Human Capacity Trumps Hydro Power … Everytime! – Part 3

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

Making Sense of it All

So, why is all this important?

How does this essay’s pre versus post hydroplant commissioning theory tie in to observable trend in the real sector? Why a long-winded soliloquy on a relatively simple sector to explain an even more basic economic concern? These must be questions swirling in the minds of the diligent readers who have made it thus far. The prompt answeris: ‘productivity’ or rather, Bhutanese labor productivity as a factor contributor to Bhutan’s economic growth.

 

A brief review of Economics first – literature states that growth is mainly affected by a country’s: 1) growth phase (business cycles) and share of its respective sectors; 2) income equality; 3) demographic changes (and employment); and, 4) productivity attributed to an accumulation of human and physical capital. Despite the importance of all the factors, our focus is on the fourth – productivity. The Cobb-Douglas function  Y = ALβKα (where β = 1-α) estimates the value of output (here, Bhutan’s GDP) as a result of two inputs (Bhutanese capital and labor). Don’t worry; we will not delve into the intricacies of this formula. Suffice it to know that Sabyasachi Mitra, Sarah Carrington and Anthony Baluga employ the same in their paper, Unlocking Bhutan’s Potential: Measuring Potential Output For the Small, Landlocked Himalayan Kingdom of Bhutan (the “ADB paper”) for the Asian Development Bank (ADB). We will use their findings to distinguish between pre and post hydroplant activities in terms of their effect on growth and, to validate our assertion that Bhutan’s impressive growth may not be the ‘fruits of our own labors’ entirely.

Another short refresher on Bhutan’s economy, which has seen significant structural changes in the last 34 years. From 1980 to 2013, the primary sector (agriculture, fishing, mining and forestry) declined notably while both the secondary and tertiary sectors increased, as shown by data from the GNHC and NSB in Table 1.

 

The primary sector added just 16.2% to GDPin 2013. Bhutan’s economy islargely made up of manufacturing (42.3%) and services (41.5%). This is a good thing. Partly as a result of its own efforts and partly affected by ‘globalization’, Bhutan has adopted and adapted to many aspects of progress, ideas, technologies and efficiency in order to integrate itself into the international product-driven system. It is considered a success story. We have seen how Bhutangrew from just Nu. 1.1 billion in 1980 to over Nu. 105 billion in 2013. The macro-level success has also translated into success for individuals. In terms of Gross National Income (GNI) per-capita (adjusted only for price level differences across countries and not for inflation) estimated by The World Bank, Bhutan’s GNIpc in 1990 was just US$ 1,410. In 2013 it was US$ 6,920. Our neighbors in India and Nepal were relatively less well off with US$ 5,350 and US$ 2,260 respectively. A logical conclusion here can be that – Bhutan’s economic transformation has seen its “grey-collar workers” (to use an American expression) replaced by “blue” and “white-collar workers” in the more ‘value-adding’ secondary and tertiary sectors, thereby explaining growth in output of both Bhutan and its people.

 

Is this really the case though?

The primacy of the primary sector may have changed, but Bhutan still relies on it heavily for key demographic factors of growth, such as employment. The Department of Labour (DOL) reckons that Agriculture (and Forestry) account for 56.3% of all employment. This translates to about 194,677 persons from a total labour force of 345,786 employed in this sector alone. Add to this, NSB’s Multidimensional Poverty Index (MPI) assessment that poverty rates (among households whose head is employed in the sector) is highest for the agriculture sector at 23% versus 4.2% in industry and 4% in the services sector; Bhutan’s real sector transformation seems more a ‘window dressing’ of sorts. It appears that ‘we are not what we do’. Our modernization drive not only struggles to integrate and mainstream the skills, knowledge and capacities of a large segment of our labor force in keeping up with the changes in the structure of our economy; but has also relegated what was once the most productive sector and people to the most rural and impoverished.

 

The primary sector is also not what it used to be. Mitra et al. (2014) find that, “The agriculture sector – the main sector of employment – remains a drag on total productivity growth”. At least on whatever little productivity we Bhutanese can muster. Don’t be fooled by the words “total productivity growth”. There isn’t much. The findings in the positively titled paper, “Unlocking Bhutan’s Potential”, indicate that there is anything but. It is not only the agriculture sector that is a drag. The manufacturing sector also, “In spite of (its) large capital investment and dominant role … has not contributed much to Bhutan’s productivity growth” (ADB paper, p.19). This is part of this essay’s contention, albeit justified only by an eyeball analysis and a response lag theory. So far, our economic growth has been driven only by investments in hydropower capital stock. Both such investments and gains frompower sales have not developed Bhutanese productivity in any manner so as to contribute meaningfully to the country’s economic growth.

 

On an important side note: large-scale, capital-intensive hydroplants account for fewer jobs for their size and significance. Most jobs are created during the construction phase and wrapped-up once a plant is operational. A fairly fixed number of technical personnel remain for supervision and operations regardless of whether output fluctuates. There are no (or negligible) variable costs in a traditional sense associated with hydroplants i.e. as output (electricity production) varies, costs (labor) do not vary. Also, “maintenance cost is mainly a function of the size of capital structure and not the current output levels”.

 

Using our preferred examples: CHP employs 510 and THP, 688 people as per DGPC. One can reasonably assume that these numbers have not varied much since the plants became fully operational (barring a force majeure event or enhancement in capacity). These are employment figures of projects that cost Nu. 2,500 million in 1987 and Nu. 41,300 million in 2007. If we compared their employment generating capacities with other less-costly economic activities, it isn’t hard to see why hydroplants offer relatively little in terms of jobs. SD Eastern Coal Company (SDECC), a mining company valued at Nu. 180 million (in 2011) employed 160 people (regulars and wageworkers) and, Druk Satair Corporation Limited (DSCL) valued at Nu. 141 million employed 180 people that year. They retained, on average, nearly a third of the people that CHP and THP did, despite being a fraction of the size, value or importance to the economy. Then there is the comparison of a “typical Ferro company”  to DGPC. This was presented during an E3 (Energy, Economy and Environment) Conference held in Thimphu in 2014. The two companies have net asset values of Nu. 327 million and Nu. 49.5 billion each (2012). Despite the large disparity in values, a ferro company employed about 170 people where DGPC employed 1,649, yielding an employment to net asset value ratio of 51.8% for ferro and just 3.3% for DGPC. Thelattercase is included here for informative purposes only. This paper neither confirms the validity nor comparability of such numbers. It also does not advocate the purposes for which it was used. These numbers are simply out there.

 

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

 

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