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p. 4 of 13 BACK | NEXT Map Executive Summary I. Overall Performance During Eighth Plan Period A. Growth, Employment, Savings, and Investment B. Fiscal Developments C. Monetary Developments and Prices D. Balance of Payments and External Debt E. Human and Social Development II. Improving Quality of Life for All: The Ninth Plan Appendix

Country Economic Review - Bhutan : I. Overall Performance During Eighth Plan Period

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A. Growth, Employment, Savings, and Investment

1. Growth and the Structure of Production

1. The Eighth Five-Year Plan began on 1 July 1997 and will end on 30 June 2002. Real gross domestic product (GDP) performance, which is calculated on a calendar year rather than a fiscal year basis, has been vigorous thus far, and an equally robust achievement is expected in the current year. Accordingly, real GDP is estimated to have grown by 6.7 percent a year in 1997-2001 and thus to have attained the annual 6.5-6.7 percent projected in the Eighth Plan (Table 1). This is an impressive performance for a small, landlocked country.

2. However, within this impressive overall economic performance there has been a marked degree of annual variation exhibited by the sectors. Agriculture, traditionally the slowest moving sector, has performed reasonably well when viewed as a whole (and above target), but this overall sector growth masks uneven trends within it - notably, disappointing crop production and exports (especially fruits and horticulture), stable livestock production, and dynamic forestry output. Moreover, since about 79 percent of a population growing at over 2 percent a year live in the rural areas and are directly or indirectly dependent on agriculture for their livelihoods, agricultural trends have an important bearing on incomes and on the Government's programs for poverty reduction. In particular, the slowdown in the fruit and horticulture subsectors has resulted in a stagnation in some important export items (apples, oranges, vegetables, etc.) over recent years. It might also have slowed the sector's structural diversification in favor of cash crops that took place during the early and mid-1990s and that contributed generally to the higher-than-average incomes earned by the farmers who switched to their cultivation.

3. Growth in the industry and services sectors outstripped growth in the agriculture sector over the Eighth Plan period, thus continuing a 20-year trend. Preliminary estimates indicate that the share of agriculture fell to about 33 percent of GDP in 2000 (from 53 percent in 1981); that of industry - comprising mining, manufacturing, electricity and water, and construction - rose to some 41 percent (from 17 percent in 1981); and that of services fluctuated over time but registered some 26 percent in 2000. Considerable structural diversification of the economy has thus taken place over the past 20 years, but these data disguise the fact that the industry sector is still dominated by a small number of firms producing a restricted number of products, and that exports are dominated by power exports to India.

4. Within the industry sector, the performance of mining and that of manufacturing appear to have been particularly disappointing, with each falling significantly short of their Eighth Plan targets in the first four years of the Plan period. Both subsectors barely expanded at all during 1997-2000, compared with annual real growth targets of 19.4 percent and 12 percent, respectively, during the Eighth Plan period as a whole (see Statistical Appendix, Tables A.2 and A.3). In the case of manufacturing, the poor performance - especially in 2000 - can be attributed to the devastating floods in the south during the year that severely disrupted production, particularly around Phuentsholing.

5. On the other hand, the performance of the electricity and water and the construction subsectors has exceeded Eighth Plan targets, particularly in the case of construction. While the growth of electricity and water seems to have been only moderate during the first two years of the Plan period, accelerated activity associated with the Basochu, Kurichu, and Tala hydro projects caused significant subsectoral growth in 1999-2001. These changes have affirmed the power sector's key contribution to Bhutanese growth. In construction, slow initial growth during the first two years of the Eighth Plan period mirrored that of the electricity and water subsector but, with the gathering expansion in hydropower, the Dungsum cement plant, and externally financed infrastructure projects, subsectoral growth in 1999-2001 has been robust and growing at 10-12 percent in real terms annually.

6. The country has enormous hydropower potential, with an estimated technical capacity of some 16,000 megawatts (MW). The development of hydropower began with the commissioning of the first stage of the Chhukha plant (336 MW) in 1986 and the initiation of sales to India. To this will be added Kurichu (60 MW) by the end of 2001, Basochu (60 MW) in 2004, and Tala (1,020 MW) possibly by 2006, and these extensions to domestic generation capacity should provide major increases to export earnings, government revenue, and the spread of electricity to domestic households and firms.

7. In services, the transport and communications subsector has grown dynamically during the Eighth Plan period (especially during the earlier years), and faster than projected, mainly as a result of the implementation of externally assisted projects and of relatively buoyant internal trade. The contribution of the financial subsector and of government services to GDP has fluctuated, sometimes erratically, but has generally fallen short of Plan projections.

8. The contribution of tourism, not identified separately in the national accounts, is increasingly important. Notwithstanding certain restrictions imposed on tourism to protect the country's unique cultural heritage and the limitations of Druk Air's seating capacity, tourism is a major employer and foreign exchange earner. The number of tourist arrivals¹ rose from 5,363 in 1997 to 7,559 in 2000 (over 40 percent), and to 5,775 in the first ten months of 2001. Although the events of 11 September 2001 in the United States reportedly led to only 315 identifiable tourist cancellations,² the more general global economic slowdown during 2001 is said locally to have been more important in leading to the reduction in tourist numbers during the first 10 months of 2001 by 9 percent (from 6,350 in the first 10 months of 2000 to 5,775 in the first 10 months of 2001). Given that Bhutanese tourism is a relatively expensive product, global economic conditions are an important variable, especially for the major long-haul tourists from United States, Europe, and Japan. Nevertheless, the longer term prospects for tourism appear bright, and will be assisted by Druk Air's plans to buy two new, larger airplanes and by a gradual return to normalcy in the global economic situation.

2. Employment and the Private Sector

9. Reliable data on employment trends in Bhutan are not available. Although the National Labour Force Survey, 1998 and 1999, conducted with the assistance of the United Nations Development Programme, provides valuable information on the structure of the labor market at given points of time, it does not provide information on changes over time. Importantly, therefore, it does not provide information on how GDP growth and the changing structure of the economy are affecting the labor market and the employment (and unemployment) situation. It is therefore not possible to assess these effects systematically.

10. However, the Survey indicates that unemployment in 1998 and 1999 stood at about 1.4 percent, mostly concentrated in the 20-24 age group, especially among young men. In a country where such a high proportion of the population live in the rural areas and are dependent on productive activities that are often aimed at little more than subsistence, this low level of open employment is not surprising. A more pressing problem, and certainly one of growing concern for the Government, is that much of the industrial development that has taken place has been capital intensive by nature³ and has not led to a commensurate growth in jobs. Moreover, Indian migrants have taken up many of these jobs, even many of the unskilled ones. In addition, many potential Bhutanese entrants to the labor market are better educated than earlier generations and are less likely than their parents to accept subsistence-level occupations. Given that the Government is also restricting the growth in the number of civil service positions, its main challenge is to absorb a growing number of better educated persons in productive occupations, and to prevent rising unemployment and the social uncertainties it could generate. The Government is thus placing heavy emphasis on private sector growth to absorb new entrants to the labor market and is sponsoring appropriate training programs.

11. Unfortunately, the performance of the private sector and privatization during the Eighth Plan period has been mixed. On the one hand, tourist companies have performed well; several examples of outsourcing (especially of public works) and corporatization and liberalization have taken place; and many farmers, traders, tour operators, and transport firms have reacted positively to the improved marketing opportunities afforded by improved road access and, in many areas, by electrification.⁴ On the other hand, as noted above, many of the key growth subsectors remain capital intensive, and none of the state-owned companies set for possible privatization during the Eighth Plan⁵ have been privatized, although significant divestment of ownership among certain state enterprises has occurred in these years. Indeed, because the number of potential buyers is so limited in Bhutan and because the Government is rightfully concerned about the dangers of concentrating the ownership of state assets in a few private hands, the gradual divestment of ownership of state enterprises might be preferable in a Bhutanese context to outright privatization. Outright privatization in Bhutan runs the risk of changing public monopolies into private ones.

12. More generally, the impediments to private sector growth in Bhutan are both numerous and mutually reinforcing.⁶ There are physical constraints caused by topography; location; and the small, widely dispersed population. There is also an acute shortage of skills of all kinds and, paradoxically, given the rapid population increase, even of unskilled labor. Moreover, there is a preference for working in government service rather than in private, paid employment and, in the case of unskilled labor, a reluctance to work in certain occupations. With restrictions now placed on the growth of the civil service, and the economic circumstances of some people becoming difficult, these attitudes are showing signs of change. However, it will take time before attitudinal change and the improvement in training facilities permit a better balance being struck between Bhutanese labor demand and supply. Thus, the domestic shortage of skilled and semiskilled labor continues to pose a constraint. These forces are not amenable to simple correction.

13. Related to these factors, moreover, the private sector's small size and comparatively recent emergence in a business environment traditionally dominated by state capitalism place a limit on the exposure of the general public to business development in a market economy. There has been little history of private commercial development, and little time for private business to become a preferred career for many people. Moreover, considerations of national interest, while legitimate, also serve to limit private sector growth. Concerns about the environment, protection of the country's cultural heritage, and the potential invasiveness of foreign investment have served to limit logging, tourism, foreign direct investment, and the hiring of expatriate labor by domestic companies. Weak financial institutions, inefficient financial intermediation, and many cumbersome official controls and approval procedures also limit private sector development, particularly among potential domestic investors, but also for foreign investment. There still is no comprehensive industrial law or policy, for example, although one is being finalized, and the Government is taking a more liberal attitude towards the extent of foreign ownership allowed.⁷

14. As such, therefore, promoting private sector growth to absorb the growing number of young men and women whose better access to education has raised their social aspirations is, perhaps, the Government's major medium-term challenge. It is not amenable to simple solution, nor can it be corrected by modifying one or two variables. It will require a complex combination of improvements to institutions, policies, attitudes, infrastructure, and business and commercial skills to effect, and it will take time. However, the price of not effecting these improvements would likely be rising unemployment and growing discontent, notwithstanding the otherwise impressive GDP growth and prudent management of the economy.

3. Saving and Investment

15. Saving and investment data as derived from the national accounts in Bhutan are not reliable: There are inconsistencies between the overall investment-saving gap and the balance on the current account of the balance of payments, and there are inconsistencies between the public investment-saving gap and the budget surplus.⁸ Nevertheless, as shown in the Statistical Appendix, Table A.1, gross national saving has declined as a proportion of GDP during the Eighth Plan period, but remains over 17 percent of GDP in the current year, while gross domestic investment has increased significantly to an estimated 43.8 percent of GDP in the current year. Accordingly, the saving-investment gap (deficit) has risen appreciably.

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