Background Of Bhutanese Public And Private Sector Economics Essay

Introduction.

The Bhutanese economy is considerably underdeveloped. The mountainous terrain and the rugged topography makes development activities complex. With an estimated population of 684,000 (2010), the country lacks work force and professionals in different departments. The country experienced an average GDP growth rate at 9% in the 10th FYP. The livelihood of the majority of the population of Bhutan still depends on agriculture and its allied group. The government has and will continue to play a lead role as Bhutanese economy undergoes major structural reform. Public sectors form the part of the companies and corporations that are owned by the government. The private sector includes all profit businesses that are not owned or operated by the government. The private sector in Bhutan is hampered by the size of the market, lack of infrastructure and financial instability which is why the public sector plays a dominant role for major economic operations.

The operation of the Bhutanese economy is divided into three sectors namely primary sector, secondary sector and tertiary sector. Initially public sector was held responsible for the operation of all the three sectors but with the advent of modern Bhutanese economy, private sector plays a significant role in enhancing production and profitability.

This paper briefs on the background of the public and private sectors in Bhutan, their contribution towards GDP, employment and social welfare. With the process of modernization, privatization is given more attention and government aims to strengthen the privatization strategy to generate more revenue, employment opportunities and expand the country’s economic operations.

Background of Public and private sector.

Public Sector.

Public sector in Bhutan is the part of the economy controlled by the nation and is concerned with providing basic government services. Akin to majority of the developing countries, public sector in Bhutan includes education, health care, police, military, public roads, communication, etc.

The public sector can be defined as:

“The public sector is that portion of society controlled by national, state or provincial, and local governments”. (Investors word.com 2011)

The Bhutanese economy is based on the unique development philosophy of Gross National Happiness initiated by the Forth King Jigme Singye Wangchuck. The Royal Government has played a leading role in the modern sector of Bhutan’s economy. The government has direct involvement in every developmental activity due to the shortage of local entrepreneurs and capital from the private entities in the country. The public sector overlaps with the private sector in producing or providing certain goods and services. In Bhutan almost every large organizations are under the ministries of the Royal Government. For instance: Ministry of Health, Education, Trade and Industry, Communications etc… are all public owned.

Since the first Five Year Plan in 1961, the government has addressed the need for basic education other than monastic education. Education programmes were given boost in 1990 when the Asian Development Bank granted a US$7.13 million loan.

Bhutan’s modern health care development accelerated with the establishment of the Department of Public Health in the 1960’s and the opening of new hospitals and dispensaries throughout the country. Even today, Ministry of health is fully under public sector. Likewise, Agriculture sector, communications, major industries like Penden cement authority, Chhukha Hydro power corporations, Bhutan tourism Industry, Druk Air etc…which forms the highest revenue in the country till date the public are under the public sector.

The Private sector.

The role of private sector is gaining more importance in Bhutan and the world as a whole. The private sector can be defined as:

“Part of national economy made up of, and resources owned by, private enterprises. It includes the personal sector (households) and corporate sector (firms), and is responsible for allocating most of the resources within an economy”. (Business dictionary.com, 2011)

The Bhutan Chamber of Commerce and Industry is a non-profit organization comprising of business community from all around the country. It was established in 1980 with the motto of developing and being responsible for private sector development. The BCCI provides linkages between the government and the private sector and works closely with all the government agencies, autonomous organizations, international organizations and donor agencies towards facilitations and promotion of trade and industrial development in the kingdom. (BCCI, n.d) Private sector development plays an important role in the economic development of the country. Various aspects of private sector development are addressed in different decision plans.

During the 6th FYP, government adopted appropriate strategies and policies to recognize the role of private sectors. Government continued to promote an “enabling environment” (8th FYP, 2002) for the continual growth and to take greater share in the private sector during the 7th FYP. The 8th FYP general approach is toward privatization and private sector development.

‘It mainly focuses on privatization of public sector activities by empowering various programmes like outright sale, partial minority ownership, management contracting, lease management and commercialization’. (8th FYP, 2002). This will encourage private sector efficiency and profitability. The plan also focuses on enhancing the current level of activities and promoting new activities.

Privatization was given due importance since the 7th FYP. Public enterprises were divested. The state trading corporation of Bhutan divested 49% of its shares, and the management of the company was given over to the private sector.(Development towards GHN, 2000.p. 28) Some of the examples of divesting programmes by the public sector to the private sector are as follows:

Calcium carbide plant, gypsum, slate and coal mines was fully privatized.

Sha slate mines in Wangdiphodrang, salt iodination plant in phuntsholing was also privatized.

Tourism sector, hotels and transport sectors are successful private firms now.

Public enterprises such as Druk Air, Hydro Power Plants, Bank of Bhutan, Bhutan Polythene corporation, Fruit Processing Unit in Paro etc…could not be sold to private sectors as they were not financially strong and most of them lacked interest. (8th FYP, 2002). Therefore public sector will remain to monitor the large industries in the country like Power Corporations, Dungsam cement project etc…because such projects are beyond the capacity of the private sector.

Private sector also has a lead role to play in different ministries of the Royal government of Bhutan. For instances:

Ministry of Agriculture – private food processing units such as Agro-based industry in Samtse manufactures pickle, juice etc. Druk Seed Corporations has successfully been achieved.

Ministry of Trade and Industry – privatization of micro and mini hydel power plants.

Ministry of communication- road constructions, postal services and forms of transportation like buses and taxis are privately owned.

Ministry of Health- Private clinics are initiated to encourage doctors to work efficiently and maximize their earnings.

Ministry of Education – Private schools especially at pre-primary and degree level have become essential in shaping the country’s future.

The main economic indicators of economic indicators in Bhutan are Gross Domestic Product, Gross National Income and International Trade.

In table 1, the real GDP in 2011 increased to US$ 1500. The real GDP growth from US$ 125.3 million in 2006 to US$ 131.3 million in 2007 with the growth rate of 21.4 percent has also been recorded. With the average exchange rate of Nu.41.1 per 1 US$,(2010) Bhutan’s GDP is therefore estimated at Nu. 61650 in 2010. This mainly accounted to the revenues from hydro-power sector, tourism and construction of infrastructures in recent years development plans. The current account of balance of payment (% in GDP) is recorded at -4.3, 12.2, -2.2, -9.6, -7.2, -13.8 in the year 2006, 2007,2008,2009,2010 and 2011 respectively. The inflation rate based on implicit GDP deflator (base year 2000) decreased to 4.5% in 2010 compared to 8.0 in 2006.

Public and private sector’s contribution towards GDP of Bhutan.

The public and private sectors work as the two hands of the Bhutanese economy. The contribution of both the sectors contributes to the nation’s capital formation. For instance, Public sector initiates various large economic activities like the hydro power which forms the major part of country’s GDP and the private sector take the responsibility in constructions of dams and micro, mini hydro power projects. Both public and private sectors are categorized into three sectors namely:

From the above table 2, we can find that the tertiary sector has recorded the highest growth at 12.2 in 2009 followed by secondary sector at 4.1 and primary sector at 1.6. this is mainly because of the structural transformation and development in community and social services, communications and storage, construction and transport, manufacturing and financial service sector.

The primary sector includes agriculture proper, livestock production, forestry and logging, mining and quarry. The overall performance of the agriculture, livestock, and forestry sectors improved during 2009. The forestry and logging sub-sector revived from its negative growth of 1.4% in 2008 to 3.9% in 2009. In 2009, primary sector’s contribution contracted by 1.6% down from 2.5% in the previous year. Corresponding, its sectors contribution to real GDP growth declined 0.5% in 2008 to 0.3% in 2009.

The secondary sectors share to nominal GDP also saw a slight decline from 20.7% in 2008 to 20.5% in 2009. This was mainly credited to the negative growth in mining and quarrying sector. The secondary sector includes manufacturing, electricity and construction. The real GDP in this sector declined from 5.5% in 2008 to 4.1% in 2009. This was mainly due to decline in manufacturing sector and electricity. The real growth in manufacturing sector dropped from 8.5% in 2008 to 6.9% in 2009. However, due to the construction of hydro-power and related infrastructures contributes, a positive growth rate of 16.1% in 2009 from – 10.2% in 2008 was recorded.

Bhutan’s tertiary sectors performance improved in 2009 with 12.2% growth compared to 4.8% in 2008. Correspondingly, this sector’s share to nominal GDP expanded to 39.8% in 2009 from 38.4% in 2008. (RGoB, RMA 2011)

Employment.

Despite the endless developmental efforts by the public and private sector, unemployment has remained a burning issue in the Bhutanese economy. With the growing population and increasing literates, unemployment has become a fundamental problem in the country.

About 50,000 school graduates and 19,000 migrants from rural to urban areas are expected to enter Bhutan’s labour market in 2002-2007, making employment generation, particularly in the private sector, an urgent need. (Bhutan country strategy paper, 2007). Most of the graduates look for government jobs in urban areas. This, coupled with the rural-urban migration, would mean that Bhutan will have to create around 14,000 jobs annually. The private sector will not be able to take all the job seekers. The limited entrepreneurial tradition and the high status accorded to government employment, together with generally inflated wage expectations (relative to the productivity level) make job creation a daunting task for such a small country. To meet this challenge, the Royal Government of Bhutan has set up many vocational training institutes to provide the job market with skilled workers in a wide range of trades. (Bhutan country strategy paper, 2007).

Although share of primary sector in GDP is gradually decreasing, agriculture is still the predominant sector providing employment to around 65.37% (NSB, 2009)

of the labour force. The private sector is emerging as the important sector generating employment opportunities for the rapidly increasing labour market. Although employment data is weak in Bhutan, it is estimated that around 60,000 people are employed in the formal sector. Of these, approximately 22, 0000 are employed in public sector institutions (of which 14, 258 are employed in the civil service). This implies that around 60 percent of total formal-sector jobs are in the private sector. However, of the total 60,000 formal sector jobs, it is estimated that 50 percent are held by non-nationals. As the share of non-nationals in public sector institutions is likely to be very small the majority of these 30,000 non-national workers are employed in the private sector. (Private sector survey.p. 9)

There are assorted difficulties faced by the Public and private sector in the development process.

Difficulties in development of private sector.

The development of a financial market has a direct relationship to the growth of private sector. The private sector lacks capital. High rate of interest is charged on borrowings. Innovative forms of lending are limited and the existing collateral-based lending does not promote entrepreneurship. (Development towards GNH,p.86)

Most private business is small and family owned but lack professional management. Job opportunities in private sector continue to be less attractive then the Royal Government despite the introduction of Chathrim for employment in the private sector. (Development towards GNH,p.86)

Privatization is a new developmental phenomenon and requires a ‘enabling environment’. The pace of setting up a comprehensive and harmonious environment needs to be stepped up.

Relatively small size of the local market.

Lack of entrepreneurial expertise and experience. There is lack of entrepreneurial talent due to the very “new” nature of most private sector activities in Bhutan;

Shortage of domestic skilled and unskilled labour.

Lack of physical infrastructure and establishment site.

Lack of competition.

Difficulties in the development of the public sector.

Bhutanese economy largely depends on foreign aids. The budgets for the development activities are received through grant, aid, debt and entire revenue of the country. The revenue of the country is very minimal to undertake developmental activities. Therefore, country is compelled to depend on public debts which in long run have to be paid with the interest and it affects the balance of payment.

Bhutan has a rugged topography and her aim to maintain 60% of the area under forest cover makes regional development difficult.

Rescheduling in undertaking the progress. The developmental activities in case of public sector are based on governments set of rules which leads to rescheduling and delay in progress.

Lack of proper accounting and auditing in public sectors. There is no regular system and mechanism to provide public sector accountants with continuing professionals and training.

Lack of skilled and unskilled labour. One-half of the population is considered literate with limited skills and experience. We have less number of technically trained professionals. Thus, the lack of adequate human resource has forced our private and public sector to remain technically backward leading to very slow space of progress.

There should be improvement in the code of conduct amongst the civil servants. Procrastination is a common problem in various governmental agencies. There are neither updated reports nor specific data available. Proper working hour should be allotted and outcome should be studied for constant progress.

Bhutan’s financial system is undeveloped and noncompetitive. It only offers very basic financial products and at a fairy high cost.

Conclusion.

The behavior of the public and the private sectors determine the success and failures of the Bhutanese economy. They are the pair of hands of the Bhutanese economy. Public sector is the part of the economy concerned with providing basic government services and private sector forms the part of national economy made up of, and resources owned by, private enterprises. Both the sector have shown rapid development progress in terms of economic and social welfare. Although at present the private sector in Bhutan is small and lacks absorptive power, the government places considerable emphasis on its role as the engine of Bhutan’s future growth. Huge employment opportunities are created due to new private firms and the existing markets in the public sectors. However, both the sectors are facing enormous problems in the development process. In order to improve the pace of development and to increase the GDP of the nation, it is recommended that the public and private sector work in harmony and frame policies such that private sector receives equal priority as the public sector. It is also recommended that the civil servants code of conduct be checked. Proper working hour should be allotted and outcome should be studied for constant progress. To improve the efficiency and the quality in the developmental activities, there should be more production of local professionals and skilled labour and implement ways to strengthen the existing sectors.