MPFD Working Paper on Graduation of Bhutan from the group of least developed countries: Potential implication and policy imperatives

Working paper12 May 2020

Despite confronted with such unfavourable conditions as mountainous topography and being landlocked and susceptible to natural disasters, Bhutan has demonstrated a strong track record in sustaining economic growth and reducing poverty over the past two decades or so. Its progress in other socio-economic indicators as reflected in its success in achieving many of the 2000-15 Millennium Development Goal (MDG) targets is also worth noting. It is unique in approaching development by valuing collective happiness as the goal of governance. Bhutan successfully met the least development countries (LDCs) graduation criteria in two United Nations triennial reviews of 2015 and 2018 and is set to graduate from the group of LDCs in 2023. The transition involves loss of certain trade preferences and other international support measures. However, as the significance of these benefits has been quite limited for Bhutan, LDC graduation should not be a major cause for concern. While most LDC-specific privileges are related to international trade, Bhutan’s overwhelming dependence on trade with India is governed through a bilateral trade agreement insulted from LDC status. Overseas development assistance is important for Bhutan although its significance in the economy has fallen. Graduation should not have much implication for development financing as development partners do not use LDC status as an important factor in deciding about aid allocation. For Bhutan, dealing with general development challenges should remain important policy priorities. It has embraced a proactive policy stance for graduation by combining its eighth five-year development plan, Sustainable Development Goals (SDGs) and Gross National Happiness (GNH) indicators. Bhutan has huge potential for developing supply-side capacities and generate employment opportunities through further development of such sectors as tourism, agribusiness, ICT and hydropower. Major impediments for exerting dynamism in these sectors include lack of investment, infrastructure deficit, and poor connectivity. Diversification of economic activities is a challenge for which one priority attention should be on developing the private sector.