Economic growth and development, and the vicious circle of poverty

A country's output can grow while most of its people stay poor, without clean water, good schools or jobs. Economists therefore separate economic growth from economic development. This lesson explains the difference, how development is measured, the features of developing countries, and the trap that keeps many of them poor.

Learning objectives

By the end of this lesson you should be able to:

• distinguish economic growth from economic development
• explain the indicators used to measure development, including the Human Development Index
• describe the characteristics of developing countries
• explain the vicious circle of poverty and how it can be broken
• explain the obstacles to development in West Africa

Growth and development

Measuring development

1. Real GDP per head, adjusted for prices.
2. Life expectancy at birth.
3. Infant and maternal mortality rates.
4. Literacy rate and school enrolment.
5. Access to clean water, sanitation and electricity.
6. The share of the population in poverty.
7. The structure of employment: the share in agriculture versus industry and services.
8. Calorie intake, doctors per head and housing quality.

The Human Development Index (HDI)

The United Nations Development Programme (UNDP) publishes the HDI, which combines three dimensions:

The HDI runs from 0 to 1. Countries are grouped as very high, high, medium or low human development. Sierra Leone is in the low human development group, though its score has risen since the end of the civil war.

Characteristics of developing countries

1. Low income per head and widespread poverty.
2. Dependence on agriculture, much of it subsistence, with low productivity.
3. Dependence on a few primary exports (minerals, cash crops).
4. Rapid population growth and a high dependency ratio.
5. High unemployment and underemployment.
6. Low levels of saving and investment; shortage of capital.
7. Poor infrastructure: roads, power, water, communications.
8. Low levels of education and health: high illiteracy, high infant mortality.
9. Unequal distribution of income and a dual economy (a small modern sector beside a large traditional one).
10. Weak technology and a shortage of skilled workers.
11. Heavy foreign debt and dependence on aid.

The vicious circle of poverty

Figure 1. The vicious circle of poverty. WASSCE Tutor diagram.

Because incomes are low, people can save little. Low saving means low investment, so the economy has little capital (machines, roads, power). With little capital, productivity stays low, and so incomes stay low. The circle repeats.

A similar circle runs through demand: low incomes mean small markets, so firms have little reason to invest, which keeps productivity and incomes low.

Breaking the circle:

1. Foreign investment and aid bring capital from outside.
2. Raising saving through banks, cooperatives and mobile money.
3. Education and training, which raise productivity directly.
4. Better infrastructure, which makes all investment more productive.
5. Land and agricultural reform, raising farm output.
6. Regional integration, which widens markets.

Obstacles to development in West Africa

Key points

• Growth is a rise in real output; development is a broad rise in welfare and quality of life.
• Development is measured by income per head, life expectancy, literacy, poverty and the HDI.
• Developing countries have low incomes, dependence on agriculture and primary exports, rapid population growth and low capital.
• The vicious circle of poverty: low income → low saving → low investment → low productivity → low income.
• Obstacles include capital shortage, poor infrastructure, low human capital, instability and debt.

WASSCE examination focus

Quick check

1. Distinguish economic growth from economic development.
2. Name the three dimensions of the Human Development Index.
3. Why does low income lead to low investment in a poor country?
4. Give two obstacles to development in Sierra Leone.

Answers: 1. Growth is a sustained rise in real output; development is a broad improvement in welfare, health, education and quality of life. 2. A long and healthy life, knowledge, and a decent standard of living. 3. People with low incomes can save little, so few funds are available for investment. 4. Any two: shortage of capital, rapid population growth, poor infrastructure, low human capital, instability, corruption, dependence on primary exports, debt, disease.