Sectors of the bhutanese economy

Different sectors of the economy play a vital role in the enlargement of any economy. Bhutanese economy is facilitated with two such sectors namely private and private sectors. The state sectors are public-owned sectors dealing with production and allocation. The private sectors are profit-oriented sectors owned by an individual and private enterprises.

Public sector is relatively in its underdeveloped stage till date with public sector being the main driver of development. For instance the electricity sector generates income that has transformed the economy over the century. On the other hand, the private sectors were initiated after 1960 with then existed in the field of agriculture and training activities. The tourism sector, the hard currency generator, was privatized only in 1991. Developments of an economy through various sectors are facilitated mainly by the nine indicators of progress influencing over the years. The contribution of the private and public sector towards the economy is facilitated by the Gross Domestic Capital Formation in the current year 2009) with more contribution from the private sectors over the years (2005-2009). In the industrial sector, the manufacturing companies are classified under private and public enterprises and their share of GDP contribution have been discussed in their sales ranging from 1992 to 1996. There are more private enterprises with more sales contributing towards GDP of the economy.

The employment data are composed of industrial sectors with more labor participation from the private firms. Apart from this, the lists of top ten private businesses are shown with their contribution to GDP through their revenue. Jigme mining Company has the highest contribution to GDP followed by the SD Eastern Bhutan Coal Ltd. Although efficient, private and public sectors have a long way to go especially with their shortcomings. For such problems recommendations have been suggested for further enhancing the productivity.

Introduction

The investors’ word (2011) defines public sector as the part of the economy that is concerned with providing basic government services and its composition varies by countries, generally including services such as police, military, public roads, public transit, primary education and healthcare for the poor. For instance Royston (1984) has conferred some of the important public sectors in England such as health, social security, transport, excise, agriculture, employment and environment sector. Apart from this Bhutan has construction, culture, ICT (information and communication technology) and tourism as various other public sectors as affirmed by the Gross National Happiness Commission (GNHC, 2010).

The Answers Corporation (2010) also refers public sector as the state sector that deals with production, delivery and allocation of goods and services by and for the government or its citizen. By the end of the 10th Five Year Plan (FYP) Bhutan aims to generate substantial portion of employment target around 75,000 jobs in crucial sectors such as tourism, cultural industry, ICT and agriculture. (GNHC, 2010)

Private sector on the other hand is the part of the economy that is run by individuals and companies for the profit (Answers Corporation, 2011). Similarly the dictionary of Business (2009) delineates it as the “part of the national economy made up of, and resources owned by private enterprises” which includes personal (households) as well as the corporate sector (firms). However, this definition is not acquired to its subjective meaning alone. For instance, the administrator of the UNDP, Mark Malloch Brown has anticipated the private sector’s focus on confronting problems of poverty reduction and human development, jobs and opportunity and growth which ‘belong there not in the gift of government’. (Organization for Economic Co-operation and Development (OECD), 2002, P.4)

The role of public sector being superior to the private sector is inevitable as suggested by the GNHC (2010). In addition, the private sector survey report (2002) has described Bhutan as having a reasonably under-developed private sector with 38,000 people being employed in it. However over the years, the development in the private sectors are to be acclaimed for, especially with wide range of activities ranging from power intensive industries in areas such as fruit processing, some mining companies, saw milling and wood industries, a group of services industries supporting wood industries and fast growing construction.(Construction Association of Bhutan (CAB), 2007).

This paper sets out primarily to study the role of private and the public sector in the economic development of Bhutan. To end this, it first highlights on the brief history of public and private sector followed by the different indicators of economic development in Bhutan. This would include their contribution in to the Gross Domestic Capital Formation (GDCF) and their role in developmental process. However this paper focuses mainly on an important sector of economy- industrial sector especially in manufacturing sector. We examine their contribution to the GDP through the sales of enterprises from the year 1992-1996 and their employment contributions from both the private and government companies

Brief history of the public and the private sector in Bhutan

The economic development of Bhutan has taken a huge step toward the path of modernization. The growth rate of GDP has increased overtime to Nu.61223.46 in 2009 from Nu.36112.13 in 2005 showing a growth rate of 0.69% over the past five years.

The public sector presents a dynamic world in itself especially with having a large portion of the sectors under its management. It has and still generates major portion of the GDP through its major hydro-power stations. It is the public sector that transformed the economy with the rapid growth in the establishment of the infrastructural facilities and the development of the hydro-power stations. According to the private sector survey (2002) hydropower sector has contributed 11% of the total GDP in 2000 and it continues to put in with more hydro-power stations over the years to come. The other prominent public enterprises that are highly not subjected to being privatized according to the 7th FYP report are the Bank of Bhutan and Druk Air Corporation.

The private sector started with the rupture of the isolation period of Bhutan in 1960s working in collaboration with the Government of India. According to the Bhutan private sector survey (2002), the private sector then existed only in the field of agriculture and some training activities. The tourism sector is the hard currency generator in the economy and was privatized in 1991, only to see 200 private tour operators as of today (Billetoft, 2010).

However in the 2000, the private sectors emerged with 9000 industrial license, 12000 trading licenses and 124 registered companies operating in fields such as power intensive industries, cement, Ferro alloys and calcium carbide, food processing, mining companies, saw milling and service industry in the construction and transport. In its nascent stage, this sector is dominated not just by medium-sized companies but small as well. This can be demonstrated with the enterprises operating in Bhutan with less than ten employees, less than $100,000 invested capital and 85% of the forms in Bhutan classified as cottage or mini industries. (Bhutan private sector survey, 2002)

The indicators of economic development

Figure –: Economic indicators of development (2005-2009)

Source: National Statistical Bureau (2010)

Contribution of public and private sectors towards GDFC of Bhutan

The public and the private sector in Bhutan play a very important role in the economic development especially in terms of the GDFC. The National Statistical Bureau (2010) defines GDCF as the purchase of the machinery and the equipment for the purchase of goods and services by the industries, general government, non-profit institution serving household and the output of construction.

Figure— below shows the contribution to the Gross Domestic capital formation in the current period (2009). The prices are compared for the consecutive years (2005-2009) taking year 2009 as the base period. As we can acknowledge the fact that the GDFC is much greater in private than the public sector, it denotes that the government is taking a serious initiative in the development of the private sector by investing domestic capitals.

For instance, the private sector’s total capital investment of machineries and equipments increased from Nu.2057.92 million in 2000 to Nu.6550.37million in 2009 which is contrast to increment from 972.54 in 2000 to 1578.15 in 2009 as in public sector. Although in both the sectors, the capital investment is increasing, the rate of increase in the private sector is more than the public. In general, the private sector accounts for 78% (Nu.73879 million) of the total GDFC for the year 2005-09 out of the total GDFC (Nu.102808.18 million) in the current price.

Figure –: domestic capital formation in the current price (2009)

Source: National Statistical Bureau (2010)

The industrial sector

The industrial sector, also called secondary sector, is a significant part of any economy. The RMA report (2011) suggest that out of Bhutan’s 6.7percent of real growth in 2009, 1.8% was contributed by the secondary sector although the real growth declined to 4.1% in 2009 from 5.5 in 2008.

The industries in Bhutan has increased overtime both in private as well as the public sector as seen below in figure 2 from 2005-2009 although the rate of growth of private sector is increasing much faster than the public sector. Bhutan today (2011) describes reasons which lies in various opportunities given by the government in terms of providing fiscal incentives such as providing 10 years of tax holidays to the new cottages and small industries established on the conditions to establish outside the two towns of Thimphu and Phuntsholing. The private sectors were also provided with the tax incentives under three categories- general (development of all sectors), specific (balanced development) and sector-specific (includes sectors such as energy, agriculture and tourism). In addition to this the entrepreneurship Development Programme (EDP) gave special focus on the development of the agriculture sector by exempting the sales tax and import duties for farm machineries and allowing the external borrowing by the private firms (the balance of foreign exchange reserve with a debt-equity ratio of 2:1 or up to Nu. 10 million from the recognized foreign financial institutions).

Figure 2: Sector-wise industrial establishment of Bhutan from 2005-2009

Source: National Statistical Bureau- RGoB (2010)

The RMA (2011) delineates that the industrial sector includes manufacturing, Electricity, water and construction sectors. The data on the manufacturing sector ranging from 2005 to 2009 states that the Gross Value Addition (GVA) has continued to grow steadily in a progressive trend. The GVA denotes the value of the output less the value of the intermediate consumption .As of recent; the contribution form the manufacturing to the GDP has declined from 8.4 in 2008 to 8.2% with real growth dropping to 6.9% from 8.5% in 2008.

In addition, the 7thFYP reportmajor enterprises and divesture programs classified under private and public enterprises as of 8th FYP are shown by the figure below.

Public Enterprises

Private Enterprise

Distillery (Army Welfare Project.)

Bhutan Carbide & Chemicals LTd.

Handicrafts Development Corporation.

Lhaki Cement Private Limited.

Wood Craft Centre

Druk Satair Corporation Limited.

Bhutan Agro Industries Ltd.

Namgail Cement Company Limited

Bhutan Marbles & Minerals Limited.

Eastern Bhutan Coal Company.

Figure: Major enterprises by sectors in 7th FYP

Source: 7th FYP report (2008)

With the advancement of such major enterprises the projection for the 8th FYP has determined the sales of such enterprises which indirectly denote the contribution to the GDP. The sales are expressed during 7th FYP ranging from 1992 till 1996 as shown by the figure-and figure — below. In the public enterprise, the Distillery Enterprise has the highest number of sales for all the years shown by the average growth rate of 21.21% followed by the handicraft development corporation (12.68%). However, the unavailability of the data on Bhutan Agro Industries Ltd clearly remarks the preliminary stage of the subsistence agriculture.

Figure—-: sales of the primary enterprises

Sources:

On the other hand the private sector with an addition of two more sectors provide more sales compared to these public enterprises which explains the government’s motive of developing private sector be it from the private enterprises. Bhutan Carbide and Chemicals has the highest sales so far followed by Lhaki Cement private Ltd with the growth rate of 12.78% and 26.27% respectively.

Figure —: Sales of the Private Enterprises

Source:

The private sector in Bhutan contributes about 5% of the total revenue in 2008 and 11% of the total tax revenue according to the Department of Revenue and Custom (2009). The following figure— represents the top 10 private business firms contributing revenue to the government (Nu. million) as of today.

Rank

Private Business

FY 2008-09

1

Jigme Mining Company

45,535

2

SD Eastern Bhutan Coal Ltd.

30,358

3

Druk Satair Corporation Ltd

26,484

4

Sherja Equipment Hiring Unit

18,920

5

Lhaki Cement

14,200

6

Bhutan Carbide and Chemicals

11,321

7

Tashi Commercial Corporation

9728

8

Jigme Industries Pvt.Ltd

8750

9

Hotel Druk

6188

10

Bhutan Hyundai Motors

5.208

Total

Total

176.592

Figure-: Top 10 private business of Bhutan

Source: Department of Revenue and Custom- MoF (2009)

In addition to this, there are 7473 people involved in the industrial sector in public and private companies in the year 2000 with more people involved in the government company. The private sector survey (2002) justifies reasons behind such differences such as lack of entrepreneurial talent with extremely small domestic market and a non-competitive and rudimentary financial system (provision of basic financial products at a high cost).

Figure–: Number of persons engaged in the industrial sectors by private and public company

Source: census of manufacturing industries (2001)

Shortcomings of the private and public sectors in Bhutan

Despite having a lot of competences for the economic welfare of the society, public as well as private have shortcomings that limit their potential especially in a country like Bhutan which is predominantly an agriculture-based economy producing primary goods and mountainous terrain making it difficult for the intervention of capital formation.

In the private goods, the factors that constrains the potential growth of the sectors are as follows as proposed by the 7th FYP(2008).

Relatively small size of the local market

lack of entrepreneurial expertise and experience

limited access to credit failure

high interest charges and

Shortage of domestic skilled and unskilled labor.

Although public sector is the driving force behind the Bhutanese economy, there are many inefficiency as well that encourages private over the public sector. These are as follows

Conclusion

The concept of public and private sector in Bhutan is very broad. In the three sectors of economy such as primary, secondary and tertiary sectors, every sectors constitutes as either as the private or public. For instance, the industrial sectors include many manufacturing industries out of which we can classify Bhutan Carbide and Chemicals Ltd and Wood Craft Centre as the private and public enterprises respectively.

Many important roles are played by public and private sectors toward the economic development of Bhutan mainly through their GDFC contribution and their employment rate. We can conclude that the private sector here plays an important role in the GDFC compared to the private sector. The highest GDFC for both private sector and public sector is in 2009 with their contribution of Nu.18262.97million and Nu. 7038.24 million toward the development of the economy.

In this paper, we have narrowed our study in the manufacturing sector comprising of public and private enterprises. The contribution toward the GDP has been discussed in the form of sales that was made during 1992-1996. It is generally interpreted that the public sectors are the driving force of the especially in Bhutan. But the manufacturing sector has more number of private enterprises having more contribution toward the GDP. Bhutan Carbide and Chemicals constitutes the highest sale followed by the Lhaki Cement Private ltd. In the public enterprise the Distillery enterprise showed the highest sale followed by the handicraft Development Corporation.

However, the employment data that is available only for the year 2000 delineates the central role played by the public industries which constitutes about 4726 of people employed in it. The reason behind is the government’s initiative toward producing more and more hydro-power stations which generated more employment opportunities which is contrast to 2727 people employed in the private sector.

With an initiative to develop the private sector, the government is in its best performance. We can interpret such result with the establishment of more private industries compared to even joint or public sector. Out of the total size of 30,317 in 2009, 30,207 are private industries.

In general we can conclude that the role of private sector towards the economic development is gaining its pace over the years especially in the secondary sector (manufacturing industries) although the public sectors still plays a dominant role.

In order to improve the private sector foster its developmental pace, it is recommended that government must formulate rules that are easy enough to be understood even by the laymen. This can be done through surveys, talks and campaigns on the private sector development among general public. In addition the government must undertake various other fiscal incentives such as regulation of minimum tax for a certain period. This measure would drastically influence the rate of participation making economy very productive.

As the public sector still plays a dominant role in the economy, the already existing public sector need to perform efficient enough to generate more GDP. Therefore it is recommended that the government must also encourage trainings and further studies to the government officials so that they are skilled and productive enough to develop proficiently.