What is economic development?
Economic development is an increase in the welfare or well-being of the citizens. When there is economic development, the quality of life or standard of living improves.
Economic growth versus economic development
Economic growth is a rise in a country’s output or Gross Domestic Product (GDP). Economic development implies that well-being or welfare has improved. Economic growth is a quantitative measure of an economy’s performance. It shows that the monetary value of total goods and services produced in a country has increased. Economic development, on the other hand, is economic growth plus change. For economic development to occur, there must be qualitative changes in knowledge, productivity, social system leading to reduction of poverty, unemployment and inequality.
Economic growth is attained by the use of greater amounts of inputs in the short run or a rise in efficiency (increase in output per unit of input) in the long run. Economic development leads to changes in type of output produced, and the allocation of inputs by sector. As the economy develops, most of output is being produced by the tertiary sector as against the primary sector in a developing economy.
Measurement of economic development
GNI per capita
A rise in GNI per capita over a long period of time is an indicator of development. GNI (Gross National Income) is the income or output attributable to a country’s citizens and businesses. GNI per capita is GNI divided by the population. It is income or output attributable to each person. In other words, GNI per capita is the average national income of a country. In a developed country, the average income (or GNI per capita) is rising because GNI or income is rising faster than the population. When a country is developed, the number of people below the poverty line does not rise; likewise, income inequality does not increase.
GNI per capita has the following problems:
(1) It does not show whether the distribution of income in the country is equal or not. Most of the income gain goes to the few rich at the expense of the majority of the people if income distribution is not equal.
(2) GNI per capita does not reveal the nature of the goods and services produced in the country. If more military goods are produced and consumed at the expense of consumer products, welfare has not improved.
(3) It ignores many other indicators of welfare or well-being such as nutrition, sanitation, housing, health, water and education.
(4) It is difficult to use GNI per capita to compare living standards between two countries owing to differences in the purchasing power of currencies. To compare living standards between countries, GNI per capita is converted to a common currency, like the US dollars. Then, it is measured in terms of the relative purchasing power of different currencies and not the nominal exchange rate. Again, some goods are traded within the country but exchange rate applies to internationally traded products.
(5) Differences in price levels make comparison between countries using GNI per capita difficult.
Poverty
Poverty is an indicator of how developed an economy is. It occurs when an individual lacks the resources required for a fair standard of living. There are two types of poverty, namely absolute poverty and relative poverty.
Absolute poverty means a household cannot meet basic needs of food, education, shelter and healthcare. This type of poverty is prevalent in developing countries where the level of deprivation is high.
Relative poverty, on the other hand, means that a household has fewer resources than others in the society. For example, a family is relatively poor if it earns less than 50% or 60% of the average income in the country. This type of poverty can exist in a developed economy, as it shows whether every household or group has benefited from economic progress.
Human Development Index (HDI)
HDI is a composite measure used to measure development by the United Nations Development Programme (UNDP). There are three dimensions, namely, longevity, educational attainment and a decent standard of living. The longevity is determined by the life expectancy at birth, i.e. the average number of years a person is expected to live for. Educational attainment is measured by using the mean year of schooling and the expected years of schooling. GNI per capita measures the standard of living dimension.
The HDI value is between zero and one. The closer to 1, the more developed a country is. The other composite measures of development are: Measurable Economic Welfare (MEW) and Multidimensional Poverty Index (MPI).
Other indicators
The other indicators of economic development include:
Health: Health measures include life expectancy at birth, infant mortality rate, doctors per 1000 people, etc. Life expectancy at birth, the average number of years a baby is expected to live, is higher in developed economies than in developing economies. It is affected by access to quality healthcare, nutrition, etc. The infant mortality rate measures the number of deaths of children under one year per 1,000 live births.
Food: Per capita calorie intake reflects a country’s level of poverty. It is the total food supply available divided by the population. Undernutrition is rampant in less developed economies.
Water: The percentage of the population that has access to safe drinking water is also used to indicate a country’s level of development.
Sanitation: Availability of sanitation facilities, such as toilets or proper waste treatment, prevents the spread of diseases. Open defecation and improper treatment of wastewater reduce the quality of life.