Booming Bhutan

The Happiest Place on Earth?

This article is the second installment of a five-part series examining the world's fastest-growing economies, according to the IMF World Economic Outlook.Buddhist monks walk past a power station in Thimphu. (Adnan Abidi / Courtesy Reuters)

The tiny kingdom of Bhutan, wedged into a Himalayan crevice between India and China, has experienced unprecedented growth in GDP -- an estimated eight percent between 2011 and 2012 and a projected 12.5 percent between 2012 and 2013, which makes it the world's fourth fastest-growing economy. This growth spurt is almost entirely thanks to the sale of hydropower to India, which accounted for 45 percent of the country’s revenue and 20 percent of its GDP in 2011. Flush with cash, the government plans to build ten new hydropower plants by 2020, bringing its total up to 40.

Behind the impressive growth, however, are systemic problems. With a population of just over 700,000, Bhutan has one of the world’s smallest and least developed economies. Almost 70 percent of the country’s wealth comes from development assistance grants from India, in addition to substantial aid from the United States and European countries. Apart from the hydropower industry, other economic sectors, including agriculture, are struggling. Bhutan must import much of its food because only 2.3 percent of the country is arable land. Although GDP growth is robust, the country’s deficit has continued to grow and the inflation rate reached 13.5 percent late last year. Furthermore, credit growth, including loans to the private sector, has risen to the unhealthy rate of 26.2 percent, which could lead both to a high nonperforming loan rate and more inflation.

Bhutan is taking steps to correct its problems, and has won plaudits for doing so from the IMF. Furthermore, the government is undergoing impressive structural reforms. Over the past two decades, Bhutan has transitioned from an absolute monarchy to a constitutional monarchy. In the mid-2000s, Jigme Singye Wangchuck, then king, transferred most of his power to a newly founded parliament and decreed that any king could be impeached by two-thirds vote of parliament. In 2006, the

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