- The misconception about economic growth and economic development
There is an irregularity which occurs with human development (aside from health conditions) when an individual though increasing in age fails to demonstrate certain expected behavior or reasoning which match their external disposition. This phenomenon can also play out on a country level with economic growth and economic development. Thus, although there maybe physical evidence of a country’s economy growing there is little to no development to match it. Over the years, economic growth and development have been used interchangeable. However, they mean different things.
Economic growth focuses on a quantitative or measurable assessment of the economy while development is qualitative in nature. If the saying “quality over quantity” rings a bell, then you’ll understand why the difference in the two terms is relevant. To better explain this, it is crucial to look at what both economic growth and economic development mean. This article will also highlight certain practical and simple examples of how terms play out on a national level.
What is economic growth?
Economic growth is said to occur in a country when there is an increase in Gross Domestic Product (GDP). GDP in simple terms is the summation or total monetary value of goods and services produced by the country during a specific period of time. Economic growth looks particularly at the quantifiable aspect of the economy revealing how much the production of goods and services have increased in comparison with the previous year. GDP is calculated from a country’s national accounts which holds data on expenditure, income, and investment for each sector of the economy.
The data collected can be used to assess the total income earned in the country in a given year (GDP) or the total income earned by the country’s citizens (Gross National Income or Gross National Product). Economic Growth focuses purely on the value of goods and services produced. It is key to note that the value of certain goods and services differ. For example, a smartphone can be considered to be more valuable than a pair of shoes or due to the weather, residents in Ghana may view an air conditioner as more valuable than someone in Alaska who may perceive a heater as more valuable. Value is therefore subjective in nature and for this reason the Current Market Value is mostly used to arrive at more accurate figures.
Practical examples of economic growth
Sunrise High School after receiving a loan or revenue from school fees decides to expand the number of classrooms it has, employ more teachers, and purchase more computers to improve learning. Likewise, the school decides to admit more students to fill the newly built classrooms. Due to the evident additions, the school can be said to have experienced growth. The increase in the size of school also requires additional expenditure to cater for salaries and other logistics. This ‘growth’ from the previous semester or year based on the measurable changes is similar to how economic growth works.
Ghana grows the best mangoes in the world. However, it does not have the capacity to produce mangoes on a large scale for exports or domestic consumption. One day an individual or company from Stockholm takes interest in Ghana’s mangoes because there is a high demand for tropical fruits on the European market. For this reason, they decide to invest in mango production in Ghana by funding a large mango exporting business called the ‘Yellow Sun’. The Yellow Sun employs roughly 200,000 Ghanaians to farm, harvest, wash, package and finally ship the mangoes to supermarkets across Europe.
As a result of this new venture, Ghana’s GDP increases by roughly US$2 million. This is because it’s the total value of goods and services produced by the new mango business- Yellow Sun. Now that GDP has increased because of the Yellow Sun’s activities in the economy, it means Ghana has experienced economic growth. This example can also apply to the discovery of crude oil in a state. For example, the introduction of new machinery and technology allows for increased production of oil and gas for exports. This also leads to new opportunities for employment in the oil and gas sector. Due to this, Ghana’s GDP increases by US$20 billion from the sale of crude oil on the international market. These figures will reflect as economic growth in the country.
Economic Development on the other hand is a much broader and extensive concept than economic growth. Unlike economic growth, it doesn’t just focus on numbers, but how such numbers translate into the standard of living in the country. Economic development is a qualitative measure usually determined by looking at a country’s Human Development Index level (HDI). HDI looks at life expectancy (the average period a person may expect to live), education, health, life expectancy at birth and the standard of living. It considers, just like economic growth, the increase in the production or output level of a country, while factoring in the quality of life of the population.
Looking at the Sunrise High School scenario, economic development will not only look at the school’s expansion through the purchase of new technology, employment of new teachers and admission of new students. It will take it a step further by assessing how well teachers are paid and treated. It would consider elements such as gender equality, sanitation, quality teaching, students’ academic performance and wellbeing, environmental safety, etc.
In the case of the Yellow Sun’s business activities, economic development would not just consider how many Ghanaians were employed but how well the company pays them, whether the company respects Ghanaian labor laws, the work environment and how the revenue the company generates is improving Ghana’s economy. Also, in the oil and gas case, development could also look at the region where exploration is taking place. For example, in the Ghana case, it could look at the Western region and how the discovery of oil and its production has led to the improvement of lives in surrounding communities, be it through the building of new schools, hospitals, decent and affordable housing etc. It would also consider how much revenue the state generates from oil production and how it’s improved the quality of life of Ghanaians.
The significant difference between economic growth and economic development
In an attempt to develop as a continent and have attractive economic growth figures, it is very easy to ignore the real indication of development which is a reduction in poverty and inequality levels. Just as the reality that external appearance doesn’t always tell the full story, growing economically doesn’t mean poverty reduction is taking place or all livelihoods are improving. Regions like India and China which have been the fastest growing economies globally have also faced similar challenges and have been putting significant measures in place to ensure growth does not outrun development. In Africa, the discovery of certain natural resources and foreign investment has contributed largely to rapid economic growth. This is often evidenced by an increase in exports of certain goods, new infrastructural projects or the setting up of foreign companies.
However, it takes a strategic development plan to ensure economic growth translates into economic development. In a lot of cases, it is only 1 percent to 10 percent of the population or expats who are able to afford the benefits of economic growth. Leaving majority of the population to be spectators of a reality they may never be able to experience. Presently, African countries have some of the highest levels of poverty and inequality globally despite being listed as some of the fastest growing economies.
In Africa there has been rapid population growth leading experts to project a double increase by 2050. This means there will be an addition of approximately 1.2 billion to the continent’s 2019 population of 1.3 billion. Such rapid growth levels have posed lingering challenges to development efforts in the region. The absence of sustainable development plans which are more inclusive in approach has led to high levels of unemployment and unreasonable high costs of living.
According to a 2019 report by Oxfam, Africa is the second most unequal continent in the world. The richest 0.0001 percent own 40 percent of the wealth in the entire continent. Africa’s three richest billionaires have more wealth than the bottom 50 percent of the population which is roughly 650 million people.
For example, in Ghana, Oxfam also noted in its 2021 report titled “Ghana: extreme inequality numbers” that the wealthiest 10 percent of Ghanaians now share 32 percent of Ghana’s total consumption which is more than what is consumed by the bottom 60 percent of the population. The very poorest 10 percent of the population consumes only 2 percent. Although 1,000 extra millionaires were created between 2006 and 2016, almost 300,000 Ghanaians could have been lifted out of poverty in this period, yet inequality increased significantly.
Moreover, data by Ghana Statistical services reveals that, in the northern parts of the country over 50 percent of the population lives on GH¢96 a month which is 14 times less than the national monthly average gross income of GH¢1,387.
A 2019 UNCTAD report showed that 490 million people in Africa live under the poverty line of US$1.90 a day. This being 37 million people more than what was projected without the pandemic. There are three major poverty lines; US$1.90, US$3.20 and US$5.50. Extreme poverty is measured by those who live beneath the US$1.90 a day line. Presently 40 percent of sub-Saharan Africa is said to live in extreme poverty. The number of poor people at US$1.90 a day has increased by 50 percent. UNCTAD data shows that those at US$3.30 and US$5.50 have also doubled. Hence all efforts made in regards to economic growth and reducing extreme poverty in the region has not translated significantly into substantial results especially for people within the US$3.20 thresholds.
In Ghana, minimum wage a day for 2022 is equivalent to US$2.07 a day which is an increase from the previous years. The depth of poverty in African countries compared to more developed regions is quite immense. Thus, if income increases, it’s barely sufficient to facilitate crossing beyond the US$5.50 threshold. It would require deliberate and strategic efforts to ensure accelerated growth matches development, which is in turn reflected in the quality of lives of the African population, irrespective of social class.
A new approach to economic growth in Africa: the bottom-up approach to development
The pursuit of economic growth is important, nonetheless it can easily camouflage or divert attention from increasing poverty and inequality in an economy. As already explained, significant foreign investment in a region facilitates economic growth. Therefore, to ensure increased foreign investment facilitates both economic growth and development, investment agreements must be strategically negotiated and contain clauses which insist for effective taxation and collaboration between local firms and foreign entities. Collaboration can be promoted through developing policies which technology transfer is tailored to the reality of the African country in question. While we also pursue partnerships which boost local industries’ capacities to produce and compete domestically and internationally.
For example, in Ghana, in place of giving huge tax exemptions in exchange for more employment, revenue collected can be used to support Ghanaian owned businesses especially small and medium scale enterprises. SMEs which contribute to over 80 percent of Ghana’s GDP including employment, can have more capacity to solve the major youth unemployment crisis if well supported. Assisting or supporting already established local businesses to scale up will translate significantly to enhancing economic growth and development.
A strategic approach the government can use is by encouraging more partnerships, cooperatives and joint ventures between local businesses or industries to wean them off competing in a very small Ghanaian market to having the capacity to compete continentally and internationally. A simple example would be supporting a group of bakers who would have otherwise competed for weekday or weekend events to establish a biscuit company which can compete with foreign owned local brands like Equator Foods, Parlays etc. or international brands like McVitie’s, Kraft, or Britannia.
The only way we can guarantee economic growth and development go hand in hand is by ensuring we have policies which guarantee that no one is left behind, especially those at the bottom of the social hierarchy. We rise from the bottom to the top and economic growth as a natural order is only effective when development is approached intentionally.
The writer is an international trade law expert at Blackbridge Consulting Group