Building a Definition of Economic Development
If economic development is not the same as economic growth, then what exactly is it?
Amartya Sen’s (1999) international work, while never providing a precise definition, considers
development to be the strengthening of autonomy and substantive freedoms, which allow
individuals to fully participate in economic life. Hence, economic development occurs when
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individual agents have the opportunity to develop the capacities that allow them to actively
engage and contribute to the economy. In the aggregate, this should lower transaction costs and
increase social mobility. Rather than being reduced to a static factor in a production process,
individuals become the agents of change in the process of economic development: they have the
freedom to realize their potential. The greater the number of individuals able to participate in the
economy and the society, the greater the opportunity for new ideas to circulate and be put into
action. Based on this, economic development is the sustained increase in real per capita income,
and measures of the distribution of income and wealth as well as increases in indicators of
quality of life, ranging from life expectancy to crime statistics to environmental quality
.
Economic development focuses on the microeconomics of growth. From this standpoint,
economic development differs from growth in terms of a focus on a broader set of metrics that
are more immediately realized. Although Sen’s work was rooted in the context of some of the
world’s poorest countries, this definition and criteria are equally relevant to the full range of
economies – both national and regional.
Inspired by Sen, economic development is defined as the expansion of capacities that
contribute to the advancement of society through the realization of individuals’, firms’ and
communities’ potential. By capacities, we mean conditions conducive to promoting an array of
intermediate outcomes that set the stage for the realization of potential or capabilities. This
potential may be realized at multiple levels– for an individual, a firm or set of firms or industry, a
community of people or a place. One lesson that history teaches is that the limits of human
potential are unbounded and lie in unchartered domains. Building capacities allows for a
platform to accommodate an uncertain future and the ability to meet many contingencies.
Economic development thus depends on the expansion of human capital in its broadest sense,
such that individuals can more fully participate in the economic, social and cultural patterns of
behavior that encourage initiative, engagement, co-operation and competition.
Defining development in this way, and contrasting it with growth gives sense to the
expected outcomes of economic development. Economic development, according to Joseph
Schumpeter (1961), involves transferring capital from established methods of production to new,
innovative, productivity-enhancing methods. Schumpeter’s conceptualization was focused on
understanding the origins of the business cycle and the conditions that gave rise to new
opportunities that propelled the economy forward to a higher economic growth trajectory
