A lot of people definitely has have that confused. I should explain to them without using large words so that I won't tax their minds so early in the morning. Okay, maybe not tax my mind so freaking early in the morning. Damn buggering cold.
Character Creation starts prior to game play. At this stage you choose your race, gender, assign stats (either points or rolled), assign class and skills (if any), and the general look of the character. Some people go into more detail, rather in PnP or for their own gratification in a CRPG.
There are also two types of Character Development: Rules Base and Story Base. Character Development (Rules Base) is the process of the character "leveling up" and gain experience. He improves skills and abilities that he had at creation or choose a different path if he or she so wished. This is not character creation.
Character Development (Story Base) is the role playing aspects in which your character grows and becomes more knowledgable of the world around him or her and the current situation.
Gothic 2 has no character creation.