Economic Development Of The Country Bhutan Economics Essay

Bhutan being the developing country its economic development started only in the early 1960s with the modernization of the country with the implementation of Five Year Plan. After that Bhutan made significant difference in the development. The Bhutanese economy lacks the private sector and it becomes mixture of private and public economy. The public sector is the primary provider of core services such as health care, education, social services and all level of government services.

However, the privatization began bit late in the 6th FYP with privatization of public sector. Private sector is the engine of economic growth and therefore, government prioritizes the public sector. At the initial stage of planned development, there was not much concern was given to private sector. According to Planning Commission, there was no private sector at the beginning. There are various economic development indicators which includes gross domestic product, economic development. Literacy rate and income distribution.

The overall contribution towards the GDP has been increased but in particular public sector contribution rises gradually whereas, private contribution is fluctuates over the year due to the some economic factors. Real GDP increase from 4.7% to 6.7% in year 2009. Both the sector generated significant employment opportunity and public sector employed skilled one and provides relatively high wages. Hospital and schools is two largest employers in many rural communities. In other hand, private sector creates jobs, increase income and reduced poverty rate. The development of public and private sector is held back by the nature of topography, small size of market, lack of competition and skilled worker, and basic financial system and non-competitive. Budget constraint and rescheduling in undertaking the process has given challenges in the development of public sector in Bhutan.

Introduction

Bhutan is a small kingdom in the eastern Himalayas, cover of an area of 38,394 square kilometers. Though country is being landlocked, with difficult terrain and a widely dispersed population, it made rapid socio-economic progress. There exist significant changes has undergone in the Bhutanese economy since inception of economic development planned. Bhutan today is the youngest parliamentary democracy in the world. In each and every country, the public and private sector play a key role in the developmental activities of the economy and for the smooth functioning of the government. Private sector and public sector are important segments of any economy in the world. The growth of economic sector determines the progress and the development of economy.

Therefore, this particular paper will be discussing on the roles that the private sector and public sector play in the economic development of Bhutan. The discussion includes definition, history of public and private sector development, indicators of economic development, contribution towards GDP from private and public sector, employment generation from both the sectors, and difficulties in development of private and public sector in Bhutan.

Definition

In economics, the term private sector is that part of economy which is both run for private profit and is not controlled by the state or is independent. In other words, it is part of national economy made up of and resources owned by, private enterprises. This sector includes the personal sector i.e., households and corporate sector, and is responsible for allocating most of the resources within an economy. Wilson and Clark, (1997, p.76), stated that “The private sector is the part of economy that is owned by individuals and operated for their personal benefit. It is made up of private citizen”. This views gives an idea that private sector is the part of economy sector where the individual has power to make their own choice of production for their own benefits and compete with other sector in the economy.

Whereas, public sector is the part of economy that concerned with providing basic government services to the society, which consists of public goods whose benefits are collectively consumed and the goods are non-rival. However, composition of the public sectors varies from country to country base on the rate of economic development. The public sector is the economic sectors which benefit all of the society and sector that encourage equal opportunity. Therefore, Wilson and Clark (1997, p.77) defined public sector as “The public sector is the part of an economy that is owned by and operated for the benefit of the whole economy”. Further it is defined by Holton and Clark (1997) as the part of the economy that is owned by the government which provide benefits to all in the society and not just who uses the service.

History of Private and Public sector Development in Bhutan

Bhutan has started its economic development in co-incident with modernization. The modernization started with the inception of first five year plan in 1961. At the initial stages of its planned development process, not much of the concern was given to the private sector and there was only agriculture as a private sector activity that was supplemented by some immature trading facilities. According to Planning Commission Secretarial (1999), in Bhutan there was no private enterprise at the beginning. However, in later the transformation of the economy has been dramatic changes with a rapid growth in urban centers, the establishment of infrastructure services, the most important thing is with the development of hydro power sector. Therefore, economic growth has influence the growth of both private and public sector.

The privatization began in the 6th FYP period (1987-1992) with privatization of public sector undertakings, corporatization of government agencies, and disinvestment of government equity. Nevertheless at the initial Bhutan has a small, new and relatively underdeveloped private sector but, at the present scenarios, private sector is operating in a wide range of activities consists of power intensive industries like cement, ferroalloys and calcium carbide, manufacturing industries, group of saw milling, tourism sector, and construction. Bhutan government privatized the sector, given the fact that the private sector is the engine of economic growth.

Indicators of Economic Development

Indicators are classified into different categories base on developed and developing country. Bhutan being developing country, some of the important indicators are;

Gross Domestic Product.

The rate of growth of economic development is one of the major indicators of the development. In other words, the rate of economic growth is measure by the per capita income and the Gross Domestic Production (GDP). The GDP is the total output of the goods and services that are produced by the nation within the domestic territory of given country in particular given time. Therefore, to achieve the economic growth the economy have to focus on the certain economic components such as national income, Gross National income and per capita income of the individual. The gross domestic product for the year between 1996 and 2005 is shown in the following graph.

Source: Statistical Yearbook of Bhutan

The diagram above clearly indicates that the gross domestic product in Bhutan has been increasing over the year and in turn economic activities are increasing. In 1996 there was Nu. 11405.2 million and it has increased to Nu. 13971.1million in 1997. It further increases to 32,178.3 m and 36941.6 in the year 2004 and 2005 respectively. By observing this trends we can say that economic development in our country is increasing.

Economic Development

Economic development is another indicators and measure of the welfare of human society level. The economic development is concerned with the eradication of poverty and to bridge the gap of inequalities, political freedom and sustainable development.

Literacy rate

According to United Nation Development Report, the literacy rate refers to the percentage of those aged 15 and above who are able to read and write a short, simple, and statement on their everyday life. Literacy rate play as a indicator of economic development in the sense more the literacy rate means more skilled human resource are available in the economy since education is the foundation for the development process. This also help in development of human resources. Human development is mainly deals with the development of socio-economic measures; non- monetary factors and it also include the life expectancy. In other words, human development is mainly concern with literacy rate, knowledge and standard of living.

Income distribution

The national income distribution is another indicators for the economic development of Bhutanese economy. The pattern and the nature of the income distribution determined the economic development in the society. For instance, a country with higher inequality distribution of income will directly affect to their development by creating huge gap between have and have not. Therefore, nation with low inequality income distribution can have higher rate of economic development. Thus, the income distribution play key role in the economic development of the country.

Contribution of Public and Private sector towards GDP/GNI

Bhutan being the agrarian economy, Agriculture sector has been backbone of our economy. Apart from this sector, construction and manufacturing contributes significant shares to the GDP of country at an average growth rate of 6.5% and 13.5% respectively. However, the contribution made by both the sector towards GDP is very to much significant. Due to the commissioning of Chukha Hydropower Project and other private companies such as BCCL, BBPL, PCAL, BFAL etc. contribution is drastically increased over the few years. Moreover the under construction of hydropower projects like PHPA, Kholongchu Hydropower Project, Mangdichu Hydropower Project, Dungsam Cement Corporation Ltd, would definitely contribute a significant share to the GDP in the forth coming years. However, development of private sector is slow progress, this is due the shortage of financial sector to support private sector which includes lack of competition and market-orientation, limited institutional capacities, and limited access by small and medium enterprises to credit, especially in rural areas in Bhutan. Therefore, in the future Bhutan has to really look into the financial support to develop private sector. The Royal Monetary Authority (RMA), found that the real GDP of Bhutan remained at 6.7% during 2009. The GDP increase from 4.7 to 6.7% in the year 2009 because of accelerated performance in the construction and services sector. Even the agricultural sector also improved a lot in that particular year. The contribution made by the public and private sector towards GDP in Bhutan for the certain year is given below.

Table.1: GDP and its Aggregates at current prices (Nu. In million)

Description

2000

2005

2006

2007

2008

2009

Public sector

4330,96

7911.51

8644.25

9454.77

10372.57

13,082.07

Private Sector

9415.96

7911.17

15,553.70

18864.06

21,761.63

Source: National Accounts Statistical, 2009.

The above table 1 represented the GDP and its Aggregates at current price in Nu. In million and it shows that public sector contribution increased year by year whereas private sector contribution decreases over the year and after some year again rises.

Employment Contribution from the Sectors

Bhutan faces the challenge of matching gain from strong economic growth to rising expectations of expanding employment opportunity and welfare improvement, providing employment opportunities educated. Since private sector is underdeveloped agriculture will need to absorb the bulk of the rapidly growing labour. Public sector employment is one segment of the service sector that employs skilled labour and provides relatively high wages. The location of public services and direct and indirect employment associated with the facilities are an important source of economic growth. Hospital and schools is often the two largest employers in many rural communities and are important to promotion of economic development (Doeksen etal, 1997).

The private sector will be the engine for economic growth, creating jobs and increasing incomes necessary to lift People out of poverty .Most people escaping poverty, finds jobs in private firms but not in public sector.

Table. 2: Number of person engaged in industrial sectors by employment status and

Sex, Bhutan, 2000.

Female

Sector

All female

proprietor

Employee

Casual

Skilled

Unskilled

Private company

341.0

40.0

149.0

83.0

69.0

Government Company

1,094.0

201.0

383.0

88.0

422.0

Male

Sector

All male

Proprietor

Employee

Causal

Skilled

Unskilled

Private Company

2,406.0

7.0

601.0

648.0

707.0

443.0

Government Company

3,632.0

–

1,607.0

566.0

789.0

670.0

Source: Statistical Yearbook of 2010

Difficulties in Development of Private and Public Sector

Bhutanese economy faced various challenges with respect to the development of private and public sector. However, some difficulties are common for both the sector. According to Ministry of Planning (1996), the factors that made difficulties in development of private and public sectors are as follows;

Bhutan is landlocked

Bhutan being least developed country in the world, it lack infrastructure and it is the main obstacle in the progress of private sector. The road network is essential for economic development, however, country being mountainous and landlocked country it is very much difficult to connect each and every corner of the country with the road and the cost of transportation is high.

Lack of competition

The country really lacks the competition among sector and it becomes monopoly. The lack of competition among the sector occurs due to the inequality income distribution which further increase the gap between have and have not. Income are accumulated or owned by few hands and only those people can invest for the production, and its further raise their income. On other hand, poor people become poorer in the hand of richer ones and thus, it contributes some challenges in development of private sector in the economy.

Extremely small market.

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%

Non-Competitiveness of production related to foreign supplies 17%

Bureaucratic obstacles 16%

Inadequate and costly financing 16%

Source; Asian Development Bank (ADB), report of country Strategy and Program

(2005).

Some difficulties of the public sector are;

Budget constraint

Rescheduling in undertaking the process

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 attract 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.