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Bhutan's Development Report

Research · January 2020

DOI: 10.13140/RG.2.2.20405.01761

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 Elisabeth do Rosário Vicente
ECON 262
Country Project – Stage II

Bhutan’s Development Report

Introduction

Bhutan is a small country sandwiched between the Himalayas in the border of India and China. It

has scattered population patterns of settlement, which can be explained by the steep mountains and deep

valleys found on the landlocked country. Bhutan only began to open up to outsiders in the 1970s since the

Wangchuck hereditary monarchy wielded power in 1907. But the county became a two-party parliamentary

democracy after elections in March of 2008. Jigme Khesar Namgyel Wangchuck succeeded his father, King

Jigme Singye Wangchuck, as a head of state in December 2006 after the former monarch announced his

abdication. His predecessor had ceded some of his absolute powers in 1998 and ruled in conjunction with

the government. Tshering Tobgay was elected Bhutan’s second and current prime minister in July 2013,

succeeding Jigme Yozer Thinley.1 The nation enjoys a great and unique philosophical guide for its

development called Gross National Happiness (GNH), a development measure that only Bhutan as a

country uses.2 The country also boasts an abundance of water resources, thereby creating ideal hydropower

harnessing conditions that, in turn, spearhead the economic growth. Revenue generated from the

hydropower aids in financing enormous investments in human capital resulting in critical developments in

various sectors such as service delivery, education, and health. Electricity access is almost universal;

however, about 96% of the population had functional piped water access in 2015.3 Besides hydropower,

1
“Bhutan Country Profile” BBC News, February 14, 2018, accessed January 20, 2020.
2
Isabel Sebastian. “Business and Corporate Social Responsibility in a Gross National Happiness Economy: Insights
from Bhutan.” In Proceedings of the International Association for Business and Society, vol. 26, pp. 24-38. 2015.
3
Ibid.
agriculture and forestry are the primary sources of earning one’s livelihood for more than half the Bhutan’s

population.

Bhutan’s Development Indicators

Bhutan has had no terrorism or national violence cases, hence a stable environment that makes

economic conditions flourish, and has promoted social improvement in recent years. Following the former

king’s push for democracy and a subsequent parliamentary election in 2008, Bhutan has developed a

reliable and robust system of managing its developmental procedures based on GNH.4 The GNH and its

components are shown below:

Illustration of Bhutan’s GNH

Fig 1. Source: dailybhutan.com

The country was able to complete its third political elections in history in 2018, and the government

that took over endorsed the First Five-Years Program (FYP) for 2018-2023, which is their 12th FYP overall.

It continues to maintain healthy relations with India in terms of economic developments and strategic plans.

India is the leading trading partner of Bhutan and provides foreign aid when needed as well as being the

financier and chief buyer of its hydropower.5 However, Bhutan experiences earthquakes, heavy floods,

4
Balasubramanian, Sriram, and Mr. Paul Cashin. Gross National Happiness and Macroeconomic Indicators in the
Kingdom of Bhutan. International Monetary Fund, 2019.
5
Ibid.

2
landslides and forest fires as forms of natural calamities and stands vulnerable to risks due to these natural

disasters and climate changes.

In the past decade, Bhutan’s level of poverty has been reduced by about two-thirds, and this has

propelled the nation to join the lower-middle economy. Since the early 1980s, the country has been having

an averaged growth in Gross Domestic Product (GDP) of about 7.5 %. The growth has distinguished Bhutan

as one of the fastest-growing world economies.6 Gross National Income per capita was around $3,080 in

2018, which constitutes three times the threshold for lower-middle-income countries as well as is 10%

below the threshold for the upper-middle-income. The country has enjoyed a massive poverty decline from

36% in 2007 to 12 % in 2017, according to the $3.20 poverty line measurement conducted in 2011, as

shown in the figure below. Bhutan’s shared prosperity has significantly progressed, but the pace has slowed

down mainly because of climate change affecting the agricultural sector and the hydropower fluctuations

that the government relies on to raise the revenue.

Bhutan’s Population Poverty rates (2007-2017)

Fig 2. Source: Bhutan Poverty Analysis Report 2017

In terms of the Human Development Index (HDI), which is measured by health, education, and

living standards, Bhutan has experienced an HDI increase of about 20.1% from 0.510 to 0.612 in 2005 and

6
Shibli A. Khan, et al. “An Empirical Study on Export, Import, and Economic Growth in Bhutan.” (2019).

3
2017, respectively. This has seen an improvement in life expectancy, per capita income and education

acting as a fulfillment to sustainable development that the globe aspires to achieve by 2030, as seen in the

graph below:

Fig 3. Source: bbs.bt

Bhutan’s Development Progress

Bhutan’s economic development continues to be dominated by hydropower as well as a fostered

commercial relationship with India. Its economic growth was estimated to have recovered to 5% according

to the fiscal year 2019.7 This follows a decline from 4.6% in the previous fiscal year that was caused by

delays in maintenance and on-board of two primary power-producing plants: Mangdechhu and Tala. On

the side of demand, growth was stimulated by consumptions as exports. Such order reflects the

overwhelming progress in the maintenance of hydropower and the public’s response to demand the

associated income inflows. As far as supply, services form the primary driving force, where both retail and

wholesale trade have appeared to be the central contributing sub-sectors.

7
Ibid, 25.

4
 The graph below indicates that the rate of poverty is inversely dependent on the level of education

and varied based on rural or urban base. People with no level of education recorded a 1.2 poverty rate in

urban areas and 10.5 in the rural areas. Conversely, people whose education is beyond grade 12 experienced

zero poverty rates. The graph, therefore, suggests that poverty levels in Bhutan are dependent on the level

of education and the place of residence.

Fig 3. Source: kuenselonline.com

Significant developments in the sector of hydropower have contributed to a reduction of the

outstanding account deficit to 16.3% of the GDP in the fiscal year 2019. This is the result of exports from

the Tala plant that increased after it was expanded following the completion of its maintenance work. In the

same fiscal year, tourist arrivals have increased as well by about 8%. The outstanding account deficit was

mainly funded by inflows of capital from India.8 The labor market experienced little progress due to the

lack of jobs and poor job standards in the labor force, which fell slightly from 65.6% to 62.6% in 2017 and

2018, respectively.

Bhutan’s agriculture accounts are a staggering 10% of the total GDP of Bhutan but employ more

than half the population of this country. However, the correlation between agriculture workers and poverty

8
Dorji Yangka, et al. “Sustainability in an emerging nation: The Bhutan case study.” Sustainability 10, no. 5 (2018):
1622.

5
is over 66%, meaning that most agricultural workers are poor — increases in exports related to agriculture

and its productivity aids in alienating poverty by reducing it. Extreme poverty is almost eliminated, which

is an achievement to boast about. The harnessing of hydropower requires a lot of capital and offers limited

job opportunities to the citizens, contributing to the reduction in participation of labor force

Predictions show that there might be a rise in the GDP growth of Bhutan of up to 6.34% in the fiscal

year of 2020 following increased exports, especially from the completion of the on-boarded Mangdechhu

power plant.9 There would be a slight reduction in the previous years due to the accruing public debt. The

growth is expected to be stable with a percentage increase of 5% to 6 %. The stability will be supported by

the ongoing construction of a hydroplant called Punatsangchhu I and also Punatsangchhu II. There is also

a possibility of little inflation in the massive growth of India and stabilizing the prices of both food and fuel.

With increases in exports form hydropower, the present-day account deficit is projected to narrow further

to about 10% of GDP in the 2020 fiscal year and 7% of 2021's fiscal year GDP.10

The budgetary outlook for Bhutan predicts an expansion of both revenue and expenditure that will

widen the existing fiscal deficit, though temporarily, to 4.9% of the total GDP by the fiscal year 2021.

Growth of income is also expected following a rise in revenue from hydropower plants like Mangdechhu

and even an inauguration of green tax on fuel as well as tax from goods and services.11 Expenditure is

expected to grow in the short term; but, it is hyped to outpace revenue growth due to expansions in the

sector of investments in non-hydro projects, which is a plan in the country. Moreover, wages from the public

sector will also go up. A prediction done earlier came true concerning the GDP of 2017 and 2018, as seen

below in figure 4:

9
Arndt, Feuerbacher, et al. “Is Bhutan destined for 100% organic? Assessing the economy-wide effects of a large-
scale conversion policy.” PloS one 13, no. 6 (2018): e0199025.
10
Ibid.
11
Ibid.

6
 Bhutan’s GDP Projection

Fig 4. Source: statista.com

A reduction in poverty will be witnessed at a satisfactory rate soon. The decrease is forecasted to go

down to about 9.9% and 8.7% in 2019 and 2020, respectively. The process of diversifying into sectors not

related to hydropower is still a critical challenge in speeding up the creation of jobs for the youth in the

non-agricultural sectors.12 Concentrating on the growth of the tourism sector may prompt significant

contributions to employment and the growth of income, more so in the poor and low-skilled people who

live in rural areas. An effort to enhance agribusiness development is required since poverty is more

concentrated in rural areas.

Considering the fact that the job opportunities for women are fewer than for men, there is a need to

ensure equality so that both males and females have equal opportunities to foster the growth of the country.

According to figure 5 below, Bhutanese women work in lower-quality jobs than men. Even though women’s

participation in the labor force has increased, it hasn’t translated into improvements in employment quality.

12
Anindya Bhattacharya, et al. “Assessment of low carbon transport for sustainable development in Bhutan: a
general equilibrium approach.” International Journal of Public Policy 14, no. 1-2 (2018): 64-103.

7
 Labor Market Profile of Male and Female in Bhutan

Fig5. Source: Labor Force Survey Bhutan 2011

According to the above figure, there was little gender disparity in terms of overall employment (with

72.3% for males and 67.4 for females). However, the quality of jobs held by females are inferior to males.

This supports by the fact that women tend to work in low paying sectors such as agriculture and family

workers compared to men. Not only that, women also have poorer prospects for career advancement.13

Gender equality policy should be put in place to ensure equal job opportunities for women, just like men in

the nation. This will enhance the skills of the women so that they can serve the nation as much as the men

do.

Causes of Rapid Development in Bhutan

The development of Bhutan had occurred in a rapid manner beginning the year 1961 when the sitting

king introduced the FYP. Before 1961, the conditions that prevailed were devastating since they committed

some economic mistakes that left the nation crippled economically.14 The first accounted group of

Bhutanese students completed secondary school education in 1968, which can be considered exceptionally

late compared to the previous years; these revelations raise a lot of questions on whether any education or

13
The World Bank, Bhutan Gender Policy Note (Thimphu: The World Bank, 2013), 13.
14
Anindya Bhattacharya, et al. “Assessment of low carbon transport for sustainable development in Bhutan: a
general equilibrium approach.” International Journal of Public Policy 14, no. 1-2 (2018): 64-103.

8
health services were being offered. The monarchical system of education was in existence, and it flourished,

just like today, as a parallel system to Western culture. The achievements so far are astonishing, given the

roots from which it all started. The broad development framework initiated by GNH to control and monitor

the decisions that could propel the country in various directions had to wait for the rise of the fourth king

in 1971.15

The rapid growth and development of Bhutan can be associated with several factors. The first and

most significant factor was the unique and dynamic leadership of the kings of Bhutan. These rulers had a

critical role in shaping national policies in that era. King Jigme Khesar Namgyel Wangchuck, who is a

visionary man, could use his foresightedness together with his passion, immense energy, and dedication to

ensure the country moves forward in all spheres of development. Rapid development indeed requires strong

coordination complemented with clear directions. The kings have always maintained a disciplined

command structure to prevent policy drifts that arise from cycles in the political arena.16 For this reason,

the authority of the King of Bhutan made sure that there was smooth flow and cohesiveness of various

developmental policies. The previous monarchical system proved to be an active prerequisite of

development. King Jigme Khesar has distributed authority and power from the source, which is the throne,

to other influential institutions for the long-term development of the Bhutan nation.

Additionally, rapid economic transformation is dependent on Bhutan’s possession of resources like

hydropower and agriculture favored by the low population density and good government policies from the

democratic government. Hydropower forms the dominant sector of investment in Bhutan and is the main

propeller of this economy. Another factor is the administration, which was and is well functioning together

with a cohesive community organization. Rapid development highly thrives in stabilized state as possession

of vast resources are coupled with a well-functioning administration.

15
Ibid.
16
Ibid, 1622.

9
 Policy Recommendations

The policies that I would recommend for Bhutan, even though it is among the fastest-growing

economies, come in four critical areas: regional development, urban resilience, improved gender equality,

and environmental sustainability. Local development, by definition, is the act of providing aid to less

developed regions in terms of economy.17The development might be domestic (within the borders like in

the case of Bhutan) or international (where one country helps another). As we saw, rural areas in Bhutan

are associated with the poor and experience slow growth and development when compared to urban areas.

The government of Bhutan ought to create means of developing these rural regions to catch up with the

other developed urban areas.18 This can be achieved through sustaining competitive advantages, promoting

efficient governance at all levels, and generating stronger regional economies that are both fair and realistic.

Urban resilience is the ability of a given urban system with those who live there to maintain

continuity despite shocks and stresses while at the same time being able to sustain itself. Bhutan is a country

under threat of attack from natural calamities such as earthquakes and flooding.19 Moreover, due to rapid

urbanization, climatic changes are consequent, and they can also have dire shocks on the nation or parts of

it. Also, there might be political instability. If Bhutan can deal with all these, then the growth of its economy

will be accelerated even more. Urban resilience is always a challenge in every country around the globe;

however, it can be achieved through the creation of sustainable development goals, new urban agendas, and

signing agreements with other nations on urban resilience and adaptation.

I would also recommend the improvement of gender equality through empowerment, economic

activity, and reproductive health. This will ensure that the country can capitalize on the potential of their

17
Isabel Sebastian. “Business and Corporate Social Responsibility in a Gross National Happiness Economy: Insights
from Bhutan.” In Proceedings of the International Association for Business and Society, vol. 26, pp. 24-38. 2015.
18
Boyreau, Genevieve, and Martin Rama. Bhutan Macroeconomic and Public Finance Policy Note: Hydropower
Impact and Public Finance Reforms towards Economic Self-Reliance. World Bank, 2015.
19
Ibid.

10
female citizens to combat economic upheaval. Similarly, maintenance of reproductive health limits the large

sums of money that the government can use in treatment. Empowering women through their groups, as well

as supporting their education and funding their businesses can help in promoting the financial independence

and sustainability of Bhutanese women.

Environmental sustainability also warrants policy recommendations; this includes natural resource

distribution and changes in consumption of energy and carbon (IV) emissions. The protection of such

sources would ensure clean water uptake and guarantee the proper use of Bhutanese resources.

Conclusion

With these policies, Bhutan would achieve most of the planned developmental activities and

significantly fulfill its targets. The country could boast of high developmental growth at a rapid rate and

expansion of both the economic and physical infrastructure. The most important is that all these

accomplishments would be achieved sustainably; these achievements would occur without much negative

impact on the social, physical, and cultural environments. The rapid development, however, may continue

to be witnessed if every shareholder in this unique country continues to do the best to realize more dreams

and targets. Bhutan ranks first in South Asia when it comes to ease of conducting business, economic

freedom, and peace, and most importantly, it is the least politically corrupt nation. With all these positive

aspects, Bhutan is still considered one of the least developed countries, but it has the potential to graduate

from this status by at least 2023. If Bhutan would implement the policies of regional development, urban

resilience, improved gender equality, and environmental sustainability, it could cross the bridge and become

a developing country rather than a lesser developed one.

11
 Bibliography

Balasubramanian, Sriram, and Mr. Paul Cashin. Gross National Happiness and Macroeconomic

Indicators in the Kingdom of Bhutan. International Monetary Fund, 2019.

Bhattacharya, Anindya, Joydeep Ghosh, Tetsuo Tezuka, and Tania Bhattacharya. "Assessment of

low carbon transport for sustainable development in Bhutan: a general equilibrium

approach." International Journal of Public Policy 14, no. 1-2 (2018): 64-103.

“Bhutan Country Profile” BBC News, February 14, 2018, accessed January 20, 2020.

Boyreau, Genevieve, and Martin Rama. Bhutan Macroeconomic and Public Finance Policy

Note: Hydropower Impact and Public Finance Reforms towards Economic Self-Reliance.

World Bank, 2015.

Feuerbacher, Arndt, Jonas Luckmann, Ole Boysen, Sabine Zikeli, and Harald Grethe. "Is Bhutan

destined for 100% organic? Assessing the economy-wide effects of a large-scale

conversion policy." PloS one 13, no. 6 (2018): e0199025.

Khan, Shibli A., Md Gazi Salah Uddin, and Md Mahmudul Alam. "An Empirical Study on

Export, Import, and Economic Growth in Bhutan." (2019).

Sebastian, Isabel. "Business and Corporate Social Responsibility in a Gross National Happiness

Economy: Insights from Bhutan." In Proceedings of the International Association for

Business and Society, vol. 26, pp. 24-38. 2015.

The World Bank, Bhutan Gender Policy Note.Thimphu: The World Bank, 2013.

Yangka, Dorji, Peter Newman, Vanessa Rauland, and Peter Devereux. “Sustainability in an

emerging nation: The Bhutan case study.” Sustainability 10, no. 5 (2018): 1622.

12

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