Economic Development

Economic development is more than simply economic growth, but also encompasses an overall improvement in quality of life. Economic growth occurs when there is an increase in GDP, the measure of value for all goods and services produced in a country during a period. All other things being equal (ceteris parabis), a higher GDP should normally translate into more economic development. 

Clearly, the two concepts are linked, but the positive correlation between them is not compulsory. An increase in GDP could, in theory, be representative of a large fortune amassed by a small number of individuals who then do not reinvest. Therefore, to measure economic development, several other less tangible factors must be evaluated.    

How economic development is measured

An increase in economic development is evidenced by improved fiscal and economic performance, but this must be accompanied by an improvement in social conditions, such as the standard of living and freedom in a country.

Economic development is less accurate to measure than economic growth, since the factors included in the calculations can be more difficult to quantify. It is necessary to assess life expectancy, healthcare, literacy, housing, and environmental issues, among others. 

Several methods have been developed to permit comparisons of economic development between countries, most notably the widely used Human Development Index (HDI). This scale includes evidence of economic growth, using GNI per capita, which includes foreign income received in addition to GDP. It also considers factors such as life expectancy at birth, along with the mean and expected years of schooling in each country. 

Thus, comparisons between countries and over time are possible. However, It is not a totally comprehensive classification since many important factors are not quantified and also, the result can mask significant variations which may exist between regions in each country.  

Countries with the highest HDI rankings, which can be considered as more economically developed, tend overwhelmingly to be those countries which are more free, in terms of civil and individual liberties.

Key factors in promoting economic development

Property rights are considered to be an essential foundational pillar in building strong economic development. According to Hoskins and O’Driscoll, ‘Prosperity and property rights are inextricably linked.’ In their essay on the subject, they elaborate by stating that it is now generally accepted by economists and policy makers that the importance of strongly protected, unambiguous property rights is of paramount importance.

Examples which clearly demonstrate this principle would include Finland and Estonia. Both countries share similar geography and cultural backgrounds, but whereas Finland enjoyed relative freedom during the Cold War, Estonia was subjected to communist rule. 

This resulted in a massive gap in economic development between the two countries, and this has only started to close once Estonia regained its independence in 1991. Today, Estonia is known as one of Europe’s top leaders in the technology space, and has become a stomping ground for some of today’s hottest start-up companies. 

Evidence of a similar effect can be drawn from the case of East and West Germany, with East Germany being markedly less developed than its western neighbor by the time of reunification, with this gap gradually starting to close. 

A practical way to promote the protection of property rights is to ensure that the principles of free trade are applied. Free trade increases entrepreneurial opportunities, which promotes the creation of new products, services, and technology, which in turn enables the development of new markets, which creates new wealth      

Successful entrepreneurs represent another key factor in contributing to economic development. By capitalizing on opportunities and turning to untapped resources, they are able to generate new wealth across many industries, while providing valuable goods and services. 

Factors which inhibit economic development

Evidently, failure to adequately protect property rights will reduce the incentive for entrepreneurs to invest and flourish, and will accordingly severely inhibit any potential for economic development. Likewise, government interventions that curtail free trade, will also produce a reduction in economic development.

Government mismanagement of the economy, or inefficient funding of health and education, play a significant role in hindering economic growth and development. Corruption, both within the government and in society at large, can have a detrimental effect on growth rates, but arguably less so than the stringent application of restrictive regulations. 

Other inhibiting factors could include the threat of war, disproportionate military expenditure, geographical location, lack of natural resources, severe pollution, lack of access to drinking water, religious issues, and historical legacies.      

Why economic development matters to SFL

At Students For Liberty, we believe that promoting economic development is a crucial element in any effort to bring about a freer world. A freer world in turn promotes economic development. This self-perpetuating cycle results in an increasingly prosperous society, wherein individuals benefit from a comfortable standard of living, accompanied by greater personal and civil liberties.