Dutch Disease in the Himalayas?

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Is Bhutan suffering from an acute case of Dutch Disease? Despite its status as the Shangri-La destination for A-list tourists, Bhutan’s land-locked status and nascent private sector pose enormous challenges for a country that is gradually moving to a more market-based economy. Thinking about this question is enough to transform one Bhutanese MP’s happiness to national economic fretting.

Paro International Airport
Paro International Airport

The term “Dutch Disease” first appeared in the Economist as a reference to the Netherlands, when the discovery and subsequent national profits from a large natural gas field displaced the manufacturing sector. Why would sudden natural resource wealth be a bad thing? The easy, profitable exploitation of a natural resource displaced the competitiveness and growth potential from other sectors of the economy.  In the Himalayan context, Bhutan’s dependency on hydropower projects (exporting electricity to energy-hungry India) contributed to jobless growth over the past few decades. Are potential moral decline and other similar problems in countries experiencing the resource curse phenomenon on a collision course with Bhutan’s desire for Gross National Happiness?

Ministry of Economic Affairs
Ministry of Economic Affairs (!), Thimphu

As Bhutan slowly opens its doors and economy to outsiders, the World Bank hopes to engage the Royal Government of Bhutan in a constructive dialogue on reforms that will promote employment growth. An Enterprise Survey along with a Workers’ Survey are currently in fieldwork with data expected to be available by August 2009. By interviewing firms on the current business environment and benchmarking indicators to similar economies, the data will suggest ways to encourage private sector growth. Ripe candidates for reform include the difficulty in obtaining credit, rigid banking policies, and inadequate transportation facilities which inhibit niche markets such as agribusiness exports.

The primary challenge for Bhutan will be the balancing act between economic liberalization to create jobs and protecting and maintaining their cultural values. The Bhutanese are deeply proud of their traditions and extremely protective of the environment. “Sustainable” is not a cynical catchword in Bhutan - rather it is an integral component to their philosophy of Happiness.   

Punakha Dzong
Punakha Dzong

Authors

Arvind Jain

Private Sector Development Specialist, World Bank

Join the Conversation

Thomas
April 17, 2009

The best thing the World Bank could do for Bhutan is to keep its poison away from the country. The Bank is a global disease that I hope does not try to infect the country.

Mohammad Amin
April 20, 2009

There is evidence in the literature to suggest that different types of natural resources have different types of effects on the economy. Most natural resource rich countries boast of better agricultural land, mineral deposits, oil, etc. In Bhutan's case, it is hydropower. Whether specialization in hydropower deprives the rest of the economy of the precious spillover effects (Dutch disease) is an interesting point worthy of further analysis.

Keith
April 21, 2009

Arvind, Mohammad, you give an interesting perspective on the Bhutan situation.

And the best thing for Thomas to do is apply his own "advice" and keep his poison out of here, before it affects the PSD blog.