diminishing and negative welfare returns of economic growth: an index of sustainable economic...

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Ecological Economics

ANALYSIS

Diminishing and negative welfare returns of economic growth: an

index of sustainable economic welfare (ISEW) for Thailand

Matthew Clarkea,*, Sardar M.N. Islamb

aSchool of Social Science and Planning, RMIT University, G.P.O. Box 2476V, Melbourne, Victoria 3001, AustraliabCentre 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

Available online 3 February 2005

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

0921-8009/$ - see front matter D 2004 Elsevier B.V. All rights reserved.

doi:10.1016/j.ecolecon.2004.10.003

* 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-

54 (2005) 81–93

M. Clarke, S.M.N. Islam / Ecological Economics 54 (2005) 81–9382

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 degra-

dation 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; Hamil-

ton, 1998; Jackson and Marks, 1994; Lawn and

Sanders, 1997; Rosenberg and Oegema, 1995; Stock-

hammer 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 prema-

turely 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 con-

cludes 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 implement-

ing 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 eco-

nomic 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

M. Clarke, S.M.N. Islam / Ecological Economics 54 (2005) 81–93 83

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

Economic sub-system

Spiritual sub-system

Social susystem

Ecologicalsystem

Fig. 1. Representation of interco

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; Die-

fenbacher, 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 con-

clusion of these studies was that at a certain point, the

costs of achieving economic growth begin to out-

weigh the associated benefits resulting in falling

Political sub-system

b-

Environmental sub-system

parent

nnected systems analysis.


welfare. At this point, (the threshold point), further

economic growth reduces welfare. The policy impli-

cations are significant as they challenge the under-

lying 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 character-

ised by low-income levels, high underemployment,

political instability and poor social capital. Economic

growth is expected to remedy these ills. However, if

Table 1

Summary of adjustments for Thai ISEW

Item Positive/negative Rationale

Personal Consumption Basis of ISEW

Income Inequality Accounting for inequalit

Adjusted Personal

Consumption

Adjusted base for index

Public Expenditure

on Education

Positive Adding in non-defensive

expenses

Public Expenditure

on Health

Positive Adding in non-defensive

expenses

Commuting Negative Subtracting costs for tim

Urbanisation Negative Subtracted for defensive

private expenditure

Private Expenditure

on Health

Negative Subtracted for defensive

private expenditure

Public Expenditure

on Roads

Positive Accounting for services

included in public expen

Consumer Durables Positive Accounting for services

included in public expen

Corruption Negative Subtracting for unaccoun

political costs to society

Debt Negative Subtracting for unaccoun

political costs to society

Air Pollution Negative Subtracting costs of

environmental damage

Water Pollution Negative Subtracting costs of


Noise Pollution Negative Subtracting costs of


Deforestation Negative Subtracting costs of


Long Term Environmental

Damage

Negative Subtracting costs of


Commercial Sex Work Negative Unaccounted costs to

spiritual system

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 incor-

porate the unreported costs (and benefits) of achiev-

ing economic growth is based on an implicit premise

that the economy is part of a larger interrelating

system (Clarke, 2004). Assuming that society is

Methodology

From Thai National Statistics Office (NSO) (1997, 1999)

y Equally distributed equivalent level of income Atkinson’s

(1970)

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).

e lost 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)

not

diture

50% of all public expenditure on roads (Daly and Cobb,

1990; NSO, 1997, 1999)

not

diture

10% of expenditure on cprivate consumer durables

(Daly and Cobb, 1990; NSO, 1997, 1999)

ted 0.0088% of GDP (1975–1981), 0.0074% of GDP

(1982–1988), 0.007% of GDP (1989–1999) based on

Phongpaichit and Piriyarangsan (1994)

ted 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)

Table 2

Summary of calculations—ISEW for Thailand

Income Distribution (cost) I ¼ 1�Pn

i¼1ðyi=lÞ1=1�a ap1

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

(benefit)

CD=Cd(0.1)

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=[(7.5�IP)+(7.5�4.6�MP)]�2

Noise Pollution (cost) N=GDP(0.01)

Deforestation (cost) D=DF(886)

Long-term Environmental L=cCDt+cCWRt+cCFt


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 intercon-

nected 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 sub-

systems 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.
Damage (cost)
Commercial Sex Work

(cost)

CSW=GNP (0.3)

where: I=measure of income inequality; yi=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 kilo-

gram); 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=munici-

pal population BOD; BOD=biochemical oxygen demand; N=cost of

noise pollution; GDP=gross domestic product; D=cost of deforesta-

tion; DF=hectares of deforestation; L=cost of long-term environ-

mental damage; cCDt=cost of carbon emissions of deforestation,

=21.59�tonne of carbon emission; cCWRt=cost of carbon emissions

of wet rice farming, =21.59�tonne of carbon emission; cCFt=cost of

carbon emissions of fuel consumption, =21.59�tonne of carbon

emission; CSW=cost of commercial sex work industry; GNP=gross

national income.

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 adjust-

ments may cross-over various components (i.e.

commuting could be considered an adjustment for

social, political, environmental and even spiritual sub-

systems—sitting in a traffic jam provides a wonderful


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 Thai-

specific adjustments are corruption, debt and com-

mercial 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).

Table 3

ISEW per capita and GDP per capita for Thailand, 1975–1999 (1988 pric

Year Economic

(millions

of baht)

Social

(millions

of baht)

Political

(millions

of baht)

Environmenta

(millions of ba

1975 289,271 �14,226 �3336 �81,373

1976 309,968 �14,380 �2771 �80,580

1977 333,312 �17,629 �5263 �137,464

1978 348,689 �17,828 �4460 �145,862

1979 368,041 �17,613 �5865 �70,782

1980 386,847 �16,607 �7034 �75,363

1981 405,849 �20,549 �8540 �79,451

1982 408,616 �17,597 �10,231 �83,773

1983 432,608 �17,658 �11,473 �83,698

1984 438,488 �21,985 �13,914 �87,772

1985 439,241 �25,719 �15,881 �90,177

1986 447,554 �28,279 �18,989 �74,774

1987 483,945 �35,342 �17,922 �78,871

1988 521,801 �43,117 �17,445 �85,397

1989 552,434 �48,866 �16,382 �91,478

1990 603,071 �54,663 �10,593 �113,112

1991 622,392 �60,523 �7050 �120,985

1992 655,585 �63,159 �2937 �126,737

1993 719,644 �57,618 781 �134,028

1994 785,056 �57,295 3409 �141,474

1995 853,737 �59,299 8159 �150,382

1996 929,336 �66,005 10,343 �158,653

1997 932,210 �65,835 2765 �163,368

1998 830,688 �55,185 �292 �163,192

1999 832,001 �70,019 �7335 �148,076

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 incorpo-

rates the various social concerns around welfare that

are not adequately captured using individual prefer-

ence 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 techni-

que 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 Piriyar-

angsan, 1994; Phongpaichit et al., 1998; World Bank,

2000).

es)

l

ht)

Spiritual

(millions

of baht)

ISEW

(millions

of baht)

ISEW

per capita

GDP

per capita

�18,646 171,690 4050 14,662

�20,371 191,866 4440 15,754

�22,430 150,526 3400 16,942

�24,558 155,981 3449 18,237

�25,744 248,037 5379 18,819

�27,190 260,653 5550 19,458

�28,562 268,747 5614 20,206

�30,133 266,882 5464 20,883

�32,043 287,736 5811 21,729

�33,754 281,063 5556 22,504

�35,137 272,327 5258 22,996

�36,950 288,562 5448 23,722

�40,599 311,211 5777 25,561

�46,051 329,791 6000 28,380

�51,838 343,870 6153 31,316

�57,650 367,053 6519 34,565

�62,420 371,414 6520 37,073

�66,967 395,785 6849 39,506

�72,808 455,971 7816 42,765

�79,645 510,051 8631 45,174

�86,771 565,444 9510 48,511

�91,513 623,508 10,372 51,489

�89,590 616,182 10,132 49,691

�79,414 532,605 8665 45,348

�82,165 524,406 8505 45,789


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.

0

10000

20000

30000

40000

50000

60000

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

ISEW per capita (1988 prices

Fig. 2. Comparison of ISEW per capita and GDP per capita me

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 money-

metric 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

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

) GDP per capita (1988 prices)

asures of welfare for Thailand, 1975–1999 (1988 prices).


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 commer-

cial 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

0

50

100

150

200

250

300

350

400

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

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

Fig. 3. Comparison of ISEW per capita and G

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. Duringperiods 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.

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

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

DP per capita for Thailand, 1975=100.


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, theoret-

ical 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 con-

sidered 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 coun-

tries. 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 unad-

justed 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.

A balanced approach to achieving economic

growth is required. Economic growth should not be

the only priority within government policies. Eco-

nomic 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 sub-

Saharan 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 consid-

ered 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 eco-

nomic 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; Deolali-

kar, 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


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. Re-

emphasising 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 bio-

diversity and the ability of the ecology to withstand

other stresses. Policies may cover limits on de-

forestation 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 corrup-

tion 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 (Phongpai-

chit and Piriyarangsan, 1994; Linter, 1998). Corrup-

tion 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 effective-

ness 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 con-

sumption, 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 depart-

ments, business and industry, disincentives for locat-

ing new or expanding existing industries within urban

centres, increasing services and rewards for those

living in rural areas, or actively encouraging reloca-

tion 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.


6. Conclusion

The paper empirically applied a ISEW to Thai-

land over a 25-year period, 1975–1999. The results

show that Thailand has begun to experience dimin-

ishing 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 diminish-

ing 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 Isranga-

kurn (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 Depart-

ment of Premier and Cabinet, Australia and World

Vision Australia.

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