Human Capacity Trumps Hydro Power … Everytime! – Final Part

A longish discussion on a well-known key to Bhutan’s shorted economy

 The Re-think Urgency

This paper has highlighted many reasons why Bhutan must rethink its economic strategies hereon. What it does not do is convey the urgency for why it must do so. If my pestering has yielded any good, it is that there are a lot of good people with very good reasons to believe the time is well nigh to start making some changes, starting with hydropower. These are the three urgency scenarios: 1) Bhutan is reaping the fruits of some very shrewd investment decisions made a long time ago. There are fears however, that these gains will be for naught if many of the negative aspects of progress are not controlled soon. They range from bureaucratic inefficiencies (e.g. procurement, cost overruns, etc), ‘white elephant’ projects, to outright corruption and nepotism in sectors that are a common resource for all Bhutanese. The window of opportunity, or for this matter, our resource buildup is very small. Mitra et al. (2014) suggest that our scarce resources must be channeled towards improving human capital as a means to boost future productivity, mainly in increased spending on education and health. Bhutan has a good track record in this regard. But, even as social spending has increased in absolute terms over time, it has declined as a percentage of GDP (ADB paper, p.26, Figure 22). The impetus to invest in human resource must be revitalized.

2) Second, gains from hydropower will not be infinitely exponential (as before) or even accumulative (as it is now). A notable reason being – the funding modality of hydropower development is changing. Where CHP and THP were funded on a 60:40 grant to debt ratio, recent projects are already on the 70:30 debt to grant schemes. The margins for error (and returns) in hydropower have become that much thinner. Plus, a lot of power revenue flows straight back as debt service to India. It does not seem to be a coincidence that Bhutan’s debt issues are becoming a concern about the same time that the funding modalities of its hydroplants are being tweaked. What our resource picture will look like when funding evolves to more market-based public-private partnerships (PPP) such as with Dagachhu Hydroplant (DHP), only our energy sector experts can tell. A simulation of such a scenario by Mitra et al. (2014) using the Government’s (RGOB) data on current hydroplants and projections of likely outlays in the near future (ADB Paper, p.24, Table 4) find that, “There will be diminishing marginal returns to capital investment in hydropower”. Hydropower is expected to drive less and less of Bhutan’s potential economic growth in the near future. The ‘break-even point’ when potential output growth in their simulation model falls below even baseline growth projections is expected to start around the year 2026. That’s only a decade or so from 2015. If capital accumulation will no longer drive growth, the impetus to find other avenues that will do so cannot come soon enough. The policies and strategies implemented by the current or the next government could very well determine the state of our economy a decade or so later. If they go by evidence, it is clear – we must direct our scarce resources towards raising Bhutanese labor productivity if we want a sustainable and healthy level of economic growth in the future.

3) The last urgency arises from climate change, which is mostlybeyond our control. Even so, it merits close attention given the importance of water to our economy. Bhutan’s location has been a blessing in many ways. The tough topography was a deterrence to external foes, one reason why it has never been colonized. Its location between China and India, while daunting, is only a matter of perspective. Many like to think that we are strategically placed between two of the world’s biggest markets. We just need to make something that they want to buy. It sits on the Southern slopes of the Tibetan Plateau, the largest source of ice and glaciers anywhere on Earth other than the North Pole and South Pole. Almost all of Bhutan’s rivers have independent riverheads within the country, so there are very few trans-boundary water issues to the North. And, they all flow down steep mountains making our ‘run-of-the-river’ hydroplants fairly cost-effective when compared with dammed projects.

But, the same geographic conditions that have been such a boon may yet put us on the forefront of a growing global concern. Climate change is contributing to melting glaciers and formation of glacial lakes. The increased frequency of Glacial Lake Outburst Floods (GLOF) has many worried, not only of the direct threat that such floods pose to the lives and livelihoods downstream but also, the sustainability of our water resources. Some of these concerns are: “melting of our reservoirs of water stored as ice”; reduced river levels; the need to regulate water; or, to turn to more expensive forms of harnessing energy like reservoir projects that store water longer. A number of studies underlie such concerns. The most notable is Karma, Yutaka Ageta, Nozomu Naito, Shuji Iwata and Hironori Yabuki’s 2003 report on glacier distribution in the Bhutan Himalayas from 1963 to 1993. Their study of 66 glaciers using topographic maps from 1963 and satellite images from 1993 find that Bhutan’s glaciers retreated by about 8.1% during this period. The United Nations (UN) also reckoned (in 2007) that Bhutan’s glaciers are retreating at a rate of 30-40 meters per year and that, Himalayan glaciers would “melt within 25 years”. This UN report was later debunked by Dirk Scherler, Bodo Bookhagen and Manfred R. Strecker who find that half of the Himalayan glaciers are in fact advancing, and that global warming “was not the deciding factor in whether glaciers survive or melt”. Scherler et al. (2011) further note that glaciers in the subdued landscapes of the Tibetan Plateau (like Bhutan’s) are retreating faster than in other regions of the Himalayas, given a lack of high surrounding mountains and more than two centimeters of debris cover to keep them from melting.

They are nevertheless, very good counsel for Bhutan to re-think and re-prioritize its economic strategies hereon. We have seen how Bhutanese productivity and contribution to growth is negligible, and that the returns from planned increases in hydropower capital accumulation is projected to diminish as early as 2026 according to Mitra et al. (2014). Factoring in the possibility of dwindling water resources, the need to diversify and pursue other means of sustaining economic growth is imperative. It is easy to think (as many do) that this is strictly an energy sector problem. It is not. Hydropower means much more than just energy and economic security for Bhutan. Which is why, in the event that output drops, we must be less concerned with alternate sources of energy for individual consumption, but more with indentifying viable sources of national income. The terms ‘diversification’ and ‘hedging’ are often articulated in this regard. They are clear messages to invest what little gains we have saved to broaden our economic base.

But in what? Tourism is often touted as the best way. Mitra et al. (2014) simulated public spending boosts in this sector and find modest gains for growth over the next decade (2013 – 2024). Is this sector really our economy’s best safety net? In 2013 its direct gross earnings was US$ 63.5 million or Nu. 3.7 billion as per the Tourism Council of Bhutan (TCB). This is just 3.5% of total GDP that year. The truth is – even if tourism wasn’t the best bet, there aren’t many other safe and sound alternatives. Successive governments in the last five to ten years (pre and post-democracy) have pursued a fair few avenues. They even brought in a lot of smart people to help us. What these expertsdid, no one seems to know. The local jury remains very skeptical. But five years and Nu. 4.9 billion out of the coffers later, our best reaction was to feebly brand such services, in the words of the Royal Audit Authority (RAA), a “flop”. Let’s go to Conjecture-land and make up a story to explain such an indictment.

Experts Bearing Advice

 The general belief is that these consultants, with their glossy terminologies and glossier reports, must have urged our leaders that there really was no need to ‘re-invent the wheel’. We’d simply study cases of countries with similar parameters and slightly better success rates and emulate what they did. The idea of ‘copy-and-paste’ very appealing to our bureaucrats and post-bureaucracy political leaders. So on they brought cases of countries like Mauritius (used only as an example, remember we’re in Conjecture-land) with strikingly similar geography, demography, political system (it is a Republic) and economy to that of Bhutan’s. It is a small (2040 km2) island nation located off the coast of Africa in the Indian Ocean. In 2013, its GDP was estimated to be US$ 11.9 billion. The country had a total population of 1.26 million with a GNIpc of US$ 17,220. Like Bhutan, it is a ‘single product’ economy relying heavily on its sugar industry. Since independence from Britain in 1968, it has actively sought to diversify its economy through tourism, financial services, and recently in information technology and education. This sounds very much like a story of Bhutan’s own economic track. Mauritius however, ranks very high on many global indicators of market freedom, competitiveness, investment climate and perception of corruption. Bhutan is better in only one of the four (selected) criteria shown in Table 2.

These numbers tell a story. Mauritius has been successful in diversifying and weaning its economy off of sugar. The island nation’s primary sector (including sugarcane) adds just 3.6% to its GDP with the secondary and tertiary sectors adding 24.2% and 74.2% respectively. The value sectors employ a notable 92.5% of the country’s total labor force. Our numbers are comparatively dismal. But, it is not as if we did not try. Bhutan has, at some point or the other, forayed into most of the sectors that Mauritius has. The first and most successful is “high value, low impact” tourism. Needless to say, it remains one of our most important sectors and the single-highest earner of foreign (non-INR) currency.

In other sectors, success has been relatively hard to come by. The second significant foray was the opening up of the telecom sector. Tashi InfoComm Limited (TICL) was licensed to compete with Bhutan Telecom (BT), the public provider, in 2008. A telecommunications and broadband policy was developed during this period and passed in 2013 to enable this sector. Its impact is still a case in development. What is certain is that, a duopoly now exists where once a monopoly did. The initial gains in improved customer services and competitive rates currentlybeleaguered with poor connectivity, sluggish Internet speeds and many such ailments. One may argue that this sector is young. But BT has existed for fifteen years since its incorporation in 2000 and before that, as the Department of Telecom (DOT). The government also made significant investments in projects such as the Thimphu TechPark to raise Bhutan’s I.T profile. It too failed to meet expectations and has the dubious distinction of being one of the country’s first “white elephant” projects. About the same time that the telecom market was being opened up, the government decided to further liberalize the financial sector. In 2010, 2 new banks – the Druk Punjab National Bank (DPNB) and Tashi Bank (T-Bank) – were licensed. If there were hopes of making Bhutan a vibrant financial services hub, it quickly disappeared. A year after their operations commenced, the local economy went through a severe shortage in INR. The Royal Monetary Authority (RMA) stopped replenishing Rupee requirements of commercial banks and set up strict monetary and liquidity measures. There have been many observations and even finger pointing as to who or what caused the concern. The popular belief being that the credit boom created by the 2 new banks,without adequate INR reserves in the central bank, was largely to blame.

Despite the tepid impact of its efforts in I.T, telecom and financial sectors, the government of the day pushed through initiatives to develop Bhutan as an education hub. A 1000-acre Nu. 1 billion Education City project was conceived in Jamje, Wangsisina of Thimphu. The project was based on a Public-Private Partnership (PPP) model between the Druk Holdings & Investments – Infra (DHI-Infra) and a Kolkota-based Infinity Group. The Parliament passed an Act in 2012 to enable the project. It too became mired in controversies, land issues and illegalities, finally leading to its closure by the succeeding government in 2014. Despite these affairs, the government is actively developing Special Economic Zones (SEZs) to foster the growth of industries. Dhamdum in Samtse, Jigmeling under Sarpang and Motanga under Samdrup Jongkhar district are examples. It is hoped that Bhutan’s comparative advantage in power, free tariff regime and access to labor and markets in India, coupled with many fiscal and non-fiscal incentives pledged in our oft-revised (or oft-manipulated, whichever way one looks at it)Foreign Direct Investment Policy will attract the sort of inflows that countries like Mauritius do. In 2013, FDI inflows into Mauritius exceeded US$ 154 million with 62% of it in real estate activities.

Conclusion

 Depending on whom one asks, there will be a number of reasons why Mauritius has a far more robust economic base than Bhutan. A caveat for those using the example of Mauritius above to draw lessons or identify fundamental causes – it is only a story-filler. Be that as it may, I cannot help but emphasize that many country studies (not included here) ascribe much of their economic achievements to what Mauritius calls a high level of equitable public investment in human capital development, mainly free education and health. Mitra et al. (2014) recommend a similar approach for Bhutan. They simulated increased government spending on developing human capital, mainly on education, and find that a 10% increase above the government’s budgeted levels lead to a much more stable growth path with a potential output growth of 7.5% in the long run. This is higher than simulations of increased government spending on tourism.

They also find that gains from higher spending on education are not just in the long-term, especially if it is “vocational in nature and directed toward improving skills that are used in the emerging sectors of the economy”. The impact then, is even in the near and medium terms. These are desirable outcomes. The only proviso must be that such interventions are focused on bridging gaps in the existing vocation, education and skills of the labor force with the ever-changing demands, technologies, know-how and opportunities in the marketplace. The target group must unequivocally be the 56.3% of Bhutanese trapped in the poor and unproductive Agriculture (and Forestry) sector. It is not too bold to believe that – even ‘graduating out’ half (50%) of those employed in this sector over the next few Five-Year Plan periods, would not only lift many out of poverty but also add significantly to the country’s productivity growth.

This will surely be a welcome boost for Bhutan’s economy in fifteen, twenty or thirty years from now if, as projected by Mitra et al. (2014), hydropower capital accumulation starts exhibiting diminishing returns and drive less of overall growth.

This paper has reiterated many times over, the critical nature of labor productivity. But, it is also only a means. The goal must be to drive the all-important economy. On the off chance that some may have missed this important connection in these ramblings; I will recap that very catchy phrase coined by James Carville for U.S President Bill Clinton’s 1998 presidential campaign – “It’s the economy, Stupid!”

By P. W. Dorji

A writer at large with parochial interests in economics, finance, government and the arts.

 

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