2009 Index of Economic Freedom

Quick Facts

Population:

• 0.6 million

GDP (PPP):

• $2.6 billion
• 11.0% growth
• 8.4% 5-year compound annual growth
• $4010 per capita

Unemployment:

• 2.5%

Inflation (CPI):

• 4.9%

FDI Inflow:

• $6.1 million

The 2009 Index assesses Bhutan's economic freedom for the first time. Its economic freedom score is 57.7, making its economy the world's 100th freest. Bhutan is ranked 18th freest among the 41 countries in the Asia–Pacific region, and its overall score is slightly less than the global average.

Despite its long isolation from global commerce, Bhutan's development in recent years has been rather rapid. The private sector is small and relatively undeveloped. Although the public sector has long been the main source of economic growth, the government now recognizes that developing a more vibrant private sector is critical to future economic progress.

Bhutan scores above the world average in fiscal freedom, monetary freedom, freedom from corruption, and labor freedom. Taxation of personal and corporate income is moderate, and flexible employment regulations and stable labor relations are potential advantages for private-sector development. Tackling corruption will be important in enabling the process of democratization to succeed. Other institutional weaknesses persist, particularly concerning investment and financial freedom. Regulation can be non-transparent and arbitrary, and the government's control of banking and finance further hampers the dynamic private investment that is needed to diversify the economy.

Background Back to the top

Bhutan, a small Himalayan constitutional monarchy that made the transition from absolute monarchy in March 2008, has one of the world's smallest and least-developed economies. Until a few decades ago, this still largely agrarian country had no roads, electricity, or hospitals. Rugged terrain makes the development of infrastructure difficult, but recent interregional economic cooperation, particularly trade development with Bangladesh and India, is helping to spur economic growth. Bhutan's international trade has long been dominated by India, and there is limited connectivity to global markets.

Business Freedom 61.7 Back to the top

The overall freedom to start, operate, and close a business is constrained by Bhutan's regulatory environment. Most businesses are controlled by the government or a few wealthy families. Starting a business takes an average of 46 days, compared to the world average of 38. Obtaining a business license requires 25 procedures, compared to the world average of 18. Regulations are sometimes inconsistent, and businesses have difficulty getting copies of laws and regulations.

Trade Freedom 42.0 Back to the top

Bhutan's weighted average tariff rate in 2005 was 21.5 percent. Import and export restrictions, inadequate infrastructure and trade capacity, underdeveloped markets, and non-transparent and arbitrary regulation add to the cost of trade. Fifteen points were deducted from Bhutan's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 83.6 Back to the top

Bhutan has moderate income and corporate tax rates. The top income tax rate is 25 percent, and the corporate tax rate is 30 percent. Other taxes include a motor vehicle tax, a property tax, and an excise tax. In the most recent year, overall tax revenue as a percentage of GDP was 10.7 percent.

Government Size 58.3 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 37.3 percent of GDP. The tenth five-year development plan (2008–2013) is expected to advocate tightened fiscal management to offset continued spending on public infrastructure projects.

Monetary Freedom75.9 Back to the top

Inflation is relatively high, averaging 5.0 percent between 2005 and 2007. The government provides very few subsidies. Bhutan is heavily dependent for monetary stability on India, which has many government subsidies. Ten points were deducted from Bhutan's monetary freedom score to adjust for the lack of competition and broad-based ownership in the economy.

Investment Freedom30.0 Back to the top

The first foreign investment in Bhutan was the State Bank of India's 40 percent holding in the Bank of Bhutan, purchased in 1972. Since then, Bhutan has pursued a conservative and restrictive foreign investment policy. All foreign investments are approved on a case-by-case basis, and no firm in Bhutan had majority foreign ownership until recently. Foreign direct investment has been a sensitive issue, largely because of concerns about its effect on culture and traditions. Concern may also stem in part from the private sector's unwillingness to lose the benefits that restrictions provide. Foreign exchange and capital transactions are subject to government controls. Foreign investors may not purchase land.

Financial Freedom30.0 Back to the top

Bhutan's financial sector is small and underdeveloped. An inadequate regulatory and supervisory framework limits access to necessary capital for local entrepreneurs. There are two state-owned commercial banks that have branches around the country. Domestic credit provided by the banking sector increased steadily from 3 percent of GDP in 2000 to 13 percent in 2006. Other financial institutions, also owned by the government, include the Bhutan Development Finance Corporation and the Royal Insurance Corporation of Bhutan; both have high levels of non-performing loans. Credit is not always allocated on market terms. Foreign exchange is tightly regulated, and the currency is not convertible. The four state-owned financial institutions dominate the Royal Securities Exchange of Bhutan, which now lists about 16 companies with more than 16,000 shareholders.

Property Rights60.0 Back to the top

In its attempt to integrate into the world economy, Bhutan has taken steps to facilitate development of the private sector. Protections of intellectual property rights are stipulated in the Industrial Property Act of the Kingdom of Bhutan, 2001, and the Copyright Act of the Kingdom of Bhutan, 2001. The Ministry of Trade and Industry's Intellectual Property Division is responsible for implementing intellectual property policies. Property rights are more equal than in most of South Asia, with women rather than men inheriting and owning property in some areas.

Freedom From Corruption50.0 Back to the top

Corruption is perceived as present. Bhutan ranks 46th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. The government's Anti-Corruption Commission has identified misuse of resources, bribery and collusion, and nepotism as major forms of corruption.

Labor Freedom85.8 Back to the top

Bhutan's flexible employment regulations facilitate overall productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is relatively easy. However, the formal labor market is not fully developed, and a more dynamic private sector is critical to fixing the mismatch between labor supply and demand.