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Ecological Economics xx (2004) xxx – xxx www.elsevier.com/locate/ecolecon

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Diminishing and negative welfare returns of economic growth: an index of sustainable economic welfare (ISEW) for Thailand Matthew Clarkea,*, Sardar M.N. Islamb b

a School of Social Science and Planning, RMIT University, G.P.O. Box 2476V, Melbourne, Victoria 3001, Australia Centre for Strategic Economic Studies, Victoria University, P.O. Box 14428, Melbourne City MC, Victoria 8001, Australia

Received 19 March 2003; received in revised form 7 July 2004; accepted 25 October 2004

Abstract Thailand has achieved remarkable levels of economic growth over the last three decades. This sustained economic growth has played a major role in reducing absolute poverty levels from nearly one third of the population in 1975 to presently less than 10%, thus increasing the welfare of many Thais. This performance ranks Thailand as one of the world’s most successful economies during this period. However, an increasing number of studies have begun to find that at a certain point achieving economic growth stops improving welfare and actually begins to diminish it due to the hidden and traditionally unreported costs of associated with this growth. With one exception, these new studies have focussed on high-income countries. This study will estimate an index of sustainable economic welfare (ISEW) for a developing country, Thailand, over a 25-year period, 1975– 1999. This paper concludes that even low–middle income countries are beginning to approach the point in which economic growth produces both diminishing and, at times, negative welfare returns as the costs of achieving economic growth begin to outweigh the benefits. These results are important for policy makers and highlight the importance of implementing alternative welfare enhancing interventions that must be considered in place of simply achieving economic growth. The emphasis of this paper is not on the methodology of estimating the ISEW for Thailand, but rather on the policy implications for developing countries of diminishing and negative welfare returns brought about through the achievement of economic growth. D 2004 Elsevier B.V. All rights reserved. Keywords: Economic growth; Thailand; ISEW; Welfare

1. Introduction Thailand has achieved remarkable economic growth over the last three decades. This sustained * Corresponding author. Tel.: +61 3 9925 2960; fax: +61 3 9925 1010. E-mail address: [email protected] (M. Clarke).

economic growth has played a major role in reducing absolute poverty levels from nearly one third of the population in 1975 to presently less than 10% (Warr, 2001). This performance ranks Thailand as one of the world’s most successful economies during this period. As it is widely accepted within mainstream literature that economic growth is a proxy indicator for welfare (Pigou, 1962; Hicks, 1940; Ravallion, 2001), this 30-

0921-8009/$ - see front matter D 2004 Elsevier B.V. All rights reserved. doi:10.1016/j.ecolecon.2004.10.003

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year period of high economic growth indicates that the welfare of all Thais has also significantly increased during this time. However, if welfare is not simply a function of economic growth, but takes into account various other issues such as inequality, environmental degradation and sustainability, achieving economic growth may in fact diminish welfare (Daly and Cobb, 1990). An alternative index of welfare, the index of sustainable economic welfare (ISEW), reflects this new approach. A number of ISEW studies have questioned the relationship between economic growth and welfare (Daly and Cobb, 1990; Diefenbacher, 1994; Hamilton, 1998; Jackson and Marks, 1994; Lawn and Sanders, 1997; Rosenberg and Oegema, 1995; Stockhammer et al., 1997). With only one exception (Castaneda, 1999), each of these studies has focussed on high-income countries. The constant finding across all of these ISEW studies is that at a certain point, additional economic growth reduces welfare. Thailand is a worthwhile country to study because as a high growth economy, it is often presented as a model for other developing countries to imitate (Watkins, 1998). It is important to apply the ISEW to developing countries to investigate whether it is possible for such low-income countries to prematurely reach this point whereby achieving economic growth no longer increases economic welfare but reduces it. This paper will estimate an ISEW for Thailand over a 25-year period, 1975–1999. This paper concludes that Thailand, a low–middle income country, is beginning to approach the point in which economic growth produces both diminishing and, at times, negative welfare returns as the costs of achieving economic growth begin to outweigh the associated benefits. This conclusion is important for policy makers and highlights the importance of implementing alternative welfare enhancing interventions in place of simply achieving economic growth. The emphasis of this paper is not the methodology of the estimation of the ISEW for Thailand, as this can be found elsewhere (Clarke and Islam, 2004), but rather on the policy implications for developing countries of diminishing and negative welfare returns brought about through the achievement of economic growth.

This study is divided into fix sections. This first section introduces the paper. The following section will set out the problem being considered. Section 3 will focus on the application of the ISEW to Thailand. Section 4 will present the results. Section 5 discusses the policy implications of these results. Conclusions are drawn in Section 6.

2. Research problem Achieving economic growth has been the central theme of economic policy in most economies since the end of the Second World War (Nordhaus and Tobin, 1973; Manning, 2001). Governments in both developing and developed countries are continuously instigating policies designed to achieve economic growth (see NESDB, 1996, 2000). There is little doubt that the main purpose of increasing economic activity is to increase welfare (Samuelson et al., 1978; Kaosa-ard, 2000). Thus, the pursuit of economic growth appears to be intimately tied with pursuing increased welfare. The major question underlying the ISEW approach is whether an increase in economic growth dreally reflects the true changes in welfareT (Brekke, 1997, p. 158). Sametz (1968) called for the costs and benefits of changes in environment, leisure time, new products, non-marketed goods, urbanisation, and government expenditure caused by achieving economic growth to be considered when measuring welfare. Nordhaus and Tobin (1973) empirically applied this approach to the United States and concluded that despite various adjustments to GDP per capita, economic growth still indicated improvements in welfare. Daly and Cobb (1990) developed the ISEW approach to question Nordhaus and Tobin’s (1973) analysis and assumption that economic growth automatically increases welfare. However, whilst this new approach questioned the desirability of economic growth, it was considered extremely unlikely that economic growth would always be undesirable with respect to welfare. It was acknowledged that economic growth had a positive role to play in enhancing welfare, but whether this would always remain the case was of particular interest. The relationship between economic growth and welfare may include aspects of diminishing and negative

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returns so that at a particular point in time, economic growth no longer adds to welfare but actually reduces it (Manning, 2001). This point, in which economic growths ceases to add to welfare and begins to reduce it, has been labeled the Threshold Point (Max-Neef, 1991). The consideration of such a point is not new within the literature (Hicks, 1940; Pigou, 1962; Ng and Ng, 2001). For the past three decades, a number of authors have argued that this point has been crossed by developed countries (see Daly, 1971, 2000; Barkley and Seckler, 1972; Zolotas, 1981; Hamilton, 1998). Thus, whilst the developed world has reached an age of mass-consumption, welfare may have decreased despite continuous increases in economic growth. Social, political and environmental pressures such as pollution, urbanisation, poorer health, and so on, may have resulted in reduced levels of welfare (Daly, 2000). Consideration within this paper is given to whether the dthreshold pointT be reached only by a so-called wealthy society?T (Max-Neef, 1995, p. 117), or whether it can also be reached by poorer countries

at much lower levels of economic development. The answer may influence future development plans and policies. Expectations for improving society’s welfare through continuous economic growth would need to be re-examined, as would the economic and social policies for achieving this outcome.

3. Thailand and the ISEW Castaneda (1999) summarised the findings of previous ISEW studies (Daly and Cobb, 1990; Diefenbacher, 1994; Hamilton, 1998; Jackson and Marks, 1994; Lawn and Sanders, 1997; Rosenberg and Oegema, 1995; Stockhammer et al., 1997). In general, these studies (of developed countries) found that welfare increased in line with economic growth (though at a slower rate) until the late 1970s or early 1980s, at which time the ISEW began to fall despite continuing increases in economic growth. The conclusion of these studies was that at a certain point, the costs of achieving economic growth begin to outweigh the associated benefits resulting in falling

Ecological parent system

Social subsystem

Economic sub-system

Spiritual sub-system

3

Political sub-system

Environmental sub-system

Fig. 1. Representation of interconnected systems analysis.

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welfare. At this point, (the threshold point), further economic growth reduces welfare. The policy implications are significant as they challenge the underlying tenants of mainstream economics, that economic growth is both central and fundamental for improving welfare. The value of Castaneda (1999) and this paper is that the focus is on developing countries (Chile and Thailand respectively). These countries are characterised by low-income levels, high underemployment, political instability and poor social capital. Economic growth is expected to remedy these ills. However, if

countries with low national income levels can reach a threshold point and economic growth has diminishing and negative welfare returns, whole new approaches to development economics are required. 3.1. Systems analysis Adjusting measures of national income to incorporate the unreported costs (and benefits) of achieving economic growth is based on an implicit premise that the economy is part of a larger interrelating system (Clarke, 2004). Assuming that society is

Table 1 Summary of adjustments for Thai ISEW Item

Positive/negative

Rationale

Methodology

Personal Consumption Income Inequality

Basis of ISEW Accounting for inequality

From Thai National Statistics Office (NSO) (1997, 1999) Equally distributed equivalent level of income Atkinson’s (1970)

Adjusted Personal Consumption Public Expenditure on Education Public Expenditure on Health Commuting

Adjusted base for index

Negative

Urbanisation

Negative

Private Expenditure on Health Public Expenditure on Roads Consumer Durables

Negative

Positive

Corruption

Negative

Debt

Negative

Air Pollution

Negative

Water Pollution

Negative

Noise Pollution

Negative

Deforestation

Negative

Long Term Environmental Damage Commercial Sex Work

Negative

Positive Positive

Positive

Negative

Adding in non-defensive expenses Adding in non-defensive expenses Subtracting costs for time lost Subtracted for defensive private expenditure Subtracted for defensive private expenditure Accounting for services not included in public expenditure Accounting for services not included in public expenditure Subtracting for unaccounted political costs to society Subtracting for unaccounted political costs to society Subtracting costs of environmental damage Subtracting costs of environmental damage Subtracting costs of environmental damage Subtracting costs of environmental damage Subtracting costs of environmental damage Unaccounted costs to spiritual system

75% of public expenditure on education due to low base (NSO, 1997, 1999). 75% of public expenditure on health due to low base (NSO, 1997, 1999). US$219 per car calculated in 1990 extrapolated to cover all years (Tanaborrboon, 1990) 18% of Bangkok personal income is spent for access to clean water and air (World Bank, 1999) 50% of all private health expenditure (Cobb and Cobb, 1994; NSO, 1997, 1999) 50% of all public expenditure on roads (Daly and Cobb, 1990; NSO, 1997, 1999) 10% of expenditure on cprivate consumer durables (Daly and Cobb, 1990; NSO, 1997, 1999) 0.0088% of GDP (1975–1981), 0.0074% of GDP (1982–1988), 0.007% of GDP (1989–1999) based on Phongpaichit and Piriyarangsan (1994) 50% of interest paid on public Debt (NSO, 1997, 1999) Costs of pollution abatement for Co2, CO, NOX, SOX, SPM (Guenno and Tiezzi, 1998; Dept of EDP, 1990). Costs of cleaning water is 7.5 baht per kilogram of Biochemical Oxygen Demand (BOD) (Phansawas et al., 1987; TESCO, 1993; Dept of IW, 1986) 1% of GNP (Daly and Cobb, 1990; NSO, 1997, 1999) 886 baht per hectare of forest lost is cost of soil erosion (Panayotou and Parasuk, 1990) Estimated damage for each tonne of carbon emissions is 21.59 baht (Nordhaus, 1991; Dixon, 1999) 3% of GNP (Phongpaichit et al., 1998; NSO, 1997, 1999)

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systems-based underscores the need to consider the wider welfare implications of achieving economic growth. Within this application of the ISEW to Thailand, explicit systems analysis is undertaken. Society is made up of hierarchical and interconnected systems and sub-systems (Capra, 1982; Dopfer, 1979; Clayton and Radcliffe, 1996; Islam et al., 2003). Within this approach, the ecological system is considered the parent system and the social sub-systems are the economic, social, environment, political and spiritual (see Fig. 1). Each of these subsystems has a direct impact on society’s well-being and therefore, measures of welfare must take into account each of these sub-systems in order for that measure to be accurate. The following adjustments that explicitly recognize the impact of achieving economic growth on various sub-systems should be undertaken in estimating an ISEW for Thailand (other adjustments might be necessary for other countries) in order to measure changes in welfare. Economic sub-system ! Personal consumption adjusted for income inequality Social sub-system ! Public expenditure on education ! Public expenditure on health ! Private expenditure on health ! Urbanisation ! Commuting Political sub-system ! Government streets and highways ! Consumer durables ! Corruption ! Debt Environmental sub-system ! Air pollution ! Water pollution ! Noise pollution ! Loss of forests ! Non-renewable resources ! Long-term environmental damages Spiritual sub-system ! Commercial sex work As these sub-systems inter-relate, some adjustments may cross-over various components (i.e.

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commuting could be considered an adjustment for social, political, environmental and even spiritual subsystems—sitting in a traffic jam provides a wonderful Table 2 Summary of calculations—ISEW for Thailand P Income Distribution (cost) I ¼ 1  ni¼1 ðyi =lÞ1=1a a p1 Public Education (benefit) Ed=PE(0.75) Public Health (benefit) H=PH (0.75) Commuting (cost) C=NRC(219d XR) Urbanisation (cost) U=BY(0.08)+BY(0.1) Private Health (cost) H(p)=PrHe(.05) Public Roads (benefit) R=Pr(.05) Consumer Durables CD=Cd(0.1) (benefit) Corruption (cost) C(pol)=GDP1975–81(0.0088)+ GDP1982–88(0.0074)+ GDP1989–99(0.007) Public Debt (cost) D(p)=IPD(0.5) Air Pollution (cost) A=cCO2+cCO+cNOX+cSOX+cSPM Water Pollution (cost) W=[(7.5IP)+(7.54.6MP)]2 Noise Pollution (cost) N=GDP(0.01) Deforestation (cost) D=DF(886) Long-term Environmental L=cCDt+cCWRt+cCFt Damage (cost) Commercial Sex Work CSW=GNP (0.3) (cost) where: I=measure of income inequality; y i =income of individuals in the ith income range; l=mean income; a=society’s perspective on equality; Ed=benefits of public education; PE=expenditure on public education; H=benefits of public health care; PH=expenditure on public health care; C=cost of commuting; NRC=number of registered cars in Bangkok; XR=exchange rate; U=cost of urbanisation; BY=average income for Bangkok residents; H(p)=cost of private health care; PrHe=expenditure on private health care; R=benefits of public roads; Pr=expenditure on public roads; CD=benefits of consumer durables; Cd=expenditure on consumer durables; C(pol)= costs of political corruption; GDP=gross domestic product; D(p)=cost of public debt; IDP=interest paid on public debt A=cost of air pollution; cCO2=cost of carbon dioxide (.03335 baht per kilogram); cCO=cost of carbon monoxide (.03335 baht per kilogram); cNOX=cost of nitrogen monoxide (2.84 baht per kilogram); cSOX=cost of sulfur monoxide (7.4 baht per kilogram); cSPM=cost of suspended particulate matters (4.15 baht per kilogram); W=cost of water pollution; IP=industrial pollution, =FI+DI+PI+CI+TI; FI=food industry BOD; DI=drink industry BOD; PI=paper industry BOD; CI=chemical industry BOD; TI=textile industry BOD; MP=municipal population BOD; BOD=biochemical oxygen demand; N=cost of noise pollution; GDP=gross domestic product; D=cost of deforestation; DF=hectares of deforestation; L=cost of long-term environmental damage; cCDt=cost of carbon emissions of deforestation, =21.59tonne of carbon emission; cCWRt=cost of carbon emissions of wet rice farming, =21.59tonne of carbon emission; cCFt=cost of carbon emissions of fuel consumption, =21.59tonne of carbon emission; CSW=cost of commercial sex work industry; GNP=gross national income.

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chance to contemplate the meaning of the universe and its conspiracy against you!). However, for simplicity (and to avoid double counting), it is of interest to categorise the adjustments within only one sub-system (Tables 1 and 2). 3.2. Adjustments unique to the Thai ISEW The methodology for estimating the separate costs and benefits can be found elsewhere (Clarke and Islam, 2004). In general, the methodology has followed that set out previously (Daly and Cobb, 1990; Cobb and Cobb, 1994). However, a small number of adjustments within this ISEW have not been made in previous ISEW studies. The Thaispecific adjustments are corruption, debt and commercial sex work. The decision to include these adjustments within the Thai-ISEW is justified by accepting the principles of normative social choice theory (Bonner, 1986; Islam, 2001; Clarke and Islam, 2004).

Normative social choice refers to the processes of ordering alternative social states on the basis of the choices, preferences and value judgments of members of that society to determine what is the best state for that society. Normative social choice theory incorporates the various social concerns around welfare that are not adequately captured using individual preference satisfaction techniques within the market place. Normative social choices can be estimated using expert opinion (or analyst), government formulated public policy, or specific interviews of individuals on welfare outcomes. The methodology for each technique is well established (Islam, 2001). Using one, or a combination of the above, it is possible to determine the social choice perspectives on various welfare issues. While not unique to Thailand, corruption, debt and commercial sex work are all issues (identified by experts, government policy or social research) that reduce welfare in Thailand (Phongpaichit and Piriyarangsan, 1994; Phongpaichit et al., 1998; World Bank, 2000).

Table 3 ISEW per capita and GDP per capita for Thailand, 1975–1999 (1988 prices) Year

Economic (millions of baht)

Social (millions of baht)

Political (millions of baht)

Environmental (millions of baht)

Spiritual (millions of baht)

ISEW (millions of baht)

ISEW per capita

GDP per capita

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

289,271 309,968 333,312 348,689 368,041 386,847 405,849 408,616 432,608 438,488 439,241 447,554 483,945 521,801 552,434 603,071 622,392 655,585 719,644 785,056 853,737 929,336 932,210 830,688 832,001

14,226 14,380 17,629 17,828 17,613 16,607 20,549 17,597 17,658 21,985 25,719 28,279 35,342 43,117 48,866 54,663 60,523 63,159 57,618 57,295 59,299 66,005 65,835 55,185 70,019

3336 2771 5263 4460 5865 7034 8540 10,231 11,473 13,914 15,881 18,989 17,922 17,445 16,382 10,593 7050 2937 781 3409 8159 10,343 2765 292 7335

81,373 80,580 137,464 145,862 70,782 75,363 79,451 83,773 83,698 87,772 90,177 74,774 78,871 85,397 91,478 113,112 120,985 126,737 134,028 141,474 150,382 158,653 163,368 163,192 148,076

18,646 20,371 22,430 24,558 25,744 27,190 28,562 30,133 32,043 33,754 35,137 36,950 40,599 46,051 51,838 57,650 62,420 66,967 72,808 79,645 86,771 91,513 89,590 79,414 82,165

171,690 191,866 150,526 155,981 248,037 260,653 268,747 266,882 287,736 281,063 272,327 288,562 311,211 329,791 343,870 367,053 371,414 395,785 455,971 510,051 565,444 623,508 616,182 532,605 524,406

4050 4440 3400 3449 5379 5550 5614 5464 5811 5556 5258 5448 5777 6000 6153 6519 6520 6849 7816 8631 9510 10,372 10,132 8665 8505

14,662 15,754 16,942 18,237 18,819 19,458 20,206 20,883 21,729 22,504 22,996 23,722 25,561 28,380 31,316 34,565 37,073 39,506 42,765 45,174 48,511 51,489 49,691 45,348 45,789

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4. Results Both the level and trend of welfare differs when measured by movements in ISEW per capita or gross domestic product (GDP) per capita indices. The ISEW per capita increases at a slower rate, but is also decreases at times when GDP per capita is actually increasing (i.e. at times of economic growth). The ISEW per capita rose and fell throughout the 1980s, effectively being unchanged in 1986 from the 1979 figure. In comparison, GDP per capita rose over 25% over this same period (Table 3). The ISEW per capita rose steadily during the next decade though at significantly different rates than the GDP per capita. Within this period, the divergence between the two indices becomes quite apparent (Fig. 2). Both indices peak in 1996. This is just prior to the financial crisis of 1997. After 1996 both indices begin to fall. Whilst GDP per capita has shown the propensity to increase in 1999, ISEW per capita has not increased but has fallen again. It is too early to confirm whether this is a trend or a fluctuation. However, by drawing on the results of other studies (Daly and Cobb, 1990; Jackson and Marks, 1994), a continuing of this divergence could be expected.

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It is important to note that even though both the ISEW per capita and GDP per capita welfare indices are money-metric, they should be considered ordinal rather than cardinal. It is therefore incorrect to say that if ISEW per capita (or GDP per capita) increases 10%, welfare also increases 10%. Further, it is also not accurate, when comparing the levels of GDP per capita and ISEW per capita to infer that the moneymetric difference between these two indices (i.e. in 1988 GDP per capita is 28380 baht while ISEW per capita is 6000 baht, a difference of 22380 baht) is the difference in welfare. What can be inferred from these two time series though is the variation and divergence in the two trend lines. The analysis of the welfare experienced by the Thai population between 1975 and 1999 is, in this instance, dependent on the shape of these two trend lines. The trend line for GDP per capita has three main phases; the initial steady rise to 1986, the accelerated growth to 1997 and the final dip and apparent recovery to 1999. However the pattern for ISEW per capita is significantly different. The rise is slower, there is not an accelerated period, nor is there an indication of a recovery in the final year after the index begins falling in 1997. Comparing the two indices further, an increasing divergence is also apparent. This indicates that the relationship between

60000

50000

40000

30000

20000

10000

19 75 19 76 19 77 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99

0

ISEW per capita (1988 prices)

GDP per capita (1988 prices)

Fig. 2. Comparison of ISEW per capita and GDP per capita measures of welfare for Thailand, 1975–1999 (1988 prices).

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GDP per capita and ISEW per capita is becoming increasingly weaker throughout the time series, casting doubts over the long-term desirability of economic growth in Thailand in terms of welfare. This is also illustrated by comparing the two measures as indices with a base year of 1975. The GDP per capita index maintains its three phases of growth (constant, accelerated and crisis), whilst the ISEW per capita index rises and falls through to the earlier 1990s, then has a steady period of growth before falling again following the financial crisis in 1997 (Fig. 3). The most significant adjustment in this ISEW was the cost of inequality to welfare. This was eight times more important than the estimated costs of commercial sex work. The largest positive adjustment within the ISEW was education. Studies suggesting that achieving economic growth may decrease a nation’s aggregate welfare are limited within mainstream literature. When discussed, such economic growth has been termed impoverishing, or welfare-reducing (see Ng and Ng, 2001). However, these descriptions are limited as they do not adequately describe Thailand’s experience in which

welfare levels improve by increasingly diminishing rates due to the increasing costs of achieving economic growth compared to the associated benefits. The concept introduced is stunting economic growth. This phenomena is so-called because this economic growth has bretarded the progressQ of welfare. During periods of stunting economic growth, welfare improves at decreasing rates, remains stagnant, and at times (while continuing to trend upwards) falls. Stunting economic growth is undesirable as its effects are sub-optimal. Optimal economic growth results in welfare increasing at the maximum rate. However, when the associated costs and benefits of achieving economic growth are considered, it can be seen that welfare does not always increase at the maximum rate. Thus, at these times, economic growth is sub-optimal or stunting in terms of welfare. This conclusion is in line with other work, such as Thailand’s performance in the Human Development Index (UNDP, 2002). However, further ISEW studies for other developing countries is required before conclusions can be drawn on the generality of the Thai economic growth experience and how this might compare to the economic growth experience of other poor countries.

400 350 300 250 200 150 100 50

19 75 19 76 19 77 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99

0

ISEW p.c. for Thailand (1975 = 100)

GDP+Sheet1!$25:$25p.c. for Thailand (1975 = 100)

Fig. 3. Comparison of ISEW per capita and GDP per capita for Thailand, 1975=100.

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5. Policy implications It is reasonable to base policy initiatives on welfare indices (Hagerty et al., 2001). Before doing so however, it is prescient to discuss the current debate on the merit of the ISEW approach for this purpose. Neumayer (1999, in press) argues that due to a number of weaknesses, the ISEW is a faulty measure of welfare. His reservations include the question of weighting, bias in composition, theoretical weaknesses in methodology and the merging of sustainability and welfare into one measure. Lawn (2003) has defended the ISEW in terms of both its theoretical underpinnings and its composition. Lawn (in press) has also further called for a standardized ISEW to be developed with a common set of methodologies in order to dampen this specific criticism. As Daly and Cobb (1990) set out, the initial purpose of the ISEW approach was to widen the scope of debate around welfare in order to move beyond an all-encompassing focus on achieving economic growth (also see the justifications for the Human Development Index; UNDP, 1990). In this regard, Nuemayer’s criticisms should be considered important but not sufficient reason to cease analysis. Perhaps in part due to this ongoing debate, policy implications based on the analysis of ISEW are rare within the literature, especially for developing countries. Therefore, having reviewed the results of the ISEW, it is important to discuss policy perspectives that logically follow from this welfare economic analysis. These are not policy prescriptions but rather are issues that should be considered by those determining policies. 5.1. Reduce emphasis on economic growth Economic growth is not always desirable with regards to increasing welfare as its net benefits are sometimes negative and rarely as positive as unadjusted aggregated standard national accounts growth rates would suggest. Therefore, the first policy suggestion is to reduce the emphasis on resource consumption based economic growth. For example, see the welfare costs within the Thai ISEW of deforestation caused through achieving economic growth.

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A balanced approach to achieving economic growth is required. Economic growth should not be the only priority within government policies. Economic growth aimed at specific sectoral areas (Warr, 2001) and for specific purposes would be better drather than pursuing economic growth for its own sake and hoping that the benefits will be spread widely enough that the poor derive some gainsT (Fields, 1995, p. 76). 5.2. Emphasise pro-poor policies Pro-poor policies are required to ensure that the poor receive the benefits of any future economic growth or any residual benefits from previous growth. If economic growth is pursued, one of its specific purposes must be to reduce poverty. Within Thailand, the Northeast region has traditionally been the poorest region, having poverty rates similar to parts of subSaharan Africa (Watkins, 1998). Whilst economic growth has been extremely high, the majority of the population who remain rural have been largely unaffected by its direct benefits but have experienced its associated costs (Dixon, 1999; Warr, 2001). Whilst controversial, a pro-poor policy that should be considered is income redistribution. (Inequality is the largest cost to welfare associated with economic growth within the Thai ISEW). Whilst there are attendant costs with re-distribution (Pigou, 1962), it is more likely to reduce income inequality than simple economic growth. Such redistribution though is not undertaken to increase prospects for future growth (Chenery et al., 1974), but rather for the expressed purposes of reducing poverty and hence lifting welfare. The reduction of inequality reduces the poverty elasticity so future growth has a greater impact on reducing poverty levels (World Bank, 2000; Deolalikar, 2002). The reduction of inequality also encourages social inclusion (Killock, 2002; Maxwell, 2001, 2003; McKay, 2002; White, 2000). Whilst poverty levels have decreased (Kakwani and Krongkaew, 2000), a large absolute number of Thais are still struggling to survive despite three decades of remarkable growth. 5.3. Emphasise other sub-systems By defining and measuring welfare using systems analysis, the importance of non-economic sub-systems

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has become apparent. Public policies can emphasise the impact other domains have to increase welfare. There are three main environmental policy areas that would positively impact welfare levels: (1) natural resource protection; (2) pollution control and abatement programs; and (3) limits on harvesting renewable resources. Whilst such government policies might exist, they may not be adequately enforced. Reemphasising these policy areas is therefore important. The costs within the Thai ISEW of pollution and environmental degradation caused through achieving economic growth are quite significant. Thailand has suffered a significant decline in its natural forest cover (Bello, 1995). The impact of this is wide-ranging. It has immediate impact on local inhabitants who rely on the forest for subsistence farming, but it has also had impacts on Thailand’s biodiversity and the ability of the ecology to withstand other stresses. Policies may cover limits on deforestation and the implementation of re-forestation programs. Thailand also has pollution emission and control policies in place but these are not vigorously enforced (Poungsomlee and Ross, 1992). Pollution control and abatement programs are required for water, air, noise, and industrial pollution. Stricter controls over the harvesting of renewable resources is required to ensure that such resources are not destroyed or forced below sustainable levels (Duraiappah et al., 1999). Such resources may include marine or land animals and vegetation. Ensuring sustainability of these resources is a large part of ensuring sustainability of welfare. Increased attention on the provision of government services and the actual mechanisms of government is also required. Policies ensuring the protection of political and civil freedoms and reduction of corruption and responsible management of debt can all improve welfare. Both debt and corruption negatively impact welfare within the Thai ISEW. Even during periods of democratic freedom, the welfare of Thailand has been negatively affected by political corruption at all levels of society (Phongpaichit and Piriyarangsan, 1994; Linter, 1998). Corruption leads to inefficient allocation of resources (Parnwell, 1996). This is perhaps the most difficult policy change as its implementation must be prepared and enforced by those with the most to lose. External

organisations, such as Transparency International, may be required to assist in monitoring the effectiveness of anti-corruption. Whilst Thailand’s public debt does not compare to the debt burdens of other developing countries, it is still a matter of concern. In the past, public debt was acquired for unproductive use such as fuel subsidies (Dixon, 1999). Whilst short-term benefits may be received in the form of cheaper or increased consumption, the longer-term costs are greater. Servicing debt results in fewer funds available for essential services that can positively affect welfare such as health and education spending. Various policies capping debt or limiting it to productive uses only could be considered. Welfare can be enhanced with appropriate policies focussing on issues of commuting and urbanisation. Commuting has been recognised as a significant cost of economic growth in Bangkok (Poungsomlee and Ross, 1992). Within Thailand, this cost is extremely high as Bangkok is one of the most primate cities in the world (Dixon, 1999). Thai authorities have long struggled with how to ease congestion in Bangkok but with an additional 800 cars a day being registered in Bangkok (Bello, 1995), solutions appear impossible. Whilst the construction of new road lanes and the Skytrain, have reduced some travel times, this area must remain a priority for policy makers as it does impact on welfare levels (Ross and Thadaniti, 1995). The benefits of urbanisation have recently been highlighted (Venables, 2003; Fujita et al., 1999), however in extreme levels of urban density, such as Bangkok, the social costs may be greater than the economic benefits. Ten percent of the Thai population lives in Bangkok making it one of the most primate cities in the world. Policy measures might involve decentralisation incentives for government departments, business and industry, disincentives for locating new or expanding existing industries within urban centres, increasing services and rewards for those living in rural areas, or actively encouraging relocation to rural areas. Finally, a healthy spiritual sub-system results in the protection of the most vulnerable within society from being de-humanised (see welfare costs within the Thai ISEW of commercial sex work). This may involve the protection from exploitation of women, and children from commercial sex work or from utter object poverty.

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6. Conclusion The paper empirically applied a ISEW to Thailand over a 25-year period, 1975–1999. The results show that Thailand has begun to experience diminishing and negative welfare returns from economic growth (termed stunting economic growth). These results are not unique but have only been previously found for developed countries (bar one exception). As Thailand has begun to experience these diminishing returns at such a low-income level should be of great concern to policy makers who primarily rely on achieving economic growth to improve welfare levels. Further work is required in a number of developing countries to determine whether the experiences of Thailand are special or common and following Lawn (2003) further work is required to standardize ISEW composition and methodology to make it more accepted by policy makers. If diminishing and negative welfare returns from economic growth can be reached prematurely then alternative theories of development are urgently required.

Acknowledgements The authors would like to thank Dr. Adis Israngakurn (Thai Development Research Institute, Thailand) for his assistance in calculating the estimates for environmental damage, Dr. Phil Lawn (Flinders University) for his helpful comments, Professor Wolfgang Schade and one other anonymous reviewer. The authors also gratefully acknowledge the financial support of the Australian Research Council (grant LP0348013) in partnership with the Victoria Department of Premier and Cabinet, Australia and World Vision Australia.

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