Bhutan improves freedom index

Bhutan is also ranked 18th out of 41 countries in the Asia-Pacific region

Bhutan’s has been ranked 103rd out of 183 countries where government allows labor, capital and goods to move freely. According to the 2011 index of economic freedom released by the Heritage Foundation, Washington’s prominent think tank and Wall Street Journal, Bhutan secured 57.6 points slightly below the global average economic freedom score of 59.7.

Economic freedom is calculated using 10 components and measured on a scale from 0 to 100, where 100 represents the maximum freedom. The 10 components scores are then averaged to give an overall economic freedom score for each country.

These components of economic freedom are business freedom, trade freedom, fiscal freedom, government spending, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption, and labor freedom.

“Bhutan’s score has improved slightly from last year, primarily because of improved scores in government spending and investment freedom,” states the report.

The report says that Bhutan has made progress in modernizing its economic structure and reducing poverty. “The public sector, especially hydropower, has long been the main source of economic growth, but the government now recognizes that developing the private sector is crucial,” it states.

It also says that a higher policy priority has been given to measures to diversify the economy, particularly in light of demographic shifts that will bring more young people into the labor market.

10 components

The Business Freedom is the measurement of the ability to start, operate, and close a business. Bhutan scored 59.8 in this component.

The report says that a modern regulatory framework has not been fully developed. “Despite recent efforts, the business climate is still hampered by inconsistent enforcement of regulations and lack of transparency,” states the report.

Trade Freedom looks at the absence of tariff and non-tariff barriers that affect imports and exports of goods and services. A score of 52 has been secured in this component. It was found that import and export restrictions, services market access restrictions, inadequate infrastructure and trade capacity, underdeveloped markets and non-transparent and arbitrary regulations add to the cost of trade.

Bhutan scored 83.9 in the fiscal freedom which measures the tax burden imposed by the government. It includes both the direct tax burden in terms of the top tax rates on individual and corporate incomes and the overall amount of tax revenue as a percentage of GDP.

The Government Spending is where the level of government expenditure as a percentage of GDP is looked at. Bhutan scored 64.1 in this area.

The report says that public spending is targeted toward transportation infrastructure and hydropower. “External borrowing from India for hydropower development is responsible for high public debt, but the fiscal balance remains stable,” states the report.

The Monetary Freedom combines a measure of price stability with an assessment of price controls. In this area, Bhutan scored 71.8. It says that the government maintains an effective monopoly on imports of rationed goods such as fertilizer, kerosene, and liquefied petroleum gas, providing these to domestic users at subsidized prices.

“Ten points were deducted from Bhutan’s monetary freedom score to account for the economy’s lack of competition and broad-based ownership,” states the report.

In the investment freedom front, Bhutan scored 20, an increase by 5 points from last year. The report points out that the foreign direct investment has been a sensitive issue, largely because of concerns about its effect on culture and traditions.

“Foreign investment is prohibited in some industries and capped in others while foreign exchange and capital transactions are subject to government controls,” state the report.

Bhutan scored 30 in the Financial Freedom. Here the report says that Bhutan needs a more efficient and competitive financial sector to mobilize savings and channel long-term capital to facilitate private sector development.

Financial freedom is a measure of banking efficiency as well as a measure of independence from government control and interference in the financial sector.

In the Property Rights, Bhutan scored 60. The report states that Bhutan has taken some steps that facilitate private-sector development and the protections of intellectual property rights are stipulated in the Industrial Property Act and the Copyright Act. “Steps to ensure greater security for property rights have been also taken,” states the report.

In the corruption front Bhutan scored 50. It says that the Anti-Corruption Commission has identified misuse of resources, bribery and collusion, and nepotism as major forms of corruption.

Bhutan ranks 49th out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009.

The Labor Freedom secured the highest points with a total of 84.7 points.

The report says that dynamic private-sector growth is critical to correcting the imbalance between labor supply and demand in Bhutan.

“Economic diversification has not progressed much, and unemployment has risen in recent years. Despite flexible employment regulations that could facilitate overall productivity growth, a formal and efficient labor market is not yet fully developed,” it further adds.

Dawa T Wangchuk in Business Bhutan