e-Keunsel, 18 February 2017
A project in Bhutan conducted by UN DESA revealed some interesting findings on how to improve productive capacity. Productive capacity is the productive resources (natural, human, physical and financial), entrepreneurial and institutional capabilities, and production linkages which together determine the capacity of a country to increase production and to diversify its economy into higher productivity sectors for faster growth and sustainable development. Building productive capacity is generally seen as a major challenge for LDCs, but it is critical in raising income, increasing human assets and reducing economic vulnerability.
Bhutan has made progress toward LDC graduation by specializing in a few economic activities, namely by focusing on natural resource based activities (hydropower generation), tourism, and some manufacturing as well as by making significant investments in social sectors. Bhutan’s progress in improving assets is rooted in the government’s Gross National Happiness (GNH) approach, which has contributed to the relatively effective use of hydropower resources as well as to ensuring that the benefits of development have been reasonably and equitably shared. However, economic vulnerability remains high due to risk of natural disasters, export instability and agricultural instability.
Increasing the rate of investment and diversification of the economy will be critical to the development of productive capacity and to sustainable development after LDC graduation. The growth identification and facilitation (GIFF) study produced under the project argues that Bhutan’s government should facilitate attracting FDI and promote Special Economic Zones (SEZs) with targeted policies – particularly in services and Information & Communications Technology (ICT) – to integrate the country into the global market and help the economy overcome first-mover and externality problems.