Unlocking Bhutan’s Potential: Measuring Potential Output for the Small, Landlocked Himalayan Kingdom of Bhutan

Abstract

"Bhutan’s rapid economic growth in the past 2 decades has been driven principally by large-scale, lumpy investments in the all-dominant hydropower sector. While growth rates have averaged 7.9% since 1981, they have also been quite volatile, making the economy very vulnerable to cyclical swings and external shocks. A key challenge for Bhutan is to channel the income generated by the hydropower sector for sustainable and inclusive growth. This has been particularly challenging when the majority of the population is employed in the low productivity and largely subsistence agricultural sector. This paper develops a macroeconomic model of Bhutan’s potential output and analyzes the impact of several policy options on potential growth for Bhutan over 2013–2030. The results show that while hydropower development will underpin future growth, higher investment in education, health, and efforts to diversify its economic base through promotion of tourism and other niche sectors can yield a much higher potential output. "