Due to Bhutan’s late start to modernization & subsequently a careful government approach, the economy remains in a considerably underdeveloped state. 85% of the population derives a living from agriculture & other activities in the traditional sector. It is estimated that only two-thirds of the money that could be expected in an economy of such size is actually in circulation. The economic structure remains shallow & narrow, overly reliant on certain specific growth areas, notably hydropower & government services & investment. However, although Bhutan is considered among the world’s poorest countries when measured in terms of GDP per capita, estimated at around US$645 (1997), a UNDP Human Development Index rating of 0.510 ranks the country within the medium human development bracket. This indicates that, while the economy remains immature, developments have been relatively balanced & have yet to seriously founder. The country can therefore justifiably retain the optimism of youth.
Agriculture remains the dominant sector, contributing about 38% of GDP (1995). The high proportion of the workforce it currently employs, the welfare role it satisfies & the lower cost of living in rural areas further enhances the importance of the sector. Within the modern sectors, the dominance of the state is reflected in the significant contributions of mining & quarrying, electricity, transport & communication, construction, financial services & community & social services. The economy has thus far been able to register healthy growth rates, with an average rate of around 6.8% over the decade 1985-95. The major growth areas lie within the small modern economy; however there has also been a steady increase in agricultural productivity.
Within the traditional sector an exp&ing range of government development services has helped stimulate increases in production & the gradual development of markets. Due to the relative scarcity of productive plots – less than 8% of total l& area is under cultivation – an emphasis has been placed on the more efficient use of existing areas. An extensive system of agricultural services has made possible significant increases in yields & some diversification of production. With the introduction & promotion of several cash crops, notably fruits & vegetables, the agricultural sector now supplies both domestic & regional markets. However, although nearly every farmer has experienced some benefits, the overall development of the sector is hindered by the perpetuation of traditional subsistence-based modes of production, market constraints, particularly the limited road network, & relatively low l& productivity. Furthermore, strategic emphases on rice production, food self-sufficiency & environmental concerns do not necessarily direct the sector towards its comparative advantages.
The government has been & remains the driving force behind the development of a modern sector of the economy. The state is both the principal producer & source of dem& through infrastructure projects. In the interests of stability & environmental & cultural conservation, many potential markets have yet to be fully exploited. Since 1987 there have been considerable initiatives to develop the private sector into a leading engine for future economic growth. Policies have been implemented which maintain macroeconomic stability while liberalizing the financial system. Public sector industries have been privatized or corporatized. Industrial infrastructure is being developed, in the form of estates & service centers. Special programs have been set up to foster the development of cottage & small industries. However, in spite of such steps, the response from the private sector has currently lagged behind expectations. Most entrepreneurs possess a trading mentality & the modern private sector remains trade rather than industry based. The sector is therefore small, concentrated around the major urban centers, provides few employment opportunities & creates only limited added value.
The government has been very careful & considered in its approach to the macroeconomy. The management of public finance is informed by the priorities of stability & self-reliance. Government expenditure & deficit financing are therefore maintained within acceptable boundaries, &, although dependent on external assistance for capital expenses, recurrent costs are now met from domestic revenues. The Government of India (GOI) has been Bhutan’s leading development partner since the start of planned development. The country now receives assistance from around 15 multilateral organizations, 19 individual donor countries, 4 financial institutions & a few non-governmental organizations. In the early 1980s aid amounted to about 50% of GDP. However, with subsequent economic growth, this figure is now below 20%. The policy towards external assistance is guided by the need to avoid excessive dependence. In this sense, the government does not attempt to attract the maximum amount of aid available, favoring the development of longst&ing relationships with non-aligned nations. Nevertheless, given the underdeveloped state of physical infrastructure & the high unit cost of development interventions, significant capital investments are required if the country is to successfully modernize.
Non-tax revenues dominate government income. In this regard, the state possesses considerable advantages derived from its ownership & measured exploitation of the natural resource base. With the current construction of additional hydropower facilities, energy generation will soon treble, & significant further potential remains. The government therefore possesses the ability to exp& future development inputs without generating significant macroeconomic instabilities – through debt financing or increasing the money supply – or placing excessive pressure on the expansion of the tax base. Given the low surpluses within the traditional sector, revenues are predominantly accrued from the modern sector of the economy. However, it will become increasingly important to broaden the tax base & make the tax structure more efficient.
The responsibility for monetary policy lies with the Royal Monetary Authority. The central objectives are to maintain price stability whilst increasing the current level of investment. The inflation rate is currently under 9%, & inflationary pressures are controlled through the establishment of an exchange rate link, pegging the Bhutanese Ngultrum to the Indian Rupee & keeping a tight rein on the money supply. The state currently possesses significant foreign exchange reserves & maintains tight foreign exchange restrictions. There is currently no private foreign direct investment. Excluding grants the current account deficit is approximately 20% of GDP, with about 80% of all trade conducted with India. Gross Domestic Savings have increased appreciably, doubling over the past decade to approximately 30% of GDP. Interest rates are administratively determined, with borrowing rates at 15%. Efforts have been continuing to develop an efficient financial sector. There are now four major financial institutions & fledgling stock & bond markets have been established. However, there is currently a significant gap between interest rates on savings & borrowing & significant excess liquidity within the sector.
To date cautious policies have attempted to bring about a gradual evolution of the economy, whilst focusing attention on developing the social & political foundations upon which such transformations might occur. In this sense, although the economy is an important aspect, it certainly has not achieved political primacy & remains tightly regulated. However, given the fundamental social changes occurring, the ongoing development of a suitable & effective enabling environment will place increasing attention on economic development & structural change. The high initial productivity gains from technology & organizational innovations are now reducing, & focus is swiftly shifting from economic mobilization to efficiency, in both policy & business spheres. Indeed, successful economic development will require the increasing financial efficiency of development policy interventions & the creation of a macroeconomic environment that stimulates private enterprise & guides the restructuring of the economy towards the nation’s comparative advantages.