The Second Annual Conference on Gross National Happiness The Second International Conference on Gross National Happiness
Local Pathways to Global Wellbeing
St. Francis Xavier University, Antigonish, Nova Scotia, Canada
June 20 to June 24, 2005

June 23, 8:30 am

Toward a development strategy for Bhutan: Translating Philosophy into Action
Dr. S. R. Osmani

Synoposis: Siddiqur Osmani, Professor of Development Economics at the University of Ulster.
Preliminary conclusions on appropriate development strategies for Bhutan. Identification of parameters: respect for the four pillars of Gross National Happiness (equitable development; promotion of cultural and spiritual life; sustainable environment; good governance); and the practical limitations of a small population and challenging geography. Principal finding is that these features can eventually be fully accommodated through an export-oriented economy specializing in low-volume, high-value goods and services, but achieving this requires an interim stage of dependence on exporting natural resources. Conclusion: scrupulous adherence to GNH in the near term vitiates prospects for comprehensive expression of GNH in the more distant future.
Chair Good morning and good happiness to all of you. It is my great pleasure to introduce Siddiqur Osmani to you this morning.

Dr. Osmani has a doctorate from the London School of Economics. He is a professor of development economics at the University of Ulster in the United Kingdom and has worked with the Bangladesh Institute of Development Studies in Dhaka and the World Institute for Development Economics Research in Helsinki. He’s written extensively on issues of poverty, equality, famine, and development.

His association with Bhutan began earlier this year when the United Nations Development Programme engaged him as team leader for research on the country’s political economy with a view to enhancing and protecting its pro-poor characteristics, and its GNH flavour. Today Dr. Osmani will report on the product of his team’s work to date, offering a preview of a discussion that will take place in Thimphu at the end of July. The study itself should be finalized in the month of August, and it will then be posted on the UNDP website.
Siddiqur Osmani Thank you very much everybody. It is a great pleasure and privilege for me to be here today in this very exceptional, highly stimulating conference, speaking to an audience which includes many people who know more about Bhutan than I do. As you might have gathered from the introduction, my association with Bhutan is rather recent and I am still learning about the country.

I entitled this discussion Toward a Development Strategy for Bhutan: Translating Philosophy into Action because Bhutan is unique among all the countries of the world in having a distinctive philosophy to guide its policy making. As such the translation of philosophy into action is something Bhutan is actually practicing. So what I’m going to suggest is not some radical new beginning; Bhutan is already doing it.

What I want to do today is share some thoughts about medium and longer term development strategies for Bhutan. Note, however, that most of the ideas that I am going to talk about are not new: they have been discussed within Bhutan and outside. What I have attempted to do is to bring these various concepts together into a coherent analytical and strategic framework; and to think consistently about the possibilities that are open to Bhutan, as well as the constraints that it must face. Then, given the possibilities and the constraints, and given the guiding philosophy of Gross National Happiness, I wish to consider what choices are open to Bhutan.

We start from the guiding philosophy which is supposed to underlie all policy making in Bhutan: the concept of GNH. Now I know that there has been much discussion on the content of this concept and also that there are many issues to be resolved here; but for practical purposes we can start by looking at what have been called the four pillars of GNH.

The first pillar is equitable development, which requires that the material development of the country be consistent across regions and across different groups of people. Promotion of cultural and spiritual life is the second pillar; sustainable environment is the third; and good governance is the fourth. All four pillars are considered ends but equitable development and good governance are also seen as means of achieving GNH.

Alongside these objectives, any development strategy in Bhutan has to be sensitive to two major constraints: the country’s limited population and its challenging geography.

Scant population has two implications: one is that the internal market is very small. Any economic development has to take place on the basis of the purchasing power of the populace, and because there are so few people the aggregate purchasing power is minimal. This makes it very difficult to develop any major industry or do anything on a significant scale. The other implication is that both skills and workers are in short supply.

Geographical constraints are both internal and external. Bhutan’s very difficult, mountainous terrain causes a lot of problems in building infrastructure, industry and agriculture. Name one, name anything: it is very hard to develop because of the challenging alpine landscape. Externally the problem is even more serious: Bhutan is a landlocked country. Without ready access to ports and other facilities, its abiliy to interact with the rest of the world is limited.

Potential development strategies for Bhutan must take into account these constraints as well as the objectives of GNH. One approach to this challenge is to begin by asking, “What is the ideal scenario for Bhutan, which will be respectful of the objectives and mindful of the constraints?” And that ideal type will be the long-term development strategy. It will not be achievable in the immediate future but we can keep it as a long-term goal.

The long-term strategy can be briefly summarized as follows: to create a situation where Bhutan is able to export low-volume, high-value goods and services based on skilled labour and cutting edge technology. In this scenario, most consumer goods would be imported (the main exception being certain basic foodstuffs).

This is consistent with the objectives because if you specialize in skill-intensive, technology-intensive goods and services, you will by definition be less demanding of natural resources—therefore it will be more environmentally friendly. You will be culturally sensitive because, again, if you specialize in production of goods and services which are skill-based, technology-based, you don’t have to import mass production technologies and engage in high volume tourism and other activities which might compromise Bhutan’s cultural heritage. It will also be highly equitable: if you concentrate on skill-based activities, almost everyone can be turned into a skilled worker, given the country’s small population.

It is also consistent with the constraints: because this development strategy is export oriented, the existence of a small home market will not be an insuperable barrier. And because it will be based on skilled work and technology it will overcome the labour problem: it doesn’t require a huge number of people; the focus is on the quality rather than the quantity of workers. The geographical constraint is resolved to some extent because high-value, low-volume products are easier to transport, even for a landlocked, mountainous country. Think of Switzerland, as an example.

This strategy is ideal for the long run because it is consistent with both the objectives of GNH and the practical constraints that Bhutan faces. The problem is that it is not feasible in the short term. While Bhutan should certainly strive to achieve that state in time, it cannot be attained immediately. In the meantime, something needs to be done to increase the living standard of the people. So a transitional strategy is needed to take us to that long-term goal.

The first objective of this transitional strategy should be to build the skill and technology base, which will be the foundation of the long-term strategy. The second is to devise alternative means of improving the livelihoods of the people in the interim that are at once consistent with long-term goals, the GNH philosophy, and the constraints of geography and population.

How do we judge between the possible alternative strategies for taking Bhutan through the transitional phase? Before discussing alternatives I want to set out some criteria that I should like to use in order to choose between the various possibilities.

Drawing from the literature, we can identify a number of constraints that countries typically face when they start their process of development. These can be classified as demand constraints, wage group constraints, and the foreign exchange constraint.

The demand constraint is that there has to be a demand for whatever a development strategy produces. Unless there is a demand for the things that you produce, you cannot continue to produce; you cannot have economic structure without demand to back it up.

The wage groups constraint means that the development strategy must provide a sufficient number of affordable, basic consumer goods, which poor people and wage earners will spend most of their income on: foodstuffs, for example. If a country produces a low volume of essential consumer goods this will drive up the price of these products. The workers will then demand higher wages to finance the necessary purchases—and as wages go up production becomes more costly, making development and growth more difficult.

The foreign exchange constraint is that unless you have foreign exchange, you cannot obtain all the necessary inputs for production. No country, particularly a small one like Bhutan, can produce everything that it requires. It needs to import raw materials, certain intermediate goods, various types of machinery, and so on. As these things cannot be purchased using the domestic currency a country must have foreign exchange or its growth and development will be hampered.

Drawing from the experience of developing countries in the transitional stage of development, three strategies can be considered typical. The first one emphasizes agriculture. It is a favorite among developing countries but it is mainly adopted by states that have a large number of people.

A second approach relies on the export of labour-intensive manufactures. Many poor countries are now growing fast by exporting cheap, labour-intensive manufactured wares like garments, consumer electronics and toys.

The third path, which a number of developing countries have pursued, is export of natural resources. The agricultural strategy can actually be considered a special case of this model.

Which of these three would be most suitable for Bhutan? In my judgment, the strategy based on agriculture is not feasible because of the country’s meagre population. This doesn’t mean that agricultural development is not important for Bhutan, but it cannot be the leading sector. It cannot be the engine of growth.

Export of labour-intensive manufactured products can address the constraints. It solves the demand constraint because you don’t have to depend on the home market. It solves the wage group constraint because it can finance the purchase of foodstuffs from export revenues. It solves the foreign exchange constraint because exports will bring in foreign exchange. The one great problem is that Bhutan does not have a sufficiently large workforce for this option to succeed.

The natural resources strategy can also address all three constraints because it, too, is export-based. And, in fact, this is the strategy that Bhutan is currently pursuing. Bhutan’s economy is dependent on exports of natural resources: principally hydro power, with some niche agricultural and forest products. Tourism can also be included because it is a service based on the natural resources of the country.

Starting about eight years ago, hydro power has become the driving force in the Bhutanese economy in this phase of modernization. It has enabled Bhutan to import a lot of foodstuffs and the like, which has kept inflation low. This has allowed the country to invest heavily in human development and infrastructure without generating inflationary pressure.

What hydro power cannot do, however, is bring in hard foreign currency because India is Bhutan’s export market and the rupee is inconvertible. The problem with this is that Bhutan needs various commodities that India cannot provide, but Bhutan cannot import these goods from other countries because of the scarcity of foreign exchange. To remedy this Bhutan needs to concentrate on other areas of the economy, such as tourism, and agricultural and forestry products.

So the export strategy must shift away from hydro power. The difficulty is that hydro power is much more environmentally friendly than the other three, so any move towards them will involve some compromise with environmental preservation. It doesn’t have to destroy the environment, but it has to encroach on it a little bit more than would reliance on hydro.

So a trade-off is beginning to emerge: if the foreign exchange constraint of the economy is left unaddressed, there cannot be development, which means giving up on the ultimate goal of the long-term strategy. But the resolution of the foreign exchange constraint requires environmental concerns to be waived to some extent.

In the final report that we are presenting to Bhutan’s government in a couple of months’ time, we give a number of other examples where there are these short term trade-offs between different components of GNH. For example, if you wish to promote equitable development now then you must contemplate some sacrifice in the environmental sphere—and also on the cultural front, by expanding the tourism sector much more than Bhutan has been doing.

The ultimate goal is to go to the long-term strategy, which is the one that is fully consistent with the GNH philosophy and the constraints of Bhutan. So the sooner we can reach the long-term goal, the sooner we can say that Bhutan has attained consistency with its philosophy and constraints. But in order to go there sooner, we have to make certain sacrifices in the present, such as compromising on the cultural or the environmental front. So there is a sense of trade-off between now and the future. More consistency with GNH now will mean that long-term consistency with GNH will be delayed. In order to hasten the long-term consistency with GNH, we have to sacrifice some consistency with GNH now.

This short-term/long-term trade-off must be contemplated very seriously. The Bhutanese people face difficult choices. As an outsider I can only point out the possibilities: the decisions are for them to make.

Thank you.

Toward a development strategy for Bhutan
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