Report points out lapses in the country’s trade polices
Report: Active trade policies are not likely to be implemented in the country because of the difficulties to achieve a harmonious balance between economic gains and spiritual factors.
This was the highlight of the Asian Development Bank’s (ADB) working paper series on trade policy for Bhutan and its compatibility with the Gross National Happiness (GNH).
“This is because the GNH indices are more oriented toward spiritual, emotional, and cultural values,” states the report published last month.
The study reveals that about one-tenth or less of the structural composition of economic affairs ministry is dedicated to international trade policy. “There are very few countries in which trade policy occupies such a small share of the government structure,” the report stated adding that many countries have a ministry of commerce or trade.
The report also highlighted that active trade policy could be one of the most effective tools in improving the GNH and basis for improving business climate. Although Bhutan has limitations in international trade, there is a room for joining global supply chain.
Active trade policy, the report mentions, can create more jobs, which is compatible with the principles of the GNH.
However, the report reveals that active (open) trade policies are not likely to be viable without a combination of a strong will for the policy and political support.
In the case of Bhutan, the report states that this may be more serious.
Going by the ADB’s working paper, one of the most urgent tasks in Bhutan is to improve general living standards. “The authority needs to benchmark successful development strategies in other countries, and to recognize that no country can make economic development without an open trade policy.”
As a developing country, Bhutan needs a continuous inflow of foreign capital and economic development to enhance the many factors related to human well-being. “But no substantial foreign direct investments (FDIs) will be feasible without improving the overall business environment in Bhutan,” the report states.
The need to have more powerful trade authority is also one of the recommendations the ADB provided. “One idea is for the Department of Trade to establish Center for Trade Policy, which would fall directly under the Prime Minister.”
The ADB’s paper also provides an insight into where Bhutan is lagging in terms of ease of doing business index.
Since a country’s trade competitiveness also depends on its procedures and infrastructure, such that long delays caused by lengthy procedures in obtaining permits, inadequate infrastructure, and unreliable logistics services would tend to reduce total trade volumes.
This particularly pertains to small companies in landlocked economies that want to reach the international markets because it tends to suffer more from the costly delays.
Bhutan, the report states, does not fare any better in terms of logistics performance, a requisite to developing a country’s external trade since it affects the costs of trading and the potential to integrate with the global market.
In the latest ranking of Logistics Performance Index, Bhutan ranked 143rd out of 160 countries. This is the lowest among the landlocked nations, including Mongolia and Nepal, and among neighboring countries, such as Bangladesh, Sri Lanka, and Pakistan.
“The most urgent task for Bhutan is to upgrade its customs clearance system.” As an isolated landlocked country, it takes time and requires large capital to build infrastructures, such as roads, ports, and bridges.
Improving customs clearance, it states, has to be done with limited resources and within a short period to break away from one of the worst regions in terms of trade facilitation as assessed in United Nation’s Economic and Social Commission for Asia and the Pacific (UNESCAP)
Bhutan liberalized tariff on imports from India, and has a separate tariff liberalization plan under the SAARC Agreement that targets a gradual reduction in peak tariff rates to 5 percent by end of 2015. This is linked to the fact that Bhutan’s trade is heavily dependent on India, and its imports from India are traded without tariffs.
“This implies that Bhutan may not face a substantial increase in imports after it further liberalizes its trade with countries other than India.”
For instance, most imported agricultural products from India are tariff free. But the logistics costs may be critical for agricultural products. India could enjoy a comparative advantage over other exporting countries. “Policies that will improve agricultural productivity do not seem to be viable while maintaining the small amount of farmland per farmer,” the report stated. “The argument that the current trade system should be maintained to help the poor farmers might sound reasonable, thus gaining political support, but it is not logical from an economic perspective.”
This, the report stated is an example of an unbalanced treatment of trade policy, ignoring basic economic logics.
The ADB paper recommends that although India is expected to remain a dominant exporter to Bhutan, trade liberalization will lead to the diversification of import sources and stable prices of imported goods. “In theory, this gain will spread to all consumers, thus improving the welfare (a part of happiness) of Bhutanese people, which outweighs the loss of government revenue.”