Economic Growth and Development: Key Concepts and Challenges
Definitions
- Economic Growth: A quantitative phenomenon, referring to the actual increase in the product or income of a certain economy. It is calculated by comparing the production obtained in two different periods.
- Economic Development: A qualitative phenomenon, considered to be the structural transformation that improves the modes of production (productivity) and the standards of living of a certain economy. It includes economic and social changes and progress for the people of the country. There is a link between the increase in productivity and the increase in income: In the labor market, when a worker produces a product for a certain value, their income is linked to that value. So, the more productive the workers are, the higher the incomes they will receive. If incomes rise, consumption is also going to increase and, together with this, also savings. When the population has more savings, it is likely that the investment will also rise, which will lead to an increase in productivity, and so on.
- Sustainable Development: Introduced by the Central Bank in the 1990s, this is a new conception of economic progress. It is the growth rate that can be extended indefinitely in time, to the extent that it does not exploit or degrade the environment or produce excessive income inequality, which is not contemplated by economic development. This organizing principle meets human development goals at the same time as sustaining the ability of natural systems to provide natural resources.
Main Defects of Per Capita Income or GDP Per Capita
- Statistical Shortcomings: There are many statistical shortcomings concerning both income and the censuses used to calculate this indicator. Statistics of most underdeveloped countries tend to be of low technical reliability, if not non-existent.
- Consumption of Non-Renewable Resources: In the calculation of GDP, items such as the consumption of non-renewable resources, which would lower it, are not considered.
- Black or Informal Economy: The existence of the black or illegal economy, or the informal economy.
- Unequal Income Distribution: Income per capita may poorly reflect the reality of a country when the distribution of income is highly unequal.
Calculating the Gini Index and Its Meaning
The Gini index is calculated as: A/(A+B). It varies between 0 and 1; the lower the value, the more equitable the income distribution of the country. The Gini index relates the percentage of income obtained with a given percentage of the population.
Comparing GDP Using Purchasing Power Parity (PPP)
The problem is that every country uses a different currency, and when using the exchange rate, the result obtained is the same GDP but in another currency, which does not show the relative purchasing power. So, we use purchasing power parities (PPP) as a conversion factor that considers the prices of the goods in the country and in the international market.
GDP Per Capita of India (Exchange Rates and PPP Index)
This graph represents the GDP per capita of India through the years, calculated with the official exchange rates (the line below) and with the PPP index (the line above). The GDP calculated with the official exchange rates is lower due to the fact that for international comparisons, the exchange rate does not reflect the relative purchasing power of currencies, and the PPP index does.
Main Conclusion from the Graph
The main conclusion we can obtain is that the higher the GDP per capita, the higher the price level. As you can see, both China and India have a low GDP per capita, leading to a low price level (that is why many companies prefer to offshore in China or India rather than in other countries because prices there are much cheaper). On the other hand, the GDP per capita of Norway is way higher, which increases prices too. The relative prices of Spain compared to the USA are lower and, hence, the GDP per capita is lower too. This means that, in terms of dollars, the USA is a much more expensive country than Spain.
The Vicious Circle of Poverty
The vicious circle of poverty is a theory that speaks about how underdeveloped countries generate a chain that does not let them prosper and that cannot be left due to the lack of different aspects. The vicious circle of poverty starts with low savings because people spend most of their wages on necessary goods, which makes a low investment due to the lack of money. After that, as there is no investment, productivity is also very low, generating very low incomes, which leads to decreasing consumption, and the chain starts again.
Fast Population Growth and Income Per Capita
A very young population pyramid raises dependency rates, thus retarding economic growth and preventing education and training development from spreading. The distribution of income and wealth in developing countries tends to be very uneven, which reduces the possibilities of development. In addition, as the population increases rapidly, it is more difficult for the income per capita to increase because there are not enough resources for everybody as there is scarcity.
Charter Cities and Economic Development
Charter cities are a project designed to increase the development of emerging economies by creating a new governance system in each of them to meet the needs of societies whose governments haven’t been able to keep them from poverty or suffer from institutional failure. The reason why they could promote economic development is that economic growth requires access to well-functioning institutions, and only the most effective will be able to lift families out of poverty. By focusing their efforts and policies on the population of a specific charter city, everything could be more tailored to the needs of those that don’t have enough resources, instead of a mixed population, where there are very different income and education levels.