growth denotes the growth of the value of production in an economy, otherwise known as the Gross Domestic Product (GDP). It depends on the level of capital accumulation—or investment—and its productivity. GDP growth used to be the only indicator of development. However, depending on its definition, GDP growth might not be a very useful standard to rely on.
The definition of development has evolved since both the academic world and policy makers started to worry about the persistence of poor quality of life in many countries—some of which showed satisfactory rates of GDP growth. So, if development is defined as the improvement of the quality of life, then GDP growth is an incomplete indicator of development.
This phenomenon could be due to several factors. First, the GDP of a country could be growing, but if the population of the corresponding country is increasing at a higher average rate, the GDP per capita will decline. Therefore, instead of using GDP growth as an indicator of development, it is better to employ GDP per capita growth.
Yet, even if GDP per capita is growing at a relatively high rate but economic inequality is also increasing, then the overall quality of life might start to deteriorate. Instead of using averages, it would be better to have indicators such as income distribution and statistics on the proportion of the population that cannot afford basic needs such as food, clothing and shelter.
Quality of life does not depend solely on income, but also on access to health services, education, electricity, entertainment, environmental sustainability, culture, and other tools for social mobility. But, even if high standards are achieved in these fields, the quality of life will still be diminished if people do not enjoy political and human rights. Therefore, an accurate definition of development must include not only the satisfaction of material needs and wants by the majority of the populace, but also freedom.
The factors defining development work both as objectives and as tools. Modern development thinking considers that freedom is intrinsic to development. Freedom is also instrumental in order to materialize a high and well-distributed level of GDP per capita, low levels of poverty, and broad access to good quality services and social mobility tools. This is because freedom and democracy—one of its manifestations—allow the population to target those key components of quality of life and development more effectively.
Among the key components of development is access to high-quality education opportunities. Education is a key tool that fuels the other components of development. For instance, if there is universal access to education, workers will be more productive and this will consequently increase the rate of economic growth. Additionally, with a good education system, even people who come from socio-economically disadvantaged origins will have access to well-paid jobs and enjoy the fruits of upward mobility. Besides, well-educated people will be able to make better political choices, thus improving the quality of democracy. But, education is also a core objective of development: striving for knowledge and understanding of the world is intrinsic to human nature, so a person with more of both has a better quality of life.
The materialization of the objectives and tools of development requires an efficient and well-financed public sector. The degree of state involvement in the economy and society is debatable, but even anti-state ideologies would accept its important role in the provision of some services. Therefore, any development and economic growth proposal must take public sector effectiveness, efficiency and issues related to fiscal and monetary policy into consideration.
Written by Professor of the Bachelor in Economics at IE University and former Costa Rican congressman, Ottón Solís