The missing link

By Nidup Gyeltshen

Bhutan’s economy perhaps learnt its biggest lessons, having experienced one of the biggest economic woes in 2012. The general atmosphere was hyped, many recommendations poured in and the media and the local economists were looking for the synonym of ‘crisis.’

In the end, it all boiled down to consumption. Bhutanese people were consuming excessively, forcing the central bank to borrow money from Indian banks and financing people’s consumption.

The central bank was financing consumption that does not add any value to the economy or fetch any returns. For most economists, this is seen as investing on a liability that will not only drain foreign currency reserve but also incur additional expense to the economy.

However, if we take a step further in understanding where we went wrong and why the economy experienced the liquidity crunch in 2012, we need to explore the very basic fundamentals of an economic theory.

Anyone who has even been briefly introduced to the subject of economics will definitely recall the three sectors of an economy, the primary, the secondary and the tertiary sector.

These three sectors constitute a modern economy, where each sector thrives in harmony with the other two sectors.

In the ancient crude society, there was only the primary sector, were people were mostly occupied in farming or dependent on natural forest resources for survival. But as societies became more sophisticated, the raw materials produced by these people had to be processed and transformed into goods.

Then came the secondary sector that transformed raw materials like wood into furniture, fruits into jams and textile into clothes. The tertiary sector came later to provide services including transportation, restaurants and hotels, education etc.

These three sectors are clearly linked – the primary sector extracts raw materials that are supplied to the secondary sector which further process them into finer goods and materials. The tertiary sector provided much needed services to all consumers.

The manufacturing sector leading to industrialization and economic development in most countries in the west was majorly a result of a marriage between the primary sector and the secondary sector.

The primary sector is the basic of any economic set up. But in case of Bhutan’s economy, there is a marked disconnect between the primary and the secondary sector.

This single missing link has been the leading cause of all the economic imbalances that Bhutan is experiencing today, – the balance of payments constraints, huge current account deficit, the shortage of Indian rupee, import-export mismatch, lack of entrepreneurial spirit, innovation and business acumen.

The primary sector, that constitute the agriculture and the mining sector has to supply predominantly labour and raw material to the secondary sector or the industries. The industries then add value to these raw materials and are sold in the market.

In such an economy, excessive consumption would not be seen as a problem but rather a stimulus to the economy. Many economies abroad, where the primary and the secondary sector are clearly linked rather encourage consumption to boost aggregate demand.

However, in our case, both raw material and labour comes from India. This leads to all the economic imbalances mentioned above. While sourcing labour and raw materials from India, the payment is settled in Indian rupee, therefore the more you import, the more pressure on the Indian rupee.

If all labour and raw materials were supplied from within the economy by the primary sector, all the economic woes that we talk about today would not have happened in the first place.

The economy seem to have directly jumped from one sector to the other before realizing the full potential of each sector. Dependence on external source for labour, raw material and technical knowledge has thus restricted business innovation.

Unless these fundamental flaws are corrected, Bhutan is still a long way from being economically self-reliant. Hydropower will provide much needed revenue to the government, but consumption level would keep increasing.

As can already be seen today, Bhutan is using more rupees to import fossil fuel than it can earn from selling hydropower to India. In fact, in 2014, net hydropower import earnings, after repaying loans were around Rs 7 billion, while the economy imported fossil fuel worth Rs 8 billion.

In other words the entire rupee earned by the hydropower sector was used up in buying fossil fuel from India.

Fixing the missing link may prove mammoth of a task, as it would mean a major reshuffle across all economic sectors. But if economic self-reliance is still a priority, serious study must be carried out.

It would be worth starting off on the agriculture sector. The government could first attempt to become agriculturally self-reliant. Bhutan’s economy is predominantly agrarian, yet we import more than half our requirements from India. Bhutan’s food trade balance showed a deficit of about Nu 5 billion in 2014, Rs 2 billion shy of our average net hydropower earning.

We import half our rice requirements from India. However, the government has a unique policy of going organic while at the same time attempting to achieve food self-sufficiency. This two-pronged policy approach is contradictory and unattainable.

Going organic would always result in lesser yield and thereby impact self-sufficiency. Given Bhutan’s limited arable land, achieving food self sufficiency would continue to remain a big challenge and going organic would further compound this challenge.

Once the primary sector is strengthened, then it would naturally promote the secondary sector, where businesses can source raw materials and manufacture them. This will substitute imports.

However, rather than focusing on the fundamental cause of the problem, most of the recommendations sought to provide a short-term respite to the economic imbalance.

For instance, proper reserve management will not solve the issue of huge current account deficit. In the long run, the economy has to export more and import less.

There are however, already subtle signs of the economy heading this direction, although slow.

In recent times, Bhutanese entrepreneurs are looking to replace imported school shoes, soaps and tissue rolls etc. Such ideas and innovation should be encouraged, given due regards and financed. These will represent the business molecules that will contribute significantly to achieving economic self-reliance.

(The writer is a journalist at Bhutan Broadcasting Service)