GRADUATION FROM THE GROUP OF LEAST DEVELOPED COUNTRIES:
PROSPECTS AND CHALLENGES FOR BHUTAN
12th Round Table Meeting, 11-12 December 2013, Thimphu, Bhutan
Richard Marshall, Economic Advisor
Table of Contents
1.
Purpose .................................................................................................................................................................. 4
2.
Background .......................................................................................................................................................... 4
3. LDC Inclusion and Graduation ....................................................................................................................... 5
3.1
Inclusion ................................................................................................................................................ 6
3.2
Graduation Criteria ............................................................................................................................... 7
3.3
Graduation Process, timeframe and trends.......................................................................................... 9
4. Bhutan’s prospects for LDC graduation ...................................................................................................10
4.1
Income Criteria ................................................................................................................................... 10
4.2
HAI Criteria.......................................................................................................................................... 11
4.3
EVI Criteria .......................................................................................................................................... 12
4.4
Prospective Timeline for Bhutan’s graduation ................................................................................... 13
a) Scenario 1: First time eligibility in 2015 Triennial Review ................................................................... 14
b) Scenario 2: First time eligibility in 2018 Triennial Review ................................................................... 14
5. Benefits of LDC Status and implications for Bhutan ............................................................................14
5.1
Trade related support measures ........................................................................................................ 15
a) Preferential market access schemes for LDCs ..................................................................................... 15
b) Special and differential (S&D) treatment related to WTO obligations ............................................... 16
5.2
Official development assistance ......................................................................................................... 16
a) Bilateral assistance to LDCs ................................................................................................................ 16
c) Impact on Bhutan ............................................................................................................................... 17
d) Multilateral assistance ........................................................................................................................ 18
e) Other forms of special support measures ........................................................................................... 19
f)
LDC Graduation Support Measures ..................................................................................................... 20
6. Analysis to Support Policy Responses ......................................................................................................20
6.1
Structural Issues .................................................................................................................................. 20
a) Human Assets ..................................................................................................................................... 21
b) Economic Vulnerability ....................................................................................................................... 22
6.2
Analyses of Socio-economic outcomes............................................................................................... 25
7. Bhutan's Vision and Policy towards graduation by 2020..................................................................28
7.1
Longer Term and the frame set by the 11th Five Year Plan ................................................................. 29
7.2
Near Term and the LDC Graduation Process ...................................................................................... 29
Annex 1: Evolution of the Inclusion and Graduation Criteria ...................................................................31
Annex 2: Selected measures in favour of exports originating from LDCs .............................................32
Annex 3: Supporting Dataset - HAI & EVI Analysis ........................................................................................33
(i) HAI ........................................................................................................................................................... 33
(ii)
EVI ....................................................................................................................................................... 34
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Purpose
This paper focuses on Bhutan’s graduation from Least Developed Country (LDC)
status and has been prepared for the 12th Roundtable Meeting (RTM) coorganized by the Royal Government of Bhutan and UN Development Programme
(UNDP) in December 2013. It provides a review of the graduation criteria and
process, the direct implications and analysis of the wider challenges faced. It
identifies the key policy questions as being bound up with structural constraints,
economic imbalances, and the potential for these to be reflected in development
outcomes. Overall, we find, that there is a need during the run-up period to
exploit, and as far as possible retain, the benefits conferred by LDC status while
addressing the main underlying questions.
This paper has six further principal sections. Section 2 provides background and
contextual material. Section 3 discusses LDC inclusion and gradation criteria
and the UN’s triennial review process. Section 4 reviews Bhutan’s current
position and the likely graduation scenarios. Section 5 identifies the direct
implications of losing LDC status. Section 6 then employs analysis of Bhutan’s
performance on the LDC criteria to identify the major imbalances and
bottlenecks, and examines the poverty and inequality issues. Finally, in Section
7, policy conclusions and recommendations are made.
1. Background
Least Developed Countries (LDCs) are defined by the United Nations system as
the most vulnerable members of the international community – having both lowincomes and facing severe structural and physical impediments to their long
term economic and social development.1 The establishment of a category of LDCs
was first advocated in 1964 during the first plenary of the United Nations
Conference on Trade and Development (UNCTAD I). Following UNCTAD II in
1968, the International Development Strategy for the second UN Decade of
Development in 1970 explicitly recognized that LDCs that required special
attention and support measures to facilitate their socio-economic development.
The then named Committee for Development Planning (CDP)2 proposed an initial
list of 25 LDCs based on a set of criteria that included low per capita GDP, low
shares of manufacturing in GDP and low human capital development (given by
the literacy rate). The list, which included Bhutan, was approved by the
2010 Triennial Review Report of the Committee for Development Policy (CDP)
CDP was Established in 1965 as a subsidiary body of the United Nations Economic and Social Council (ECOSOC)
Council, the Committee of Development Planning was renamed the Committee for Development Policy (CDP) in
1998. CDP provides independent advisory services to the ECOSOC on development issues. Its mandate includes
undertaking a triennial review of the list of the least developed countries (LDCs), on the basis of which it advises
the Council on countries that should be included to the list and those that qualify for graduation from it.
1
2
4
Economic and Social Council and endorsed by the General Assembly in
November 1971.
The current list of LDCs comprises 49 countries, of which 34 are in Africa, 14 in
the Asia Pacific and 1 in Latin America. Of the 49 LDCs, 16 countries, which
include Bhutan, also fall into the category of land locked developing countries
(LLDCs) that are characterized by a lack of territorial access to the sea,
remoteness and isolation from global markets and high transit costs.
Despite three successive UN Conferences on LDCs (UNLDCs)3 to generate
international attention and action to support LDCs, most of these countries are
struggling to meet the internationally agreed development goals (IADGs) and
continue to face enormous social, economic, political and environmental
challenges. Overcoming these challenges is an enormous task, which is evident
from the fact that only three countries - Botswana in 1994, Cape Verde in 2007
and Maldives in 2011 - have graduated from LDC status since its inception. To
reinvigorate international efforts to support LDCs to effectively address these
challenges, the Fourth UN Conference on the Least Developed Countries
(UNLDCIV) held in 2011 adopted the Istanbul Programme of Action (IPoA) which
underscored the need to overcome the structural challenges faced by the LDCs in
order to eradicate poverty, achieve the IADGs, and most pertinently, enable half
the number of LDCs to achieve the LDC graduation criteria by 2020.
With the rapid increase in Bhutan’s per capita Gross National Income (GNI) and
the significant progress it has made in key socioeconomic indicators, Bhutan is
seemingly among those countries that are poised to be targeted for graduation in
the medium term. Moreover, the Eleventh Plan of the Royal Government explicitly
includes graduation from the LDC category by 2020 as one of three development
milestones to be achieved. To facilitate LDC graduation and ensure its longer
term sustainability, greater attention needs to be paid to address many of the
structural and other challenges that Bhutan continues to face despite its strong
growth performance and progress in its social indicators. This is precisely the
focus of the latter sections of this paper. The Eleventh Plan presents an
opportunity to reflect more deeply on the question of Bhutan’s graduation from
the LDC category, with the objective of strengthening and deepening cooperation
with development partners to facilitate as well as effectively prepare for this
eventuality.
2. LDC Inclusion and Graduation
The definition and the eligibility and graduation criteria for LDCs have evolved
over the years (see Annex1 for further details) keeping in mind the need to
UNLDC I in1981 adopted the Substantial New Programme of Action (SNPA); UNLDC II in 1990 adopted the
Programme of Action for LDCs; UNLDC III in 2001 adopted The Brussels Programme of Action (BPoA).
3
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identify and track the long‐term structural weaknesses inherent to LDCs, while
maintaining stability in the criteria to ensure credibility of the process and the
list itself.
The assessment the LDC status is undertaken by the UN’s Committee for
Development Policy (which reports to Economic and Social Council) on a rolling
three year basis and employs three criteria (the Triennial Review). It is important
to emphasize this is a separate process to the more mechanistic categorization
provided by the World Bank to define income status (Low, Lower Middle, Upper
Middle and so forth).
3.1
Inclusion
As per the 2012 Triennial Review, LDCs are defined as “low-income countries
suffering from severe structural impediments to sustainable development”. The
current criteria and thresholds, all of which must be met for a country to be
identified for inclusion in the list of LDCs are given below (note countries also
have to consent to their inclusion). There are separate and higher graduation
thresholds, which are reviewed next.

Gross National Income (GNI) per capita: With an inclusion threshold of US$
992 or less at the 2012 review, the GNI criterion serves as an indicator of the
productive and income generating capacities of an economy and its ability to
provide requisite services. The GNI value is three a year rolling average of the
years prior to the review, and is calculated on the basis of the World Bank’s
Atlas method4. The threshold is re-priced using the SDR inflation series (a
weighted average of the main reserve currencies).

Human Assets Index (HAI): With an inclusion threshold score of 60 or less
at the 2012 review, the HAI criterion serves as an indicator of the stock of
human capital. Higher values of HAI indicate positive progress on human
assets. It is based on a set of 4 equally weighted indicators related to health
and education: (i) nutrition in terms of percentage of population
undernourished; (ii) health in terms of mortality rate for children aged five
years or under; (iii) education in terms of the gross secondary school
enrolment ratio; and (iv)the adult literacy rate. The threshold is established
using a min-max procedure (similar to that used in calculation of the UNDP’s
Human Development Index) in reference to a specified country grouping
(essentially all LDCs plus non-LDC LICs)5.
4
See: http://data.worldbank.org/about/country-classifications/world-bank-atlas-method
The approach adopts upper and lower benchmarks, then scales LDC progress between best and worst
country performance.
5
6

Economic Vulnerability Index (EVI): With an inclusion threshold score of
36 or more, the EVI criterion serves as an indicator of structural vulnerability
of the economy, and the frequency and extent of external shocks. Higher
values of EVI denote increased vulnerability. It is based on 2 indexes with
equal weight that measure exposure and shock dimensions of vulnerability,
and which are further broken down into 6 sub-indexes with 8 corresponding
indicators (with varying weights) in the chart below:
Chart 1: EVI Components and Indicators
Sub-indexes
Exposure
Index
(1/2)
EVI
Economic Vulnerability Index
Index
Shock
Index
(1/2)
Indicators
1. Size sub-index (1/8)
1. Population (1/8)
2. Location sub-index (1/8)
2. Remoteness (1/8)
3. Economic Structure subindex(1/8)
3. Merchandise export
concentration (1/16)
4. Share of Agriculture, forestry
and fisheries (1/16)
5. Share of population in low
elevated coastal zones (1/8)
6. Instability of exports of goods
and services (1/4)
4. Environment sub-index
(1/8)
5. Trade shock sub-index
(1/4)
6. Natural shock sub-index
(1/4)
7. Victims of natural disasters
(1/8)
8. Instability of agricultural
production (1/8)
Note: Number in parenthesis denote respective weights assigned
Taken together the three measures chart the wider developmental progress of
LDCs across key domains. The EVI has a special purpose in mapping the severe
structural and physical impediments faced, and is the defining characteristic of
the classification. While both GNI an HAI are constitutive of development, they
also measure the ability of LDCs to overcome these constraints6.
3.2
Graduation Criteria
The question of graduation from the list of LDCs was first raised in 1991 and
rules for graduation were established during the same year. The rules for
Note: In 1991 CDP established that countries with a population exceeding 75 million should be excluded from
the list of LDCs on grounds that large economies do not suffer the severe structural handicaps that are
characteristic of the LDC category1991 (CDP triennial review report ).
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graduation have also evolved over the years keeping in mind the need to ensure
that graduation of an LDC is based on significant improvements in the country’s
development prospects; accord equal treatment to countries in the review process
over time; and flexibility is shown in the application of rules, particularly for
those countries that are very close to meeting the graduation thresholds to
ensure sustainable exit from the category and prevent others from falling back.
There is a deliberate asymmetry between the inclusion and graduation
thresholds, with the graduation bar being set at a higher level of 20 per cent for
the income criteria and 10 per cent for the HAI and EVI criteria (rounded to the
nearest index number). In addition, the eligibility for graduation is determined
over two consecutive triennial reviews. While inclusion is determined once and is
effective immediately, graduation requires a preparatory period of three years
during which time UN institutions provide support (discussed in more detail
below) and graduating LDCs are assisted in developing a Smooth Transition
Strategy.
It is also important to note that while inclusion requires the consent of the
country concerned, graduation does not, and remains the decision of CDP and
the UN Economic and Social Council (ECOSOC). Nevertheless, listed counties are
invited to make submissions and although rigorous, the process is not
deterministic; as such, certain counties judged eligible have not been graduated.
The most notable is Equatorial Guinea (which is now identified by the World
Bank as a high income country), others, for example Maldives, have been granted
additional preparatory years (in this case to reflect the impact of the South Asian
Tsunami).
The 2012 thresholds for the three criteria for graduation are a GNI per capita of
US$1,190 or more, which is based on a three-year average; a HAI score of 66 or
more; and an EVI score of 32 or less (note the minimization target for EVI versus
maximization for the others). A country becomes eligible for graduation if it meets
the threshold levels for graduation for at least two of the three criteria.
Additionally, a country also becomes eligible for graduation under the income
only rule if its GNI per capita exceeds at least twice the established threshold
(US$ 2380 or more for 2012 review). This is regardless of its HAI and EVI scores
but provided that the prospect of sustaining the level of GNI per capita is high.7
To be recommended for graduation, a country must be found eligible at two
successive Triennial Reviews.
Equatorial Guinea in the 2009 review and Vanuatu, Tuvalu and Angola in the 2012 review were found eligible
under the income only rule.
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3.3
Graduation Process, timeframe and trends
After an LDC has been found eligible for graduation for the first time by CDP,
UNDESA prepares an ex-ante impact assessment and UNCTAD prepares a
vulnerability profile as inputs to the following triennial review. The eligible
country is invited to present its views on graduation (which may be in the form of
an oral presentation and/or a written statement) to CDP in the year prior to the
review. Graduation is then either confirmed by recommendation to ECOSOC or
reversed if circumstances warrant it, as was the case with Vanuatu and Tuvalu8.
Once graduation is endorsed by ECOSOC, the UN General Assembly (GA) is then
required to take note of ECOSOC decsiosn at its first session. Graduation takes
effect three years after the GA notificatsion. During this three-year period,
referred to as the transition period, the country remains on the list of LDCs and
continues to benefit from the special measures associated with LDC status (see
below) and prepares the Smooth Transition Strategy which is implemented in the
post‐transition period. The chart below provides a timeline for the process.
Chart 2: LDC Graduation Timeline
Source: LDC Handbook
However, the GA does not necessarily have to accept ECOSOC’s endorsement as has been the case for Equatorial Guinea. This is in spite of its exceeding the
According to the CDP’s 2012 triennial review report, Vanuatu and Tuvalu have been recommended for
graduation after a third consecutive determination of eligibility for graduation, the delay being that the CDP had
questioned the sustainability of their development progress in the preceding two triennial reviews.
8
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income only rule by a factor of 12, and relates to concerns over its wider
developmental status. Its EVI (at 43.7) and HAI (at 43) remain well below the
thresholds. Notwithstanding this, CDP in its 2012 report noted that “the
prolonged inaction by the GA on Equatorial Guinea is prejudicial to the credibility of
the LDC category as a whole”.
In addition graduation may also be deferred even after endorsement due to
extenuating circumstances. For instance, Samoa’s graduation has been deferred
until January 2014 due to the severe devastation that it suffered from 2009
tsunami. The graduation of the Maldives was also delayed for the same reasons.
3. Bhutan’s prospects for LDC graduation
This section reviews Bhutan’s position in relation to the three graduation criteria
and its prospects for the forthcoming reviews in 2015 and 2018. It also maps out
two alternative graduation scenarios and timelines. It is underlined that it
difficult to gauge Bhutan’s future position with any certainty, and still less so the
global thresholds. This is especially for HAI and EVI, as these are set somewhat
judgementally.
4.1
Income Criteria
Bhutan’s has progressed significantly on the income criterion. As Table 2
illustrates, from a gap of 23.3 per cent of the threshold in 2006, it exceeded the
GNI graduation threshold in 2012 by over 42.8 per cent. Moreover, it is also now
approaching the upper threshold of US$ 2380 with a gap of 28.6 per cent (as
specified under the income only rule).
Table 1: Bhutan’s Income Criteria trend for last three CDP Reviews
Triennial Review Year
2006
2009
2012
GNI Graduation Threshold (US$)
900
1086
1190
GNI Bhutan (US$)
690
1486
1700
23.3%
below
36.8 %
above
42.8% above
Bhutan GNI per capita as % of threshold
Source: Authors’ Calculations
Bhutan’s GNI per capita (per the World Bank WDI series) has more than doubled
over the last ten years (see chart). Assuming a similar growth trend, which is
likely to be the case given that two to three further hydropower projects are
expected to be commissioned over the Eleventh Plan period, Bhutan’s GNI per
capita could be around US$ 2415 by 2015 and US$ 3100 by 2018 (the next two
review dates)9. Similarly, based on broad trends in its evolution, the upper ceiling
Based on a roll forward of current GNI levels and a rolling five year average of annual growth, note also the GNI
value is a three year average lagged by some 2 years.
9
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for the income threshold for graduation may rise to US$ 2740 in 2015. In this
case, Bhutan would continue to meet the income criteria but not yet qualify
under the income only rule.10
Chart 3: Bhutan GNI per capita (US$)
$3,000
$2,420
$2,500
$2,210
$2,000
$1,640
$1,500
$1,000
$500
$780
$820
$860
$950
$1,070
$1,230
$1,750
$1,850
$1,990
$1,340
$500
$0
1991 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Bhutan GNI Per Capita (US$)
Source: World Bank World Development Indicators (WDI)
4.2
HAI Criteria
Although still below the graduation threshold, Bhutan’s has made significant
progress on human assets in recent years. As illustrated below, it has succeeded
in closing the gap from 30.6 per cent of the threshold in 2006 to 10.6 per cent in
2012.
Table 2: Bhutan’s HAI Trend for last three CDP Reviews
Triennial Review
HAI threshold for graduation
Bhutan’s HAI
HAI gap as % of threshold for graduation
2006
2009
2012
64
66
66
44.4
58.6
59
30.6%
below
11.2%
below
10.6%
below
Source: Authors’ calculations
Analysis of the different dimensions of HAI indicates that the under-five mortality
and gross secondary school enrolment rates have all improved strongly; a
particular issue is the literacy rate, while malnourishment exhibits average
performance (see Section 6). This prioritization is somewhat reflected in the
Eleventh Plan. Here the key challenges are cited as malnutrition among children
under 5, with 12.7 per cent classified as moderately underweight and 3.2 per
cent as severely underweight; a high under-five mortality rate11 of 69 per 1000
live births; and a low adult literacy rate of 55.3 per cent. Given the priority that
10
11
Based on a pro-rata the increase in GNI thresholds over the past three Triennial Reviews.
See RoGB (2013) Eleventh Five Year Plan.
11
the Government continues accord to the social sector and the progress made, the
prospects for Bhutan meeting the HAI threshold by 2015 are strong, though not
guaranteed.
4.3
EVI Criteria
The EVI criterion, which as noted is fundamental to the LDC category, is
designed to reflect the level of vulnerability and determine the extent to which a
country would be affected by shocks. As for other LDCs, it is the most
challenging aspect for Bhutan’s graduation. Moreover, the country’s relatively
weak position belies many of the policy challenges faced (again taken up in the
analysis reported in Section 6).
As the table below illustrates, the gap in Bhutan’s EVI as a percentage of the
threshold for graduation for this criterion has widened from 22.6 per cent in
2006 to 38.1 per cent in 2012, underscoring the high level of vulnerability faced.
As later analysis will show a key dimension is the weak level of resilience to
shocks versus others within the grouping.
Table 3: Bhutan’s EVI Trend for last three CDP Reviews
Triennial Review
EVI threshold for graduation
Bhutan's EVI
EVI gap as % of threshold for graduation
2006
2009
2012
38
38
32
46.6
52.9
44.2
22.6%
below
39.2%
below
38.1%
below
Source: Authors’ Calculations
In terms of the exposure aspect of EVI, with a population of slightly over
700,000, as a small economy Bhutan is faced with a narrow economic base and
high dependency on external trade. Its trade to GDP ratio was around 115 per
cent in 2011. Moreover, export concentration increases a country’s exposure to
trade shocks, and in the case of Bhutan more than 40 per cent of its exports are
concentrated on hydropower exports to India. Furthermore, mineral and metal
based products which constitute the second major exports of Bhutan are highly
dependent on the availability of low cost hydropower. The hydropower sector is
also subject to considerable hydrological risks.
Economic vulnerability arising out of its small population size is further
exacerbated the County’s landlocked and remote position, both factors, which
although not explicitly included in the formula, have been noted by the CDP as
structural obstacles to trade and growth. Bhutan’s difficult mountainous
topography further compound these constraints, and it is faced with a series of
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knock-on impacts - difficulties in building and maintaining infrastructure, and
the high costs of transportation and delivering social services.
With regard to economic structure, a larger share of agriculture, forestry and
fisheries in GDP implies higher exposure to shocks, both in relation to terms of
trade and to natural disasters. In the case of Bhutan, the share of agriculture,
forestry and livestock in GDP has been declining, indicating lower exposure. But
the analysis reported later, suggests this has not been a significant driver.
Referring to the shock sub-index, Bhutan is highly vulnerable to both the natural
or weather-related phenomena and those derived from its exposure to global
trade. With a highly fragile mountain eco-system, Bhutan is increasingly prone to
natural disasters that have negative impacts on economic progress and pose a
major challenge to development of strategic infrastructure. Glacial Lake Outburst
Floods, persistent landslides, rising frequency of earthquakes, floods, forest fires
and windstorms are major natural threats of concern. Equally significant is the
threat climate-induced disasters pose to Bhutan’s hydropower sector.
On the trade side, as referenced, Bhutan is heavily dependent on hydropower
exports which are highly vulnerable to hydrological and climatic risks. Moreover,
this is heighted by India being a monopsony buyer. Bhutan’s external sector has
also been characterized by high, volatile and persistent current account deficits
averaging at about 13 per cent of GDP during the period of 2001 to 2011, which
peaked at 33 per cent of GDP in 2004-05. However, it is important to recall these
deficits are primarily a result of the import of capital to facilitate development of
the hydro-power sector. Nevertheless, there remain major macroeconomic
challenges, notably an on-going rupee shortage due to mismatches in flows and
other current account pressures. These underscore the instability of Bhutan’s
exports and varying capacity to import goods and services from export earnings.
It is unlikely therefore that Bhutan will meet the EVI graduation threshold for
some time. Analysis will show the severest challenges, aside from population
size, are the persistent narrow economic base, volatility in exports and weak
agricultural production. These are familiar issues, and in response, Bhutan
launched an Economic Development Policy (EDP) in 2010 with a vision to
promote a green and self-reliant economy and achieve diversification. Successful
implementation of the EDP 2010 would go some way to addressing these
challenges and ensure a more sustained development path in the longer term.
4.4
Prospective Timeline for Bhutan’s graduation
Two possible scenarios and timelines are set out premised on listing in 2015 and
2018, and alternatively listing in 2018 and 2021. The key considerations are
improvement in GNI versus the upper threshold (and hence qualification under
the income only rule) and on the HAI criterion.
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a) Scenario 1: First time eligibility in 2015 Triennial Review
The earliest that Bhutan can be considered eligible for graduation is the 2015
triennial review. Assuming that Bhutan is found to be eligible then (on account of
meeting the income and HAI criteria, or under the income-only rule) and given
eligibility has to be sustained over two reviews, the earliest that Bhutan can be
recommended for graduation is the 2018 triennial review.
UNDESA would prepare the ex-ante impact assessment of Bhutan’s graduation
and UNCTAD the vulnerability profile of Bhutan that serve as inputs to the CDP’s
decision-making for the review in 2018. Bhutan would then be invited to present
its views on the possibility of graduation to the CDP expert group meeting on the
review of the list of LDCs in 2017.
CDP may then recommend Bhutan’s graduation in 2018 on the basis of the
triennial review that year. Assuming ECOSOC endorses the recommendation for
Bhutan’s graduation and the UN General Assembly also takes note of the
decision of ECOSOC during its session that same year, Bhutan’s graduation
would take at the end of 2021 (three years after recognition by the General
Assembly).
b) Scenario 2: First time eligibility in 2018 Triennial Review
In the event Bhutan’s first time eligibility for graduation is deferred to 2018
(based on delayed achievement of thresholds) CDP is likely to recommend
Bhutan’s graduation in 2021. Indeed, it is still possible that Bhutan would
marginally undershoot both the double income and HAI thresholds in 2015.
Assuming ECOSOC endorses the recommendation and the UN GA takes note of
the decision of ECOSOC during its session that same year, Bhutan’s graduation
would then take effect in 2024.
4. Benefits of LDC Status and implications for Bhutan
This section considers the direct financial implications of Bhutan’s graduation,
for ODA revenues and loss trade concessions. Currently, LDCs benefit from
special support measures that aim to assist them in overcoming the severe
structural impediments to growth and sustainable development and
consequently facilitating their graduation from the category. These measures fall
into three main categories, namely trade related special and differential (S&D)
treatment; targeted ODA that includes concessional financing and technical
cooperation; and other support measures12.
CDP Handbook on Least Developed Country Category: Inclusion Graduation and Special Support Measures
2011.
12
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5.1
Trade related support measures
Special support measures to LDCs are predominantly related to international
trade and include preferential market access and special treatment regarding
World Trade Organization (WTO) obligations. The latter relate to Trade Related
Investment Measures (TRIMs), Trade Related Intellectual Property Rights (TRIPs)
and Sanitary and Phyto-sanitary (SPS) requirements, and trade-related capacity
building. In addition, LDCs also benefit from less restrictive application of the
rules of origin restrictions as compared to other developing countries.
a) Preferential market access schemes for LDCs
Developed and many developing countries, provide preferential access for LDCs
imports at zero or reduced tariff rates under the Generalized System of
Preferences (GSP) and the Global System of Trade Preferences (GSTP), a
reciprocal scheme among developing countries that recognizes the special needs
of LDCs. Additionally, some regional trading agreements such as the South Asian
Free Trade Agreement (SAFTA) also contain preferential market access provisions
for their LDC members (See Annex 2 for a full list of LDC-specific preferential
market access schemes).
With more than 90 of Bhutan’s exports being made to India, with whom it shares
a free trade agreement, the loss of preferential market access is unlikely to have
a major impact. Equally, Bhutan faces major supply-side constraints that
prevent its utilization of preferential market access. In addition, the significance
of LDC preferential access may diminish with declining trends in global tariffs.
This notwithstanding, preferential market access can play a significant role in
Bhutan’s efforts to diversify its economic and export base and needs to be
factored in its transition strategy. Initial analysis (see below) of Bhutan’s five top
export markets suggested the potential loss in tariff abatement is currently was
less than USD 100,000 per year.
Table 4: Potential Additional Tariffs Payable (based on 2010 data)13
Country
1. India
2. Hong Kong, China
3. Bangladesh
4. European Union (27)
5. Japan
Total
Total USD m
2011
Average Tariff
Impact USD m
75.7
16.2
5.8
1.1
0.6
99.4
N/A
N/A
N/A
5.50%
4.60%
0.060
0.027
0.088
Source: Author’s calculations
13
Sourced from WTO website, impact calculated by applying average national tariff
15
b) Special and differential (S&D) treatment related to WTO obligations
In all, 32 of the 49 LDCs are members of the WTO and stand to benefit from
special provisions safe guarding of the interests of LDCs; increased flexibility for
LDCs in rules and disciplines governing trade measures; extension of longer
transitional periods to LDCs; and provision of technical assistance. The most
significant of these are lead-in periods of ten years on compliance with Trade
Related Intellectual Property Rights (TRIPs) and Trade Related Investment
Measures (TRIMs). Again these are both vital derogations in respect of economic
diversification policies, and would assist the objectives outlined in the EDP.
Additional room is also given in relation to the application of Sanitary and PhytoSanitary (SPS) standards.
Furthermore, to alleviate the difficulties faced by LDCs in their accession
process, WTO has adopted guidelines for facilitating and accelerating
negotiations with acceding LDCs, which include the exercise of restraint in
seeking excessive concessions from acceding LDCs; the granting of transitional
periods to enable acceding LDCs to implement commitments and obligations
effectively; the provision of technical assistance by WTO member States in the
accession process of an LDC; and the provision of technical assistance on
accession procedures by the WTO Secretariat.
Bhutan is not yet a member of WTO, and postponed accession in 2012 over
concerns in relation to market liberalization. As a country currently in the
accession process, Bhutan may lose these concessions upon graduation and as
such will need to factor them in its transition strategy. It is also worth noting it
that would be more advantageous for Bhutan to accede to WTO while still having
LDC status. Nevertheless, it already benefits from technical assistance provided
under the Enhanced Integrated Facility (EIF) to all LDCs, which is part resourced
by the WTO. This has included financing of the Diagnostic Trade Integration
Strategy (DTIS) in 2012.
5.2
Official development assistance
a) Bilateral assistance to LDCs
Support measures in the area of bilateral development financing, technical
cooperation and other forms of assistance commonly involve voluntary
commitments made by donor countries. The Istanbul Programme of Action calls
for 0.15 to 0.20 per cent of donor GNI to be provided as aid to LDCs, which is
equivalent to $60.2-80.3 billion. As of 2011, total aid provided to LDCs amounted
to 0.10 per cent of GNI in 2011, equivalent to about $44 billion. In line with this,
several bilateral donors employ needs-based ODA allocation regimes which either
16
employ LDC status explicitly, or make use of the criteria which define the
category.
In addition, some donor countries provide specific support measures to LDCs.
Though their relevance to Bhutan is questionable, these global initiatives
include:
- Japan’s MIRAI Initiative (Minimal Interest Rate Initiative for low-income
LDCs) launched in 2006.
- The LDC Infrastructure Fund (LIF), which is a joint initiative by the
Netherlands Development Finance Company (FMO) and Government of the
Netherlands, are two such examples.14
- An initiative by the United States Agency for International Development
(USAID) in partnership with UNDP and Cisco Systems aims at bridging the
digital divide between developed countries and LDCs through IT education
opportunities to more than 35,000 students from LDCs.
c) Impact on Bhutan
It is difficult to gauge the full possible impact of LDC graduation on Bhutan’s
ODA inflows. Yet evidence does suggest it is may be smaller than first imagined.
This is foremost because Bhutan’s largest donor is India, and different
considerations operate for the de facto budget support currently provided (and
India accounts for approximately 66 per cent of all ODA)15.
Second, with regard to other donors, interviews with local missions revealed a
mixed picture with some suggesting there would be no material impact (e.g.
Japan), while others were suggestive of an impact (e.g. Switzerland). Many,
however, noted that the scaling down process was already underway that the
loss of LIC status was far more material. This is especially pertinent to World
Bank and Asian Development Bank concessional lending (retuned to below). In
attempt to provide additional rigour desk-based research established which of
the major donors were likely to apply LDC or LDC-based considerations in
allocating aid, and this suggested the loss in ODA at most would be 26 per cent
of the total excluding India. This is illustrated in the chart below, while material,
this is not a catastrophic loss.
Under MIRAI LDCs can avail of a concessional yen loans with a 0.01 per cent interest rate and a 40-year
repayment period (with a 10-year grace period. LIF provides long-term financing to stimulate private investors to
invest in infrastructure in LDCs in energy, telecommunications, transportation, environmental and/or social
infrastructure.
15 Across project, programme and tied-ODA categories for 2001/12 projected data.
14
17
Chart 4: Top 10 Donors (ex. India), full shading indicates graduation impact
Note: UN contributions are shown in net terms (US$6.24 m) of five UN resident agencies. This also does not reflect
Trust Funds and other donor monies. All resident and non-resident UN delivered (US$12.3m) in 2011.
It is worth recording, however, that the sectoral pattern of ODA losses is likely to
be more significant. Some sectors may be disproportionally affected, notably
education. This is an area for further enquiry, which might then be taken up
within the transition process.
d) Multilateral assistance
Regional and multilateral financial institutions (ADB, World Bank and IMF) do
not provide specially designed concessionary financing for LDCs. Indeed, such
financing is based on the World Bank’s classification of low-income countries,
and low middle income (i.e. those lacking creditworthiness for non-concessionary
financing).
For example, the criteria for eligibility concessionary financing from the
International Development Association (IDA) are granted to all countries below an
established threshold of GNI per capita (US$1,175 in fiscal year 2012). Lower
Middle Income Countries (Bhutan’s current status) are still able to access IDA
funds up to a threshold some 20 per cent higher. Moreover, for a transitional
period so-called blend countries are able to borrow from both IDA and IBRD (the
non-concessional lending arm of the Bank). It is worth underlining also, that
there is a degree of subjectivity in determining access to IDA and IBRD funds,
and this is determined by technical judgements made by the Bank’s senior staff
18
and endorsed at Board level. As such, Bhutan’s graduation is unlikely to have
any impact on World Bank or other multilateral institution lending16.
The UN system, including its funds and programmes, provide targeted technical
cooperation programmes, such as through the UN Development Account
earmark a proportion of their budgets specifically for LDCs. For example: the
United Nations Development Account project on Capacity-building for graduation
strategies for least developed countries in Asia and Africa was implemented
during the period 2008-2011; UNDP had a stipulated target of about 62 per cent
of its core budget in 2004-2007 for LDCs; pursuant to the United Nations GA
resolution adopted in 1973 UNCDF has focused its investments in the LDCs and
is active in 37 of the 49 LDCs; and the World Food Programme (WFP) has
targeted the allocation of at least 50 per cent of its resources to LDCs.
Bhutan is currently a beneficiary of these programmes. Support from the UN
system would slow after graduation. Yet the annual core funds allocated at
US$4.6 million, as distinct from the total sum of US$12.3 million administered
(2011 data, is less substantial. While there will be some loss, this is unlikely to
material. The greater impact would most likely be a diminished UN presence.
There are additionally, several global UN allocation regimes which pay specific
reference to LDCs, including:
- The Global Environment Facility (GEF): GEF manages the United Nations
Framework Convention on Climate Change (UNFCCC) Least Developed
Countries Fund (LDCF), which responds to the needs of LDCs that are highly
vulnerable to climate change and supports projects of LDCs based on their
national adaptation programmes of action (NAPAs).
-
The World Meteorological Organization (WMO): Since 2003, the WMO has
initiated a programme that seeks to enhance and strengthen the capacities of
the National Meteorological and Hydrological Services (NMHSs) of LDCs to
enable them to meet their needs in relation to weather, climate and water. A
trust fund for the LDCs has also been established in this regard.
While the importance of the environment in Bhutan’s development framework
and its high vulnerability to climate change, mean any loss of support under
GEF and WMO is a concern, again, the sums involved are relatively small.
e) Other forms of special support measures
Other forms of special support measures include financial support from the
United Nations for the participation of representatives of LDCs in annual and
special or emergency sessions of the General Assembly, which average about US
$ 20,000 per country per annum. Additionally funding is also provided for
16
Source: interview with World Bank Country Director, 10th November 2013
19
participation of LDCs in various processes related to the UN including the annual
review of the Programme of Action for the LDCs, the United Nations Consultative
Process on Oceans and the Law of the Sea and the United Nations Framework
Convention on Climate Change (UNFCCC). The loss of such support would
impact on Bhutan’s ability to participate in these forums.
Furthermore, contributions by LDCs to the regular budget of the United Nations
are capped at 0.01 per cent of the total United Nations budget irrespective of
their GNI national income and a 90 per cent discount is granted in their
contributions to peacekeeping operations.
f) LDC Graduation Support Measures
Additionally, it is worth noting the measures in place to support LDC graduation
directly. These are specifically, the analytical inputs offered by UNDESA and
UNCTAD (the ex-ante impact assessment and the vulnerability profile
respectively) and the TA available from UN agencies to support the development
of Smooth Transition Strategies by national governments. While these supports
would be available to Bhutan, the key point to underline is, rather, their
inadequacy vis-à-vis challenges faced17. The non-availability of dedicated
resources has been raised by many recent graduating LDCs. As yet no donors or
multilateral agencies have come forward with resources to fulfil these needs.
5. Analysis to Support Policy Responses
This penultimate section, which has two parts, aims to inform the national policy
response to LDC graduation and help frame the contents of the Smooth
Transition Strategy (adopted at the latter stages of the process). It begins by
employing the LDC status formula to identify the key structural constraints
faced. Second, socioeconomic issues are examined via a series of poverty and
inequality metrics. These are natural counterparts, as any economic imbalances
tend to be reflected in distributional outcomes. Indeed, part of the policy
challenge faced by Bhutan is both to enhance productivity and output while also
securing equity. The analyses provided here are used to inform the policy
discussion which follows in the final section.
6.1
Structural Issues
Drawing on the discussion above, we disaggregate the LDC status data (for HAI
and EVI) and make comparisons against the group of LDCs judged most likely to
graduate. This group, which we define as the upper quartile of the distribution
on each of the indices, effectively represent Bhutan’s LDC peers. We take this
Notably by the Republic of the Maldives – see: Impacts of Graduation from Least Developed Countries (2009);
paper from the Maldives Partnership Forum (MPF, Male).
17
20
approach, since as noted above, it is impossible to accurately predict the
threshold values, and because these are only specified at HAI/ EVI level.
Additionally, rather than attempting to gauge the graduation timeline, here we
use the LDC index formulae to provide pointers on the key structural issues to
be addressed in the short and longer term.
a) Human Assets
Our starting point is the 2012 HAI calculations, which showed Bhutan to be
some 10.6 per cent below the graduation threshold. As the table below shows,
disaggregating the data and comparing against the overall LDC and upper
quartile averages, performance varied considerably across the indicators. Note
that negative values represent underperformance (i.e. the Bhutan value is below
the quartile average).
Table 5: HAI Components – Bhutan versus LDC Averages
HAI
Components
Bhutan
Upper Quart. Average
Index (diff. %)
Graduation Threshold
Index (diff. %)
HAI
59.0
68.0 (-9/-13%)
66 (-7/-11%)
Undernourishment
Under 5
Mortality Rate
Literacy Rate
75.0
83.3 (8.3/-10%)
n/a
67.6
67.9 (0.3/-0%)
n/a
37.1
70.5 (-33.4/-47%)
n/a
Secondary
Enrolment
56.5
50.4 (+6.5/+13%)
n/a
Note: Differences are calculated on the averages & threshold values.
Differences data against the upper quartile averages highlight the main issues,
and these are also displayed in graphical form below. Clearly the main HAI
variance is the adult literacy rate, where Bhutan lags the best LDCs by some 33
index points (47 per cent on the upper quartile average). This is a major
variation, yet problematically, as stock variable, it is slow to change and difficult
to influence. The difference between this and the secondary enrolment rate
(where Bhutan out performs) is stark, underlining the rapid developmental
transformation which has taken place. Nutrition also figures as an area for
improvement, yet more recent data suggests stronger progress here.
21
Chart 5: Variations against Upper Quartile Averages for HAI
20.0%
0.0%
-20.0%
-40.0%
-60.0%
HAI
Prevalence of
Under 5 mortality
undernourishment
(per 1000)
in total population
(%)
Literacy rate
Gross secondary
enrolment ratio
Author’s calculations
b) Economic Vulnerability
Replicating this exercise for the more complex EVI formula provides the following
results (see Table below). Here again major variations are apparent. Note that, in
contrast to HAI, positive variations are indicative of underperformance (i.e. are
above the quartile average).
Table 6: EVI Components – Bhutan versus LDC Averages
Bhutan
EVI
44.2
Upper Quart. Average
Index (diff. %)
33.6
Exposure Index
42.5
33.8 (+8.7/ 25.7%)
n/a
-
Population
75.5
23.1 (+52.4/ 227%)
n/a
-
Remoteness
58.3
56.2 (+21/4%)
n/a
-
0.0
14.3 (-14/-100%)
n/a
36.1
41.4 (-5.3/-13%)
n/a
-
Population in low lying
areas
Economic
Structure
sub-index
Export Concentration
41.9
26.6 (+15.3/+58%)
n/a
-
Agriculture Share
30.3
56.3 (+26.0/+46%)
n/a
45.9
33.4 (+12.5/+37%)
n/a
53.0
42.4 (+10.6/+25%)
n/a
63.8
64.5 (-7/-1%)
n/a
Agricultural Instability
42.3
20.3 (+22.0/+108%)
n/a
Export Instability
38.8
24.3 (+145/ +60%)
n/a
HAI Components
-
Shock Index
-
Natural Shocks
index
Disaster Victims
Sub-
22
Graduation Threshold
Index (diff. %)
32 (+10.6/ +38.1%)
Note: Differences are calculated on the averages & threshold values; positive values indicate under-performance
Differences on the upper quartile LDC averages are again illustrated graphical
form in the chart below. The most serious issues for Bhutan are relative
population size, export concentration and stability (both agricultural output and
exports). These are familiar themes, but they do highlight the relative priorities.
While little can be done about the size of the nation’s population (and hence
domestic market size), export concentration and stability, and agricultural
output are amenable to policy interventions.
Interestingly, remoteness does not figure strongly, as this variable continues to
improve as the centre of gravity in world trade moves eastward with the rise of
China and India. Yet remoteness in Bhutan’s case must still be a key
developmental issue. Equally, economic structure, here mapped via a crude
measure of structural diversification, shows Bhutan (rather erroneously) to be
comparatively better off. The inclusion of population within low lying areas (a
recent feature) is a major factor behind Bhutan’s improved performance on EVI
between 2009 and 2012. This caused some debate, with landlocked LDCs
criticizing its addition.
These weaknesses underline the difficulties and
imperfections of the LDC graduation assessment, and are issues which should be
picked up in any future dialogue with the CPD after initial listing.
Chart 6: Variations against Upper Quartile Averages for EVI components
250%
150%
50%
-50%
-150%
Source: Author’s calculations, See Annex 3 for base data
Clearly, some of these findings mirror the issues identified in the Government’s
Economic Development Policy. Especially significant is the dominance of the
hydropower sector and activities allied to it (such as ferrous alloy production and
other high energy input industries). Crude structural indicators (such as that
included within EVI) fail here, as they aggregate all activities within the industrial
sector. Yet even the most basic disaggregation such as illustrated in the chart
23
below, underline the dominance of hydropower, mapped by the light shaded area
(here manufactures is isolated from other industrial value added). This structural
pattern is far from unique within the LDC grouping, but Bhutan’s case is still
atypical, given the sector’s size and cross-linkages to other activities.
Economic imbalances of this type commonly also result in imbalanced socioeconomic outcomes, reflected in both the size and spatial distribution of income,
and as result sluggish rates of poverty reduction and greater social exclusion.
The second part of this section addresses these questions.
24
Chart 7: Disaggregated Shares of Industrial Value- added
40
30
20
10
Manufacturing, value added
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
1993
Value added as a % GDP
50
Industry value-added, ex Manufactures
Note: Industrial value-added excluding manufactures used as proxy for power & extractive sectors.
6.2
Analyses of Socio-economic outcomes
Bhutan’s poverty reduction record has been exceptional. Dramatic and across
the board, reductions have been made in the headcount ratio for both the Dollar
1.25 and national poverty rates (as illustrated in the table and diagram below).
Similarly, non-income poverty mapped by the Multiple Poverty Index, shows
Bhutan as having one of the lowest index values in the region and for LDCs at
0.119 in 2012 (the product of the headcount an intensity). Nevertheless, the fact
that the income headcount ratio remains at 12 per cent, and the MPI headcount
at 27.2 per cent, underlines that poverty reduction must remain a policy priority.
Table 7: Bhutan Poverty Rates
Year
Dollar 1.25
Headcount
29.2
10.2
1.7
2003
2007
2012
Dollar 1.25
Gap Ratio
7.0
1.8
0.3
National
Headcount
23.2
12.0
Poverty Headcount %
Chart 8: Poverty Headcount Rates 2002- 2012
30
25
20
15
10
5
0
2003
2007
National
2012
Dollar 1.25
25
National
Gap Ratio
6.1
2.6
With regard to inequality, the Lorenz curves (mapping the relative distribution of
income against a horizontal equality line) depicted in the chart below show that
the distribution initially improved and then stabilized (for the 2003, 2007 and
2012 surveys). The Gini coefficients for the three surveys at 0.46, 0.35 and 0.36
respectively, mirror this pattern (see table below). This is perhaps a surprising
outcome given the nature of the Bhutanese economy and the dominance of
electricity generation, a sector which has generally weak distributional dynamics.
Table 8: Inequality and Pro-poor Growth Data
Year
Gini
Coefficient
Gini Change
on previous
2003
2007
2012
0.46*
0.35
0.36
-24%
+3%
Growth Elasticity of
Poverty USD 1.25
HCR
1.98
2.95
Growth Elasticity
of Poverty National
HCR
1.70
Source: Author’s calculations
Moreover, if we examine the pattern of growth and its relationship with poverty
reduction, we find equally surprising outcomes. Firstly, our estimates for the
Growth Elasticity of Poverty, a measure which depicts the relationship between
economic growth and poverty redaction, yield values of between 1.98 and 2.95
for the Dollar 1.25 headcount (intervals 2003 to 2007 and 2007 to 2012), and
1.70 for the national headcount ratio (2007 to 2012 interval). This suggests
strong pass through from economic growth to poverty reduction, as these values
are at the upper end of the scale. Second, as shown graphically below, the
Growth Incidence Curve (a mapping of income gains across the distribution from
rich to poor) suggest a generally pro-poor pattern.
Chart 9: Crude Growth Incidence Curve 2007-2012 Interval
Growth in Consumption
25%
20%
15%
10%
5%
0%
1
2
3
4
5
Quintiles ( poor to rich)
Source: Author’s calculation
However, these data do not allow for analysis of the spatial distribution of
income, and here again, the nature of Bhutan’s economy, with the dominance of
a capital intensive, low employment and location specific sector, would tend to
26
exacerbate geographical differences. As such, the spatial component of inequality
can become a major driver of overall inequality. Moreover, as they are based on
aggregated data, standard inequality and poverty measures may fail to map such
localized pressures.
The preferred treatment to gauge the level of spatial inequality is a decomposition
of the Theil index (or other additively decomposable measure). Unfortunately data
limitations have meant this was not possible. However, we offer a comparison of
per capita consumption at district level for the most recent poverty surveys (for
2007 and 2012). The full dataset is provided at Annex 3, however as the chart
below illustrates there are considerable differences between localities in both
years. The standard deviation in each is high (at around one third of the mean
value), and moreover, the respective coefficients of variation at (0.31 and 0.36)
suggest the level of inequality has grown between the two survey dates.
The implications of this analysis are that while, the economic model has had no
discernible impact on the size distribution of consumption (and by implication
income) the spatial distribution has been affected. Drawing on the standing
literature this is an early indication of deteriorations in aggregate inequality.
Given the dominance of the core sector will accelerate in coming years, as
additional hydroelectric capacity comes on line, it is likely these pressures will
worsen.
Chart 10: District level consumption for 2007 and 2012
9000
Nu per person per month
8000
7000
6000
5000
4000
3000
2000
1000
0
2007
27
2012
7. Bhutan's Vision and Policy towards graduation by 2020
Bhutan’s policy towards graduation from LDC status has been implicit in its
Vision 2020 document which envisages Bhutan as a middle income country by
2020 and the Economic Development Policy 2010 which targets self-reliance by
2020. Moreover, the Eleventh Plan explicitly includes graduation from LDCs as a
key milestone18. Additionally, as a party to the LDCIV, Bhutan has effectively
accepted the provisions of IPoA which includes enabling half of the LDCs to
attain graduation status by 2020.
Yet, within official circles and among many commentators, there remains some
reticence, and a degree of concern regarding LDC graduation. This paper has
shown these fears are not without substance, and Bhutan continues to face
serious structural challenges, especially in addressing its high economic
vulnerability and exposure to shocks. This is driven by the still growing
dominance of a single economic sector, considerable volatility in exports and
agricultural production, and deep seated weaknesses in human capital.
Additionally, the pressures of its landlocked status, geo-political context and
problematic topology further compound these issues.
It must also be recognized that the Government has made demonstrable progress
in sustaining Bhutan’s development and addressing the key challenges faced.
Both the EDP and the Eleventh Five-Year Plan reaffirm an approach which
favours sustainable development with a strong social inclusion orientation. This
is firmly underpinned by the tenets of Gross National Happiness. It is a
testament to this approach that the current economic model has thus far, had
only limited impacts on income inequality. Indeed, this is most likely to be a
product of the high level of public provisioning, especially expanded high quality
schooling and healthcare.
As this paper has shown, there will be direct implications of LDC graduation in
terms of lost preferential treatment in international trade, and potentially,
weaker ODA flows. While the analysis has shown these impacts to be less
significant than first imagined, the trade concessions in particular, have a
natural fit with the policies promoted by the Government within the EDP. Indeed,
the market access and special and differential treatment measures have been
designed specifically for the type of developmental context faced by Bhutan.
Equally, the availability of ODA may enable Bhutan to overcome some of the
financing hurdles it currently faces in relation to key infrastructures and new
technologies. Therefore, somewhat ironically, the loss of such benefits may come
at a time when Bhutan may finally be in a position to utilize them.
18
While Bhutan can be eligible for graduation as early as 2015, the earliest that it can effectively graduate is 2021.
28
The forward policy agenda is extensive. For clarity, and given this paper’s focus
on LDC graduation, we break this down into longer and near term priorities, with
the latter directly concerned with the graduation process.
7.1
Longer Term and the frame set by the 11th Five Year Plan
The longer term response calls for a reorientation of Bhutan’s current path to
structural transformation in a manner that strengthens agricultural productivity
and the contribution of manufacturing and services.
Alongside on-going
development of the hydro-power sector, policy choices need to support higher
value production in domestic, and export markets, to sustain high, but also more
balanced growth. The template provided by the EDP offers a sound basis, but
given the extent of the pressures and the somewhat limited impacts of its
orthodox policy package, measures might be supplemented by alternative
choices. These might include the provision of selective incentives (finance and tax
concessions) to key sectors, and a more flexible and trade promoting use of tariff
and trade policies.
In turn, complementary strategies are needed to ensure the growth process
becomes more inclusive. This is crucial given the likely growing pressures from
the core economic model. Key to this is the creation of gainful and productive
employment for a growing educated labour force. Equally, stronger efforts are
likely to be needed to redistribute resources via high quality public provisioning
and new measures, specifically more comprehensive social protection.
The Eleventh Plan provides the overall framework for such a reorientation of
Bhutan’s economy. Successful implementation of the Plan will be critical for the
sustainability of Bhutan’s development during and after the graduation process.
In this regard, addressing the challenges and constraints to achieve the
objectives of the EDP 2010, one of the three key milestones of the Eleventh Plan,
will be a key determinant of success.
7.2
Near Term and the LDC Graduation Process
It is important to begin by recalling that Bhutan is in an advantageous position
of undertaking preliminary planning some eight or nine years prior to final
graduation. This paper has mapped out the likely trajectory, the implications
and key issues, and the graduation requirements. It is important the preparation
process also now begins in earnest. This is first, with a more thoroughgoing
analysis of the direct ODA and trade implications, and subsequent engagement
with bilateral partners and via multilateral frameworks. Indeed, there are good
precedents for retaining trade concessions and ODA allocations, in the post–
graduation period.
29
Second, Bhutan should make early preparations for its country response to the
CDP on listing for graduation, and for the development of its Smooth Transition
Strategy later in the process. This will be aided by a strong engagement with the
lead UN institutions locally and globally. It is particularly useful that early
contact is established with UNDESA and UNCTAD. The country response also
enables any key issue to be raised, while the Transition Strategy is an ideal
vehicle for identifying and resolving policy and financing issues. Indeed, the latter
may also serve as a costed programme which development partners may be
approached to support via a one-off injection of funds to ensure graduation is
achieved effectively and sustainably.
There are also a series of funding
modalities which might be considered, including the establishment of a unified
dedicated fund for LDC graduation overseen by a multilateral agency.
Third, throughout the process, oversight, monitoring and reporting are essential
counterparts to successful graduation. Such efforts need necessarily to be
synergized with the surveillance undertaken by the CPD and UNDESA. The local
UN agencies can provide a vital conduit, as both system-insiders while also
serving as advocates for Bhutan.
Before finally closing, it is vital also to consider inter alia the wider context in
which Bhutan’s graduation will occur, namely strengthening of its
democratization process. Clearly, a strong and diversified economy, which is
inclusive and based on significantly higher levels of labour market participation
and productivity, is a vital pre-requisite for its full successful development.
With the continued support of its development partners, Bhutan should be
confident in overcoming these challenges and constraints. The Government will
seek to strengthen cooperation with its development partners by deepening
engagements into new areas of economic and technical cooperation and exploring
innovative mechanisms to overcome the persistent structural challenges that
must be addressed to secure the sustainability of the development process and
graduation from LDC status.
30
Annex 1: Evolution of the Inclusion and Graduation Criteria
2011
LDCs are low-income countries suffering from the most severe structural impediments to sustainable development.
Criteria
Indicators
2005
Criteria
Indicators
2002
Criteria
Indicators
1999
Criteria
Indicators
1991
Criteria
Indicators
1971
Criteria
Indicators
GNI Per
Capita
Human Asset Index (HVI)
a)
Economic Vulnerability Index (EVI)
Percentage of population
undernourished
Under five mortality rate
Gross secondary enrolment ratio
Adult literacy rate
a) Population
b) Remoteness
b)
c)
Merchandise export concentration
c)
d) Share of agriculture, forestry and fisheries in GDP
d)
e) Share of population in low elevated costal zones
f)
Victims of natural disasters
g) Instability of agriculture production
h) Instability of exports of goods and services
LDCs are low-income countries suffering from low level of human resources and a high degree of economic vulnerability.
GNI Per
Human Asset Index (HVI)
Economic Vulnerability Index (EVI)
Capita
a) Percentage of population
a) Population
undernourished
b) Remoteness
b) Under five mortality rate
c)
Merchandise export concentration
c)
Gross secondary enrolment ratio
d) Share of agriculture, forestry and fisheries in GDP
d) Adult literacy rate
e) Homelessness due to natural disasters
f)
Instability of agriculture production
g) Instability of exports of goods and services
LDCs are low-income countries suffering from low level of human resources and a high degree of economic vulnerability
GNI Per
Human Asset Index (HVI)
Economic Vulnerability Index (EVI)
Capita
a) Average calorie intake per capita as
a) Population
a percentage of the requirement
b) Export concentration
b) Under five mortality rate
c)
Share of manufacturing and modern services in GDP
c)
Gross secondary enrolment ratio
d) Instability of agriculture production
d) Adult literacy rate
e) Instability of exports of goods and services
LDCs are low-income countries suffering from low level of human resources and a high degree of economic vulnerability.
GDP Per
Augmented Physical Quality of Life (APQL)
Economic Vulnerability Index (EVI)
Capita
a) Average calorie intake per capita as
a) Population
a percentage of the requirement
b) Export concentration
b) Under five mortality rate
c)
Share of manufacturing and modern services in GDP
c)
Combined primary and secondary
d) Instability of agriculture production
school enrolment ratio
e) Instability of exports of goods and services
d) Adult literacy rate
LDCs are low-income countries suffering from long-term handicaps to growth, in particular, low levels of human resource development
and/or severe structural weaknesses.
GDP Per
Capita
Augmented Physical Quality of Life
Economic Vulnerability Index (EVI)
(APQL)
a) Per capita calorie supply
a) Export concentration
b) Life expectancy at birth
b) Share of manufacturing and modern services in GDP
c)
Combined primary and secondary
c)
Share of employment in industry
school enrolment ratio
d) Per capita electricity consumption
a) Adult literacy rate
LDCs are countries with very low levels of per capita gross domestic product facing the most severe obstacles to development.
GDP Per
Adult Literacy Rate
Share of Manufacturing in GDP
Capita
Source: CDP (changes are highlighted in bold and underlined)
31
Annex 2: Selected measures in favour of exports originating
from LDCs
32
Annex 3: Supporting Dataset - HAI & EVI Analysis
(i)
Countries/ Indicators
HAI
LDC
HAI
Prevalence undernourishment in pop (%)
Value
Under 5 mortality
(per 1000)
Max-min
Maxmin
Value
Gross secondary
enrolment ratio
Literacy rate
Value
Maxmin
Maxmin
Value
Somalia
L
1.4
62.0
5.0
174
0.5
19
0.0
7.8
0.0
Chad
L
18.1
39.0
43.3
209
0.0
34
11.5
25.7
17.4
Burundi
L
20.8
62.0
5.0
164
6.4
67
55.4
24.8
16.4
Central African Republic
L
21.6
40.0
41.7
173
1.3
55
40.3
12.6
2.9
Democratic Republic of the Congo
L
21.7
69.0
0.0
192
0.0
67
55.8
37.9
31.0
Afghanistan
L
22.5
37.0
46.7
202
0.0
28
4.0
45.5
39.5
Niger
L
24.3
16.0
81.7
164
6.8
29
4.9
13.4
3.7
Sierra Leone
L
24.8
35.0
50.0
174
0.6
41
21.2
34.6
27.3
Ethiopia
L
28.2
41.0
40.0
113
37.6
30
6.4
35.7
28.6
Burkina Faso
L
29.2
8.0
95.0
167
4.9
29
5.0
20.7
11.9
Mali
L
30.2
12.0
88.3
193
0.0
26
1.6
37.7
30.8
Mozambique
L
30.7
38.0
45.0
141
20.6
55
40.1
25.5
17.2
Angola
L
31.6
41.0
40.0
170
2.8
70
59.9
31.3
23.7
Guinea-Bissau
L
34.2
22.0
71.7
198
0.0
52
36.3
36.0
28.9
Haiti
L
35.6
57.0
13.3
83
55.6
49
31.6
47.6
41.8
Eritrea
L
35.6
65.0
0.0
72
62.6
67
55.4
31.9
24.4
Guinea
L
36.8
16.0
81.7
150
15.0
39
19.3
38.1
31.2
Zambia
L
36.9
44.0
35.0
156
11.8
71
61.2
45.6
39.6
Liberia
L
38.5
32.0
55.0
126
29.8
59
45.4
31.6
24.0
United Republic of Tanzania
L
40.1
34.0
51.7
101
44.8
73
63.9
6.1
0.0
Benin
L
41.1
12.0
88.3
136
23.8
42
22.2
37.1
30.1
Rwanda
L
42.2
32.0
55.0
128
28.3
71
60.9
32.2
24.6
Djibouti
L
42.4
26.0
65.0
115
36.3
55
39.5
36.1
28.9
Equatorial Guinea
L
43.0
30.0
58.3
167
4.7
93
91.1
26.2
18.0
Malawi
L
44.1
27.0
63.3
136
23.8
74
64.9
32.1
24.6
Comoros
L
45.3
47.0
30.0
100
45.3
74
65.5
46.3
40.4
Togo
L
45.5
30.0
58.3
116
35.7
57
42.5
50.9
45.4
Uganda
L
45.8
22.0
71.7
126
29.5
71
61.8
28.1
20.1
Senegal
L
47.0
19.0
76.7
96
48.1
50
32.9
37.4
30.5
Mauritania
L
47.1
8.0
95.0
119
34.0
57
43.3
24.4
16.0
Timor-Leste
L
48.1
31.0
56.7
92
50.4
51
34.1
56.3
51.4
Gambia
L
49.2
19.0
76.7
105
42.6
46
28.7
54.1
49.0
Yemen
L
52.3
30.0
58.3
71
63.3
62
49.9
44.1
37.9
Madagascar
L
52.5
25.0
66.7
64
67.2
64
52.6
31.1
23.4
Sudan
L
52.6
22.0
71.7
98
46.4
70
60.3
39.0
32.2
Bangladesh
L
54.7
26.0
65.0
61
68.9
56
41.2
49.3
43.6
Cambodia
L
57.9
25.0
66.7
85
54.7
78
70.1
46.2
40.2
Bhutan
L
59.0
20.0
75.0
63
67.6
53
37.1
60.8
56.5
Nepal
L
59.8
17.0
80.0
49
76.6
59
45.5
43.5
37.2
Lao People's Democratic Republic
L
61.4
22.0
71.7
57
71.7
73
63.6
44.7
38.5
Lesotho
L
62.1
14.0
85.0
115
36.6
90
86.2
46.4
40.4
Solomon Islands
L
65.1
11.0
90.0
54
73.1
77
68.8
35.5
28.4
Myanmar
L
68.8
20.0
75.0
73
61.7
92
89.4
54.3
49.2
Sao Tome and Principe
L
74.9
5.0
100.0
76
59.8
89
85.0
59.2
54.7
Vanuatu
L
77.7
5.0
100.0
35
85.1
82
76.0
54.7
49.7
Kiribati
L
86.9
5.0
100.0
53
74.2
92
89.3
85.6
84.0
Tuvalu
L
88.1
10.0
91.7
36
84.5
95
93.3
84.4
82.7
Mean Top 12
Bhutan Variance
68.0
83.3
67.9
70.5
-13.2%
-10.0%
-0.4%
-47.4%
50.4
12.0
%
(ii)
Countries/ Indicators
EVI
L
EVI
Exp.
Index
Pop
Value
Remoteness
Maxmin
Kiribati
L
82.0
85.3
101 093
100.0
Gambia
L
67.8
50.2
1 776 103
62.0
Tuvalu
L
63.9
79.4
9 847
100.0
Liberia
L
61.0
49.4
4 128 572
49.0
Guinea-Bissau
L
60.5
58.0
1 547 061
64.1
Eritrea
L
59.0
25.7
5 415 280
44.8
Burundi
L
57.2
42.9
8 575 172
37.8
Solomon Islands
L
55.2
63.1
552 267
80.0
Timor-Leste
L
53.3
50.6
1 153 834
68.6
Zambia
L
53.0
42.3
13 474 959
30.8
Chad
L
52.8
37.5
11 525 496
33.2
Malawi
L
51.9
42.6
15 380 888
28.8
Angola
L
51.3
37.9
19 618 432
25.0
Cambodia
L
50.5
39.5
14 305 183
29.9
Somalia
L
50.1
42.0
9 556 873
36.1
Comoros
L
49.9
56.8
753 943
75.2
Sierra Leone
L
48.5
41.1
5 997 486
43.3
Haiti
L
47.3
35.8
10 123 787
35.2
Rwanda
L
47.3
38.7
10 942 950
34.0
Vanuatu
L
46.8
60.6
245 619
92.4
Djibouti
L
46.3
46.9
905 564
72.3
Sao Tome and Principe
L
46.1
56.0
168 526
98.2
Lesotho
L
45.9
46.5
2 193 843
58.7
Myanmar
L
45.0
34.8
48 336 763
11.2
Sudan
L
44.4
29.9
44 632 406
12.4
Mozambique
L
44.4
40.1
23 929 708
22.0
Bhutan
L
44.2
42.5
738 267
75.5
Mauritania
L
44.2
43.3
3 541 540
51.4
Equatorial Guinea
L
43.7
43.5
720 213
75.9
Afghanistan
L
38.8
27.6
32 358 260
17.4
Niger
L
38.6
33.1
16 068 994
28.1
Yemen
L
38.5
28.7
24 799 880
21.4
Madagascar
Burkina Faso
L
L
38.0
37.5
33.7
36.1
21 315 135
16 967 845
23.8
27.3
Value
77.72
3
46.16
2
81.42
7
50.46
3
47.27
1
41.51
6
71.38
0
79.30
0
67.92
2
80.57
2
54.61
9
80.14
8
59.67
9
50.28
3
55.40
2
64.43
3
49.40
6
54.28
2
70.28
8
82.93
9
46.77
6
52.31
4
88.89
6
46.82
4
39.11
0
72.24
2
56.61
4
41.47
3
48.80
0
54.44
3
54.52
7
43.61
7
69.23
5
56.92
Maxmin
% Pop. in low
coastal zones
Value
Econ
str.
Index
Maxmin
Export conc.
Valu
e
Maxmin
Shares of agric.
forest & fish
Valu
e
Shock
index
Nat.
Shock
index
Maxmin
Victims of Dis.
Value
Maxmin
Agric. Instab.
Value
Maxmin
Export instab.
Value
Maxmin
84.7
100.0
0
100.00
56.4
0.70
70.7
25.8
42.1
78.7
57.4
5.094
91.1
5.89
23.7
39.34
100.0
45.2
37.55
53.64
40.0
0.37
31.5
29.6
48.5
85.4
70.8
0.360
56.3
17.27
85.2
40.41
100.0
89.3
99.50
100.00
28.5
0.29
21.8
21.8
35.2
48.4
38.1
0.082
36.8
8.80
39.4
22.61
58.7
50.6
15.08
21.55
76.4
0.55
52.8
71.5
100.0
72.6
45.1
0.065
33.7
11.96
56.5
89.46
100.0
46.6
26.11
37.30
83.9
0.89
92.7
45.3
75.1
63.1
38.3
0.710
65.2
3.61
11.4
31.34
87.8
39.4
1.67
2.38
16.3
0.17
8.1
15.5
24.6
92.2
84.5
7.515
96.2
14.95
72.7
35.44
100.0
76.7
0.00
0.00
57.1
0.51
48.6
39.7
65.6
71.4
62.9
2.251
80.4
9.90
45.4
28.98
79.9
86.6
19.47
27.81
58.0
0.68
68.8
28.9
47.2
47.4
48.4
1.592
75.8
5.39
21.0
18.90
46.3
72.4
3.49
4.99
56.5
0.64
63.3
30.3
49.6
56.1
27.1
0.067
34.1
5.21
20.1
30.52
85.1
88.2
0.00
0.00
50.2
0.68
67.7
20.3
32.7
63.8
62.7
4.251
88.7
8.27
36.6
24.45
64.8
55.8
0.00
0.00
60.9
0.86
89.7
20.0
32.1
68.2
56.9
2.465
81.6
7.47
32.3
28.82
79.4
87.7
0.00
0.00
54.1
0.60
59.3
29.9
48.9
61.2
75.5
7.795
96.7
11.56
54.4
19.07
46.9
62.1
5.28
7.54
56.9
0.97
100.0
9.1
13.8
64.7
39.8
0.345
55.7
5.91
23.9
31.88
89.6
50.4
23.87
34.10
43.7
0.35
28.9
35.5
58.5
61.4
63.6
6.907
95.1
7.45
32.1
22.76
59.2
56.8
4.98
7.11
68.1
0.41
36.3
60.2
100.0
58.2
57.1
5.882
93.0
5.42
21.2
22.77
59.2
68.0
14.29
20.41
63.5
0.50
46.9
48.2
80.0
43.0
46.9
2.231
80.3
4.02
13.6
16.74
39.1
49.3
9.68
13.83
58.0
0.26
18.6
58.5
97.4
55.9
53.4
0.277
52.8
11.49
54.0
22.54
58.5
55.4
9.19
13.12
39.5
0.49
46.2
20.4
32.8
58.8
51.7
4.345
89.0
4.15
14.3
24.79
66.0
75.4
0.00
0.00
45.5
0.38
33.4
35.0
57.6
55.8
70.2
1.255
72.7
14.02
67.7
17.43
41.4
91.2
4.53
6.47
52.3
0.70
70.5
21.1
34.1
33.0
56.3
2.775
83.1
6.96
29.5
7.89
9.6
46.0
40.58
57.97
11.4
0.25
17.9
3.9
5.0
45.7
66.0
7.069
95.4
8.25
36.5
12.61
25.4
52.9
26.04
37.20
35.6
0.47
43.1
17.6
28.1
36.2
13.8
0.000
0.0
6.60
27.6
22.57
58.6
98.6
0.00
0.00
28.8
0.49
45.9
7.9
11.7
45.2
63.8
3.363
85.7
9.27
42.0
12.95
26.5
46.0
25.78
36.83
45.3
0.33
27.4
38.3
63.2
55.2
34.5
0.428
58.5
3.45
10.5
27.74
75.8
36.4
0.55
0.79
70.2
0.83
86.0
33.1
54.4
58.9
50.4
2.865
83.6
4.69
17.3
25.24
67.5
77.8
11.79
16.84
43.6
0.44
40.6
28.5
46.6
48.7
66.9
4.855
90.5
9.53
43.4
14.13
30.4
58.3
0.00
0.00
36.1
0.46
41.9
18.9
30.3
45.9
53.0
0.638
63.8
9.32
42.3
16.64
38.8
39.3
29.25
41.78
40.7
0.47
43.9
23.1
37.4
45.1
45.4
3.627
86.7
2.26
4.1
18.44
44.8
48.5
6.38
9.11
40.4
0.77
78.9
2.1
1.8
43.9
4.4
0.000
0.0
3.13
8.8
30.03
83.4
55.6
0.00
0.00
37.4
0.26
19.4
33.7
55.5
50.1
52.2
1.279
72.9
7.31
31.4
19.40
48.0
55.7
0.00
0.00
48.6
0.30
23.9
44.3
73.4
44.2
63.6
5.612
92.4
7.94
34.8
12.42
24.7
42.0
2.37
3.38
48.0
0.79
80.6
10.1
15.4
48.2
27.4
0.127
42.6
3.76
12.2
25.72
69.1
74.0
58.7
5.52
0.00
7.89
0.00
28.9
58.6
0.22
0.54
13.8
52.2
27.0
39.3
44.0
65.0
42.4
39.0
46.7
41.8
2.203
0.220
80.1
49.8
3.96
7.77
13.3
33.9
16.45
15.83
38.2
36.1
Lao People's Democratic
Republic
L
37.1
36.7
6 288 037
42.5
Mali
L
36.8
37.5
15 839 538
28.3
Uganda
L
36.2
28.8
34 509 205
16.4
Benin
L
36.2
39.3
9 099 922
36.9
Senegal
L
36.1
36.0
12 767 556
31.7
Central African Republic
Democratic Republic of the
Congo
L
35.7
43.3
4 486 837
47.7
L
35.4
28.2
67 757 577
6.0
Togo
L
35.4
37.9
6 154 813
42.9
Ethiopia
L
33.5
31.0
2.5
Bangladesh
L
32.4
34.6
84 734 262
150 493
658
United Republic of Tanzania
L
28.7
26.9
46 218 486
11.9
Guinea
L
28.6
35.0
10 221 808
35.1
Nepal
L
27.8
26.6
30 485 798
18.3
33.6
31.70
%
33.8
25.83
%
Mean (UQ top 12)
Bhutan Variance
0.0
23.1
226.35
%
61.47
0
58.70
0
68.79
9
47.04
1
45.36
5
63.11
5
56.02
5
47.48
2
62.61
5
43.27
2
60.79
4
49.34
3
56.60
7
64.3
0.00
0.00
39.8
0.33
27.6
31.7
52.0
37.4
57.5
4.296
88.9
6.35
26.2
10.20
17.3
60.9
0.00
0.00
60.8
0.58
56.3
39.6
65.3
36.1
47.5
0.820
67.1
6.65
27.9
12.39
24.6
73.5
0.00
0.00
25.5
0.21
12.9
23.4
38.0
43.6
38.0
0.771
66.3
3.28
9.6
19.79
49.3
46.3
20.95
29.93
44.1
0.36
30.2
35.3
58.1
33.0
48.3
1.338
73.5
5.77
23.1
10.31
17.7
44.2
31.48
44.97
23.2
0.28
21.0
15.9
25.3
36.3
66.3
0.653
64.1
14.18
68.5
6.88
6.3
66.4
0.00
0.00
59.0
0.35
29.0
53.5
89.1
28.0
30.0
0.199
48.4
3.65
11.6
12.80
26.0
57.5
0.04
0.05
49.1
0.35
29.4
41.6
68.8
42.6
22.2
0.042
27.9
4.54
16.5
23.91
63.0
46.9
11.91
17.01
44.8
0.20
12.3
46.6
77.2
32.8
43.6
0.603
63.0
5.95
24.1
11.64
22.1
65.8
0.00
0.00
55.5
0.35
29.7
49.0
81.3
36.0
47.6
2.444
81.5
4.04
13.7
12.32
24.4
41.6
45.56
65.09
31.5
0.38
33.0
18.8
30.1
30.3
52.6
6.053
93.4
3.70
11.9
7.36
7.9
63.5
2.25
3.22
29.1
0.19
10.7
29.0
47.4
30.5
51.1
1.451
74.6
6.60
27.6
7.96
9.9
49.2
7.95
11.36
44.6
0.52
49.4
24.4
39.7
22.2
26.3
0.193
48.1
2.35
4.6
10.40
18.0
58.3
0.00
0.00
29.9
0.14
5.2
33.2
54.6
28.9
35.2
0.742
65.8
2.37
4.7
11.79
22.6
14.3
100.00%
41.4
12.75%
56.3
46.05%
33.4
37.63
%
42.4
25.07
%
56.2
3.75
%
35
26.6
57.71
%
64.5
1.07%
20.3
108.04
%
24.3
59.54
%