Due
to Bhutan's late start to modernization and subsequently a careful
government approach, the economy remains in a considerably underdeveloped
state. 85% of the population derives a living from agriculture
and 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 and narrow, overly reliant on certain
specific growth areas, notably hydropower and government services
and 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 and 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 and 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 and quarrying, electricity, transport and communication,
construction, financial services and community and 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 expanding range of government
development services has helped stimulate increases in production
and the gradual development of markets. Due to the relative
scarcity of productive plots - less than 8% of total land
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 and some diversification of production. With the
introduction and promotion of several cash crops, notably
fruits and vegetables, the agricultural sector now supplies
both domestic and 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, and relatively low
land productivity. Furthermore, strategic emphases on rice
production, food self-sufficiency and environmental concerns
do not necessarily direct the sector towards its comparative
advantages.
The government has been and remains the driving force behind
the development of a modern sector of the economy. The state
is both the principal producer and source of demand through
infrastructure projects. In the interests of stability and
environmental and 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 and service centers.
Special programs have been set up to foster the development
of cottage and 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 and 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
and creates only limited added value.
The government has been very careful and considered in its
approach to the macroeconomy. The management of public finance
is informed by the priorities of stability and self-reliance.
Government expenditure and deficit financing are therefore
maintained within acceptable boundaries, and, 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 and 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 longstanding
relationships with non-aligned nations. Nevertheless, given
the underdeveloped state of physical infrastructure and 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 and measured exploitation of the natural resource
base. With the current construction of additional hydropower
facilities, energy generation will soon treble, and significant
further potential remains. The government therefore possesses
the ability to expand 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
and 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%, and inflationary
pressures are controlled through the establishment of an exchange
rate link, pegging the Bhutanese Ngultrum to the Indian Rupee
and keeping a tight rein on the money supply. The state currently
possesses significant foreign exchange reserves and 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 and fledgling stock
and bond markets have been established. However, there is
currently a significant gap between interest rates on savings
and borrowing and 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 and 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 and remains tightly regulated. However,
given the fundamental social changes occurring, the ongoing
development of a suitable and effective enabling environment
will place increasing attention on economic development and
structural change. The high initial productivity gains from
technology and organizational innovations are now reducing,
and focus is swiftly shifting from economic mobilization to
efficiency, in both policy and business spheres. Indeed, successful
economic development will require the increasing financial
efficiency of development policy interventions and the creation
of a macroeconomic environment that stimulates private enterprise
and guides the restructuring of the economy towards the nation's
comparative advantages.
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