Bhutan drops to 111th position in Economic Freedom Index

The index is jointly compiled by the Heritage Foundation and Wall Street Journal 

The government in Bhutan may not yet have acknowledged the severity of the economic crisis facing the domestic economy but a slew of international economic rankings show that all is not well with Bhutan’s economy.

Just short on the heels of the International Finance Corporation report that Bhutan had slid six places on the its ‘Ease of doing Business Index’ another prominent ranking has seen Bhutan drop by one place to be the 111th most free economy in the world. This is out of 179 countries.

Bhutan tails far behind countries like tiny Tonga, underdeveloped Swaziland, genocide recovering Rwanda, strife-torn Lebanon etc.

The Economic Freedom Index is a prestigious international index compiled by one of America’s most influential think tanks The Heritage Foundation in collaboration with the Wall Street Journal Paper.

“The fall of Bhutan in this and also previously the IFC indicator is troubling because both indicators deal mainly with regulatory and red tape issues hampering business which can be addressed by the government but are not being addressed,” said a prominent economist on the condition of anonymity.

“These indicators would also give us a strong clue about why despite having a liberal FDI policy we are getting very little investors in Bhutan,” said the economist.

A prominent businessman of a major business house said that the rankings also show that the government’s slogan or private sector development had failed to take off. “The international rankings only show what we already know in Bhutan, which is that the government falls far short on the private sector development front,” he added.

The Economic Freedom Index is important for Bhutan as several major international companies study these and other rankings as information to be factored in before making any investments.

Bhutan’s score has decreased from last year; primarily because of worsening government spending, labor freedom, and trade freedom says the report.

Bhutan is ranked 21st out of 41 countries in the Asia–Pacific region, and its overall score is below the global average.

The report says the public sector, especially hydropower, has long been the main source of economic growth, but the government now recognizes that private-sector development is crucial.

Nonetheless, lingering constraints on private-sector development include the inefficient regulatory framework, pervasive non-tariff barriers, and a rudimentary investment code. The financial sector remains small and without adequate regulation or supervision. The lack of access to financing precludes entrepreneurial growth.

According to the report the foundations of economic freedom are relatively strong, with corruption present but under control, and new steps have been taken to ensure greater security for property rights. It says that recently, a higher priority has been placed on measures to diversify the economy, particularly in light of demographic shifts that will bring more young people into the labor market.

The report acknowledges that over the past decade, Bhutan has made progress in modernizing its economic structure and reducing poverty.

In the report Bhutan has been ranked under 10 economic freedoms which are property rights, freedom from corruption, fiscal freedom, government spending, business freedom, monetary freedom, labor freedom, trade freedom, investment freedom and financial freedom.

Bhutan’s total score in all these 10 areas is 56.6.

The biggest minus points for Bhutan has been in government spending. The report notes Government spending has increased to 38.6 percent of total domestic output, with public debt reaching 70 percent of GDP. This means that governments spending beyond its capacity leading to a larger fiscal deficit and also more debt. Coincidentally a Bhutan Chambers of Commerce and Industry (BCCI) report on the rupee crisis places the majority of the blame for the rupee crisis on excess government expenditure.

Another major problem area is Labour Freedom. It says that the imbalance between labor supply and demand persists. Economic diversification has not progressed significantly, and unemployment has risen in recent years.

The report basically points out to the above two key weak areas of Bhutanese economy where government expenditure is growing along with the national debt but at the same time economic diversification and employment is not growing.

Bhutan has also lost points in areas like Trade freedom where the report says, ‘High tariff and non-tariff barriers prevent dynamic growth in trade. Foreign investment has been a sensitive issue, largely due to concerns about its effect on culture and traditions and possibly because of the domestic private sector’s unwillingness to lose the benefits that restrictions provide.’

Points have also been lost in Business Freedom where the report points out that a modern regulatory framework has not been fully developed. It says that despite recent efforts, the business climate is still hampered by inconsistent enforcement of regulations. On average, it takes 36 days to start a company.

There has been no gain or loss of points on Property Rights, Investment Freedom and Financial Freedom (number of Financial Institutions.)

On the positive side Bhutan has gained some positive points on Freedom from corruption. The report says that corruption is present in Bhutan but it has not yet gone out of control. It says, ‘The government’s Anti Corruption Commission has identified misuse of resources, bribery and collusion, and nepotism as major forms of corruption.’