Bhutan, located in the eastern Himalayas, is a small landlocked country between the People’s Republic of China (PRC) and India. Virtually the entire country is mountainous. Despite challenging geography and limited connection to the global markets, the country managed to ignite and sustain strong economic growth by unlocking its hydro potential. 

Bhutan’s development performance has been guided by its philosophy of gross national happiness—of striving to balance spiritual and material advancement through four pillars: sustainable and equitable economic growth and development, preservation and sustainable use of the environment, preservation and promotion of cultural heritage, and good governance.

Visiting Bhutan was quite an experience. It was remote and seemingly disconnected not only geographically, but also spiritually from the tainted world of economic means. It seems the peaceful, nature-loving, traditional Bhutanese could do well without much assistance from economic planning and modern technology. However, the truth is Bhutan’s happiness also relies heavily on its economic growth and development and its policymakers strive to achieve harmony and balance in the economic development process like those in any other countries. 

Bhutan has enjoyed sustained high economic growth at an annual average of 8.5% since 2001. Hydropower development, which started in the mid-1980s and the subsequent export of surplus electricity to India have largely sustained the growth. Bhutan’s relatively strong growth also helped reduce poverty and advance social development. The government’s investments in social and human development allowed for a number of its targets under the Millennium Development Goals (MDGs) to be met earlier than scheduled. 

Bhutan’s economic outlook remains favorable in the medium term. However, its narrow economic base leaves its economy vulnerable, especially to cyclical swings in certain sectors. While hydropower development has been a powerful driver for rapid growth, the country’s economic growth eventually became too dependent on the hydropower project cycle and related construction. For example, economic growth slows when there is no new construction or additional production in the power subsector. In the meantime, other non-resource based sectors remain largely underdeveloped except to some extent tourism and other services activities such as transport, storage, and communication as well as finance, insurance, real estate, and business services. The private sector remains small and faces many hurdles to providing sources for future economic growth. 

Bhutan’s quest for a society that provides not only economic but also spiritual well-being is a brave call.

To diversify the economy while maintaining high rates of growth, additional drivers of growth that exploit Bhutan’s comparative advantage need to be identified. In this context, ADB’s upcoming country study puts forth two new industries as emerging growth drivers. The first is information and communication technologies and the second, “cleaner” manufacturing, in particular, micro, small, and medium enterprises. 

These two new drivers of growth may offer opportunities that are complementary to Bhutan’s pursuit of inclusive and sustainable socio-economic development, when right conditions are met. The government recognized the need to provide a conducive environment to encourage more private sector investment, as an essential source of growth in the future. The Tenth Five-Year-Plan affirmed this core strategy of vitalizing industry for poverty reduction, relying heavily on how the private sector performs and delivers, within the context of empowering micro, small, and medium enterprises for industrial expansion and employment generation. Such endeavor should start with addressing the key constraints to growth, including: (a) creating fiscal space, (b) ensuring adequate and quality infrastructure provision, (c) improving access to quality education (particularly of secondary, tertiary, and vocational education) to address labor market mismatch, (d) broadening access to finance, and (d) providing level playing field to promote competition. 

Like its guiding principle, the goal of Bhutan’s socio-economic development presents something new to the world. Perhaps, Bhutan’s quest for a society that providing not only economic but also spiritual well-being is a brave call. But whatever the outcomes, it may be worth pursuing harmony and balance in economic growth and development. After all, our understanding of economic growth and development is also evolving, that is to consider inclusiveness and environmental sustainability.