A new dawn for Bhutanese businesses

The PDP Government came to power with a strong promise of change, most obvious in their manifesto and the ambitious 32 agenda items pledged for the first 100 days. I’m certain that the new Government is already aware of the challenges ahead: Not everything will be easy to implement, and many items are not even within control of the party or the Government. In this column and next week’s, I will provide some rational thoughts on several pledges as they relate to the economy and the private sector:

Revise pay for the civil service and local government leaders: This is certainly a popular measure, especially to voters with family in the civil service. The last pay raise to civil servants came into effect in January 2011, almost three years ago. During that time, inflation has averaged 9.7%, meaning that prices of goods have risen by about 32% over the past three years. Bhutan’s 24,000 strong Civil Service represents some 15% of the labour force, and by giving them more buying power, much of their spending will go back into the economy in the form of consumption. (This then raises the question of how much of that consumption – vehicles, televisions and building materials – will be spent in the country?) One challenge is to not make civil service too popular, as bright minds are needed in the private sector and startup activities as well. Some money should be saved to promote entrepreneurship to create future private sector employers in addition to civil service employees.

Revise National Minimum Wage Rate: There is an ongoing debate on whether raising a minimum wage helps or hinders an economy. It is thought that if the wage is raised too much, it could actually reduce employment as employees become too expensive. This is not the case in Bhutan as the minimum wage here is already quite low. Raising the minimum wage will put more cash into the pockets of the urban poor, and thereby more cash into the economy. Those earning minimum wage spend more of their wages every month, and spend more of that wage on locally produced goods and services. One challenge in Bhutan is that the minimum wage will not help the poorest, those living in rural areas off subsistence agriculture. For younger workers and those in cities, however, a small increase in their wage will allow for more money for food and rent, both large expenditures in urban areas.

Do away with Pedestrian Day: It was generally agreed within the business community that Pedestrian Day was seriously hindering business operations. One example cited was a cement factory that was required to fill its trucks with cement and keep them running on the property to prevent the cement from setting while they waited for the roads to open for delivery at 6PM. Once Pedestrian Day was shifted to the first Sunday of every month, the negative economic impacts were already greatly reduced. While the reason given for Pedestrian Day was environmental, it more likely that environmental impacts were just shifted. Done well, pedestrianisation can produce enormous social and community benefit in small sreasstreets in urban areas, while still allowing cars and public transport to go about their economic activity on surrounding streets.

Free electricity in rural areas: I have mixed feelings about anything “free”. Whether it is electricity, malaria nets, or cook stoves, studies have shown that when something is free it loses value for the consumer. In the case of electricity, the current tiered pricing system is exemplary, and with the lowest bracket of “lifeline energy”, the poorest pay only Nu70 per month for basic lighting and electricity. Offering free electricity has proven to be a slippery slope, as has been the case for agriculture in India, where free water and electricity have led to huge inefficiencies and a bloated system with too much power for any politician to ever revoke. It would preferable to see electricity charged at a nominal rate in the current tiered system, paired with a grant system for the poorest (calculated through the poverty census) to cover their first 100 units. In this way, the political lock-in avoided.

Do away with taxes for small and rural businesses: Giving a tax break for small and rural businesses is an excellent way to allow them to get up and running and provide both jobs and investment into the local community. The concept of “doing away” with taxes, however, is slightly more complicated. At what point do growing companies start to pay taxes? Would this be an incentive for businesses to stay small? A well-designed system of tax breaks could be structured so that desirable things like employment or investment are desirable, while growth is not deterred. Interestingly, China just announced such a system last week. Ensuring that any tax breaks or tax credits have a phase out will also be critical, as will making business income and profits more valuable than the tax breaks or credits they incentivise.

Overall, the outlook for business does show promise, though the execution will be the proof. Next week I’ll look at a few more pledges which will have an impact on business, including electricity prices, the proposed private sector development plan and guaranteed employment for youth.