Bhutan, a country situated in the South East Asian region, had a very few trading partners in the past however, things improved drastically for the country with it moving from closed to open economy (free trade) in the 1960s. Free trade is a trade where countries carry out economic activities without restrictions or barrier ‘such as import and export tariffs’, barrier to market entry and policies (Johnston, Gregory, & Smith, 2011, free trade). While some countries have gained benefits from the policy of free trade, some countries argue against free trade claiming that it is a burden to developing countries leading to exploitation, environmental pollution, unemployment of domestic workers, underperformance of domestic industries and deteriorating country’s economic growth. Unlike other countries, Bhutan’s policies are made based on the Gross National Happiness (GNH) principles which highly values the psychological aspects of social welfare and well-being of the people.
The Bhutanese economy has undergone significant change since the beginning of the planned economic development in the 1960’s. Within a span of 40 years the country has transformed itself from mostly subsistence farming to a modern trading economy with an expanding regional and global economic ties. Bhutanese economy is mostly based on agriculture which is still the main source of livelihood for about 79 percent of the people who lives in rural areas. However, in the recent years, its economic growth has been led mainly by hydropower sector. Bhutan has been gifted with enormous hydroelectric potential with an estimated potential to generate about 30000MV of electricity, which contributes significantly to the country’s economy. Some of the benefits include improvement in infrastructures, expanded markets, access to technologies, free movement of labour and capital, investment, and political relations in form of integrations. These benefits play a major role in the economic development of developing countries.
Hydro-power is also considered as the backbone of the Bhutanese economy because it helps the country in its economic development and foreign relations. The rugged terrain, compounded by the fact that the country is land-locked does not provide much economic advantage to Bhutan however, the hydro- power has helped Bhutan to reach to a new level of modernization. Transportation costs are high and unless Bhutan can think of certain products, her exports are not going to be competitive and earn less income. The decision by the Royal Government to exploit its water resources for production of electricity has changed the economic scenario for Bhutan, involving rapid development in all section and districts. The rapid altitudinal variations with swift flowing rivers has made Bhutan a natural haven for hydro power production.
The close and friendly ties between Bhutan and India has provided the necessary political will and the market for Bhutan’s power, as India has a huge power deficit. While electricity has provided the much needed revenue, the Royal Government has also prioritized network expansion in the Country. It is expected that by 2020, the entire Country will have access to electricity. Industrial activities are expected to increase with the commissioning of Tala Hydroelectric Project. Due to the commissioning of Chukha Hydropower Project and other private companies such as BCCL, BBPL, PCAL, BFAL etc… contribution has drastically increased over the few years. Moreover, the under construction of hydropower projects like PHPA, Kholongchu Hydropower Project, Mangdichu Hydropower Project, would definitely contribute a significant share to the GDP in the coming years. The role and importance of hydropower for social and economic development of Bhutan and its aspects which is related to planning and policy initiatives are being pursued by the Hydropower sector which fulfils the national objectives.
However, countries argue that free trade deny them with access to sources of revenue from foreign investors that could otherwise be used in their development projects. The argument is laid on the fact that ‘free trade allows trade between countries without imposing tariffs and taxes’ (Wacziarg, ; Welch, 2008 p. 197). Hence, the trade is exploitive to the developing countries. Most governments and particularly those from developing countries steer their economic development projects and caters for wages from revenues that they get from tariffs, taxes and licensing of businesses that operates within its territories and so, free trade deny them from accessing these funds. Hence, their development projects may end up taking time and making a country poorer as most of its resources are utilized at no benefits.
Free trade theory does not tell us that free trade is good for economic development. According to Ha Joon Chang, Rich nations tell poor countries to embrace free trade policies that the rich themselves never practiced. The main underlying point that beats the myth of capitalist free trade and its supposed success with globalization is that all the current wealthy countries achieved their wealth not through free trade but through the use of highly protective tariffs and effective use of subsidies and laws that regulated foreign business within their own country. If the developed nations really want to help developing countries, they should accept asymmetric protection. He states that the proper role of developed countries and institutions like the World Bank, IMF and WTO, is to get out of the way of developing countries and more importantly accept asymmetric protection for developing states. The challenge for the bad Samaritan nations is to give developing countries headroom for them to grow.
Even history rejects “Free trade” and supports the “infant industry” as a model for development. Here, Chang brings in the picture of his son, he says that the protection that is provided to his son (who is compared to the infant industry) should not shelter him from competition forever. He should be rendered help to develop his talents and gather capabilities but he should not be pampered too much that he ends up depending solely on his parents. When the time is right, he should go out into the big world, get a job and live an independent life. Likewise, the infant industries should be provided protectionism until they are technologically advanced, effectively organized and ready to enter the world of competition. When they are fully prepared then they need to enter the competition as soon as possible to survive in the competitive world of market. Hence, free trade simply is not working for the developing countries.
Free trade is not working because it forces developing countries to eliminate the very same protective barriers that the rich countries used to gain their wealth. Trade liberalization has created other problems too. It has increased the pressures on government budgets, as it reduced tariff revenues. This has been particularly serious problem for the poorer countries because they lack tax collection, they heavily rely on the tariffs (which sometimes account for over 50% of the total government revenue). Falling of the revenue meant severe cuts in important areas like education, health, physical infrastructure thereby damaging the trade liberalization in the long term. Although, Bhutan by virtue of its geographical location on the Southern slope of the Eastern Himalayas, is blessed by nature with altitudinal varying land mass with good vegetation cover, perennial flow of water and fair climatic conditions which are favourable condition needed for hydropower project and is endowed with rich development potential for harnessing hydropower. However, due to
Most of the schemes identified are run-of-the river types and they are found to be techno-economically least-cost and environment-friendly. Bhutan has an estimated hydropower potential of 30,000 MW and 120 TW mean annual energy generation indicating an average development potential of 781 kW in a square kilometre of area of land. So far 23,760 MW has been identified and assessed to be technically feasible. Only 1.6% of the potential is harnessed so far. Bhutan’s ability to harness the hydropower resources has been made possible because of the close and friendly ties with its neighbour India. India has been the lead donor in providing both technical and financial assistance to develop the numerous hydro power projects in Bhutan.
The private sector in Bhutan is hindered by the small size of market. Moreover Bhutanese trade link is confined to India and it really lacks the export where the products remained within Bhutan and India. Small market means limited opportunity to get income or profit from their production so, the primary aims of the private is to earned profit, therefore, because of small market individual were discouraged to invest for the capital.
Lack of skilled Bhutanese workers
We have less number of technically trained professionals and therefore to operate the modern technology, invite expertise from outside country, where in return high payment has to be made as a reward for their services. This leads to outflow of the currency. Therefore, shortage of adequate human resource has forced private and public sector to remain technically backward, as a result there exist a very slow progress.
Basic financial system and non-competitive
The financial system of Bhutan is another challenge for the development of private sector. Financial system just being the basic and its non-competitive it offers very basic financial product and a fairly high cost. The lack of financial support, leads to backwardness of the economic activities. The Bhutanese financial institution are able to lend the loan for few individuals and that is also only at high interest rate. The high interest rate will directly affect on investment since capital investment is associated with the interest rate. Therefore, capital investment will be high when interest rate is low. Thus, the lack of financial support and high interest rate it gives challenges for the development of private sector.
Lack of skilled labor 20%
The Government of Bhutan requires new policies to meet the threshold score of the GNH index. However, the GNH index includes some factors seemingly unfavorable to an active trade policy. Moreover, although the share of trade reached 80% of gross domestic product (GDP) as of 2013, the involvement of the trade authority in the government is very small (the trade authority belongs to only one of 10 departments under the Ministry of Economic Affairs). In most countries, trade policies are administered in the cabinets, such as Ministry of Commerce, Ministry of Trade, or Ministry of Foreign Affairs and Trade. Bhutan is a landlocked country with little economic power, which has resulted in a passive attitude toward international trade.
Active trade policies are not likely to be implemented in the country because of the difficulties to achieve a harmonious balance between economic gains and spiritual factors. This was the highlight of the Asian Development Bank’s (ABD) working paper series on trade policy for Bhutan and its compatibility with the Gross National Happiness (GNH).
“This is because the GNH indices are more oriented toward spiritual, emotional, and cultural values,”
Conclusion-The economic development of Bhutan begins from early 1960s with the inception of first five-year plan. While it has made significant growth in economic development. The private sector refers to the business sector and that exclude all the activities that are outside the direct influence of public sector (Bhutan National Human Development, 2005). Private is seen as dynamic force behind employment growth, where it attracts the fast growth of educated people. At the present scenario Bhutanese economy really lack private sector but never the less, it has made progress in modernizing its economic structure and reducing poverty. Today the main source for our revenue is hydro-power sector.
Private and public sector is the important segment of any economy and they play vital role in development activities. The growth of private sector indicates the true sense of economic development. Therefore, the contribution of GDP from both the sector determines the growth rate of economic development. Bhutan’s real GDP growth was remained at 6.7% during 2009. Despite the important has been given to private sector, GDP contribution from public sector is much higher. Therefore, Bhutan being a weak private sector development it is reasonable to say the economy is mixture of both the sectors that is private and public sector.
However, government of Bhutan did not expect public sector employee to grow rapidly, rather it was the private sector that is expected to play an important role in creating jobs for youths in the future. Like any other developing countries, Bhutanese economy also face some challenges in development of private and public sector due to the underdeveloped infrastructures and some other various nature and economic factors. Thus, in the future Bhutanese economy has to really focus on the certain economic policy in order to achieved sustainable economic growth.