Short-Run Costs, Long-Run Gains: Asymmetric Dynamics Between Social and Economic Development

Endogenous growth theory explains the asymmetric dynamic relationship between economic and social development through human capital accumulation and innovation, institutional quality, and demand channels. The objective of this paper is to assess the dynamic relationship between social and economic development in developing countries, where institutional imperfections and development instability create the most pronounced asymmetries. A composite social development index, obtained using the entropy method, operationalizes social development as the expansion of human capabilities in three dimensions: health, education, and material security. A panel vector error correction model (PVECM), estimated using the generalized method of moments (GMM) on panel data from 18 countries in Central Asia, the Middle East, and North Africa for the period 2001–2023, revealed asymmetric dynamic relationships: improved social indicators are associated with a short-term slowdown in economic indicators and more favorable economic dynamics in the medium term. In contrast, economic growth is accompanied by a positive lagged response in social development, although the short-term response may reflect the costs of social adjustment. The influence of control variables confirms the positive role of agglomeration for economic development, revealing the social costs of rapid urbanization and demographic pressure on social development. Estimates of the error correction coefficients indicate a slow adaptation of the system to long-term equilibrium, high inertia, and institutional rigidity of macrosocial processes. Impulse response functions confirm the dynamic and delayed nature of the interaction between economic and social development and positive shocks in the medium term. The obtained empirical results substantiate the need for institutional regulation of policy decisions on human capital accumulation and innovation, as well as social reforms.