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

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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) co-

organized 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 low-

incomes 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

1 2010 Triennial Review Report of the Committee for Development Policy (CDP) 2 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.

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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

3 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).

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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 5 The approach adopts upper and lower benchmarks, then scales LDC progress between best and worst country performance.

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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

Index Sub-indexes Indicators

Econom

ic V

uln

era

bil

ity I

ndex

EV

I

Exposure

Index

(1/2)

1. Size sub-index (1/8) 1. Population (1/8)

2. Location sub-index (1/8) 2. Remoteness (1/8)

3. Economic Structure sub-

index(1/8)

3. Merchandise export

concentration (1/16)

4. Share of Agriculture, forestry

and fisheries (1/16)

4. Environment sub-index

(1/8)

5. Share of population in low

elevated coastal zones (1/8)

Shock

Index

(1/2)

5. Trade shock sub-index

(1/4)

6. Instability of exports of goods

and services (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

6 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.

7 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

8 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.

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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

Bhutan GNI per capita as % of threshold 23.3%

below

36.8 %

above

42.8% above

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

9 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.

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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$)

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 2006 2009 2012

HAI threshold for graduation 64 66 66

Bhutan’s HAI 44.4 58.6 59

HAI gap as % of threshold for graduation 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 Based on a pro-rata the increase in GNI thresholds over the past three Triennial Reviews. 11 See RoGB (2013) Eleventh Five Year Plan.

$500

$780 $820 $860$950

$1,070$1,230

$1,340

$1,640$1,750

$1,850$1,990

$2,210$2,420

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1991 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Bhutan GNI Per Capita (US$)

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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 2006 2009 2012

EVI threshold for graduation 38 38 32

Bhutan's EVI 46.6 52.9 44.2

EVI gap as % of threshold for graduation 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.

12 CDP Handbook on Least Developed Country Category: Inclusion Graduation and Special Support Measures 2011.

15

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 Total USD m

2011

Average Tariff Impact USD m

1. India 75.7 N/A -

2. Hong Kong, China 16.2 N/A -

3. Bangladesh 5.8 N/A -

4. European Union (27) 1.1 5.50% 0.060

5. Japan 0.6 4.60% 0.027

Total 99.4 0.088 Source: Author’s calculations

13 Sourced from WTO website, impact calculated by applying average national tariff

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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 Phyto-

Sanitary (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

17

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.

14 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.

18

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

19

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

20

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

17 Notably by the Republic of the Maldives – see: Impacts of Graduation from Least Developed Countries (2009); paper from the Maldives Partnership Forum (MPF, Male).

21

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%)

Under-nourishment

75.0 83.3 (8.3/-10%) n/a

Under 5

Mortality Rate

67.6 67.9 (0.3/-0%) n/a

Literacy Rate

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.

22

Chart 5: Variations against Upper Quartile Averages for HAI

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

HAI Components Bhutan Upper Quart. Average

Index (diff. %)

Graduation Threshold

Index (diff. %)

EVI

44.2 33.6 32 (+10.6/ +38.1%)

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

- Population in low lying

areas

0.0 14.3 (-14/-100%) n/a

- Economic Structure

sub-index

36.1 41.4 (-5.3/-13%) n/a

- Export Concentration

41.9 26.6 (+15.3/+58%) n/a

- Agriculture Share

30.3 56.3 (+26.0/+46%) n/a

Shock Index

45.9 33.4 (+12.5/+37%) n/a

- Natural Shocks Sub-

index

53.0 42.4 (+10.6/+25%) n/a

- Disaster Victims

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

-60.0%

-40.0%

-20.0%

0.0%

20.0%

HAI Prevalence ofundernourishmentin total population

(%)

Under 5 mortality(per 1000)

Literacy rate Gross secondaryenrolment ratio

23

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

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

-150%

-50%

50%

150%

250%

24

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 socio-

economic 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.

25

Chart 7: Disaggregated Shares of Industrial Value- added

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

Dollar 1.25

Gap Ratio

National

Headcount

National

Gap Ratio

2003 29.2 7.0 - -

2007 10.2 1.8 23.2 6.1

2012 1.7 0.3 12.0 2.6

Chart 8: Poverty Headcount Rates 2002- 2012

0

10

20

30

40

50

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

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07

20

08

20

09

20

10

20

11V

alu

e ad

ded

as

a %

GD

P

Manufacturing, value added Industry value-added, ex Manufactures

0

5

10

15

20

25

30

2003 2007 2012

Po

vert

y H

ead

cou

nt

%

National Dollar 1.25

26

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

Growth Elasticity of

Poverty USD 1.25

HCR

Growth Elasticity

of Poverty National

HCR

2003 0.46* - - -

2007 0.35 -24% 1.98 -

2012 0.36 +3% 2.95 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

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

0%

5%

10%

15%

20%

25%

1 2 3 4 5

Gro

wth

in C

on

sum

pti

on

Quintiles ( poor to rich)

27

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

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Nu

per

per

son

per

mo

nth

2007 2012

28

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.

29

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.

30

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.

31

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 GNI Per Capita

Human Asset Index (HVI) Economic Vulnerability Index (EVI)

Indicators a) Percentage of population undernourished

b) Under five mortality rate c) Gross secondary enrolment ratio d) Adult literacy rate

a) Population b) Remoteness c) Merchandise export concentration d) Share of agriculture, forestry and fisheries in GDP 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

2005 LDCs are low-income countries suffering from low level of human resources and a high degree of economic vulnerability.

Criteria GNI Per Capita

Human Asset Index (HVI) Economic Vulnerability Index (EVI)

Indicators a) Percentage of population undernourished

b) Under five mortality rate c) Gross secondary enrolment ratio d) Adult literacy rate

a) Population b) Remoteness c) Merchandise export concentration d) Share of agriculture, forestry and fisheries in GDP e) Homelessness due to natural disasters f) Instability of agriculture production g) Instability of exports of goods and services

2002 LDCs are low-income countries suffering from low level of human resources and a high degree of economic vulnerability

Criteria GNI Per Capita

Human Asset Index (HVI) Economic Vulnerability Index (EVI)

Indicators a) Average calorie intake per capita as a percentage of the requirement

b) Under five mortality rate c) Gross secondary enrolment ratio d) Adult literacy rate

a) Population b) Export concentration c) Share of manufacturing and modern services in GDP d) Instability of agriculture production e) Instability of exports of goods and services

1999 LDCs are low-income countries suffering from low level of human resources and a high degree of economic vulnerability.

Criteria GDP Per Capita

Augmented Physical Quality of Life (APQL) Economic Vulnerability Index (EVI)

Indicators a) Average calorie intake per capita as a percentage of the requirement

b) Under five mortality rate c) Combined primary and secondary

school enrolment ratio d) Adult literacy rate

a) Population b) Export concentration c) Share of manufacturing and modern services in GDP d) Instability of agriculture production e) Instability of exports of goods and services

1991 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.

Criteria GDP Per Capita

Augmented Physical Quality of Life (APQL)

Economic Vulnerability Index (EVI)

Indicators a) Per capita calorie supply b) Life expectancy at birth c) Combined primary and secondary

school enrolment ratio a) Adult literacy rate

a) Export concentration b) Share of manufacturing and modern services in GDP c) Share of employment in industry d) Per capita electricity consumption

1971 LDCs are countries with very low levels of per capita gross domestic product facing the most severe obstacles to development.

Criteria GDP Per Capita

Adult Literacy Rate Share of Manufacturing in GDP

Indicators

Source: CDP (changes are highlighted in bold and underlined)

32

Annex 2: Selected measures in favour of exports originating

from LDCs

Annex 3: Supporting Dataset - HAI & EVI Analysis

(i) HAI

Countries/ Indicators LDC HAI Prevalence under-

nourishment in pop (%)

Under 5 mortality (per 1000)

Literacy rate

Gross secondary enrolment ratio

Value Max-min Value

Max-min

Value Max-min

Value Max-min

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 68.0 83.3 67.9 70.5 50.4

Bhutan Variance -13.2% -10.0% -0.4% -47.4% 12.0

%

(ii) EVI Countries/ Indicators

L EVI

Exp. Index

Pop

Remoteness

% Pop. in low coastal zones

Econ str.

Index

Export conc.

Shares of agric. forest & fish

Shock index

Nat. Shock index

Victims of Dis.

Agric. Instab.

Export instab.

Value

Max-min

Value Max-min

Value Max-min

Value

Max-min

Value

Max-min

Value Max-min

Value Max-min

Value Max-min

Kiribati L 82.0 85.3 101 093 100.0 77.72

3 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

Gambia L 67.8 50.2 1 776 103 62.0 46.16

2 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

Tuvalu L 63.9 79.4 9 847 100.0 81.42

7 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

Liberia L 61.0 49.4 4 128 572 49.0 50.46

3 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

Guinea-Bissau L 60.5 58.0 1 547 061 64.1 47.27

1 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

Eritrea L 59.0 25.7 5 415 280 44.8 41.51

6 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

Burundi L 57.2 42.9 8 575 172 37.8 71.38

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

Solomon Islands L 55.2 63.1 552 267 80.0 79.30

0 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

Timor-Leste L 53.3 50.6 1 153 834 68.6 67.92

2 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

Zambia L 53.0 42.3 13 474 959 30.8 80.57

2 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

Chad L 52.8 37.5 11 525 496 33.2 54.61

9 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

Malawi L 51.9 42.6 15 380 888 28.8 80.14

8 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

Angola L 51.3 37.9 19 618 432 25.0 59.67

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

Cambodia L 50.5 39.5 14 305 183 29.9 50.28

3 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

Somalia L 50.1 42.0 9 556 873 36.1 55.40

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

Comoros L 49.9 56.8 753 943 75.2 64.43

3 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

Sierra Leone L 48.5 41.1 5 997 486 43.3 49.40

6 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

Haiti L 47.3 35.8 10 123 787 35.2 54.28

2 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

Rwanda L 47.3 38.7 10 942 950 34.0 70.28

8 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

Vanuatu L 46.8 60.6 245 619 92.4 82.93

9 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

Djibouti L 46.3 46.9 905 564 72.3 46.77

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

Sao Tome and Principe L 46.1 56.0 168 526 98.2 52.31

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

Lesotho L 45.9 46.5 2 193 843 58.7 88.89

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

Myanmar L 45.0 34.8 48 336 763 11.2 46.82

4 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

Sudan L 44.4 29.9 44 632 406 12.4 39.11

0 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

Mozambique L 44.4 40.1 23 929 708 22.0 72.24

2 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

Bhutan L 44.2 42.5 738 267 75.5 56.61

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

Mauritania L 44.2 43.3 3 541 540 51.4 41.47

3 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

Equatorial Guinea L 43.7 43.5 720 213 75.9 48.80

0 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

Afghanistan L 38.8 27.6 32 358 260 17.4 54.44

3 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

Niger L 38.6 33.1 16 068 994 28.1 54.52

7 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

Yemen L 38.5 28.7 24 799 880 21.4 43.61

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

Madagascar L 38.0 33.7 21 315 135 23.8 69.23

5 74.0 5.52 7.89 28.9 0.22 13.8 27.0 44.0 42.4 46.7 2.203 80.1 3.96 13.3 16.45 38.2

Burkina Faso L 37.5 36.1 16 967 845 27.3 56.92 58.7 0.00 0.00 58.6 0.54 52.2 39.3 65.0 39.0 41.8 0.220 49.8 7.77 33.9 15.83 36.1

35

Lao People's Democratic Republic L 37.1 36.7 6 288 037 42.5

61.470 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

Mali L 36.8 37.5 15 839 538 28.3 58.70

0 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

Uganda L 36.2 28.8 34 509 205 16.4 68.79

9 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

Benin L 36.2 39.3 9 099 922 36.9 47.04

1 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

Senegal L 36.1 36.0 12 767 556 31.7 45.36

5 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

Central African Republic L 35.7 43.3 4 486 837 47.7 63.11

5 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 Democratic Republic of the Congo L 35.4 28.2 67 757 577 6.0

56.025 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

Togo L 35.4 37.9 6 154 813 42.9 47.48

2 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

Ethiopia L 33.5 31.0 84 734 262 2.5 62.61

5 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

Bangladesh L 32.4 34.6 150 493

658 0.0 43.27

2 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

United Republic of Tanzania L 28.7 26.9 46 218 486 11.9 60.79

4 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

Guinea L 28.6 35.0 10 221 808 35.1 49.34

3 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

Nepal L 27.8 26.6 30 485 798 18.3 56.60

7 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

Mean (UQ top 12) 33.6 33.8 23.1 56.2 14.3 41.4 26.6 56.3 33.4 42.4 64.5 20.3 24.3

Bhutan Variance 31.70

% 25.83

% 226.35

% 3.75

% -

100.00% -

12.75% 57.71

% -

46.05% 37.63

% 25.07

% -

1.07% 108.04

% 59.54

%