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UN recommends Bhutan’s LDC graduation

Bhutan’s 50th anniversary as UN member could be marked with the graduation

Should Bhutan’s graduation from least developed country (LDC) happen in 2021, it would prove historic as it marks the 50th anniversary of the country’s membership with the United Nations (UN).

Sao Tome Principe and Solomon Islands, the two African nations and Kiribati, in the central pacific are other three nations recommended for graduation.

The graduation was credited to increasing national earning power as well as Bhutan’s access to better health care and education.

The recommendations will be forwarded to UN Economic and Social Council for endorsement, which will then refer its decision to the UN General Assembly, as per the UN press release.

The chair of United Nations Committee for Development Policy (CPD), Professor Jose Antonio Ocampo, announced this on March 15.

Foreign secretary, Sonam Tshong, said that this is the ultimate purpose of development. While the graduation only comes as a recommendation, he said that it is the nation’s aspiration to improve the lives of its people.

“The graduation coinciding with the 50th anniversary of membership to the UN is significant,” he said. “We have started with UN aid and the recommendation is the end result of our wise leadership and sound policy.”

Sonam Tshong added that it entails less burden on the UN and that the country needs to work harder to sustain itself after graduation.

How is the graduation  assessed?

Having met the graduation criteria for the first time at the triennial review in 2015, Bhutan met the criteria again in 2018, making it eligible to be recommended for graduation by the CDP. The graduation is likely to take place in 2021.

LDCs are defined as “low-income countries suffering from severe structural impediments to sustainable development.”

The assessment is based on three criteria- gross national income (GNI) per capita, Human assent index (HAI) and economic vulnerability index (EVI).

The thresholds for the three criteria for graduation are a GNI per capita of USD 1,242 or more, which is based on a three-year average; a HAI score of 66 or more; and an EVI score of 32 or below.

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 regardless of its HAI and EVI scores. To be recommended for graduation, a country must be found eligible at two successive triennial Reviews.

 

Challenges

While Bhutan easily meets two of the three criterion, economic vulnerability index remain a challenges. Bhutan’s GNI per capita is USD 2,277 while the requirement is USD 1,242 (three-year average), and the HAI score improved from 45 in 2000 to 67.9 today.

The country has not met the third criterion, economic vulnerability index (EVI). Bhutan’s EVI improved from 43.04 in 2000 to 40.2 today. Higher the EVI, higher is the economic vulnerability of a country.

As per the Gross National Happiness Commission’s (GNHC) review paper in 2013, 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, which is also subject to considerable hydrological risks.

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. Bhutan is highly vulnerable to both the natural or weather-related. “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,” it stated. Glacial Lake Outburst Floods, persistent landslides, rising frequency of earthquakes, floods, forest fires and windstorms are major natural threats of concern.

On the trade side, it was stated that Bhutan is heavily dependent on hydropower exports, which are highly vulnerable to hydrological and climatic risks aggravated by India being a monopsony buyer.

“It is unlikely therefore that Bhutan will meet the EVI graduation threshold for some time,” the review paper states.

However the recommendation is based on the fact that per capita income almost tripled and Bhutan continues to perform very well in health and education since 2003.

The graduating country, however has a grace period (normally three years) before graduation effectively takes place. This period, during which the country remains an LDC, is designed to enable the country and its development and trading partners to agree on a “smooth-transition” strategy, so that the planned loss of LDC status does not disrupt the socioeconomic progress of the country.

 

Implication

During the round table meeting held in November last year, A United Nations Economic and Social Commission for Asia and Pacific (UNESCAP)’s official, Oliver Paddison said Bhutan is on the cusp of graduation and has more to gain.

When countries graduate, an element they lose in the transition period is the preferential access to markets mainly in developed economies. But in case of Bhutan the trade scenario would be largely unaffected, he said because Bhutan doesn’t have much trade with the US or Europe, its main trading partner being India.

“Maybe foreign investors are not that willing to invest in an LDC because they consider these states politically unstable, which is not the case in Bhutan,” he said. “If you graduate, you also send out this signal that you are doing well with a stable political and social setting which could attract FDI.”

However, as the country’s small population is spread thinly across the country, the per capita cost for building infrastructure and the per capita cost for delivering services is much higher than it is in most other countries. This, for an economy of only USD 2B, is going to be a huge challenge.

Economic vulnerability is a major concern given Bhutan’s heavy dependence on hydropower.  Bhutan has a very high level of public debt. A financing gap will continue for the foreseeable future.

However, on the positive side the government has declared that the 12th Five Year Plan will facilitate the leap of graduation.

“We need to prove to ourselves that economic growth is possible without undermining social progress, without compromising our culture and without destroying our environment. We need to prove to ourselves that development can be holistic, balanced, sustainable and inclusive… that we can achieve the targets that we have agreed to in the 2030 Global Agenda,” Lyonchhen Tshering Tobgay had said during the round table conference last year.

In many economies, graduation also entails a sect oral shift in the economy. For instance, in 2018, the share of labour force in agriculture would drop to 47 percent from 80 percent in 2000. Like wise, 36 percent of the workforce would be in the service sector in 2018 from 17 percent in 2000.

In its quest to become a low middle-income country, the implication could translate into change in modalities and composition of the (Official Development Assistance) ODA.

A graduated country loses access to multilateral LDC specific funds. In trade, graduation could imply a loss of duty free access to foreign markets. But bilateral agreement with India would not be affected and majority of the country’s trade is with India.

In addition during the transition phase, there are various funding windows from the UN to support smooth transition from LDC to middle income.

However, the foreign secretary said that there would not be immediate impact as the country still has the support of bilateral relationships such as India and Japan.

He said that most of the multilateral development partners have already phased out, except for Austria.

“There will be some implications but we must work harder,” he said.

Tshering Dorji

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