DE

Bhutan
Lessons from Bhutan: The Bhutanese Economy and the Private Sector

Punakha Dzong
Punakha Dzong, Bhutan © Karma Choden

Overview

The Bhutanese economy commercialized only after 1961 when the first development plan began. Prior to that, it was a small and scattered population relying heavily on subsistence agriculture. The little trade that existed was bartering and exchange of surpluses within communities. Records show that external trade with Tibet in the north and the Indian state of West Bengal existed. Annual trade was recorded at Rs. 200,000with West Bengal and Rs. 150,000with Tibet.[1] In between India and Tibet, it is also reflected that the trade was of transitional with Bhutan trading goods originating elsewhere such as tea, gold, salt, pearls, and coral. 

Since 1961, Bhutan’s economic development plans are outlined in the Five-Year Plans (FYP) of Bhutan. The planning cycle articulated socioeconomic development priorities for implementation over a five-year period with overarching emphasis on either infrastructure, poverty alleviation, agriculture and animal husbandry. Bhutan is in its 12th FYP (2018-2023) with the objective of creating a ‘Just, Harmonious and Sustainable Society through enhanced Decentralization’.

When planning began in 1961, despite the economy being reliant primarily on agriculture, there was slow broadening of the economic base in the budding sectors of health, education, infrastructure, and roads. The Bhutanese people were engaged in activities other than farming. These changes led to higher standard of living, social and cultural indicators in part driven by hydropower, tourism along with supportive fiscal and monetary policy.[2] According to the World Bank, Bhutan had experienced an annual average economic growth of 7.6% between 2007 and 2017. Bhutan had a single-digit inflation, a stable exchange rate, and accumulating international reserves indicating a stable economy during the period. The Asian Development Bank (ADB) had projected Bhutan’s GDP to grow by 6.0% in 2020, which has since been hampered by the COVID-19 pandemic. The GDP projections have been revised and expected to contract by 3.4% in 2021 and grow by 3.7 % in 2022.[3] The GDP (current 2018) for Bhutan is USD 2.535 billion, with exports of USD 595.8 million and imports of USD 948.5 million with a balance of trade of USD (388.7) million.

The economic structure of Bhutan is divided into primary (agriculture), secondary (industry) and tertiary sector (services). The agriculture sector continues to absorb the majority of the workforce by employing 51.1% of the working population despite accounting for only 16.2% of GDP.[4]  There continues to be a disparity in income with the average income earned by a worker in the industry and the service sectors is Nu 354 and Nu 604 per hour, , while it is only Nu 67 per hour in the agriculture sector.[5] The contribution of the industry and service sector  is 41.8% and 42% (2017 est.)[6] while employing 23.3% and 34.9% of the workforce. The unemployment rate is calculated at 2.7 % (2019).

Most trade is conducted with India with which it shares a preferential trade agreement and accounts for over 80 % of its trade, with higher imports from India. This continues to reflect underlying economic fundamentals of high dependency on imports that includes a large expatriate labour force, grants, aid, and debt.  Most of the country’s top exports, apart from electricity, is in the natural form, while the top imports are fossil fuels, like petrol and diesel, hydropower equipment like turbine, vehicles, and rice.  

Despite economic growth brought on by hydroelectricity generation, the linkages of hydropower development have remained minimal with low job creation. Apart from the civil service, the tourism sector generates the highest employment. With the ‘high value, low impact’ tourism model, it has created over 30,000[7] jobs across the service industry inclusive of transport and handicrafts. The growth in other sectors continue to be government driven with the private sector at the periphery. At times, the government dominance across all important sectors and agencies are considered in direct competition with the private sector.

Currently, the private sector in Bhutan is predominantly characterized by small-scale enterprises in trade, industry, and services. There are around 14,000 establishments employing around 74,000 persons.[8] The private sector is dominated by two economic sectors—wholesale and retail trade with 60% of the total establishment and 24.1% of employment; accommodation and food service activities with 21% or 2,900 establishments; and manufacturing with only 5.1% of the establishments employing around 14.5%, indicating the low employment elasticity of industries. The construction sector which accounts for only over 1% of the total number of establishments employs 18.5% of the total employment.[9] Though the businesses licenses have continued to grow over the years, they tend to lack variation.

There is cognizance from the government that the role of the private sector needs strengthening having identified it as the ‘engine of growth’ for Bhutan from the 10th FYP onward. Given that the stable macroeconomic and political environment, the abundant natural resources, and the growing number of educated youths joining the labour market, the conditions are right for fast-tracking private sector development so as to fulfill its potential to contribute to GNH through creation of more opportunities and a higher standard of living. As an overarching development philosophy, Gross National Happiness (GNH) ensures a holistic and sustainable approach to development and strongly advocates a harmonious balance between material and non-material dimensions of development. A GNH Policy Screening Tool and a GNH Project Screening Tool are used by the Gross National Happiness Commission (GNHC) to determine suitable policies and projects for implementation by relevant ministries and sectors. Any investments that are considered to impinge on aspects of GNH are included in the negative list, which leaves businesses to constantly innovate. This element could add another layer of burden that may obfuscate the growth of the sector with added challenges and costs.

The Bhutanese private sector is impeded by inherent constraints of being a sparsely populated, landlocked and mountainous country. These factors impact the economies of scale while raising the cost of manufacturing and transportation. It continues to deal with operational challenges such as limited access to finance, low technology and limited innovation and at times must compete with the state-owned companies (SOEs) in their own backyard.  Unlike the SOEs, the private sector continues to experience higher rate of attrition, funding constraints, and innovation and specialization constraints. 

Bhutan has consistently been in the top 20 most peaceful countries in the world[10] and has enjoyed over a century of political stability. Low levels of corruption and a growing English educated population with access to the one of the largest markets in the world should have enabled the promotion of a broad-based private sector growth far more rapidly.

Over the years, there have been considerable efforts made by the government that have improved the ease of doing business. The government has prioritized enhancing the investment by revising regulations such as the Economic Development Policy, FDI policy, and investment ownership in recent times. The Ease of Doing Business Index 2020 ranked Bhutan 89 out of 190 countries, with an overall score of 66.0. The number of days for starting a new business and registering property has reduced significantly streamlining paying taxes, enforcing contracts, getting credit, and electricity. In addition, the draft strategy of GNH 2008 has identified areas of opportunities with areas amongst which ‘innovation, creativity and enterprise’ ‘enabling environment’ and ‘national spatial policy’ should lend significance to the strengthening of the private sector in Bhutan.

The impact of modernization has been immense for Bhutan, socially and culturally. The high-income disparity between rural and urban and unemployment, despite a youth literacy rate of 93.1%, continues to morph into higher drug offences and crime rate. Further, the Covid-19 pandemic upended the economy with the subsequent suspension of tourism and closure of the international borders. In response, the government introduced various fiscal and monetary mitigation programs and strategies to protect the economy and general population. A National Credit Guarantee Scheme (NCGS) was introduced as a counter cyclical policy measure during the COVID-19 pandemic to enhance access to finance. It eased access to credit with guarantees for loans for establishing viable businesses without collateral. The supply and movement of essential goods continued seamlessly during the pandemic and lockdowns.  Bhutan’s success in handling the vaccination drive efficiently with the 93% of the adult population vaccinated within 16 days of the vaccination campaign was lauded globally.

A robust recovery and growth are expected from 2022 onwards for the Bhutanese economy. However, with no end in sight for the pandemic, it would require a revival of dialogue and commitment between the government and private sector towards creating a space from whence rhetoric and reality converge to strive for sustainable socioeconomic growth and avoid pitfalls that could threaten the fabric of Bhutanese society in the mid- and long-term.

[1] Gupta, British Relations with Bhutan as cited in Sarkar, R., & Ray, I. (2006), Two Nineteenth Century Trade Routes in the Eastern Himalayas: the Bhutanese trade with Tibet and Bengal

[2] The World Bank

[3] Retrieved from https://www.adb.org/countries/bhutan/economy on 28th May 2021

[4] RMA (2020), Annual Report.

[5] RMA (2020), Annual Report (pg. no. 38)

[6] NSB (2020), Annual Statistics.

[7] Retrieved from The BBS (2019), www.bbs.bt

[8] National Statistical Bureau (2018-19), Economic Census of Bhutan.

[9] (ibid).

[10] Institute for Economics (2020), Global Peace Index.