Economic blueprint for a South Asian dragon

Forty years of socioeconomic development in Bhutan have resulted in Indocentric trade and the emergence of a class of economic manipulators who have gained from the political problems of the south. Bhutan's development strategy must hinge on investing revenue from its hydroelectricity sales into education and health, while promoting economic interdependence with India.

Bhutan's economy, which had historically looked north to Tibet, reached a turning point in 1865, when the Sinchula Treaty was signed with British India. This reorientation from north to south was the result of repeated attempts by the British to use Bhutan as an intermediary for commercial and diplomatic ties with Tibet. Early British travellers to Bhutan have chronicled the cautiousness with which society treated these approaches, but it was only a matter of time before it gave in.

The links forged by the Sinchula Treaty were reinforced during the visit to Thimphu in 1958 by Indian Prime Minister Jawaharlal Nehru. Cross-border relations with Tibet were broken the following year, and Bhutan´s integration into India´s economy began in earnest. Today, interaction with the Indian states of Assam and Bengal has become indispensable, India continues to provide large grants for development projects, and Indian companies have commercial ties with the major industrial projects.

Economic integration did have its opponents. Traditionalists who supported the Shabdrung theocracy were vehemently against falling under Indian influence. But the third king, Jigme Dorji Wangchuk, with advice from his prime minister, Jigme Palden Dorji, used the Chinese occupation of Tibet to convince the traditionalists of the need for Indian support to counterbalance the communist threat.

In 1964, the traditionalists engineered the assassination of Prime Minister Dorji, the architect of Bhutan's Indian-in spired First Five-Year Plan (1961-1966). Since then, the monarch has assumed responsibility for development plans, working hand-in-hand with a small coterie of advisers. Since his father´s death in 1972, King Jigme Singye Wangchuk has directed development activities, serving as the Chairman of the Planning Commission till June 1991.

Since 1961, Bhutan Has completed six five-year plans. The first three concentrated on basic infrastructure, and were entirely funded by India (except for U$9.3 million in United Nations technical assistance for the Third Plan). Major highways, schools, hospitals and initial work on the prestigious Chukha Hydroelectric Project were completed during this period.

The last three five-year plans emphasised industrial ventures to generate revenue and employment. The major projects completed over the past 15 years include the Chukha power project in 1986, the Penden Cement Plant in 1980, the Gedu Plywood Project in 1984, the Bhutan Calcium Carbide Project in 1988, and the Bhutan Particle Board Project in 1989. Except for Chukha and Penden, which were built with Indian help, funds for other projects came from bilateral and international sources.

Power to the Plans

India´s share of the plans has decreased steadily — down to 63 per cent in the Fourth Plan and 25 per cent in the Sixth Plan, which ended in 1992. The role of diversifying the sources of development finance has been taken up by the United Nations Development Programme (UNDP) office in Thimphu, under whose stewardship Bhutan's plan outlay grew from Nu 1106 million For the Fourth Plan to Nu 9559 million in the Sixth (Nu 1 = IRs 1).

The Seventh Five Year Plan, which began in July 1992, has an outlay of about Nu 22 billion (U$ 870 million). The Plan document emphasises more power projects. India is to provide U$ 300 million in grant assistance and project-tied finances for the 1500 tonne-per-day Nanglam Cement Plant, the 60 megawatt Kurichu Hydroelectric Project, the 60 MW Bhunakha Reservoir Project, the 45 MW Tangsibji Hydroelectric Project and the 1930 MW downstream Chukha II and Chukha III integrated power generation system. Other donors will help with domestic telecommunications, mineral-based industries, tungsten mining ventures, health care and manpower development.

The Bhutan Aid Consortium meets in Paris every five years, bringing together all UN organisations, the World Bank, the Asian Development Bank (ADB), the European Com-munity as well as bilateral donors. The most recent Consortium meeting was in March when the donors pledged the entire U$ 870 million required for the Seventh Plan. Out of this, India´s commitment was equivalent to U$ 300 million, and U$ 570 million was to be borne by multilateral agencies and bilateral Northern donors.

The unusually high assistance committed (amounting to $290 per capita per year under the official population figure of 600,000) conflicts with the now well-established policy of donors linking aid to the Third World to human rights. Perhaps even more significant is that Bhutan's absorptive capacity to utilise such generous assistance is limited, particularly at the present time when development projects in the south are halted and the flight of refugees has created an acute labour shortage. Past experience has also shown that a major portion of the external assistance will actually seep back to India or other donors through the stipulated purchase of materials, labour or professional services. It is also important to note that (he later development plans have allocated less for education and public health and more for infrastructure-building and industries. Under the slogan of privatisation, many of the industrial units established with foreign assistance have now been acquired by the "new royal family" and other members of the Thimphu elite. Without careful monitoring by donors and in the absence of check-and-balance mechanisms within Bhutan, this trend could continue with the Seventh Plan as well.

Running on Deficit

The government runs persistent fiscal deficits in hundreds of million ngultrums. In 1988, the annual current expenditures, estimated at Nu909 million, constituted 24 per cent of the total GDP. But this is only part of the picture. If Bhutan had to pay the Nu 690 million needed annually for maintenance of Phuntsholing-Thimphu, Tongsa-Geylephug, and Tashigang-Samdrupzonker trunk roads (financed so far by the Indian Border Roads Task Force) and the yearly Nu200million for the security forces (financed by the Indian Ministry of Defence), the annual current expenditure would total Nu 1799 million.

In 1988, the annual Government income, which accrues as taxes, tax-refunds, and surplus revenue from public enterprises, amounted to Nu 735 million. About 43 per cent of this collection came from the sale of Chukha electricity and Penden cement — both projects located in south Bhutan where political turmoil is presently concentrated.

Inl988, the difference between the annual revenue and the current expenditures amounted to a deficit of Nu 174 million. If the ad hoc grant assistance from India for the roads and the Royal Bhutanese Army were added, the difference would widen to Nu 1146 million. If the donors, particularly India, were to reduce their assistance for whatever reason, the budget deficit would be considerable.

The figures cited above, which are the latest available, are for 1988. The situation might have improved considerably over the past three years after the full-scale operation of the Chukha calcium carbide pi ant and particle board projects. However, revenue from the agro-forestry sector has suffered due to the political turmoil. Under normal conditions, the annual revenue from the sale of southern Bhutanese produce such as oranges, cardamom, ginger and betet nut is around Nu 150 million.

A constant worry of those who manage the Bhutanese economy is its "Indocentricity". Political advisers to the King prescribe trade diversification to keep Indian influence at bay. To promote diversification, the government provides export subsidies of up to 30 per cent for all exports to third countries. However, in 1989, such exports fetched not more than U$ 0.5 million, from the sale of wood products, cash crops, and boulders and minerals to Bangladesh and Singapore. The need to service Bhutan's U$ 74 million hard currency debt has provided ammunition to those who call for trade diversification as a means to earn foreign exchange.

Opponents of Indocentric trade even prescribe reopening trade with Tibet, harking back to the cultural and historical links with the northern neighbour. But this would be futile, as the demands of the modern Bhutanese economy can only be met from across the southern border. As an illustration, the major imports of Bhutan from Tibet in the 19th century constituted yak tails, Chinese silk, silver and blankets. In 1988, the economy´s demands, in descending order of value, were diesel, rice, tires and tubes, truck chassis, iron rods, machinery, fabrics, and so on.

The foremost advocates of trade diversification are Foreign Minister Dawa Tshering, Minister of Trade and Industry Om Bahadur Pradhan, and Sangey Nidup Dorji, the first brother-in-law of the King who is practically the defacto Prime Minister of Bhutan. The three make it a point to meet once every week with UNIDO's representative and trade expert, Richard Lisak, who has been stationed in Thimphu since 1989. The purpose of these meetings is to work out the logistics of trade diversification schemes.

Serious thought is thus being given to strategies that would minimise dependence on India for trade, development assistance and defence subsidies .There are two primary reasons for this urgency. First is the rich urban population's escalating demands for luxury goods and, secondly, the need to maintain infrastructural and institutional projects set up since 1961. However, any realistic appraisal shows that Bhutan's efforts to correct Indocentric policies by the strategy of 'India escapism' may be counter-productive to long-term national interests.

Mismanaged Economy

The policies on privatisation or export promotion are seen as ways of transferring ownership of public resources to members of the Thimphu elite. The foremost example is the case of the Gedu Plywood Project, built in the 1980s at Nu 145 million with grants from the UNDP and soft-term loans from the Kuwait International Development Fund. This project has now been sold to Yab Ugen Dorji, father-in-law of the King, at discount of 80 percent of the book value. The initial share value of the project was Nu 1000, but was bought by the Yab ('father-in-law' in Dzonkha) at Nu 198, with the entire foreign exchange burden to be borne by the Bhutan Government.

Another instance was the 'secret' auction bid on the duty-free import business owned and operated until 1991 by the Ministry of Finance. The Yab submitted three tender offers to the Ministry valued at Nu 1.1, 3.0, and 4.0 million while others were discouraged even to bid by Government officials. Sonam Wangmo, owner of Yu-Druk Travel Agency, withdrew her Nu 1.5 million bid, but found to her surprise that the Yab won the auction on payment of a royalty less than her bid.

It is important to focus on the activities of Yab Ugen Dorji because they not only symbolise, but are at the center of the mismanagement of the Bhutanese economy today. The Yab's economic competition with the Dorji clan is also significant in explaining the problems in the south, for it was the Dorjis who helped to open up southern Bhutan by inviting in Nepali-speaking settlers. The Yab and his followers hold no brief for the settlers and in fact feel that expelling them would also weaken their Dorji competition.

More recent mischief of Yab Ugen Dorji has been his capture of a contract for felling the young forest plantations on the southern slopes of the Siwalik foot-hills and in the plains near the Indian border. The contract, which is expected to fetch monopoly profits in millions of Ngultrums to the Yab, goes against an earlier decision of the 69th National Assembly, held in November 1989, to create a two kilometre-wide green belt along the Bhutan-India border.

Educated Bhutanese are not against the rich getting richer, as long as the competition is fair. For example, Dasho Ugen Dorji, popularly known as Dasho Rim, does not draw as much fire as the Yab even though his corporate assets run to over Nu 2000 million — from ownerships or business portfolios held in the Tashi Commercial Corporation, Royal Insurance Corporation, and Bhutan Carbides and Chemical Ltd. His annual contributions in taxes and dividends to the Government exceed Nu 100 million. Actually, Dasho Rim's peak period was pre-1988, when he had near-monopoly control over key sectors of the economy. In retrospect, however, his manipulation of the governmental machinery in his favour was on a much lower scale than the Yab's is today.

The Yab had a medium-sized retail business before the marriages of his daughters to the King. From a retail merchant to an economic power within less than half of a decade was a journey made by riding roughshod over rules and regulations. The Yab's skills in manipulating Government policy is reflected in his acquisition of the Wangdiphodrang Timber Saw Mill owned until 1990 by Kabji Penjor, a prominent citizen from Thimphu district After the Forest Department denied lumber for the saw mill, he sold his business to the Yab. Immediately thereafter, lumber supply was resumed.

Yab Ugen Dorji and family now own Singye Enterprises, Dhendup Enterprises, Bhutan Engineering Corporation, Lakhi Cement Project and Bhutan Tourism Corporation. His cumulative assets, presently worth over Nu 1000 million, are expected to increase rapidly to catch up with his rival Dasho Rim in just a few more years. The Yab's unfair business practices are also affecting members of the royal family who were once active in mining, trading and manufacturing. The King's aunts Ashi Choeki, Ashi Deki, and Ashi Pema have all withdrawn from big business in order to avoid clashes with the Yab and his associates, who today form a powerful clique.

The current state of nepotism, favouritism, and gross interference in the functioning of the Government machinery has disillusioned many. Unless political reforms are introduced urgently, with proper mechanisms to check and balance, Bhutan could face continual social unrest irrespective of the policies it adopts to arrest the current political crisis.

The royal family members must be discouraged from running affairs of the Government. Instead, they should be encouraged to utilise their by-now considerable as sets to lead industrial development, but under fair competition with Bhutanese participants .Healthy competition between the Yab, the Wangchuks and the Dorjis would actually do a lot of good for the economy, particularly if each three "houses" could develop loyal folio wings in the managerial and labour levels by extending shares in business and profits.

Despite its disadvantages (of being landlocked and Indocentric) the prospects for socioeconomic development in Bhutan are good, particularly in comparison to other countries in region. The country must now look beyond the scope of traditional business and economic opportunities, taking the people and the mountains as assets in future socioeconomic development programs.

The Way Ahead

Agriculture cannot be the focus of development for Bhutan. The available cultivable lands, estimated at less than 8 per cent of the total area, are by and large already covered under improved agricultural practices. The Third and Fourth Five-Year Plans prioritised agricultural development, but ended in the realisation that Bhutan cannot become self-sufficient in food production unless it accepts negative rates of return on investments. Except for cash crops — such as apple, potato, cardamom, and orange—almost all efforts went to waste.

Equally frustrating was the experience with wood-based industries established during the Fourth Plan with enormous subsidies on the capital costs. Bhutan owes over U$ 22 million to foreign batiks because of wrong investments on the Gedu Plywood Project, Bhutan Particle Board and other wood-processing industries. The Gedu Plywood Project has an annual capacity of 40,000 cubic metres of logs and required construction of 200 km of feeder forest roads in western Bhutan. The roads, though useful in some places, have caused significant downstream sedimentation. According to a World Bank forestry survey report, the present rate of timber extraction in Bhutan is over two-and-half times the ecologically sustainable limit of 13 million cubic metres per annum.

The Government might end with the same experience in the case of mineral-based industries. Deposits of dolomite, limestone, graphite, and gypsum have been discovered, but these are low-value and high-volume commodities requiring large scale extraction procedures.

Prospects exist to develop power-intensive industries, such as manufacturing of ferro silicon, ferro alloys, and calcium carbide and chemicals. A ferro silicon and ferro alloys project is underway as a collaboration between Tashi Industries and Japan's Marubeni company. These projects have been set up to utilise cheap Chukha power, which is to be supplied at almost one-third the export price. Such concession is desirable as long as industrial projects promote long-term growth in the country by making use of local raw material, creating employment opportunities, or adding value to finished products. If the requirements of bulky raw materials are large, however, as is the case for Bhutan Calcium Carbide Project with regard to limestone feed, the cost of transportation becomes the decisive factor even for power-intensive industries.

Hydropower is Bhutan's most obvious economic resource. The successful implementation of Chukha (which brings in Nu 500 million annually, almost half of the national income) has encouraged planners to think of the hydro resource as the main area for future development. About 10 per cent of Bhutan's total area is under perpetual snow cover and four major river systems (Torsa, Wangchu, Sunkosh, and Manas) drain from Bhutan into the Brahmaputra. These rivers, combined, have a theoretical hydropower capacity of 20,000 MW with energy generation potential of 40 billion kwh. Given the Seventh Plan proposals, including the decision to prepare feasibility reports with Indian assistance for 1930 MW Chukha II and III downstream projects, Bhutan seems to be on the right course in this sphere. Income is generated to fund future development programmes and mutually beneficial interdependence with India is promoted.

Tourism, which was begun in the late 1970s, has not been given adequate attention of late and hence has not been able to generate significant export revenues. At present tourism´s earnings amount to less than Nu 50 million (U$ 2 million) annually — which is small compared to one estimate of U$ 50 million that Bhutan could earn if it serviced more tourists. The delays in tourism development is attributed to the conflict of interests between the "traditionalists" and "realists" among the Bhutanese elite. The former, in alliance with the monarchy, regard tourism as a threat that could erode the traditional base of theocracy. Though it is now given some more importance, after a short break in late 1980s, tourism is likely to be de-emphasised again. This is because the interest of the Thimphu rulers is to retard change, whereas tourism's ultimate impact is to accelerate it.

Bhutan's unspoilt mountain environment hold tremendous promise not only for holiday tourism, but also other service-oriented businesses such as .retirement villages, holiday homes, high school education and health facilities. There is, for example, scope to generate jobs by tapping the global retiree market and the Subcontinental market for good schooling, and to develop linkages in the local economy through support infrastructures and consumer target industries.

The development strategy should be to invest more on resources in the establishment of hydropower projects or tourism-related infrastructures and invest the surplus resources generated by these projects on manpower development, with specific training on service-oriented mountain-related businesses where there are comparative advantages. Traditional development sectors, such as agriculture, forestry and mineral-based industries have serious limitations in terms of sustainability.

In June 1991, Bhutan's per capita Gross National Product (GNP) jumped from U$ 190 to U$ 425. This upward revision was due not to a sudden spurt in national productivity, but because of a drastic official reduction of the population estimate from 1.4 million to 0.6 million. This was done on the pretext of correcting an earlier mistake the Government says it made in 1971, when it joined the UN. Bhutanese dissidents do not agree with Thimphu´s revision, although they too have doubts about the 1.4 million figure.


The Gross Domestic Product (GDP), estimated for 1988 at nominal Nu 3858 million, does not necessarily reflect the welfare level of the average citizen. This is because the national income is greatly skewed in favour of the Thimphu gentry. Subsistence farmers, who constitute about 90 per cent of the total population, depend on income from livestock products and agricultural produce. Rural per capita GDP is still at U$ 138 despite the revised figures.

The future of the Bhutanese nationstate depends upon the cooperation of the different social groups, each enjoying its fair share of the economy's possibilities. Traditionally, the Bhutanese people used to be divided only into the nobles and commoners. But a third group has emerged in the past decades of development planning — the educated middle class. This group is under the lid at the moment, but is acutely aware of what it sees as a conspiracy by the nobles and the royal family to control allocation of resources in the development plans. And it is up to this middle class to steer the economy on a liberal, equity-based direction. The middle class will ultimately form the link between the nobility and the peasantry and will also provide the economic leadership that will offer alternatives to today´s way of doing things.

In the final analysis, Bhutan's socioeconomic development must go hand-in-hand with political reforms. The political crisis of the past two years which has at the time of writing forced over 85,000 Bhutanese into exile is partly a by-product of 'development' and education, which led to political consciousness and awareness of one´s rights and issues of equity. At the same time, the perception grew that past projects have benefited primarily the Drukpa elite.

Southern Bhutan, the epicentre of the tensions, is where the hydroelectric plants, the cement factories, the timber industry and cash crop plantations are located. Major mineral resources are also concentrated in the southern foothills.

Without resolving the crisis of the southern Bhutanese, it will be unrealistic to expect the national economy to live up to its incredible promise.

D.N.S. Dhakal was economic adviser to the Ministry of Trade and Industry in Thimpu until October 1991. He is now the General Secretary of the BNDP. The views expressed here are his own and do not necessarily reflect those of his party.

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