Experts from prominent institutions have emphasized that Bhutan need to focus on certain key sectors for economic growth for the country’s sustainable growth. They point towards Bhutan’s unique advantage in agriculture, energy, and tourism as areas with significant potential for growth.
Sonam Lhendup, an economist at the Asian Development Bank (ADB) said that Bhutan’s comparative advantages, especially in agriculture, energy, and tourism, could position the country for growth. “We should focus on what we can do best in the areas like hydropower, tourism, and agriculture.” He noted that Bhutan could serve as a key player in the regional hydropower market, for instance, if Bhutan could develop its own capacity to build hydropower plants starting from designing.
He also suggested that Bhutan should concentrate on exporting services, particularly in the tourism sector, which represents a significant comparative advantage for the country. “We can build a value chain around tourism,” he added.
Further, he pointed out that developed countries like Australia follow a similar approach, not by producing a wide range of goods, but by diversifying into areas such as mining and agriculture. Similarly, Switzerland follows a strategy of vertical diversification. “By focusing on building sophistication in just one or two sectors, Bhutan can become a regional leader,” he added.
Sanjeev Mehta, an economist and senior professor at Royal Thimphu College (RTC) also shared the importance of diversification in Bhutan’s economy to achieve sustainable growth. He pointed out that the country’s heavy reliance on a limited number of sectors poses risks for long-term stability.
According to the professor, agriculture remains a cornerstone of Bhutan’s economy due to its contributions to food security, price stability, and export earnings. However, with Bhutan’s agricultural growth stagnating, he emphasized that the sector should be a primary focus for transformation. “Infrastructure development, access to credit, and climate adaptation are crucial for a more resilient agricultural sector,” he said.
The second area highlighted was the agro-based industries sector. Given Bhutan’s potential in organic farming, the professor said that agro-processing industries could add significant value to agricultural products and cater to growing markets in India and domestic through expanding the tourism sector.
The third sector identified was IT and ITE services, where Bhutan’s favorable environmental conditions and access to a skilled labor force could provide a competitive edge. “We have the opportunity to tap into the growing demand for IT services in the region,” the professor added.
According to a World Bank report, Bhutan needs to diversify its economy beyond the hydropower sector, alongside reforms in agriculture and finance, for long-term growth and job creation for youth.
The report states that despite Bhutan making significant progress in reducing poverty and advancing human development, structural transformation has been slow, and job opportunities have been limited, especially for the educated and youth. The country enjoyed high real GDP growth, averaging 7 percent from 2001 to 2019, largely driven by the hydropower sector. In 2021, hydropower contributed more than a third of goods exports and domestic revenues, or 16% of GDP.
It identifies several obstacles to economic growth. Furthermore, the report notes that productivity gains have been limited due to a significant portion of the labor force being employed in low-productivity sectors such as agriculture and public services.
The labor market in the agriculture sector comprises 40 percent of the total workforce, followed by the public sector (25 percent, including education and health). Hydropower, while vital, is capital-intensive and offers limited job creation, employing less than one percent of the labor force.
“A diversification of the renewable energy mix with investments in solar, wind, and geothermal could increase Bhutan’s clean energy generation capacity with positive impacts on its green growth strategy,” the report states. Large foreign currency inflows from hydropower projects have led to an appreciation of the real exchange rate, a phenomenon known as ‘Dutch disease,’ which undermines the competitiveness of the non-hydro sector.
It recommends three urgent actions to facilitate economic diversification by incentivizing the growth of non-hydro industries and the private sector. “Economic diversification will benefit from allocating a much larger share of hydropower revenue towards domestic investment in tangible assets, including infrastructure and industries.”
Currently, 54 percent of domestic revenue, with 40 percent coming from hydropower, is consumed by public spending on wages, goods, and services, rather than financing investments.
The report also recommends enhancing agricultural productivity and selective crop diversification and certification to facilitate access to niche markets. Raising agricultural productivity by diversifying into high-value crops, based on Bhutan’s comparative advantages, can support the broader process of diversification by releasing labor for non-agrarian sectors and boosting agricultural exports. The report also highlighted the importance of financial sector reforms to support the process of economic diversification.
Nidup Lhamo from Thimphu
