2014 Index of Economic Freedom

Bhutan

overall score56.7
world rank116
Rule of Law

Property Rights60.0

Freedom From Corruption58.8

Limited Government

Government Spending57.2

Fiscal Freedom82.9

Regulatory Efficiency

Business Freedom59.4

Labor Freedom83.6

Monetary Freedom65.8

Open Markets

Trade Freedom49.4

Investment Freedom20.0

Financial Freedom30.0

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Quick Facts
  • Population:
    • 0.7 million
  • GDP (PPP):
    • $5.0 billion
    • 9.7% growth
    • 8.2% 5-year compound annual growth
    • $6,665 per capita
  • Unemployment:
    • 3.2%
  • Inflation (CPI):
    • 9.7%
  • FDI Inflow:
    • $15.9 million
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Bhutan’s economic freedom score is 56.7, making its economy the 116th freest in the 2014 Index. Its score has increased 1.7 points from last year, primarily due to improved scores in government spending and freedom from corruption. Bhutan is ranked 24th out of 42 countries in the Asia–Pacific region, and its overall score is below the global and regional averages.

Since Bhutan’s economic freedom was first assessed in the 2009 Index, its progress in implementing more targeted reforms to advance economic freedom has been stagnant at best. Although Bhutan has taken steps to modernize its economic structure and reduce poverty, only two of the 10 economic freedoms—trade freedom and freedom from corruption—have recorded score improvements. Declines of about 10 points in both investment freedom and monetary freedom have helped to keep the country within the status of “mostly unfree” in the Index.

A higher priority has been placed on measures to diversify the economy. The public sector, especially hydropower, which has driven strong economic growth over the past five years, has long been the main source of economic expansion. However, with the poverty rate still high, the government has recognized that broad-based development is crucial. Taxation of personal and corporate income is moderate, and relatively flexible employment regulations are a potential advantage for private-sector development.

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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 58.8 Create a Graph using this measurement

The government operates with limited transparency and accountability, but steps have been taken in recent years to improve both. The Anti-Corruption Commission has identified misuse of resources, bribery, collusion, and nepotism as major problems. Bhutan’s civil and criminal codes include many modern provisions based on English common law. Property rights are generally better protected than in other South Asian countries.

Limited GovernmentView Methodology

The top individual income tax rate is 25 percent, and the top corporate tax rate is 30 percent. Other taxes include a property tax and an excise tax. Overall tax revenue is 13.5 percent of GDP. Government expenditures amount to 37.8 percent of GDP, and public debt has risen to over 70 percent of the economy as the government has borrowed to finance the opening of new hydroelectric projects.

Regulatory EfficiencyView Methodology

Starting a business is relatively straightforward, costing about 5 percent of the average annual income, but obtaining necessary licenses is time-consuming and costly. The labor market remains underdeveloped. Despite some improvement, the supply-and-demand imbalance in the labor market persists. Bhutan receives subsidized LPG and kerosene from India and maintains a significant number of financial and commercial controls.

Open MarketsView Methodology

As of 2007, Bhutan had a 17.8 percent tariff rate. Importing is a slow and costly process. New foreign investments may be screened by the government. Despite some progress in improving efficiency, the government-controlled financial sector does not meet private-sector credit needs sufficiently. The banking sector remains burdened with non-performing loans.

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 Kong90.10.8
2Singapore89.41.4
3Australia82-0.6
4New Zealand81.2-0.2
5Taiwan73.91.2
6Japan72.40.6
7Macau71.3-0.4
8South Korea71.20.9
9Malaysia 69.63.5
10Kazakhstan63.70.7
11Thailand 63.3-0.8
12Azerbaijan61.31.6
13Samoa61.14.0
14Kyrgyz Republic 61.11.5
15The Philippines60.11.9
16Sri Lanka60-0.7
17Vanuatu59.52.9
18Mongolia58.9-2.8
19Fiji58.71.5
20Indonesia58.51.6
21Tonga58.22.2
22Cambodia57.4-1.1
23Bhutan56.71.7
24India55.70.5
25Pakistan 55.20.1
26Bangladesh 54.11.5
27Papua New Guinea53.90.3
28China52.50.6
29Tajikistan52-1.4
30Laos51.21.1
31Maldives512.0
32Vietnam50.8-0.2
33Nepal50.1-0.3
34Micronesia49.8-0.3
35Burma46.57.3
36Uzbekistan46.50.5
37Kiribati46.30.4
38Solomon Islands46.21.2
39Timor-Leste43.2-0.5
40Turkmenistan42.2-0.4
41North Korea1-0.5
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