A pragmatic and gradualist approach to economic development is reflected in both the central concept of Gross National Happiness being of greater importance to Gross National Product and in a "Middle Path" strategy. These stress that the development process should be informed by the imperatives of balance and equity within and between spheres. Indeed, Bhutan's vulnerable position places additional emphasis on national security, and therefore stability. In this sense, the economy remains one of a number of priorities. It is significant that within the overall policy approach economic development is only a sub-category supporting human development and self-reliance, and framed by concerns for national security, good governance, social equilibrium and environmental and cultural preservation. Economic goals therefore need to be interpreted in relation to respective social, political, cultural and ecological contexts.

The Royal Government of Bhutan is pursuing a human centered approach to development. The economy may therefore be interpreted from a livelihood perspective. As the country undergoes social transition and the population becomes larger and better educated and expectations expand, it will be increasingly necessary for the economy to provide suitable employment opportunities. Although development cannot be gauged entirely by the ability to achieve steady economic growth and development, growth is a precondition for successful transformation. Changes in the social environment need to be translated into concomitant increases in economic mobilization and productivity. The government has proved particularly successful at maintaining the status quo. However, the imperative of economic development presents the new challenge of successfully transforming an underdeveloped system as opposed to maintaining and managing a well-functioning one.

The achievement of sustained economic growth is notoriously problematic, and has been a major failing throughout the developing world. During the initial stages of transition the economy has been protected as much as possible and an emphasis has been placed on stability. However, as the modernization process proceeds, the challenges faced will become increasingly complex and the policy decisions far from clear-cut. The economic structure remains significantly underdeveloped, and there is a risk that considerable social pressures will emerge as acceptable livelihood opportunities are not created. Due to the small size of economy and society, tapping into foreign markets will be extremely important and growth will need to be export-led. This places additional emphasis on competitiveness. In an attempt to direct the economic structure towards the country's comparative advantages the economy is being gradually liberalized. The government is slowly deregulating the economy and working towards the satisfaction of international trading standards.

Three principal avenues have been identified for Bhutan's sustainable development: increased self-sufficiency in food production, hydropower expansion and industrial development. These refer to the traditional and modern public and private sectors respectively. The vast majority of Bhutanese earn their livelihoods within the traditional agricultural sector of the economy. Although the continued expansion of the modern economy will generate a gradual change in the employment structure, this situation is unlikely to transform in the near future. Steady growth rates are therefore important towards the achievement of balanced development and a stable transition. Indeed, as the lowest common denominator, such progress fulfills important economic and social roles, providing the majority of the population a basic livelihood. The leading growth area is likely to be horticulture (both fruits and vegetables). However, given the nature of the landscape, opportunities for increases in productivity lag behind those in other areas of the economy. Most improvements though will impact upon people in the less developed categories of society, and potentially raise the welfare base.

Central to growth will be the prudent harnessing of the natural resource-base, especially for the generation of hydropower, and there remains considerable potential for further development of these resources. Of the 16,280MW of the techno-economically exploitable hydropower potential only 355MW has currently been tapped, dominated by the 336MW Chukka scheme. This situation is fast changing with the current construction of the Kurichu (45MW), Basochhu (60.8MW) and Tala (1020MW) hydroelectric projects. Mineral extraction remains relatively limited, with only 30% of the country having been geologically mapped and much of the potential commercial exploitability yet to be determined. The industrial extraction of timber for export in an unprocessed form is heavily discouraged, due to potential environmental ramifications. The availability of a cheap and reliable supply of energy will aid in the future efficiency of natural resource-based processing industries.

Given the particular conditions in Bhutan, many forms of enterprise are at a competitive disadvantage. However, the uniqueness, wealth and diversity of the ecological and cultural environments opens up the possibility of catering to very specialized demands. There appears to be significant potential for the exploration of such niche markets, for low volume - high margin trade, which perfectly suit a situation where there are high transactions costs. Examples include those markets in genetic resources and obscure foodstuffs. Perhaps the area where there exists the greatest prospect for growth is the tourism industry. Concern for the preservation of ecology and culture has led to the careful and gradual exploitation of this considerable asset. However, given the appropriate investments in infrastructure, the expansion of the industry, and the promotion of such markets as eco-tourism and cultural tourism, would be entirely consistent with other development objectives.

Efforts to deepen and broaden the nation's economic structure are confronted with formidable obstacles. These include a lack of semi-skilled and skilled labor, the small and still fragmented domestic market, the low purchasing power of the population, and severe diseconomies in production and distribution, translating in high production costs. Furthermore, given the relatively high wage rates and transportation costs, Bhutan is not ideally suited to the most basic forms of industrial production. It is likely that the country will need to specialize in more advanced industries competing on the international market. The government has selected the theme of 'sophistication and civilization' as the guiding principle for industrial transformation. This presents the vision of environmentally friendly industries, using sophisticated technology to produce high value/low volume products for the world market. Greater advantage will be made of the country's environmental and cultural resources, in both the promotion of tourism and the marketing of exports.

The continued emergence of the private sector in both rural and urban areas will be of fundamental importance. This will better integrate the population as stakeholders in the development process, increase options and opportunities, and create channels for the fulfillment of changing aspirations. The development of entrepreneurial skills and the creation of an environment nurturing to productive business ventures is of critical importance to the expansion of domestic and export markets and the restructuring of the economy along the lines of comparative advantage. Indeed, the harnessing of more flexible and dynamic individual initiatives will be fundamental to successful economic development. Unfortunately a follow-the-leader syndrome is currently evident, where private initiative has become heavily concentrated around certain business areas such as tourism, construction and petty trade. There have been only limited cases where enterprising individuals have ventured into more innovative fields.

That the modern private sector has been slow to respond to changes elsewhere may allude to some telling realities. The sector remains heavily trade-based, where a trading mentality encourages ventures where there is a relatively quick return on investment. Furthermore, the profitability of the financial sector leads to tight investment regulations, limiting access to significant amounts of capital. Both factors have possibly hindered industrial expansion. Potentially most disturbing of all may be the current lack of profitable business opportunities. In this light there is a risk of a dual economy emerging, with a small, modern, export-oriented enclave set in a sea of micro-enterprises producing low-value products with simple technologies for the domestic market, with few interactions between them. Whatever the primary reasons, it will become increasingly important for the state to continue to develop an environment fostering to productive enterprise and to place a greater emphasis on the modern sector of the economy in general and certain key strategic industries in particular.