Human Capacity Trumps Hydro Power … Everytime! Part 4

Productivity and Growth

The intent here is not to put the onus squarely on hydropower. Hydro fan-boys must be champing at the bits to write their own sharp rejoinders to this paper. But if it all sounds dismal, the bigger picture isn’t any better. Bhutanese productivity across all sectors isn’t anything to boast about. The agricultural sector is a drag; the manufacturing sector damp; the services sector – which really “leads productivity development in (the) economy” – is still developing; and, the sum of all three do not affect growth much. Mitra et al. (2014) find that, “Bhutan’s potential growth has not been driven much by productivity growth”. Plainly – our growth is not a result of our hard work. We may think that – the economic transformation; technological progress; international goodwill; modernization; investments in health and education; good governance; and, putting people at the ‘center of development’ for decades would’ve made us productive citizens contributing to the nation’s growth. It hasn’t. The same ‘Rule of 70’ that shows our economy doubling every 4 years in the pre-hydro period (1981-1985) indicates that it doubles only every 5 years since. Meaning, we are taking longer to add to our economy. Our forefathers, subsisting in an agrarian economy with none of the perks of progress, were adding to overall growth at a faster rate than we are. The question then is – if our productive capacities are not driving economic growth, what is?

Mitra et al. (2014) find that, “Capital accumulation contributes 4.2% to potential growth, 1.8% to labor, and 1.6% to total factor productivity growth” as shown in Figure 14 below. It is the huge increase in capital stock from investments in hydropower that drivesour economic surges. How is this capital accumulated? Most of it is built-up in the years before the commissioning of a hydroplant. Or, as we’ve been calling it, the pre-commissioning period. The concrete dams, headrace tunnels, stations, heavy electrical machines and network of cables and towers characterizing such installations are the most tangible. The less visible but arguably more important, is the build up of small-economic zones to support such projects. Roads, schools, hospitals, colonies, bazaars and offices are all capital stock accumulated during the hydroplant’s build-up years. The effect of such activities on the local economy and evidence in the findings of Mitra et al.(2014) lend much to our belief that a hydroplant’s construction activities are more likely to drive Bhutan’s growth surges.

How does Bhutan afford the immense investments in development of hydropower? Surely Bhutanese productivity cannot be so negligible or of no consequence to its growth? A casual observer may be inclined to think that we are actually a prudent and productive bunch, going strictly by the size of our investments. After all, basic economic rationale states that – the amount invested in an economy is equal to the amount saved.

But are our savings really driving our investments? And, do we save that much? The World Bank estimated that Bhutan’s gross domestic savings (as a percent of GDP) was about 25.2% in 2013. A rough estimate against a GDP of Nu. 105 billion (2013) yields a savings of Nu. 26.5 billion. If we then employ the Ministry of Economic Affairs’ (MOEA) estimate that average investment cost (MW) for potentialhydro-projects will be about US$ 0.84 million per MW , our total yearly savings will not be sufficient to fund a medium-sized hydroplant. The obvious answer to the question posed above is – India. The demand and funding for our power investments come from India. Again, Mitra et al. (2014) note that this is a key reason why Bhutan’s “investment ratios are not constrained by (its) domestic savings”. India funds Bhutan’s power projects and in turn, Bhutan meets the demands of India’s energy-hungry economy. Notwithstanding this mutually beneficial relationship, the fact is – a lot of Indian taxpayer money goes into increasing Bhutan’s physical capital stock. One might even say that Bhutan’s economic growth surges are really driven by Indian productivity.

A Pat or a Kick?

It must be dismal reading so far. Especially for some of us who believe that we are living in a golden period of our country’s history. But we Bhutanese often say, “Not a kind word from the mouth of one who cares”. It is in this spirit I say that, “The numbers don’t lie”. Bhutan is a lot richer than it was three decades ago. The Bhutanese are better off than many in our neighboring countries. In terms of governance, development, conservation, stability or any of a number of standards that countries are held to every year, we ‘check most of the boxes’. Our policies vis-à-vis trade, clean and green FDI, conservation over development and cultural integrity have been lauded worldwide for being prudent and enlightened. Then there is Gross National Happiness (GNH). The philosophy itself is as old as the country’s development history. Although the idea of well-being economics has existed for a long time before, Bhutan can be credited for making real efforts in functionalizing it, mainstreaming it into government policy and above all, making it relevant and trendy on the global scene.

Why then not be more triumphant, one might ask? For, even as numbers don’t lie, they don’t always tell the truth either. As far as we’ve come, we must recognize our collective failings and preempt systemic weaknesses with corrective measures. We have seen thus far: a gradual and long-term decline in our economy; a structural transformation that may not be to the benefit of the largest number of Bhutanese; a theory of what really drives our economy; inquired as to who may be driving our growth; and, even questioned our own productivity as a contributory factor to national output. The expression that the Bhutanese have “first world expectations but a third world work ethic” resonates loudly in light of these statements. This is a harsh opinion, but I’m not alone in thinking so. Mitra et al. (2014) offer strong and timely basis for many of the doubts expressed here. Most of which are evident to anyone willing to sit down, fill in a few cells on Excel and eyeball the results. They however do so without foregoing tact as this local can, and often does. This may be one reason why most of their real opinion (and shock value) is lost in rigorous assessments and academic jargon. It is nevertheless, a good reminder that we must be our own harshest critics if we are to get off our ‘hydropower high’ and move towards bringing the economy to a well-diversified and even keel. The first step being – acceptance that the disquieting real sector readings here are reasonably true.

The Bhutanese like to think of ourselves as great adaptors. The ability to endure amid two of the world’s largest and most populous countries and, in a region that has seen its fair share of regimes collapse in the last fifty years, is no easy feat. Still, it is advantageous to take-in the goodwill and assistance of many – both foreign and local – who sincerely want to help. This is a good time to evoke another local proverb to, “Consider the views of others, but that the decision is ours’ alone”. Mitra et al. (2014) outline most of what Bhutan needs to consider going forward. The authors start with a baseline of growth in the long-term (2013 – 2030). They simulate various policy and shock scenarios with their likely impact on long-term growth. These include: 1) continuing the government’s existing strategy of building more hydroplants; 2) enhancing human capital to increase labor productivity; 3) increasing public spending on education to enhance human capital; and 4) diversifying the economy via increased spending on tourism.

We will not discuss the findings for each simulation. The initial disclaimer to not offer my 2-Chhetrums on taking the economy forward still applies. My focus is also on the real sector only. The monetary, fiscal and external sectors, which are key to the economy, are not covered here. This is not because they are less important. On the contrary, and based on recent events, they are very relevant to the Bhutanese and present far better opportunities for clever writing. The “Rupee crisis”; too much government spending; ballooning national debt; and, trade imbalances with India and Countries-Other-Than-India (COTI) make for very interesting critique and sensationalism indeed. Their omission then, is not for reasons of importance, substance nor appeal. It is this writer’s own limitations in forming the correct correlations and causalities of so many important sectors of the economy that they are so.

By P.W. Dorji

 

 

 

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