7 Mar, 2012

Replacing the Devastation of Greed-is-Good with Wisdom of Sufficiency Economy

Dr Supachai Panitchpakdi, Secretary-General, UNCTAD

“Sufficiency Economy and the Direction of Sustainable Development”

Speech delivered at the opening of the International Conference on the Sufficiency Economy, Bangkok, Thailand, 16 February 2012.

It is a great pleasure for me to be here, and an honour to address this prestigious gathering on the contributions that the concept of the Sufficiency Economy has made, and can continue to bring to addressing today´s economic woes, and to development economics more broadly.

As you well know, ever since the concept of the Sufficiency Economy was first presented by His Majesty the King Bhumibol Adulyadej in his Birthday address on 4 December 1997, it has received growing attention by economists, development specialists as well as international institutions, who have recognized its contribution to the development discourse. Indeed, in May 2006, the former Secretary-General of the United Nations, Kofi Annan, awarded His Majesty King Bhumibol Adulyadej of Thailand the United Nations Development Programme’s First Human Development Lifetime Achievement Award. Thus, the value added of the concept developed and practiced in Thailand has already gained recognition beyond the borders, particularly as it is so closely associated with Thailand´s development achievements.

EXHIBITION TO PAY TRIBUTE TO KING BHUMIBOL’S SUFFICIENCY ECONOMY PROJECTS AT QUEEN SIRIKIT NATIONAL CONVENTION CENTRE, BANGKOK, MARCH 8-12 The Office of His Majesty’s Principal Private Secretary, in collaboration with the Chaipattana Foundation, the Office of the Royal Development Projects Board, and the Bureau of the Budget, are organizing an exhibition on “84 Years of His Age, the True Happiness for the People,” to mark the 7th Cycle Birthday Anniversary of His Majesty the King on December 5, 2011. The event aims to publicize the royal activities, the royal initiatives, and the achievements of the Royal Development Projects initiated by His Majesty. HRH Princess Maha Chakri Sirindhorn will present royal trophies to the winners of the national contest on “the Application of the Philosophy of Sufficiency Economy”. The event will include a special seminar, activities, a photographic display and a 4D film. Organizer : Office of the Royal Development Projects Board (ORDPB). Tel : +66 (0) 2 447 8500-6. For more information, Please visit www.rdpb.go.th

Of course, the key pillars of the philosophy of the Sufficiency Economy as provided by his Majesty in his statements, are not, and never pretended to be, a fully-fledged economic model of development, in the sense of conventional economic theory. It does not include any quantitative models, fancy graphs, or econometric estimations that often underlie the complex concepts in modern economics. Instead, the philosophy of the Sufficiency economy stands out in its simplicity. Indeed, this simplicity has led some commentators to dismiss the concept as mere common sense or unhelpful. However, I tend to believe – and perhaps I am old-fashioned in this way – that simplicity is a virtue. Some of the most powerful concepts in science are simple. Indeed, we are now finding out that complex models that were used by financial institutions in recent years were themselves little more than cover for some very simple ideas that maintained, essentially, that markets are “self-regulating” and that “greed is good”. In practice, these ideas have led to shattered lives in communities across the world and must be put aside if we are to build more inclusive and sustainable economies in the future.

The Sufficiency Economy combines neatly distilled insights from the development experience of Thailand, particularly in the agricultural sector, with some fundamental values in Buddhist philosophy. It is also, of course, strongly influenced by the experience and lessons of the Asian Financial Crisis in 1997/98, which exposed the consequences of financial excesses and exuberance.

It is the purpose of this gathering of economists and scholars to draw out and elaborate some of these lessons. Of course, this conference could not come at a more appropriate moment. If the Sufficiency Economy concept was born out of the ‘catharsis’ of the Asian Financial crisis, we are today facing a very similar, yet much bigger, such ‘catharsis’ in the form of a protracted global financial crisis, which has not only had a disastrous impact on economies and livelihoods across the globe, but also – and perhaps even more devastatingly, thrown into question much of the accepted wisdom in economics.

The promises of liberalized international finance and the high rewards they have been able to deliver for a select few in a small group of countries have come to be paid for by taxpayers and the poor all over the world. Government interventions of trillions of dollars were needed to prevent a repeat of the Great Depression, and it is not yet clear if they have succeeded.

But, more importantly, the crisis also brought down the fundamental tenets of conventional development wisdom, such as the belief in the power of unfettered global finance to improve the allocation of resources and manage risk, or that integration into the world economy was in and of itself a development strategy. We therefore find ourselves at a crucial juncture where we have to re-examine and re-think development economics as we know it. In this context, one recent initiative that I think is worth noting is the work of the Commission on the Measurement of Economic performance and Social Progress set up by President Sarkozy of France in 2008 to examine the ways in which economists have traditionally measured social well-being and in particular to suggest ways to move beyond a narrow GDP metric.

In his Foreword to the report of the Commission, the president noted that “We are in one of those eras when, with our certainties shattered and our traditional ways of thinking shown to be impotent, everything has to be rebuilt and reinvented. We are in an era when the central question for politics is what model of development, what model of society and civilization, we aspire to live under and bequeath to our children”. I believe that this spirit should also guide us to consider the contribution that the concept of the Sufficiency Economy can make. And I think it can indeed make an important contribution. Let me therefore outline a number of areas, where I think that the Sufficiency Economy offers lessons for the new development paradigm. Lessons that I wish had been learnt earlier.

Ladies and Gentlemen,

As you know, the concept of the sufficiency economy highlights the need for moderation, and stresses the ´middle path´ as the overriding principle for appropriate conduct, be it at the level of the individual, families or communities, or in the adoption of a development strategy. Thus the Sufficiency Economy aims to avoid excessive environmental degradation, or “excessive dependence on” international borrowing and international trade, so as to reduce one´s exposure to risk and to protect oneself against outside shocks (such as the Asian Financial Crisis). Added to that is a concern over the loss of the moral fabric and communal links in a society that seems to be pursuing only economic growth and material accumulation.

It is important to point out that the Sufficiency Economy should not be confused with the concept of self-sufficiency, or turning away from the world economy. His Majesty, the King has been careful to point out that he does not mean to advocate for autarchy. In his writings, he has said that, for example, farmers should first of all produce for themselves, and only devote one-third of their land to producing goods to trade. And even then, they should sell their surplus preferably in nearby villages. Similarly, with regard to international borrowing, the King has said that there is no need to be fully independent of the outside world. One can borrow, so as to make some sound investments, but only so much that one can repay the debt incurred. The idea of moderation plays a role here. Thus, the main thrust of the Sufficiency economy approach is, therefore, to find ways of engaging in a balanced manner, safely and inclusively, with a globalizing world. It emphasizes development from within, self-protection, conservation, caution and moderation, which calls for the sustainable use of resources and concern for the social and environmental impact of economic decisions.

I think that this approach contains a number of important insights for today´s development challenges. Let me therefore name a few of them.

1) Agricultural production

The first case, and perhaps the most obvious, is rural development through agriculture. It is here that the sufficiency economy approach has demonstrated its effectiveness most clearly. I will not dwell on this case, because the evidence speaks for itself and has been widely acknowledged. His Majesty´s rural development projects have benefited many people across Thailand by promoting small-scale agriculture, appropriate farming technologies, sustainable use of water resources, conservation, and flood and drought mitigation.

Thailand´s experience in rural development has helped lift millions of people out of poverty and provided a framework for balanced and sustainable agricultural development. As such, it may serve as a useful model to be replicated in other parts of the world were agricultural productivity has been stagnating. Indeed, it has been estimated by the UN Economic and Social Commission for Asia and the Pacific that raising the average agricultural productivity of the Asia-Pacific region to that of Thailand could take over 200 million people out of poverty and reduce inequality. And beyond our region, there is an even great need for improvements in agricultural productivity in sub-Saharan Africa. Indeed, the recent food crisis has painfully exposed the decade-long stagnation of the agricultural sector in African countries. We urgently need to address this issue if we are to address the problem of hunger. I am convinced that Thailand´s sufficiency economy model has something to offer in this regard.

2) Financial excesses

Just like the Asian crisis in 1997, the recent global financial crisis has once again exposed the folly of a globalization driven by unfettered speculative capital flows and related financial interests. And yet, for many decades, international financial flows have emerged as an increasingly dominant feature of the global economy and now dwarf measures of the real economy: to give just one example, by 2006, the value of global financial assets was almost three and a half times global GDP. Yet, contrary to what has been promised, liberalized capital markets do not serve to allocate capital where it is most needed to support the creation of productive capacities, mitigate and manage risks efficiently or ´end the business cycle as we know it´. Instead, it has once again been shown that financial markets are subject to herd behaviour, prone to speculative bubbles, and regularly lead to disruptive financial crises. Thus, we now know, as we should have already known after the last crisis, that deregulated financial markets are prone to give rise to fragile economies. It is exactly these kinds of dangers that the Sufficiency economy framework cautions us against when it calls for limits in exposure to risk.

The risks are partly created by an incentive structure that rewards pursuit of short term opportunities for profit, even at the expense of longer-term development objectives. This has meant that banks and traders developed ever more convoluted financial instruments to diversify (or hide) risks, and were willing to take in increasing levels of risk to maximize profits. Competitive pressures between banks only accelerated this dynamic. Just consider that by the summer of 2007 – just before the crisis hit – the systemically important European banks had a leverage ratio of 45 to 1, while for US banks it was about 34 to 1. This means that only one 34th of a bank´s loans needed to go bad in the US for the bank to go bust (or rely on assistance from the state).

We should also remember that the dominance of finance had another key consequence, namely significant increases in inequality. The benefits and profits arising from capital mobility accrued only to a select few, while the search for short term profits has meant that the majority of people experienced pressure on wage rates, greater job insecurity and stagnating living standards. In the UK, for example, executive pay has continued to spiral this year, while seven out of ten employees are facing a pay freeze or pay cut. Even since the beginning of the crisis, the number of billionaires in the world has continued to grow by nearly a third. In the US, corporate profits have risen sharply, and businesses have taken advantage of the slump to shed labour, cut hours and halt pay increases. Corporate cash holdings are near record levels.

This level of inequality created by finance-driven globalization is not only morally undesirable. It is also bad economics. High levels of inequality create a natural tendency to deflation, as depressed wages lead to lower demand. Concentrating large profits in the hands of a few also increases the likelihood of bubble economies and reinforces the dominance of financial interests, thus exacerbating the risks and inequalities that created them in the first place. Milanovic summarises the destructive logic as follows:

The root cause of the crisis is not to be found in hedge funds and bankers who simply behaved with the greed to which they are accustomed (and for which economists used to praise them). The real cause of the crisis lies in huge inequalities in income distribution that generated much larger investible funds that could be profitably employed. The political problem of insufficient economic growth was to be “solved” by opening the floodgate to cheap credit. And the opening of the credit floodgate, to placate the middle class, was needed because in a democratic system an excessively unequal model of development cannot exist with political stability.

With these new insights, it is clear that we must reign in global finance to once again become a tool to finance long-term development, rather than a source of risky speculative flows. Ever since the crisis, several proposals have been made to increase regulation of banks and global financial flows, yet the resistance has been strong. Stronger regulation, for example in the form of higher capital requirements, reduces the risk exposure as well as the profitability of banks. However, it increases the protection against systemic crises. The same would be true for the proposed tax on international financial transactions, which has the added benefit of possibly raising significant amounts of capital. There is a balance to be struck here, and recent events remind us that perhaps this balance was off. The guidelines of the Sufficiency Economy remind us that in striking this balance, moderation is best. Again, I wish it had been learnt earlier.

3) Trade

Just like in the area of debt and finance, the concept of the Sufficiency economy cautions against excessive exposure to risk in trade. Of course, it does not mean to question the theory of the gains from trade, nor does it preach autarchy. But it draws attention to the need for a sound balance between production for the domestic market and exports. This is one hard lesson that many countries in this region are learning today. We all know that the initial take-off in the Asian region was largely export-led. However, this has also meant relying heavily on demand for their exports in other growing economies, particularly in Europe and America. This required developing a production structure geared to meeting the needs of exports markets. However, once the crisis decreased demand in foreign markets, many of the East Asian economies have been forced to rethink their policies with a view to increasing production for domestic and regional demand. A more pragmatic approach, in line with the Sufficiency Economy philosophy, would require a careful balance between covering essential needs through local production and exporting any surplus to help meet other needs through imports.

4) Inclusive growth

Another idea closely related to the sufficiency economy is that of inclusive development. We have seen that GDP per capita alone can be a highly misleading indicator of development. After all, growth is not a goal in itself but only valuable to the extent that it translates into social and human development objectives (such as improved health care, public services, higher literacy etc.). However, in many cases, conventional development models have focused on trade integration or GDP growth, and paid insufficient attention to the underlying human development indicators. For example, some of the poorest countries have achieved significant growth rates just prior to the crisis. However, in many cases, this growth was really due to high prices of oil, and its benefits mainly accrued to elite within the country with access to the oil revenues. The large majority of the population did not see any benefits from the growth, and human development did not improve. The same can happen with trade integration. In many developing countries the opportunities arising from trade liberalization only accrue to a few advanced industries, while the majority of the population works in sectors that are squeezed. A more inclusive development policy should therefore take into account poverty, employment and social objectives.

5) Environmental sustainability

A fifth area in which modern development theory stands to learn from the Sufficiency economy concerns environmental sustainability. It is widely recognized that the development path adopted by today´s advanced countries has not properly accounted for its (ab)use of “natural capital” or damage to ecosystems and that, given current technologies (or those on the horizon), the Earth´s ecological limits do not permit the replication around the world of the patterns of production and consumption of the advanced countries. Fossil fuelled industrialisation has, over the past two centuries, helped those countries achieve unprecedented increases in living standards but at the cost of a build up of carbon emissions that have overrun the absorptive capacity of the atmosphere and brought about dangerous and potentially irreversible changes in the earth´s climate.

Despite a growing awareness of those limits, the world remains far from finding ways to correcting mounting environmental imbalances or the catastrophic outcomes which the scientific community predicts for the planet. Recent evidence that carbon emissions have continued to rise even during the recession adds to concerns that the planet is heading towards dangerous tipping points beyond which it may become impossible to recover a recognizable form of ecological balance.

For many developing countries, these environmental threats are already adding to the vicious circle that traps them at a low level of income, degrades their resource base and constrains their ability to build resilience to withstand future shocks. Recent estimates suggest that 300,000 people die each year because of global warming, while 300 million lives are seriously threatened by the ongoing environmental transition. Unfortunately, so far an environmentally sustainable growth path for the global economy has proved an elusive goal. This is due to the inability of the market to adequately reflect the true environmental costs of production in prices, and the inability or unwillingness of governments to correct this market failure. In addition, a comprehensive solution to the global environmental challenges will also have to recognize the closely interrelated nature of development and environmental challenges.

It would be economically unrealistic and morally unacceptable to demand that, as part of their contribution to addressing the climate challenge, the developing countries should compromise their economic growth ambitions in order to protect much higher living standards elsewhere. Rather, new partnerships will have to be formed around the development and diffusion of green technologies, large-scale retrofitting programmes, the coordinated replacement of energy-intensive patterns of production by alternatives fuelled by renewable sources, and changes in trade patterns supporting the transition of the global productive matrix towards environmental sustainability. The only way to close income gaps, within and across countries, while building a low carbon, high growth global economy is through a shift to a new modality of global development encompassing economic, social and environmental dimensions.

These are only some of the areas, in which I think the philosophy of the Sufficiency economy is in some ways ahead of conventional economic wisdom. Of course, it does not yet offer a comprehensive alternative in and of itself. But, with the help of gatherings like this, I am sure that it can be developed further and inform a new development thinking that has learnt the lessons of past failures. The Sufficiency Economy reminds us that optimization does not always equal maximization, but, in many cases, moderation.

I hope that this time around, we will learn this lesson.