2021 Index of Economic Freedom

Bhutan

OVERALL SCORE58.3
WORLD RANK109
Rule of Law

Property Rights62.6

Judicial Effectiveness45.7

Government Integrity55.0

Government Size

Tax Burden82.2

Government Spending71.6

Fiscal Health70.2

Regulatory Efficiency

Business Freedom67.3

Labor Freedom79.6

Monetary Freedom74.3

Open Markets

Trade Freedom40.8

Investment Freedom20.0

Financial Freedom30.0

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Quick Facts
  • Population:
    • 0.8 million
  • GDP (PPP):
    • $7.9 billion
    • 5.3% growth
    • 5.8% 5-year compound annual growth
    • $12,390 per capita
  • Unemployment:
    • 2.3%
  • Inflation (CPI):
    • 2.6%
  • FDI Inflow:
    • $7.2 million

Bhutan’s economic freedom score is 58.3, making its economy the 109th freest in the 2021 Index. Its overall score has decreased by 3.8 points, primarily because of a decline in trade freedom. Bhutan is ranked 22nd among 40 countries in the Asia–Pacific region, and its overall score is below the regional and world averages.

After only three years in the moderately free category, Bhutan’s economy fell back into the ranks of the mostly unfree this year. To increase economic freedom and stimulate the economy, the government needs to remove tariffs and other restrictions on trade and liberalize the investment code and banking rules. Improvements in judicial effectiveness and government integrity would also encourage confidence among investors.

IMPACT OF COVID-19: As of December 1, 2020, no deaths had been attributed to the pandemic in Bhutan, but economic growth was forecast to decline to 0.6 percent for the year.

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Background

The small Himalayan kingdom of Bhutan transitioned from absolute monarchy to constitutional parliamentary democracy in 2008. Former Prime Minister Tshering Tobgay’s People’s Democratic Party, which won a majority in the National Assembly in 2013, lost unexpectedly to Lotay Tshering’s Bhutan United Party in 2018 elections. Bhutan has one of the world’s smallest and least-developed economies. Even into the late 20th century, the landlocked country was largely agrarian with few roads, little electricity, and no modern hospitals. Recent interregional economic cooperation that includes growing trade with Bangladesh and India is stimulating economic growth. Connections to global markets are limited and dominated by exports of hydropower to India. Those exports could increase if chronic construction delays were resolved.

Rule of LawView Methodology

Property Rights 62.6 Create a Graph using this measurement

Judicial Effectiveness 45.7 Create a Graph using this measurement

Government Integrity 55.0 Create a Graph using this measurement

Although individuals generally have the right to own property and establish businesses, the registration of property or new businesses can be cumbersome. Judicial independence is respected, but court rulings are often inconsistent. In general, criminal penalties for corruption by officials are implemented effectively. However, nepotism and favoritism in public procurement and government employment remain problems.

Government SizeView Methodology

The top individual income tax rate is 25 percent, and the top corporate tax rate is 30 percent. Other taxes include property and excise taxes. The overall tax burden equals 16.0 percent of total domestic income. Government spending has amounted to 30.7 percent of total output (GDP) over the past three years, and budget deficits have averaged 2.5 percent of GDP. Public debt is equivalent to 110.0 percent of GDP.

Regulatory EfficiencyView Methodology

The cost of starting a business and the price of electricity have increased slightly. The majority of Bhutan’s people work in hydropower, agriculture, or forestry. The value added per worker relative to the minimum wage has increased. The state maintains significant financial and commercial controls, and Bhutan is the largest recipient of Indian foreign aid, especially through the co-financing of numerous hydropower projects.

Open MarketsView Methodology

Bhutan has three preferential trade agreements in force. The simple average tariff rate is 22.1 percent. Layers of nontariff barriers significantly impede dynamic flows of trade. Bhutan is not a member of the World Trade Organization. The underdeveloped investment framework and restrictions on foreign ownership limit opportunities to attract foreign investment. Access to credit is difficult, and the financial sector is rudimentary.

Country's Score Over Time

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Regional Ranking

RANK COUNTRY OVERALL CHANGE
1Singapore89.70.3
2New Zealand83.9-0.2
3Australia82.4-0.2
4Taiwan78.61.5
5Malaysia74.4-0.3
6Japan74.10.8
7South Korea740.0
8Kazakhstan71.11.5
9Thailand69.70.3
10Indonesia66.9-0.3
11Brunei Darussalam66.60.0
12Philippines64.1-0.4
13Kyrgyz Republic63.70.8
14Mongolia62.46.5
15Fiji62.2-1.2
16Samoa61.9-0.2
17Vietnam61.72.9
18Vanuatu60.5-0.2
19Papua New Guinea58.90.5
20China58.4-1.1
21Uzbekistan58.31.1
22Bhutan58.3-3.8
23Tonga57.5-1.3
24Cambodia57.30.0
25Bangladesh 56.50.1
26India56.50.0
27Solomon Islands56.53.6
28Sri Lanka55.7-1.7
29Tajikistan55.23.0
30Burma55.21.2
31Maldives55.2-1.3
32Laos53.9-1.6
33Afghanistan53-1.7
34Pakistan51.7-3.1
35Nepal50.7-3.5
36Micronesia50.4-1.6
37Turkmenistan47.40.9
38Timor-Leste44.7-1.2
39Kiribati44.4-0.8
40North Korea5.21.0
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