Bhutan’s Graduation from LDC: Opportunities and Challenges
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Sneha M
Ms. Sneha M. is a Research Analyst at the South Asia Centre at the Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA), New Delhi. She has published multiple research… Continue reading Bhutan’s Graduation from LDC: Opportunities and Challenges read more
Keywords: Bhutan, United Nations
Bhutan, known for its unique developmental model centered on collective happiness (gross national happiness), has achieved yet another milestone. By the end of 2023, Bhutan joined the group of developing middle-income economies by foregoing its title as a ‘Least Developed Country’ (LDC).1
Attaining non-LDC status signifies a notable achievement in the developmental journey of landlocked nations. However, the ongoing reduction of international support measures associated with this status presents potential challenges for Bhutan as the country continues to work towards sustaining its integration into the global economy.
UN Criteria and Evaluation Process
The United Nations (UN) classifies LDCs as nations characterised by low-income levels and substantial structural barriers hindering sustainable development. This category of LDCs was formally established in 1971 through General Assembly Resolution 2768 (XXVI). The decision to include or graduate a country from the LDC list is determined by the UN General Assembly, relying on recommendations from the Committee for Development Policy (CDP) and subsequently approved by the Economic and Social Council (ECOSOC).
The CDP conducts triennial reviews of the LDC list, which involves assessing the eligibility of countries for inclusion or graduation from the LDC category. This process aims to provide targeted assistance to the most underdeveloped nations within the developing world. Currently, the UN recognises 45 nations as Least Developed Countries (LDCs).2 Among them, nine are situated in Asia, three in the Pacific, one in the Caribbean, and 33 in Africa.
The LDCs undergo evaluation based on three benchmarks—Gross National Income (GNI) per capita, Human Assets Index (HAI) measuring health and education outcomes, and Economic and Environmental Vulnerability Index (EVI).3 To be promoted from LDC, a nation must meet the graduation requirements for two of the aforementioned criteria in two consecutive triennial review periods of the CDP. No matter how well a nation does in the other two criteria, it may be recommended for graduation if its GNI per capita increases to twice the predetermined level.
In sum, achieving these goals may necessitate the implementation of a combination of strategies. These could encompass stimulating economic growth through infrastructure investments, improving governance, diversifying the economy, addressing environmental concerns, and making substantial investments in human development.
Charting Bhutan’s Economic Course
In 1971, Bhutan joined the initial cohort of LDCs.4 Over subsequent decades, the Himalayan Kingdom has undergone a remarkable transformation, experiencing substantial economic growth and witnessing an overall enhancement in the living standards of its populace.
Bhutan’s economic growth since 1961 has been marked by a trajectory of development plans. Initiated with India’s support during the first and second Five Year Plans (1961–1972), Bhutan laid the foundation for its economic journey in 1961. The subsequent decades witnessed steady growth, prominently influenced by development in the hydropower sector.
In the 1990s and 2000s, the opening of Chukha Hydropower Plant played a pivotal role. In the 2010s, the focus on sustainable development and diversification of sectors such as tourism contributed to continued economic resilience. Moreover, from 2010 to 2019, Bhutan’s economy exhibited robust expansion, boasting an average annual Gross Domestic Product (GDP) growth exceeding 5 per cent, resulting in significant reductions in poverty.
Bhutan has achieved remarkable advancements, including substantial progress in education, with an estimated overall literacy rate of approximately 66 per cent in 2018. The provision of electricity has become nearly universal, reaching 98 per cent coverage in 2017, and basic access to potable water services extended to about 97 per cent of the population in the same year. The country’s growth has resulted in a remarkable decline in the national poverty rate, dropping from 23.2 per cent in 2007 to 8.2 per cent in 2017. In terms of the Human Development Index (HDI), Bhutan scored 0.654 in 2019, surpassing other Asian LDCs.5
However, the year 2020 brought unprecedented challenges as the government implemented early-stage lockdowns and border closures in response to the COVID-19 pandemic. Despite effective containment efforts, these stringent measures took a toll on the economy, contributing to an estimated 10 per cent decline in GDP.
Regardless, the February 2021 Monitoring Report by the UN CDP underscored Bhutan’s exceptional performance, with GNI per capita growth estimated at USD 2,982, three times the graduation threshold of USD 1,222. Additionally, Bhutan’s Human Assets Index (HAI) score exhibited substantial improvement, reaching 79.4 (compared to the required score of 66). Despite excelling in GNI per capita and HAI, Bhutan faces challenges in meeting the Economic & Environmental Vulnerability Index (EVI) criterion, with an EVI of 25.7, below the threshold of 32.6 Nonetheless, this positions Bhutan as one of the fastest-progressing non-oil exporting LDCs.
Despite these challenges, there has been a noteworthy rebound in economic growth, with projections indicating an approximate 4.2–4.7 per cent expansion since the financial year 202223.7 In FY 2022–23, the economy again grew by 4.6 per cent, driven by reopening of the borders for tourism in September 2022. The industry sector expanded by 5.1 per cent, with growth in construction and manufacturing, while the services sector grew by 5 per cent, creating more jobs, especially in transport and trade services.8
Prospects and Predicaments
Bhutan’s exit from LDC carries significant promise across multifaceted dimensions of its development trajectory. Economically, this transition opens new doors for the nation, ushering in opportunities that have the potential to ignite robust growth and development. The improved economic conditions that accompany such a shift may act as magnets for foreign investments, encouraging diversification of industries and enhancing Bhutan’s recognition on the global stage.
In addition, the anticipated focus in the 13th Five Year Plan (FYP) on infrastructure development holds the promise of increased efficiency and connectivity.9 This could manifest through the creation of advanced transportation networks, energy infrastructure, and improved communication systems, all of which play crucial roles in fostering economic vitality. As Bhutan asserts greater autonomy in decision-making post graduation, a noticeable decrease in reliance on foreign aid could be anticipated.
This transition empowers the nation with increased control over its policies and resources, fostering a trajectory towards a self-reliant and robust economy. Importantly, the positive effects extend beyond economic dimensions, encompassing notable improvements in human development, particularly in healthcare, education, and overall living standards.
However, amidst these promising prospects, it is crucial to underscore the importance of responsive governance and strategic planning. Navigating the challenges associated with such a transformative phase necessitates prudence and vigilance to prevent potential economic pitfalls in the years to come.
Grappling with various challenges and developmental constraints, Bhutan has significant economic vulnerabilities exacerbated by natural disasters. Its small and vulnerable economy, characterised by mountainous terrain, sparse population, limited industrial development, constrained global market access, and a narrow product range meeting international standards, faces predicaments upon graduating from its LDC status. The graduation will impact LDC-specific international support measures (ISM) in international trade, official development cooperation (ODA), and climate resilience support.
The Himalayan Kingdom currently benefits from LDC-specific preference schemes, such as the Generalised System of Preferences (GSP) providing tariff exceptions, and duty-free and quota-free (DFQF) market access in the European Union (EU) and Japanese markets. Regional trading agreements, like the South Asian Free Trade Agreement (SAFTA), also offer preferential market access. However, exiting LDC status implies the erosion of these preferential trade agreements, resulting in increased tariffs and negative implications for export and economic diversification efforts.10
Bhutan’s development success has historically relied on natural resources, particularly hydropower generation and tourism. Despite the swift rise in per capita income, reflected in the evolution of GNI per capita, there are concerns about structural impediments hindering economic diversification. Hydropower, as a capital-intensive sector, significantly contributes to the GDP, fostering the growth of energy-intensive industries.
In the realm of international trade, Bhutan currently stands outside the World Trade Organization (WTO) but is actively considering membership and may join shortly. As a non-WTO member, Bhutan is not bound by WTO provisions, lacking the protective cover of multilateral rules. The potential benefits of WTO accession, including facilitating export expansion, must be weighed against challenges, heightened scrutiny, and the necessity to undertake commitments, especially considering the capacity constraints of LDCs acknowledged by WTO members. Nonetheless, the predominant worry revolves around the potential consequences of climate change on Bhutan’s economic advancement, presenting a risk to the achievements made through persistent efforts.
Conclusion
For Bhutan to sustain its growth and development trajectory post graduation, a comprehensive set of policies is imperative to tackle the multifaceted challenges inherent in its development path. As a small, vulnerable, landlocked nation heavily reliant on a limited range of export commodities, Bhutan remains exposed to economic vulnerabilities and natural disasters. The country’s ability to continue its developmental journey after graduation hinges significantly on the graduation process itself, emphasising the necessity of a seamless transition.
A pivotal aspect of Bhutan’s transition strategy should center on alleviating structural challenges, enabling the effective implementation of 13th FYP and cultivating the resilience required for navigating the post-LDC status environment. In sum, the transition should address vulnerabilities through economic diversification, developing productive capacities for structural transformation, and bolstering disaster management to enhance economic and natural disaster resilience.