Is Bhutan on the Cusp of a Rev­o­lu­tion in Pri­vate Sec­tor Growth?

Much work needs to be done, but Bhutan should cel­e­brate its quick progress on eco­nomic de­vel­op­ment.

Bhutan Times - - Editorial - By Mark Turner

Bhutan has made re­mark­able de­vel­op­men­tal progress since the 1960s when the Third King de­cided to end the Hi­malayan king­dom’s self-im­posed iso­la­tion from the rest of the world. Then, it took up to six days to travel from the In­dian bor­der to Bhutan’s cap­i­tal, Thim­phu. Now the jour­ney takes 5 hours on a paved road while one can catch flights from Paro Air­port to a va­ri­ety of in­ter­na­tional des­ti­na­tions.

Western-style education, which was vir­tu­ally nonex­is­tent in the 1960s, now caters to all chil­dren to the end of high school. There have been dra­matic im­prove­ments in life ex­pectancy, in­fant mor­tal­ity and poverty lev­els. GDP has con­sis­tently grown, of­ten at a rapid rate.

The Ber­tels­mann Trans­for­ma­tion In­dex (BTI) records rapid progress for Bhutan. In the BTI’s Sta­tus In­dex, which ex­am­ines the political trans­for­ma­tion to­wards democ­racy and a mar­ket econ­omy in de­vel­op­ing and tran­si­tion coun­tries, the coun­try has climbed from 110th rank in 2008 to a re­mark­able 54th place in the forth­com­ing BTI 2016 re­port.

How­ever, the eco­nomic growth that has sup­ported all wel­fare im­prove­ments has been largely govern­ment driven. The chal­lenge to­day is to gen­er­ate the pri­vate sec­tor ex­pan­sion that will pro­vide jobs and con­tinue to raise liv­ing stan­dards.

Bhutan’s econ­omy needs di­ver­si­fi­ca­tion

Eco­nomic growth in Bhutan has greatly re­lied on hy­dropower de­vel­op­ment from which the sur­plus out­put is trans­mit­ted to In­dia. But hy­dropower has not gen­er­ated much em­ploy­ment. Tourism of the high cost-low im­pact va­ri­ety has cre­ated ap­prox­i­mately 28,000 jobs in ho­tels, trans­port, hand­i­crafts and cater­ing. Other ser­vice in­dus­tries are typ­i­cally in retail and re­pair ac­tiv­i­ties and while such busi­nesses are nu­mer­ous they lack vari­a­tion and in­no­va­tion.

Large pri­vate sec­tor com­pa­nies are few in num­ber and state-owned en­ter­prises play ma­jor roles in the econ­omy. Agri­cul­ture con­tin­ues to be the prin­ci­pal source of liveli­hood for the 65 per­cent of the pop­u­la­tion who re­side in ru­ral ar­eas but the sec­tor has reg­is­tered lit­tle growth in re­cent years and ac­counts for less than 20 per­cent of GDP.

The govern­ment has iden­ti­fied the pri­vate sec­tor as the en­gine of growth for Bhutan in both the Tenth (2008-2013) and Eleventh (2013-2018) Five Year Plans. It has also ac­knowl­edged that the growth must be more broad-based and di­verse than it has been in the past. But there are con­straints to re­al­iz­ing the plans’ am­bi­tions for the pri­vate sec­tor.

Pri­vate sec­tor ex­pan­sion must be aligned with prac­tice of Gross Na­tional Hap­pi­ness

The first con­straint is the need to align pri­vate sec­tor de­vel­op­ment with the coun­try’s de­vel­op­ment phi­los­o­phy and prac­tice of Gross Na­tional Hap­pi­ness (GNH). This novel ap­proach to de­vel­op­ment re­jects fo­cus on GDP growth in fa­vor of poli­cies that foster good gov­er­nance, sus­tain­able so­cioe­co­nomic de­vel­op­ment, cul­tural preser­va­tion, and en­vi­ron­men­tal con­ser­va­tion.

The Prime Min­is­ter has ar­gued that “GNH and busi­ness can re­in­force each other,” while the Eco­nomic Affairs Min­is­ter has ob­served that GNH “chal­lenges busi­nesses to be in­no­va­tive and cre­ative, to re­spect en­vi­ron­ment, iden­tity and cul­ture.”

Ac­tions by suc­ces­sive gov­ern­ments have con­trib­uted to an im­prove­ment in the coun­try’s busi­ness en­vi­ron­ment which saw Bhutan rocket from 148th rank in 2013 to 71st in 2016 in the World Bank’s global Do­ing Busi­ness sur­vey. In large part this has been due to changed meth­ods of cal­cu­lat­ing cer­tain in­di­ca­tors but there has been a steady flow of mea­sures aimed at mak­ing more busi­ness-friendly reg­u­la­tions and en­hanced govern­ment pro­cesses.

Also note­wor­thy are the very low level of cor­rup­tion in Bhutan and the suc­cess­ful pro­mo­tion of good gov­er­nance es­pe­cially when com­pared to the coun­try’s South Asian neigh­bors.

Ge­og­ra­phy and in­fra­struc­ture still ad­versely af­fect pri­vate sec­tor de­vel­op­ment. The moun­tain­ous ter­rain and the an­nual mon­soon make it dif­fi­cult to con­struct in­fra­struc­ture that is “tech­ni­cally sound and cli­mate re­silient”.

Also, Bhutan is land­locked, bor­dered in the north by China and in the south, east, and west by In­dia. Bhutan has no re­la­tions with China and over 80 per­cent of its trade is with In­dia. Trans­ac­tion costs are high and in­clude ex­ten­sive doc­u­men­ta­tion, cus­toms pro­ce­dures and, given the coun­try’s land­locked sta­tus, the need to use ports in In­dia for trade with third coun­tries.

Education presents fur­ther prob­lems. Is­sues of ac­cess have been re­solved but qual­ity is the press­ing con­cern. Stan­dards vary across the sys­tem and are bi­ased in fa­vor of ur­ban ar­eas. There is also a mis­match be­tween the prod­ucts of the education sys­tem and the present and fu­ture needs and de­mands of the mar­ket.

Fur­ther­more, the schools and ter­tiary in­sti­tu­tions are pro­duc­ing ever larger num­bers of grad­u­ates but there are in­suf­fi­cient jobs for them. Many re­ject em­ploy­ment in agri­cul­ture and drift into the towns where youth un­em­ploy­ment rates are al­ready high.

The govern­ment needs to act as a cat­a­lyst for en­trepreneur­ship

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