Economic Growth, Underdevelopment and Economic Development

Lessons

Senior 6 · Economics

Economic Growth, Underdevelopment and Economic Development

5 lessons

Lesson 5 of 5

Economic development and its indicators

25 min

Case: 159th, and rising

In UNDP's Human Development Report 2025, Rwanda's Human Development Index (HDI) for 2023 was 0.578, ranking it 159th of 193 countries. That sounds low. But the same report shows the index at 0.340 in 2000, and places Rwanda 9 places higher on the HDI than on income per head alone (UNDP, HDR 2025, Tables 1 and 2).

Think: what could make a country rank higher on human development than on income? And what does a single number such as 0.578 actually measure?

Definition

Economic development: a sustained improvement in the well-being of a country's whole population. It includes rising real incomes, but also less poverty, inequality and unemployment, better health and education, and a wider range of choices and freedoms. It usually involves structural change: a shift of workers from low-productivity farming to industry and services.

The goals of development

Michael Todaro and Stephen Smith (Economic Development) describe three core values of development:

Sustenance: the ability to meet basic needs for food, shelter, health and protection.
Self-esteem: a sense of worth, of not being used by others for their ends.
Freedom from servitude: the ability to choose, free from want, ignorance and oppression.

From these follow three objectives: to increase the availability and distribution of basic goods; to raise levels of living (incomes, jobs, education, cultural values) and to widen the economic and social choices open to individuals and nations. Amartya Sen (Development as Freedom, 1999) put the same idea as the expansion of people's capabilities: what they are actually able to be and to do.

Factors that drive development

Factor	Its role
Economic growth	Provides the income and tax revenue that development needs
Human capital	Health and education are both goals of development and causes of it
Institutions and governance	Rule of law, low corruption and accountable government decide whether growth reaches people
Infrastructure	Roads, power, water and ICT connect people to markets and services
Technology	Raises productivity in farming, industry and services
Peace and stability	Allow long-term investment and planning
Population and gender equality	Slower population growth and women's education raise income per head and well-being
External relations	Trade, investment, aid and regional integration bring markets, capital and ideas

Indicators of development

Type	Indicators	Weakness
Monetary	GNI or GDP per head, at PPP	Averages hide distribution; ignores non-market welfare
Health	Life expectancy, infant and under-five mortality, stunting	Each covers one dimension only
Education	Literacy, enrolment, mean and expected years of schooling	Years in school are not the same as learning
Living conditions	Access to safe water, sanitation, electricity; housing	Access does not show quality or reliability
Composite	HDI; inequality-adjusted HDI (IHDI); Multidimensional Poverty Index (MPI); the older Physical Quality of Life Index (PQLI) of literacy, infant mortality and life expectancy	The choice of dimensions and weights is a judgement
Structural	Share of workers outside farming; urbanisation; share of manufactures in exports	Structure changes slowly and can mislead in a services economy

Definition

Human Development Index (HDI): UNDP's summary measure of average achievement in three dimensions: a long and healthy life, knowledge, and a decent standard of living. Since the 2010 report it has been the geometric mean of three dimension indices (UNDP, Human Development Report 2025, Technical notes):

\text{HDI} = \left( I_{\text{health}} \times I_{\text{education}} \times I_{\text{income}} \right)^{\frac{1}{3}}

Each index is scaled between fixed "goalposts":

I = \frac{\text{actual value} - \text{minimum}}{\text{maximum} - \text{minimum}}

Dimension	Indicator	Minimum	Maximum
Health	Life expectancy at birth (years)	20	85
Education	Expected years of schooling	0	18
Education	Mean years of schooling	0	15
Income	GNI per head (2021 PPP US$)	100	75,000

The education index is the arithmetic mean of its two indices, and the income index uses natural logarithms: $I_{\text{income}} = \frac{\ln(\text{GNI}) - \ln 100}{\ln 75\,000 - \ln 100}$ , because each extra dollar adds less to well-being as income rises. Categories: low (below 0.550), medium (0.550–0.699), high (0.700–0.799) and very high (0.800 and above).

Worked example 1: Rwanda's HDI for 2023

Data from HDR 2025, Table 1: life expectancy 67.8 years; expected years of schooling 12.6; mean years of schooling 4.9; GNI per head 2,971 (2021 PPP US$).

I_{\text{health}} = \frac{67.8 - 20}{85 - 20} = \frac{47.8}{65} = 0.735

I_{\text{education}} = \frac{1}{2}\left( \frac{12.6}{18} + \frac{4.9}{15} \right) = \frac{0.700 + 0.327}{2} = 0.513

I_{\text{income}} = \frac{\ln 2\,971 - \ln 100}{\ln 75\,000 - \ln 100} = \frac{7.997 - 4.605}{11.225 - 4.605} = 0.512

\text{HDI} = (0.735 \times 0.513 \times 0.512)^{\frac{1}{3}} = (0.1931)^{\frac{1}{3}} = 0.578

This matches the published value. Health is Rwanda's strongest dimension; education, pulled down by adults' low mean years of schooling, and income are the weakest.

Worked example 2: why a geometric mean?

(a) Find the arithmetic mean of Rwanda's three indices. (b) Find the HDI if mean years of schooling rose from 4.9 to 6.0, with everything else unchanged.

\text{(a)}\quad \frac{0.735 + 0.513 + 0.512}{3} = 0.587

The geometric mean (0.578) is lower, because it penalises uneven achievement: a country cannot make up for poor schooling with very long lives, as it could with a simple average.

\text{(b)}\quad I_{\text{education}} = \frac{0.700 + \frac{6.0}{15}}{2} = \frac{0.700 + 0.400}{2} = 0.550

\text{HDI} = (0.735 \times 0.550 \times 0.512)^{\frac{1}{3}} = 0.592

Because education is one of Rwanda's weakest dimensions, improving it raises the HDI by more than an equal gain in the strongest one would.

Rwanda's human development since 2000

Rwanda's HDI rose from 0.340 in 2000 to 0.578 in 2023, and it moved from the "low" to the "medium" group by 2020. Adjusted for inequality, however, the 2023 value falls to 0.399 (the IHDI), a loss of 31.0%: the averages behind the HDI hide large differences between Rwandans (UNDP, HDR 2025, Table 3).

Warning

The HDI has limits. It is an average, so it ignores inequality (hence the IHDI). It leaves out freedom, security, the environment and the quality of education. Its data often lag by a year or more and are revised, so compare values only within the same report: each report recalculates past years with new data.

Definition

Sustainable Development Goals (SDGs): 17 goals with 169 targets, adopted by all UN member states on 25 September 2015 in the resolution "Transforming our world: the 2030 Agenda for Sustainable Development", to be reached by 2030. They replaced the eight Millennium Development Goals (2000–2015).

The 17 Sustainable Development Goals

SDG	Goal	SDG	Goal
1	No poverty	10	Reduced inequalities
2	Zero hunger	11	Sustainable cities and communities
3	Good health and well-being	12	Responsible consumption and production
4	Quality education	13	Climate action
5	Gender equality	14	Life below water
6	Clean water and sanitation	15	Life on land
7	Affordable and clean energy	16	Peace, justice and strong institutions
8	Decent work and economic growth	17	Partnerships for the goals
9	Industry, innovation and infrastructure

The SDGs differ from the older goals in covering every country, not only poor ones, and in joining economic, social and environmental aims: they treat development as sustainable only if it "meets the needs of the present without compromising the ability of future generations to meet their own needs" (the Brundtland Report, 1987).

Rwanda's plans: Vision 2050 and NST2

Rwanda's long-term plan is Vision 2050, carried out through five-year strategies: NST1 (2017–2024) and now NST2 (2024–2029).

Target	Baseline	Target	Source
GDP per head	US$837 (2019)	over US$4,036 by 2035 (upper-middle income); over US$12,476 by 2050 (high income)	Vision 2050, pp. 7 and 17
Life expectancy	67.8 years (2020)	71.7 by 2035; 73 by 2050	Vision 2050, p. 17
Gini coefficient	0.43 (2017)	0.35 by 2035; 0.3 by 2050	Vision 2050, p. 17
Real GDP growth	8.2% (2023)	9.3% a year on average, 2024–2029	NST2, p. 9
Stunting of under-fives	33% (2019–20)	15% by 2029	NST2, p. 25
Jobs	–	1.25 million productive and decent jobs, 2024–2029	NST2, p. 12

Vision 2050 itself estimates that reaching its income targets needs average growth of at least 12% a year in 2018–2035 and 10% in 2036–2050 (p. 13). Note that the Vision 2050 Gini baseline (0.43, 2017) uses an older method than EICV7's 0.370 for 2024, so the two cannot be compared directly.

Economic growth and economic development compared

Economic growth	Economic development
A rise in real output (real GDP)	A rise in the well-being of the whole population
Quantitative: one number, the growth rate	Qualitative and multidimensional: health, education, poverty, freedom
Can happen quickly, even in one year	A long-term process
Measured by real GDP or GNI per head	Measured by HDI, IHDI, MPI, poverty, inequality and social indicators
Can occur without structural change	Involves structural and institutional change
Possible without development (lesson 2)	Hard to sustain without growth

Tip

Remember the HDI as "long, learned, decent". A long and healthy life (life expectancy), a learned population (two schooling measures, averaged) and a decent standard of living (log of GNI per head), combined by a geometric mean. Learn the goalposts: 20–85, 0–18, 0–15, 100–75,000.

Important

Discuss. Rwanda ranks 9 places higher on the HDI than on income per head. Using the worked examples, explain which of its dimensions make this possible, and which dimension Rwanda should raise first to climb further. Would your answer change if you used the IHDI?

TED, "Anna Rosling Rönnlund: See how the rest of the world lives, organized by income" (about 12 minutes, 2017). Her Dollar Street project photographs homes, including homes in Rwanda, ordered by income. Watch for her claim that income shapes daily life more than culture does, and ask what an income ranking misses.

✦

Practice

Define economic development, and give Todaro's three core values of development.
Distinguish between economic growth and economic development (four points).
A country has life expectancy 72 years, expected schooling 13.5 years, mean schooling 8 years and GNI per head 8,000 (2021 PPP US$). Calculate its HDI.
Explain why the HDI uses a geometric mean and takes the logarithm of income.
Rwanda's HDI was 0.340 in 2000 and 0.578 in 2023. Calculate the percentage increase.
Name the SDG that each of these supports: (a) Girinka cows for poor families; (b) the 12 years of basic education; (c) universal access to electricity.
Explain three limitations of the HDI as a measure of development.
"Rwanda's rising HDI shows that growth has brought development to all Rwandans." Evaluate, using figures from this unit.

Show answersHide answers

A sustained improvement in the well-being of the whole population: higher real incomes, less poverty, inequality and unemployment, better health and education, and wider choice. Core values: sustenance, self-esteem, freedom from servitude.
Any four from the comparison table: quantitative vs qualitative; real GDP vs HDI and social indicators; short run vs long run; no structural change needed vs structural change; growth can occur without development.
$I_h = \frac{72 - 20}{65} = 0.800$ ; $I_e = \frac{1}{2}\left(\frac{13.5}{18} + \frac{8}{15}\right) = \frac{0.750 + 0.533}{2} = 0.642$ ; $I_y = \frac{\ln 8\,000 - \ln 100}{\ln 750} = \frac{4.382}{6.620} = 0.662$ ; HDI $= (0.800 \times 0.642 \times 0.662)^{\frac{1}{3}} = 0.698$ .
The geometric mean penalises uneven achievement, so strength in one dimension cannot fully offset weakness in another. The log of income reflects diminishing returns: an extra 1,000 dollars matters more to a poor person than to a rich one.
$\frac{0.578 - 0.340}{0.340} \times 100 = 70\%$ .
(a) SDG 1, No poverty (or SDG 2, Zero hunger); (b) SDG 4, Quality education; (c) SDG 7, Affordable and clean energy.
Any three: it is an average that ignores inequality; it leaves out freedom, security and the environment; years of schooling do not measure learning; data lag and are revised; the choice of dimensions and goalposts is a judgement.
For: HDI rose from 0.340 to 0.578, with long gains in life expectancy; poverty fell from 39.8% to 27.4% (2017 to 2023–24). Against: the IHDI of 0.399 shows a 31% loss to inequality; rural poverty (31.6%) is almost twice urban poverty (16.7%); stunting was still 27% in 2025; mean schooling is only 4.9 years. Judgement: growth has brought broad development, but not yet to all Rwandans equally.

1Case: 159th, and rising

2The goals of development

3Factors that drive development

4Indicators of development

5Rwanda's human development since 2000

6The 17 Sustainable Development Goals

7Rwanda's plans: Vision 2050 and NST2

8Economic growth and economic development compared

Case: 159th, and rising

The goals of development

Factors that drive development

Indicators of development

Rwanda's human development since 2000

The 17 Sustainable Development Goals

Rwanda's plans: Vision 2050 and NST2

Economic growth and economic development compared