2013 Index of Economic Freedom

Bhutan

overall score55.0
world rank122
Rule of Law

Property Rights60.0

Freedom From Corruption57.0

Limited Government

Government Spending38.8

Fiscal Freedom82.7

Regulatory Efficiency

Business Freedom60.5

Labor Freedom84.4

Monetary Freedom67.3

Open Markets

Trade Freedom49.5

Investment Freedom20.0

Financial Freedom30.0

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Quick Facts
  • Population:
    • 0.7 million
  • GDP (PPP):
    • $4.3 billion
    • 5.9% growth
    • 9.1% 5-year compound annual growth
    • $6,112 per capita
  • Unemployment:
    • 4.0%
  • Inflation (CPI):
    • 8.6%
  • FDI Inflow:
    • $13.9 million
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Bhutan’s economic freedom score is 55, making its economy the 122nd freest in the 2013 Index. Its score has decreased 1.6 points from last year, primarily because of worsening government spending, monetary freedom, and fiscal freedom. Bhutan is ranked 25th out of 41 countries in the Asia–Pacific region, and its overall score is below the global and regional averages.

Over the past decade, Bhutan has taken steps to modernize its economic structure and reduce poverty. The foundations of economic freedom are relatively strong, with corruption present but under control, and institutional efforts have been made to ensure greater security for property rights. Recently, a higher priority has been placed on measures to diversify the economy. The public sector, especially hydropower, has long been the main source of economic growth, but the government now recognizes that broad-based private-sector development is crucial.

Nonetheless, Bhutan has made little progress in expanding economic freedom. Lingering constraints on private-sector development include an inefficient regulatory framework, high tariffs and pervasive non-tariff barriers, and a rudimentary investment code. The financial sector remains small and without adequate regulation or supervision. The lack of access to financing is a serious constraint for potential entrepreneurs.

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Background

Bhutan, a small Himalayan constitutional monarchy that made the transition from absolute monar­chy to parliamentary democracy in March 2008, has one of the world’s smallest and least-developed economies. Until a few decades ago, the country was still largely agrarian, with few roads, little electricity, and no modern hospitals. Rugged ter­rain makes the development of infrastructure difficult. Recent interregional economic cooperation, particularly involving trade with Bangladesh and India, is helping to encourage economic growth. Connections to glob­al markets are limited and dominated significantly by India.

Rule of LawView Methodology

Property Rights 60.0 Create a Graph using this measurement

Freedom From Corruption 57.0 Create a Graph using this measurement

Although Bhutan has set a laudable course in transitioning from absolute to constitutional monarchy, the initial laws passed in 2012 by its first-ever parliament have tended to expand government interference in the marketplace. Still, property rights are generally better protected than in most other South Asian countries. The Anti-Corruption Commission has identified misuse of resources, bribery, collusion, and nepotism as major problems.

Limited GovernmentView Methodology

The top income tax rate is 25 percent, and the corporate tax rate is 30 percent. Other taxes include a property tax and an excise tax. The overall tax burden is equal to 14.4 percent of total domestic income. A value-added tax (VAT) is set to be introduced in an effort to broaden the tax base. Government spending has increased to 45.2 percent of total domestic output, with public debt accelerating to 82 percent of GDP.

Regulatory EfficiencyView Methodology

Recent reforms have reduced the cost of starting a business by eliminating the minimum capital requirement. Despite some improvement, the supply-and-demand imbalance in the labor market persists. Inflation has accelerated slightly above its five-year average of 8 percent. In May 2012, Bhutanese monetary and economic authorities introduced additional financial and trade controls in an attempt to curb foreign-exchange outflows.

Open MarketsView Methodology

A high 17.8 percent average tariff and numerous non-tariff barriers increase the cost of trade. Foreign investment has been a sensitive issue, largely because of concerns about its effect on culture and traditions, but also because of domestic producers’ unwillingness to lose the benefits that restrictions provide. The Bank of Bhutan enjoyed a monopoly for many years, but competition has improved with the opening of the sector to more foreign partnerships.

Country's Score Over Time

Bar Graph of Bhutan Economic Freedom Scores Over a Time Period

Country Comparisons

Bar Graphs comparing Bhutan to other economic country groups

Regional Ranking

rank country overall change
1Hong Kong89.3-0.6
2Singapore880.5
3Australia82.6-0.5
4New Zealand81.4-0.7
5Taiwan72.70.8
6Japan71.80.2
7Macau71.7-0.1
8South Korea70.30.4
9Malaysia 66.1-0.3
10Thailand 64.1-0.8
11Kazakhstan63-0.6
12Mongolia61.70.2
13Sri Lanka60.72.4
14Azerbaijan59.70.8
15Kyrgyz Republic 59.6-0.6
16Cambodia58.50.9
17The Philippines58.21.1
18Fiji57.2-0.1
19Samoa57.1-3.4
20Indonesia56.90.5
21Vanuatu56.60.0
22Tonga56-1.0
23India55.20.6
24Pakistan 55.10.4
25Bhutan55-1.6
26Papua New Guinea53.6-0.2
27Tajikistan53.40.0
28Bangladesh 52.6-0.6
29China51.90.7
30Vietnam51-0.3
31Nepal50.40.2
32Micronesia50.1-0.6
33Laos50.10.1
34Maldives49-0.2
35Uzbekistan460.2
36Kiribati45.9-1.0
37Solomon Islands45-1.2
38Timor-Leste43.70.4
39Turkmenistan42.6-1.2
40Burma39.20.5
41North Korea1.50.5
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