Economic Growth, Underdevelopment and Economic Development
Senior 6 · Economics
Economic Growth, Underdevelopment and Economic Development
Lesson 2 of 5
25 min
By the end of 2025, 85.4% of Rwandan households had access to electricity, up from 64.53% in the 2020–21 fiscal year, according to Rwanda Energy Group (REG). Of these, 60.1% were connected to the national grid and 25.3% relied on solar systems. The second National Strategy for Transformation (NST2, 2024–2029) aims for universal access to electricity for productive use (MINECOFIN, NST2, p. 12).
Think: a carpenter in Gakenke who can now run an electric saw, and a tailor in Gisagara who can work after dark, both produce more. Is electricity a cause of economic growth, a result of it, or both?
Definition
Determinants of economic growth: the factors that decide how fast an economy's real output can and does rise. On the supply side they decide productive capacity (the PPC or LRAS); on the demand side they decide how much of that capacity is used.
Definition
Physical capital: man-made aids to production, such as machines, roads, power lines and buildings. Investment is spending that adds to this stock.
Human capital: the skills, knowledge and health of the labour force, which decide how much each worker can produce.
Productivity: output per unit of input; labour productivity is output per worker or per hour worked.
| Determinant | How it raises growth | In Rwanda |
|---|---|---|
| Physical capital (investment) | More and better machines, roads and power raise output per worker and shift the PPC out | NST2 plans for private investment to rise from 15.9% to 21.5% of GDP (NST2, p. 12) |
| Human capital | Education, training and health make each worker more productive and able to use new technology | Expansion of TVET schools and the twelve years of basic education |
| Size of the labour force | More workers can produce more, if there are jobs and capital for them | A young population: NISR counted 13.2 million people in 2022 |
| Natural resources | Land, minerals and water are inputs; their discovery adds to capacity | Methane gas in Lake Kivu used to generate electricity; tin, tungsten and tantalum ores |
| Technology and innovation | New methods produce more from the same inputs | Mobile money and digital government services |
| Institutions and stability | Secure property rights, low corruption and peace encourage people to save and invest | Business registration online through the Rwanda Development Board |
| Aggregate demand | Spending by households, firms, government and foreigners decides whether capacity is used | Exports, tourism spending and public investment |
Economists sum up the supply side in one relation, called growth accounting. If capital receives a share of national income and labour the rest, then
where and are the growth rates of capital and labour and is the growth of total factor productivity (TFP): the part of growth that comes from using all inputs better, through technology, skills and organisation. It is measured as what is left over, so it is sometimes called the Solow residual.
Worked example
Worked example 1: how much growth came from productivity? (illustrative figures)
In a year an economy's real output grows by 8%, its capital stock by 10% and its labour force by 3%. Capital's share of income is . Find the growth of total factor productivity.
So 4 percentage points of growth came from more capital, 1.8 from more labour, and 2.2 from better use of both. Only the last can go on indefinitely: adding capital alone runs into diminishing returns.
Worked example 2: the growth NST2 needs
NST2 expects income per head to rise from US$1,040 in 2023 to US$1,369 by 2029 (MINECOFIN, NST2, p. 9). What average annual growth rate of income per head does this imply?
These are US dollar figures, so they also reflect changes in prices and in the exchange rate, not only real growth. Compare this with the 9.3% a year of real GDP growth that NST2 targets: population growth and the rate at which the franc changes against the dollar make up much of the gap.
Start at E₁. If aggregate demand alone rises (AD₁ to AD₂), for example because the government spends more, the economy moves in the long run to E₃: output stays at Y₁ and the price level rises from P₁ to P₂. That is inflation, not growth. If long-run aggregate supply also rises (LRAS₁ to LRAS₂), because of investment, skills and technology, the economy reaches E₂: output rises to Y₂ and the price level stays at P₁. Sustained, non-inflationary growth needs capacity to grow as fast as demand.
| Type of policy | Examples | Main limitation |
|---|---|---|
| Supply-side: capital | Public investment in roads, power, water and ICT; tax incentives for private investment; attracting foreign direct investment | Costly and slow to pay off; may need borrowing |
| Supply-side: labour | Education, TVET, health care, nutrition programmes | Returns come years later |
| Supply-side: markets and institutions | Simpler business registration, secure land titles, fighting corruption, competition policy | Needs strong, honest administration |
| Financial deepening | Mobilising savings through banks, SACCOs, pension funds and capital markets | Low incomes limit how much people can save |
| Demand-side | Lower interest rates, higher government spending or lower taxes when there is spare capacity | Causes inflation once capacity is reached (E₃ in the diagram) |
| Trade and integration | Export promotion, regional markets such as the EAC and the AfCFTA | Exposed to world prices and partners' policies |
| Benefits | Costs |
|---|---|
| Higher incomes and consumption: more food, housing and goods per person | Damage to the environment: pollution, deforestation, loss of wetlands and depletion of minerals |
| More jobs, and less unemployment and underemployment | Wider inequality, if the gains go mainly to owners of capital and to cities |
| Higher tax revenue without higher tax rates, to pay for schools and clinics | Inflation, if demand grows faster than capacity |
| Poverty reduction, if the gains reach poor households | A wider current-account deficit, as rising incomes suck in imports |
| A lower burden of public debt as a share of GDP | An opportunity cost: consumption given up today to pay for investment |
| Confidence that attracts further investment | Crowded cities, congestion and social strain from rapid urbanisation |
Warning
List less, evaluate more. An A-level answer does not stop at a list of benefits and costs. It asks which kind of growth: is it led by consumption or by investment, by exports or by borrowing? Who gains: the poorest households or a few firms? Can it last, or does it use up soil, forests and minerals? The same growth rate can be good or harmful depending on these answers.
Definition
Growth without development: a rise in real GDP that does not bring a matching improvement in the living standards of most of the population, measured by their health, education, incomes and freedom from poverty.
The table compares countries with similar incomes per head. Income is gross national income (GNI) per head in 2021 purchasing-power dollars, from UNDP's Human Development Report 2025 (data for 2023).
| Country | GNI per head (2021 PPP US$) | Life expectancy (years) | Mean years of schooling |
|---|---|---|---|
| Equatorial Guinea | 12,762 | 63.7 | 8.3 |
| Sri Lanka | 12,616 | 77.5 | 10.8 |
| Gabon | 18,854 | 68.3 | 9.7 |
| Rwanda | 2,971 | 67.8 | 4.9 |
Equatorial Guinea and Sri Lanka have almost the same income per head, yet people in Sri Lanka live nearly 14 years longer. Rwanda's income per head is less than a quarter of Equatorial Guinea's, yet its life expectancy is higher. Equatorial Guinea's income comes mostly from oil, much of it produced by foreign firms and received by a small group. This is the typical pattern of growth without development.
Why it happens:
Tip
Growth is necessary, not sufficient. A poor country cannot develop for long without growth: there is too little income to share. But growth alone does not guarantee development. Use this sentence as the backbone of any essay on the two.
Important
Discuss. Return to the opening case. Electricity raises output (it is a cause of growth), and a richer economy can afford more power lines (it is also a result). What other determinants of growth work in both directions like this? What does that imply for a government trying to start growth in a very poor region?
EconplusDal, "Costs and Benefits of Economic Growth for Living Standards (With Evaluation)". Note how each point is followed by an evaluation ("it depends on…"), then try the same with the costs and benefits table in this lesson.
Practice
Sources and credits
Written by Ganzaa: the text, the AD–LRAS diagram, the tables, the worked examples and the practice items. The figures in worked example 1 and the practice items are illustrative.
