The theory of development, which influenced the world from the mid-1940s to the 1970s, viewed the problem of less developed countries stemming from low capital and resource misallocation. Economists during this period believed that development was equivalent to a growth process that required high capital and resource reallocation from low-productivity agricultural sectors to high-productivity manufacturing sectors. Rostow (1960) argued that countries had to go through successive stages of growth, from the taking-off stage to the sustaining growth stage. Also, savings-led growth was considered essential (Harrod 1939; Domar 1957). However, there was a problem of capital accumulation in less developed countries—people were too poor to save. It was thought that foreign aid, together with the right combination of savings and investment, would solve the capital accumulation problem. These patterns of growth-driven development and structural change dominated development theory at that early stage (see, for example, Singer, 1950; Lewis, 1955; Kuznets, 1955; and Prebisch, 1962).
When the theory of a non-linear long-term growth process emerged, it was considered to be a reason why a country experienced multiple stable equilibrium. One equilibrium occurs at a high level of investment, thus resulting in high output and income. The other occurs at low capital and investment levels, which leads a country to a poor income situation. A country might be stuck in a bad equilibrium; such a situation is called a poverty trap. This poverty trap, together with problems of inadequate infrastructure, high social overhead capital and coordination failure, could impede the growth and development of a country for a long time. The Big Push or public-led policy helps accelerate the economy and pushes the economy out of the poverty trap (Rosenstein-Rodan, 1943; Nurkse, 1953).
Because of the successes of active Keynesian government and the Marshall Plan in the 1940s, the government was regarded as a prime mover in correcting all problems obstructing economic growth during this period. This type of economic development valued a strong role for the government. There were huge market interventions from the government, such as directing and coordinating investment flow, subsidizing investment, and opening new investment opportunities by creating new industries, especially in relation to import-substitution industries.
After the glory days of State-led development stressing capital accumulation and structural change, problems began in the 1970s. The record showed that, even with high income and industrialization growth rates, countries still suffered from high unemployment, high income inequality, excessive debt, high inflation, unbalanced growth and economic instability. As a result of these failures in the development process, the second era of development theory emerged in the late 1970s.
This phase of development theory is based on the neoclassical theory, originating from the works of Milton Friedman in the 1960s, which reasserted classical principles in new models. This phase of development theory viewed the problems of underdevelopment as resulting from overly active government. Therefore, sustaining growth and stability required that government interventions—which included price distortions in the domestic factors of production and commodity markets, and barriers to international trade—be removed. The economy would then achieve efficient movement of resources among sectors, appropriate technology adoption, and an increase in capital accumulation.
From the late 1970s to the late 1990s, government failure was blamed for impediments to development. Instead, laissez-faire government was suggested as more effective (Krueger, 1990). This was an era of neoliberalism, which emphasized liberalizing domestic and international markets for both goods and factors for production, which would help a country to achieve a sustained economic growth. This market-oriented development strategy dominated the world, especially during the 1980s. The Washington Consensus,1 a set of reforms aimed at stabilizing the economy via liberalization and openness, is evidence of the development thought during this stage.2 However, neoliberalism eventually lost some of its credibility because of unrealistic assumptions of efficient markets and resource allocation that a country would achieve through market liberalization. Stiglitz (2002) commented that, without higher capacity to cope with risk, liberalization increased countries’ risk exposure. Markedly, there were several economic collapses—such as the Mexican peso crisis in 1994, the Asian financial crisis in 1997 and the Russian ruble crisis in 1998. Also, most countries under the Washington Consensus performed poorly in terms of growth and poverty reduction (Rodrik, 2002). More importantly, the practice was not applicable to less developed countries that had been bombarded by problems of imperfect markets, incomplete or missing markets, asymmetric information, or dysfunctional or missing institutions.
The institutional problem is currently seen as one of the most challenging hurdles to development. The problem of dysfunctional or missing institutions is the root of several problems associated with market and non-market activities. Additionally, the new kinds of market failures, such as an incomplete market, transaction costs, imperfect and costly information, and the absence of futures markets (Meier, 2001, p. 21) interest economists because they are believed to be obstacles to economic growth and development.
Furthermore, capital accumulation was later seen as an insufficient source of sustainable economic growth. Technology and human capital are crucial for driving long-term economic growth. Effective use of human capital as well as the existence of a suitable institution that encourages the acquirement of technology, have been placed high on the research agenda because of the complementary effects between them.
The role of government has shifted from minimal to optimal.3 Government becomes more active when it takes on the important task of improving the institutional setup by strengthening or creating institutions. With the right institutions, economic incentives will be created and the market will function properly. Nevertheless, the government must pay attention, not only to economic matters, but also to social development issues, including politics. Still, the problem of good governance remains an agenda of development theory.
Others focus not on aggregate economic growth but on the broader aspect of development. At the 2006 Copenhagen Consensus Conference, well-known economists, United Nations ambassadors and senior diplomats from 24 countries (accounting for 54 per cent of the world’s population), prioritized current major world challenges4 that needed immediate attention. Those ranking at the top were: communicable diseases; sanitation and clean water; malnutrition and hunger; and education. All of them target improvement of people’s quality of life.
The Millennium Development Goals5 are also aimed at improving the well-being of people, especially in less developed countries. The Goals are to eradicate extreme poverty, to achieve universal primary education, to promote gender equality and to empower women, to reduce child mortality, to improve maternal health, to combat HIV/AIDS, malaria and other diseases, and to ensure environmental sustainability. Human well-being is considered a key to achieving all other aspects of development.
Another challenge to development concerns environmental issues. Environmental sustainability has received much attention in the international arena since the Brundtland Report, Our Common Future (WCED, 1987), was published. It is obvious that environmental degradation and depletion of resources are clear and present dangers, and pursuing economic prosperity at the expense of the environment and natural resources is considered unsustainable. Therefore, environmental protection and natural resource conservation are requisites for development.
From the previous discussion of past theories and other development concerns, there are still challenges in development that need to be addressed: the problems of institutions, of human capital, of environment and of the role of government.
This paper proposes a new theory of development: the philosophy of sufficiency economy. Both the theoretical framework and the practices of the philosophy are discussed in addressing the above-mentioned development challenges. The theoretical framework is in section II; section III presents the contribution of the philosophy to development concerns; and concluding remarks are included in section IV.