The Public And Private Sectors In Bhutan Economics Essay

The private sector is the part of the economy which runs for private profit and it is not controlled by the government where as public sectors are that part of the economy conserved with providing basic government services.

In Bhutan, both public and private sector plays an important role in economic development of the country. Though private sector is considered as an engine of economic growth, which contributes more to government revenue, generates high employment opportunities and contributes more towards country’s GDP (GNI), and increase the economic growth. But at the same time public sectors also plays an important role in reduction of economic inequalities and public sector is an important instrument which the country can employ in preventing of monopolistic tendencies. The point of the public sector can be utilized to promote general welfare of the country.

Since Bhutan is landlocked country with low entrepreneurial talent due to very new nature of most sectoral activities, and there are certain difficulties in development of private and public sectors like inefficient human factors, lack of credit facilities, inadequate infrastructural facilities, lack of technology and also lack of resources etc.

While Bhutan is on the path to be a middle income country by 2020, with self-reliance economy and private sector to play the lead role and government move as facilitator and promoter and wants to achieve full-employment by 2020 (estimated, 97.5%). Both private and public sector plays an important role in economic development of the country. Though private sector is important for economic growth but public sector is also an important instrument for economic development and social welfare. Both public and private sector have contributed to GDP (current 6.7%) which helped in increasing the government revenue and Gross domestic capital formation in the economy.

Private sector is the branch of an economy that is governed by an individual that does not falls under the direct control of government as are designed to earn their own benefits. The private sectors make their own choice of production for their benefits and compete with other private sectors in the economy. Wilson and Clark (1997, p.76) defined private sector as “The part of an economy that is owned by individuals and operated for their personal benefit. It is made up of private citizen”. This statement means that the private sector is the privately owned business where individual operate for their sole benefit and the private individual has right to determine over their production, allocation and distribution of goods and services. The private sector produces private goods and services that mostly promote the economy welfare of owners of private sectors. It is every individual’s views to maximize their cost and benefits through the idea of competition with others. The competition and efficient utilization of resources is the guiding principle behind every private sector. Nevertheless, the private sector produces and generates majority of income in economy development which potentially contributes to the economy growth. Therefore, private sectors are sensible to refer as the engine of economic growth.

Public sector on the other is a different sector from private sector as its services are fully regulated by government. The resources in this case are publicly owned. According to Wilson & Clark (1997, p.77) states, “The public sector is the part of the economy that is owned by the whole society and operated for its benefit”. Unlike private sectors, the costs and benefits in case of public sectors are collectively shared by all the consumers in the economy. The components of public sector greatly vary across the country. In Bhutan, public sector includes such services as the police, military, public roads, public transit, primary education and healthcare for the people.

So the following paper will be focusing on the roles of private and public sector that play in the economic development of Bhutan, history of these two sectors. It also discusses some of the indicators of economic development in Bhutan followed by the contributions made by these two sectors towards GDP (GNI) and employment in Bhutan and some of the difficulties in development of private and public sector in Bhutan.

History of Private and Public sector

Bhutan is one of the most isolated countries since 1961, it started its first development plan by opening its door of economy to the rest of the world with the inception of first five year plan with assistance from Government of India. With opening the economy with the rest of the world the private sector activity was only agriculture supplemented by some immature trading facilities. The economy has taken off to a higher growth since 1980 and has registered a long-term average annual growth rate of 7.6% in the 26 years after 1980. The average annual growth rate in the 1980s was 7.4% but de-accelerated to 5.9%, however, accelerated again to 7.9% in the first six years of the present decade. (Economic Development Policy of the kingdom of Bhutan, 2010, p.3).

Today, Bhutan’s private sector is operating in an extensive range of activities in the country at present day. Bhutan had experience the modern system of economy until at the end of self imposed policy of isolation in country since 1961. The wise monarch late king Jigme Dorji Wangchuck ended the age old policy and bought the country into the international mainstream whereby the economic liberalization is the important reform taken by the late king besides other socio-political reforms. The true modern Bhutanese economy started with inception of First Five Year Plan (1st FYP) in 1961.At present Bhutan is in the progress of the 10th FYP and the country has achieved so much within half a century. In modern Bhutan the public sector has contributed so much to the growth of economy since Bhutan is welfare oriented country. The commencement of 1st FYP was the first step towards transforming the rural barter economic system to modern economy. The state undertook ventures in the manufacturing and service sector there was no potential in the private sector during those days.

Indicators of economic development of Bhutan

There are various indicators by which economics use to see the performance of the economy. In the Bhutanese context, some of the variables which are usually adopted to measure the development are listed below;

Gross Domestic Product

Literacy Rate

Measures of Poverty

Life expectancy

Balance of payment

1. Gross Domestic Product

Gross domestic product (GDP) defined as the total output of goods and services that are produced within the domestic territory of a given country during the fiscal year. Bhutan’s GDP stands at Nu. 61,223.5 millions with GDP Per Capita of Nu. 89,639.1 in 2010 (Bhutan 2010, Data Sheet).The real GDP grew at an average of 9.6% over the Ninth Plan period between 2003 to 2007, showing the growth of 21.4% in 2007. GDP per capita in 2002 and 2006 estimated US$ 835 and was US$ 1,414.01. (10th Five Year Plan, 2008-2013, p.4). In 2008, the country’s per capita income was US$ 2152. (Economic Development Policy of the Kingdom of Bhutan, 2010, p.1). So it indicates that the economic development is progressing.

The gross domestic product for the year between 1996 and 2005 is given in the following graph.

Source: Statistical Yearbook of Bhutan 2006

One of the main indicators of economic development is Gross domestic product. It indicates that the gross domestic product in Bhutan has been increasing over the year. So it means that the economic activity in our country is increasing over the years. In the above graph, we can see that the GDP in 1996 was Nu.11405.2million and it had increased to Nu.13971.1 in the fiscal year of 1997. It counts Nu.32.178.3million and Nu.36941.6 in the year 2004 and 2005 respectively.

2. Literacy rate

The literacy rate is the percentage of people who are eligible to read and write in their everyday life. Education is one of the most essential and impressive indicators of economy development. The literacy rate in Bhutan is at 59.5% (Bhutan 2010, Data Sheet, “Towards supporting evidence based-decision making”). It indicates that Bhutan is not economically developed and shows that Bhutan is working hard on education and skilled people in developmental programmes. It is the productive and skilled labors which directly pull up the nation economy. If there is high literacy it also indicates the positive sign of economy were skilled and knowledge of people is considered as driving forces for social and economic development. Therefore, higher the literacy rates better the development condition in the economy.

3. Measures of Poverty

The National Statistical Bureau determined the poverty line as Nu.1096.94 to a person a month, of which Nu 867 is for food and the balance considered as non-food expenditure. Food poverty concerns not only the sufficiency in quantity but also the nutritional intake of food. In Bhutan poverty rate has decreased from 31.7 percent to 23.2 percent between 2004 to 2007. (Poverty Analysis, 2007).

The poverty reduction is the main objective of the 10th FYP and government aims to reduce poverty to 15% by the end of 10th FYP. The recent Mid-term review reveals significant reduction in the poverty rate. The poverty data helps in planning and decision making process to develop the economy.

4. Life expectancy

The life expectancy is another indicator of the economic development which shows that higher the life expectancy, better indicator of economic development. The overall life expectancy was 68.9 were for male was 68.4 and for female 69.4 as of 2010 life expectancy rate. It brings the development in health, education and other social services. So it acts as an instrument that indicates the economic development in a country. (Bhutan 2010, Data Sheet. “Towards supporting evidence-based decision making”).

5. Balance of Payment;

Positive balance of payment shows better economic development as it shows more inflow of capital, more export than the import and better competition in the international market. Bhutan’s balance of payment shows positive because the negative balance of payment is finance through foreign aids.

Contribution of Public and Private Sector towards GDP (GNI) of Bhutan

The GDP of a country is defined as the value of final goods and services produced by normal residents of a country during a fiscal year. Private sector contribution to economic growth in Bhutan is very significant. This is due to strict government control over private sector business activities, lack of access to credit, inadequate legal framework for private sector activities, limited entrepreneurial skills, and an inefficient government-controlled financial system that does not meet private sector credit needs. As also Bhutan’s financial system was heavily burdened with nonperforming loans on average across all financial institutions, were close to 40%. It was therefore imperative to strengthen the financial institutions in many basic ways, to move toward a market-based system as distinct from a centrally administered system, to privatize financial institutions, and to establish an effective banking supervision system. The table below shows the GDP contribution by major private and public sector.

Table 1: Gross domestic capital formation in constant price (Million Nu.)

In current prices

2000

2003

2004

2005

2006

2007

1. Machinery and equipments

3,031

3,476

5,060

4,432

1,408

1,183

Government

973

619

741

535

893

659

Private

2,058

2,857

4,319

3,898

515

524

2. Construction

6,835

10,661

11,272

9,565

9,242

10,671

Government

2,108

1,607

1,880

2,168

2,865

3,679

Private

4,728

9,055

9,392

7,397

6,377

6,975

3. Gross fixed capital formation

9,866

14,137

16,333

13,997

10,650

11,855

4. Change in stock

-354

-204

-44

86

103

53

5. Gross domestic capital Formation

9,512

13,933

16,288

14,083

10,752

11,908

Source: National Accounts Statistics Report 2000-2007

In the table above, the Gross domestic capital formation has continued to increase from 2000 onwards thereafter 2005, there seems a declining trend in the economy.

Employment Contribution from both the sectors

The employment generation by these sectors of economy is the significant contribution towards economic development .Government has launched a concerted effort to create additional 35,000 to 40,000 jobs from the priority sectors with 40-45% in rural areas. Construction sector has employed close to 35,000 people in the past and additional 10,000 local jobs expected in the construction sector over the next three years. The tourism sector is expected to create around 10,000 additional jobs with tourism sector’s aim to increase tourist to 100,000 by 10th FYP.

The current formal sector work force is around 60,000 persons (of which about 30,000 are thought to be non-nationals & employed mostly in the construction activities) the creation of an additional 90,000 jobs in private sector appears as a formidable challenge. Vibrant private construction sector to create employment opportunities for this increasingly literate workforce has been recognized by the Royal government as a high priority issue and now forms a central tenet of the Ninth Five Year Plan.

Table 2. Number of person employed in type enterprise

Sector

Number of persons employed

Government

49,900

Public corporation

10,500

Private corporation

8500

Armed forces

4900

Private Business

66,000

Agriculture farming

180,200

NGO/INGO

1000

Total

320900

(Source: Labor Force Survey Report, 2010)

From the above table we can find that private sector offers more economic employment as compared to public sector and private sector is still working for its betterment. However, Bhutan being backed-up by agriculture, many people are engaged in agriculture sector which also symbolized the literacy rate in Bhutan is low and the living standard of people is poor. Vibrant private business and corporations creates more employment opportunities which shows that the development progress is positive that brings better position in the economy.

Difficulties in Development of Private and Public Sector in Bhutan

1. Inefficient Human resources

2. Underdeveloped infrastructure

3. Financial inadequacy

4. Lack of market

5. Lack of entrepreneurship skill

1. Inefficient Human resources

A lack of skilled Bhutanese workers or manpower and unwillingness of Bhutanese workers to undertake menial or unskilled work. Although Bhutan has made rapid advancement in the field of education and human resource development, much work remains before the nation is equipped with the human resources required to sustain the process of development. The nation’s skill base is extremely limited and just over one-half of the population is considered literate. As 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.

2. Underdeveloped Infrastructures

The lack of infrastructure and the insufficient capital equipments are also the main obstracles in the progress of private and public sectors in Bhutan. Moreover Bhutan has poor capital with low saving and low investment. In order to have capital formation large savings are essential and the rate of saving also depends upon the size of income of the people. Even due to inefficient labor and lack of improved technologies hinders the development of private and public sectors in Bhutan. However, the Bhutan’s young and unstable Himalayan mountain ranges progress very less development with heavy expenditure.

3. Financial inadequacy

Financial inadequacy is also one of the most difficulties faced by both sectors. Our private and public sectors are financially constrained. The most government undertaking has to depend on the foreign aid and other donor agencies. The domestically produced revenue is not enough for all economic activities. The profit in private sector is bare minimum as the commodities are primary product dominated. Therefore, it is very difficult to engender enough revenue to upgrade the business.

4. Lack of market

Bhutan is landlocked country with mountainous and rugged topography most of the inhabitants are scattered. The lack of strong road network lacks a strong market base which further hinders the capital formation in the country. Moreover, with the landlocked country water transportation is absolutely not possible and most of the public and private sectors will be nearby sea level. More over demand for market shares are also low due to people’s low income and low population. Our goods and services have less competence in world market. Therefore it has been always a problem for both sector of the economy to progress.

5. Lack of entrepreneurship skill

The lack of entrepreneurship ability is another factor that backward the economy growth. Though the entrepreneurship is regarded as the corner stone for the growth of economy, most of the public and private sectors lack fundamental key in the development and most of Bhutanese are not risk lovers and they always look for immediate lump-sum reward. The lack of market and private property also pulls back the development. While most of the business individuals lack the business skills that are fundamental in the development of private sectors.

The Role of Private Sector in Bhutan

The private sector produces goods and services that mostly promote the economy welfare of private sectors owners. It is every individual views to maximize their cost and benefits through the idea of competition with others. However, the private sector produces and generates majority of income in economy development which potentially contributes to the growth of economy. Thereby, private sectors are sensible to refer as the engine of economic growth which plays the major roles as given below;

1. Employment generation

The employment generation is the significant contribution from private and public sector of the economy. The development in private sector creates thousands of opportunities which help government to solve the unemployment problems. The private sectors like tourism and construction sector offers huge employment opportunities. The current employment rate is 3.7% as of 2010 (Bhutan 2010, Data sheet).

2. Increase government revenue

The private sector is also considered as the basis government revenue generator. The contribution in the form of tax is also the important source of government revenue. As when more and more public sector develops, there is always explosion of country in to better state. The mode of economy transaction increases and thereby the more revenue or taxes can be generated. Therefore contribution in the form of taxes becomes the government revenue.

3. Infrastructure development

The growth in private sector is an indicator of improvement in the infrastructural facilities in the economy. The social services like health, education, proper water supply and sanitation facilities, transportation, would come up with increase number of private sectors.

Role of Public Sector in Bhutan

To accelerate the rate of capital formation

Capital formation is one of the most important roles of the public sector in the country. Bhutan still has lack of factors that determines the capital formation mainly due to slow development of public sector. The rate of capital formation depends upon saving and investments were Bhutan has low propensity to save and invest.

Redistributing Income

The important role of the public sector is redistributing of income, however, in Bhutan there are many individuals who are not able to earn enough income to survive. It is notice that some members of our society who are handicapped and simply they are unable to work at productive position. On other hand, public sector impose the taxes to the income of those who work and result into redistributing certain part of their income to those who are unable to work. So in context to Bhutanese society, the maximum private property we own are the maximum income we have and more opportunities we have of being capable to produce. This condition tends to make the rich become richer. However, by redistributing income, our government is trying to provide equity and justice among Bhutanese people and it try to make many other opportunities to earn equally. Redistributing of income provide public assistance to low income groups and opening many opportunities available for their survival and this help in alleviating poverty in the country.

Conclusion

The development of public sector started with commencement First Five Year Plan and above all private sector is at emergent stage in our country. However, our economy is young and has a future potential to become the vibrant economy. As our economy is recent phenomenon and it has experienced the achievement of planned economic development. In this paper it reveals that both sectors of the economy challenged by many removable constraints like lack of efficient human capital, market, infrastructure, financial inadequacy and in particular private sector pressured with excessive regulation. So it recommended that government and private individual to invite technical expert to train our human resource and share their views and ideas, to create market for economy. By advancing loans at affordable interest rate. This will help in achieving the role private and public sector in economic development of Bhutan.

To increase our private sector, the government must minimize the regulation to make efficient use of available resources in sustainable manner so that it can also help our private individuals to make use of their full potential skills and resources for the development.Therefore, It is also recommended that government must revise the existing system of plans, policies and strategies that government must make encourage labour and taxation policies like tax holiday and incentives for labour for the developemnt of the private sector.