ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT

The terms economic growth and economic development have got a tendency of being used
interchangeably as if they mean the same thing. The two terms however have got different
meanings. In fact, a close analysis shows that one leads to the other.

Economic Growth
This refers to an increase in output per capita. it is a quantitative change. it involves increase in the
volume of goods and services e.g. cars, houses, household goods, education services, medical
services, transport services, legal services, banking services, e.t.c.

As more goods and services are produced and consumed, the standard of living increases. So,
economic growth can lead to a high standard of living.

Economic growth can also be described as the steady process by which the productive capacity of
the economy increases over time to bring about a rising change in the level of national income.
Economic growth is measured by output per capita.

Economic Development
This is a wider concept than economic growth. It is a process by which the economy is transformed
from one whose rate of growth is small or negative to one where there is a significant increase in
per capita income. That is a permanent and long term feature.

Economic development involves both quantitative and qualitative change. it therefore involves
economic growth i.e. increase in output per capita and qualitative change gin the economy.
Qualitative change occurs in the economy when institutional arrangements e.g. customs, belief,
values and attitudes change and the changes are geared towards increasing quality. It also involves
movement to highly scientific and technological arrangements e.g. customs, beliefs, values and
attitudes change and the geared towards increasing quality. It also involves movement to highly
scientific and technological methods of production. It involves acquisition or improvement of
skills and increased capacity to deal with the environment.

Therefore, development = Economic growth + new methods of production

It involves changes in the whole system, i.e. cultural changes, political changes, social changes,
economic growth and economic development.

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Differences between Economic Growth and Economic Development
Economic Growth Economic Development
1. It uses the available techniques to 1. It involves the use of new scientific and
increase output e.g. in agricultural sector, technical methods or production to increase
output can be increased by increasing acres output e.g. in agricultural sector output can
of land be increased without increasing acres of
land but by use of scientific methods of
production e.g. irrigation, use of fertilizers,
spraying, e.t.c.
2. It can discriminate between sectors e.g. 2. It does not discriminate between sectors
there would be improvement in output in the e.g. there cannot be development of
industrial sector. agricultural sector without the industrial
sector
3. It does not change the social set up of 3. It is gradual i.e. changes in beliefs,
the nation e.g. it does not change customs, values, attitudes and technology
religious beliefs, customs e.t.c. and skills acquisition does not take a short
time. it takes a long time.
4. It does not change the social set up of 4. It changes the social set up of the nation
the nation e.g. it does not change e.g. customs, religious beliefs
religious beliefs, customs e.t.c.
5. It involves a low rate efficiency 5. Involves a high rate of efficiency due to
increased skills and improved technology
6. There is no sustained permanent increase 6. There is a sustained permanent increase
in output per capita. in output per capita which is a long term
feature.

N/B
It should be noted that economic growth can do without economic development but economic
development follows economic growth. Economic development cannot occur without economic
growth. in other words, in order to increase the rate of economic development i.e. change in beliefs,
customs, acquisition of skills and new technology output must increase first.
Determinants of Economic Growth and Economic Development
1. Rate of Capital Formation
No economic growth and development is possible without construction of roads and
bridges, buildings, factories with machinery installed, railways, airports, harbours, ships,
producing tools and equipments for industrial and agricultural purposes and producing all
other facilities necessary for further production associated with high level of productivity.
In LDC’s insufficiency of capital is the most limiting factor in their development strategies.

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2. Capital- Output Ratio
This ratio determines the rate at which capital grows as a result of a given volume of capital
investments. A lower capital- output ratio tends to lead to a comparatively high rate of
growth of output than a higher capital-output ratio e.g. a capital output ratio of 3: 1 means
that capital investment of Sh. 3 results in additional output worth Sh. 1. Thus given the
output, a smaller capital investment will be needed if the capital output ratio is lower than
when it is high.
3. Rate of Population Growth
Natural resource may exist in an economy but the labour is needed to be employed to
exploit the resources and if this is small owing to smallness of population, then the rate of
growth and development will be small and resources will not be fully exploited.
On the other hand, rapid population growth may result into high population which may
lead to overcrowding and resources may not be sufficient to support the population hence
output per capita will decline. Population is also necessary for providing market. a high
population provides market and encourages greater output.
4. Availability of Natural Resources and the Rate of Their Exploitation
Where a country is endowed with more natural resources such as minerals, forests, fishing
grounds, e.t.c. and te rate at which this resources are exploited is high then the rate of
economic growth and development will also be high and vice versa. Also if the country
does not have natural resources but has got the means of importing them, then this can
facilitate a higher rate of economic growth and development.
5. Technical Progress and Enterprise
improvement in technology e.g. introduction of modern methods of production can highly
influence the rate of economic growth and development for example, in agriculture the use
of fertilizers, improved seeds, herbicides, irrigation, tractors, e.t.c. will lead to greater
output and development.
Also improvement in entrepreneurial abilities can highly influence the rate of economic
growth and development. Improvement in entrepreneurial abilities can be achieved by
training people in management courses, equipping them with good management principles
so that they can have the courage to borrow capital, manage it efficiently and generate
steady additional income.

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Measurements of Economic Development
Economic development is measured by the following factors:
1. Life expectancy and mortality rate
2. Number of teachers and doctors per head
3. Number of calories in the diet
4. Steel and electricity consumption per head
5. The share of value added in manufacturing
6. Capital labour ratio in manufacturing
7. Miles of roads railways e.t.c. and the number of automobiles
8. The level of GDP per capita (output per capita)
9. Proportion of labour force engaged in primary activities. If high is a manifestation of under-
development
10. Ratio of foreign trade to gross domestic product. If high is an indication of under-development.

Under-development
From a political point of view under development is defined as a process by which the present
under-developed countries were and have been exploited by their colonial and neo-colonial
masters making them under-developed.

On the other hand from the economic point of view under-development is defined as the state of
backwardness, poverty, low income, e.t.c. in the economy. an under developed country is one that
is backward in terms of development, one where the level of poverty is very high, one where the
level of incomes is so low, e.t.c.

Under-developed countries, the rate of resource exploitation is so low such that the rate of
economic development is low as well. There is inadequate utilization of resources i.e. land, labour
and capital.
Characteristics of Under-Development
1. Excessive dependence on agriculture. Third world countries excessively depend on agriculture
because there are very few non- agricultural occupations to match with the high rate of
population growth. About 70-80% of the population is engaged in agriculture.
2. Insufficient capital equipments. Third world countries do not have adequate capital equipments
per head. The amount of capital per head is small.
3. Low rate of capital formation. In third world countries, the rate of capital formation is very low
because of low rate of investment and low inducement to invest.
4. Small size of domestic market. In third world countries, the size of domestic market is small
because of the low level income.
5. Weak under-developed industrial sector. In third world countries, the industrial sector is very
weak and under-developed. There are very limited manufacturing industries. What majority

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 exists are those industries which process primary products for export and value added in this
case is small.
6. Abundant supply of un skilled labour and unskilled entrepreneurs. This is due to low level of
education and inappropriate education.
7. Low and un-even distribution of income. In third world countries the level of income is low
and there is a remarkable inequality in the distribution of income. The low level of income is
mainly due to investment in unproductive activities e.g. housing.
8. Dependence on external sources. in third world countries there is a high level of dependence
on foreign investment, foreign aid and foreign technical know how which in the long run may
become the causes of retardation of the economies.
9. Foreign trade orientation i.e. greater dependence on the foreign market than on the local
market. In LDC’s the ratio of export output is normally greater than output fro the local market
due to small size of the domestic market.
10. In adequate physical infrastructures such as roads, railways, e.t.c.
11. In adequate social and cultural facilities e.g. insufficient housing and sanitation.
12. Inadequate education and training
13. High level of unemployment especially disguised unemployment
14. High population growth rate
15. Others include:
a) Low life expectancy
b) Prevalent malnutrition and under-nutrition
c) High infant mortality rate
d) Low degree of specialization
e) High level of illiteracy e.t.c.
Obstacles to Economic Growth and Development
1. Foreign domination- this leads to exploitation of the natural resources e.g. through selling in
the local market the highly priced manufactured goods while buying te raw material at very
low prices. In other words, by being in the market for manufactured goods, there is no attempt
to develop local industries and the few industries available are owned by foreigners who pay
low wages and charge high prices.
2. Mis-use of resources due to market imperfections such as immobility of factors of production,
price controls, ignorance regarding market trends, monopolistic practices, unawareness of
foreign markets, e.t.c. these factors make the productive capacity of the economy to be low so
that there is under-utilization of the resources.
3. High population growth. If population grows at a faster rate than the rate of resource
exploitation then the rate of economic growth and development will slow down.
4. The vicious circle of poverty-low income leads to low savings and low saving leads to low
investment, low investment leads to low production and low production leads to low income
hence the vicious circle of poverty.

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5. The present pattern of trade whereby LDCs are importers of highly priced manufactured goods
and exporters of lowly priced raw materials leading to persistent Unfavourable terms of trade.
6. Demonstration effect – international demonstration effect which the MDCs export their high
standards of living to LDCs has made it difficult for LDCs to save and invest. it should be
noted that a person’s consumption does not merely depend on his own income but is very
much influenced by the living standards of his relatives and friends. This means that instead
of increasing his own savings when his income increases, he increases his consumption as a
result of the demonstration effect. Thus demonstration effect increases the propensity to
consume which reduces the rate of savings and investment.
7. Very low standards of living e.g. under-nutrition, poor hygiene inadequate medical attention,
inadequate education thus illiteracy, all of which lead to low productivity.
8. Shortage of entrepreneurial abilities and the spirit of innovation and experimentation.
9. Social and political factors such as:
 Lack of fore thought
 Lack of ambition
 Unwillingness to bear risks ad risk ventures
 In ability to co-operate
 Submissiveness
 Insufficient administration
 Low punctuality
 Arbitrary legal system
 Political instability such as frequent changes of governments
 Tribalism