How to diversify Bhutan鈥檚 economy?

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class="views-field views-field-field-authors"><span class="field-content"><ul><li><a href="/web/20190704101635/http://blogs.worldbank.org/team/yoichiro-ishihara" hreflang="en">Yoichiro Ishihara</a></li></ul></span></span>|<span class="views-field views-field-field-date"><span class="field-content"><time datetime="2019-01-28T12:00:00Z">January 28, 2019</time> </span></span></div> </div> </div> </div> </section> <section class="views-element-container langswitcher block block-views block-views-blockalso-available-in-block-1 clearfix" id="block-views-block-also-available-in-block-1-2"> <h2 class="block-title">This page in:</h2> <div class="form-group"><div class="langswitcher test view view-also-available-in view-id-also_available_in view-display-id-block_1 js-view-dom-id-cb3eaf09e31e558d2fc8a43ae9c2cb311820a977dfaa2ba8b363cadd857ba089"> <div class="view-content"> <div class="item-list"> <ul> <li><div class="views-field views-field-langcode"><span class="field-content"><a 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But it needs to do a better job at diversifying its economy by improving its physical and human capital by using resource rents from hydropower." height="454" src="/web/20190704101635im_/http://blogs.worldbank.org/sites/default/files/endpovertyinsouthasia/pb041461.jpg" title="Bhutan has made tremdendous progress in reducing poverty. But it needs to do a better job at diversifying its economy by improving its physical and human capital by using resource rents from hydropower." width="680"/><figcaption> Bhutan has made tremendous progress in reducing poverty. But it聽needs to do a better job at diversifying its economy by improving its physical and human capital by using resource rents from hydropower.</figcaption></figure><p> Will diversifying its economy help Bhutan address its youth unemployment, let alone its macroeconomic volatility and vulnerability?<br/><br/> With the right approach, yes.<br/><br/> And to that end, the latest World Bank <a href="https://web.archive.org/web/20190704101635/http://documents.worldbank.org/curated/en/259671548449315325/Bhutan-Development-Report-A-Path-to-Inclusive-and-Sustainable-Development" rel="nofollow"><em>Bhutan Development Report: A Path to Inclusive and Sustainable Development</em> </a>proposes solutions relevant to Bhutan鈥檚 context.<br/><br/><span class="shareable-quote"><a data-customlink="tl" class="use-ajax" target="_blank" href="https://web.archive.org/web/20190704101635/https://twitter.com/intent/tweet?text=For+more+than+ten+years%2C+developing+the+private+sector+through+greater+economic+diversification+has+been+Bhutan%E2%80%99s+top+policy&url=http://blogs.worldbank.org/endpovertyinsouthasia/how-diversify-bhutan-s-economy/?cid=EXT_WBBlogTweetableShare_D_EXT&via=WorldBankSAsia">For more than ten years, developing the private sector through greater economic diversification has been Bhutan鈥檚 top policy聽<i class="fa fa-twitter icon"></i></a></span> as described in the <a href="https://web.archive.org/web/20190704101635/https://www.gnhc.gov.bt/en/wp-content/uploads/2017/05/TenthPlan_Vol1_Web.pdf" rel="nofollow">10<sup>th</sup></a> and <a href="https://web.archive.org/web/20190704101635/https://www.gnhc.gov.bt/12rtm/wp-content/uploads/2013/10/Eleventh-Five-Year-Plan-Volume-I-Final.pdf" rel="nofollow">11<sup>th</sup> five-year plans</a>.<br/><br/> Yet, <span class="shareable-quote"><a data-customlink="tl" class="use-ajax" target="_blank" href="https://web.archive.org/web/20190704101635/https://twitter.com/intent/tweet?text=youth+unemployment%2C+especially+for+educated+Bhutanese%2C+has+remained+high%3A+67+percent+of+bachelor%E2%80%99s+degrees+holders+were+jobless+in+2016.&url=http://blogs.worldbank.org/endpovertyinsouthasia/how-diversify-bhutan-s-economy/?cid=EXT_WBBlogTweetableShare_D_EXT&via=WorldBankSAsia">youth unemployment, especially for educated Bhutanese, has remained high: 67 percent of bachelor鈥檚 degrees holders were jobless in 2016.聽<i class="fa fa-twitter icon"></i></a></span><br/><br/> Diversifying the economy is touted as a standard prescription to cure such development ailments as joblessness, low productivity, and macroeconomic volatility.<br/><br/> However, international experience shows that this prescription does not always work.<br/><br/> Case in point: A World Bank鈥檚 analysis <a href="https://web.archive.org/web/20190704101635/http://www.worldbank.org/content/dam/Worldbank/Feature%20Story/ECA/diversified-development-eurasia-full-report.pdf" rel="nofollow">Diversified Development</a> concludes that in resource-rich countries, investing in physical capital, human capital and economic institution are the best ways to sustain growth in the private sector.<br/><br/> Further to that, the development of specific sectors, which is often a common ingredient of diversification strategies in certain countries, is neither necessary nor sufficient for private-sector-led growth.<br/><br/><span class="shareable-quote"><a data-customlink="tl" class="use-ajax" target="_blank" href="https://web.archive.org/web/20190704101635/https://twitter.com/intent/tweet?text=The+main+driver+of+Bhutan%E2%80%99s+high+growth+and+poverty+reduction%2C+hydropower+has+led+the+country%E2%80%99s+development+and+will+remain+the+backbone+of+its+economy.&url=http://blogs.worldbank.org/endpovertyinsouthasia/how-diversify-bhutan-s-economy/?cid=EXT_WBBlogTweetableShare_D_EXT&via=WorldBankSAsia">The main driver of Bhutan鈥檚 high growth and poverty reduction, hydropower has led the country鈥檚 development and will remain the backbone of its economy.聽<i class="fa fa-twitter icon"></i></a></span><br/><br/> However, <span class="shareable-quote"><a data-customlink="tl" class="use-ajax" target="_blank" href="https://web.archive.org/web/20190704101635/https://twitter.com/intent/tweet?text=Bhutan+needs+to+do+a+better+job+at+diversifying+its+economy+by+improving+its+physical+and+human+capital+by+using+resource+rents+from+hydropower.&url=http://blogs.worldbank.org/endpovertyinsouthasia/how-diversify-bhutan-s-economy/?cid=EXT_WBBlogTweetableShare_D_EXT&via=WorldBankSAsia">Bhutan needs to do a better job at diversifying its economy by improving its physical and human capital by using resource rents from hydropower.聽<i class="fa fa-twitter icon"></i></a></span><br/><br/><span class="shareable-quote"><a data-customlink="tl" class="use-ajax" target="_blank" href="https://web.archive.org/web/20190704101635/https://twitter.com/intent/tweet?text=Bhutan+ranks+149+out+of+160+countries+on+the+2018+Logistics+Performance+Index+and+121+out+of+176+countries+on+the+2017+ICT+index.&url=http://blogs.worldbank.org/endpovertyinsouthasia/how-diversify-bhutan-s-economy/?cid=EXT_WBBlogTweetableShare_D_EXT&via=WorldBankSAsia">Bhutan ranks 149 out of 160 countries on the 2018 Logistics Performance Index and 121 out of 176 countries on the 2017 ICT index.聽<i class="fa fa-twitter icon"></i></a></span><br/><br/><span class="shareable-quote"><a data-customlink="tl" class="use-ajax" target="_blank" href="https://web.archive.org/web/20190704101635/https://twitter.com/intent/tweet?text=Bhutan+falls+in+the+bottom+half+of+the+Human+Capital+Project+rankings+on+critical+indicators+such+as+expected+years+of+schooling.&url=http://blogs.worldbank.org/endpovertyinsouthasia/how-diversify-bhutan-s-economy/?cid=EXT_WBBlogTweetableShare_D_EXT&via=WorldBankSAsia">Bhutan falls in the bottom half of the Human Capital Project rankings on critical indicators such as expected years of schooling.聽<i class="fa fa-twitter icon"></i></a></span></p>  <p> While surprising, these numbers are no news to Bhutan鈥檚 business community.<br/><br/><a href="https://web.archive.org/web/20190704101635/http://documents.worldbank.org/curated/en/673381506689928071/Investment-Climate-Assessment-of-Bhutan-Removing-Constraints-to-Private-Sector-Development-to-Enable-the-Creation-of-More-and-Better-Jobs" rel="nofollow">The 2017 Investment Climate Assessment (ICA) of Bhutan</a> identified access to skilled labor and access to markets as some of the key binding constraints to private sector development.<br/><br/> Regarding economic institutions, and despite <a href="https://web.archive.org/web/20190704101635/https://www.moea.gov.bt/wp-content/uploads/2017/07/Economic-Development-Policy-2016.pdf" rel="nofollow">the government鈥檚 increased focus on developing the private sector</a>, state-owned enterprises (SOEs) remain dominant in viable commercial sectors.<br/><br/> Though declining, the total assets of the SOEs exceed 150 percent of the size of the economy and constrain the development of the private sector.<br/><br/><span class="shareable-quote"><a data-customlink="tl" class="use-ajax" target="_blank" href="https://web.archive.org/web/20190704101635/https://twitter.com/intent/tweet?text=Demographic+projections+suggest+that+Bhutan+needs+to+urgently+improve+its+physical+and+human+capital+as+well+as+its+economic+institutions&url=http://blogs.worldbank.org/endpovertyinsouthasia/how-diversify-bhutan-s-economy/?cid=EXT_WBBlogTweetableShare_D_EXT&via=WorldBankSAsia">Demographic projections suggest that Bhutan needs to urgently improve its physical and human capital as well as its economic institutions聽<i class="fa fa-twitter icon"></i></a></span>, particularly those that manage resource rents, provide public services and regulate the business environment.<br/><br/> In the next few years, about 8,000 people will join the labor market each year鈥攖hat鈥檚 four times the total employment in the financial sector, and well beyond the absorption capacity of the public sector.<br/><br/> And Bhutan鈥檚 working age population is set to increase until the 2020s.<br/><br/> This is both a challenge and an opportunity.<br/><br/> True, an increase in working age population can boost growth.<br/><br/> But this positive scenario is contingent upon the job opportunities that new entrants can find on the labor market.<br/><br/><span class="shareable-quote"><a data-customlink="tl" class="use-ajax" target="_blank" href="https://web.archive.org/web/20190704101635/https://twitter.com/intent/tweet?text=The+good+news+is+that+Bhutan+is+well-equipped+to+address+its+deficiencies+in+physical+capital%2C+human+capital+and+improve+its+economic+institutions.&url=http://blogs.worldbank.org/endpovertyinsouthasia/how-diversify-bhutan-s-economy/?cid=EXT_WBBlogTweetableShare_D_EXT&via=WorldBankSAsia">The good news is that Bhutan is well-equipped to address its deficiencies in physical capital, human capital and improve its economic institutions.聽<i class="fa fa-twitter icon"></i></a></span><br/><br/> First, Bhutan has strong governance and stability.<br/><br/> Bhutan ranks 26 out of 180 countries in <a href="https://web.archive.org/web/20190704101635/https://www.transparency.org/news/feature/corruption_perceptions_index_2017" rel="nofollow">the 2017 Corruption Perception Index</a> and 19 among 163 countries in <a href="https://web.archive.org/web/20190704101635/http://visionofhumanity.org/app/uploads/2018/06/Global-Peace-Index-2018-2.pdf" rel="nofollow">the 2018 Global Peace Index</a>.<br/><br/> Second, with the completion of mega hydropower projects such as Punatsangchhu I and II, Bhutan鈥檚 hydropower generation capacity will soon triple and provide the necessary resources to invest in physical and human capital.<br/><br/> With that in mind, improvements in the health and education systems will be vital to address the emerging challenges.<br/><br/> On physical capital, improvements will be needed in road and air connectivity along with ICT investments.<br/><br/> On institutional development, the government needs to focus on addressing state dominance</p> </div> </div> <div class="field field--name-field-topic field--type-entity-reference field--label-above"> <div class="field--label">Topics</div> <div class="field--items"> <div class="field--item"><a 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How to diversify Bhutan鈥檚 economy?