Can a Booming Hydropower Industry Help Reduce Poverty in Bhutan?

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SEATTLE — The Kingdom of Bhutan is a small landlocked nation located in the mountains of the eastern Himalayas. The country is home to 770,000 people and shares borders with both China and India. In 2008, Bhutan transitioned from an absolute monarchy to a constitutional monarchy with a democratically elected parliament. Over the course of five years, from 2007 to 2012, the percentage of people living in poverty in Bhutan reduced by almost half. The government recently stated its desire to reduce the poverty rate to five percent by 2018, and a booming hydropower industry could help achieve that goal.

According to the International Monetary Fund, Bhutan was the third fastest-growing economy in 2016 with a projected real GDP growth rate of 8.4 percent. The key drivers of growth in the economy are agriculture, tourism, mining, forestry and, particularly, hydropower. Investments in the hydropower sector were largely responsible for increasing the economic growth rate from 2.1 percent in 2013 to 6.5 percent in 2015.

Despite the recent growth, development challenges in the country remain. According to the United Nations Development Program, 12 percent of the population live in poverty, and there is a big urban-rural divide in poverty rates. The poverty rate in rural areas — where 70 percent of the population live — is 16.7 percent, compared to just 1.8 percent in urban areas. The booming hydropower industry presents a golden opportunity to boost government revenues, create jobs and consequently reduce poverty in Bhutan.

Loans and grants from the Indian government have fueled the growth of the hydropower industry in Bhutan. Bangladesh is also proposing to invest $1 billion in a major hydropower project in Bhutan, and like India, plans to use the electricity generated to supplement its own domestic demand. Hydropower accounts for around 40 percent of Bhutan’s export revenue and a quarter of its overall GDP. The industry is, therefore, critically important to the country’s continued growth and development.

A recent report by the Vasudha Foundation highlighted some potential issues regarding the development of the Bhutanese hydropower industry. The report cites major environmental impacts as a cause for concern and claims that hydropower projects have not generated jobs for the local population. The report also highlights the inversion of the Indian grant-loan ratio for financing Bhutanese hydropower development. Indian financing used to be 70:30 in favor of grants, but this ratio is now inverted so that 70 percent of the financing is now in the form of loans and just 30 percent in the form of grants.

Consequently, Bhutan is now receiving more loan financing than grant financing from India, and this is having an impact on Bhutan’s national debt. The World Bank recently offered Bhutan a $24 million credit to reduce the pressure on its burgeoning debt, promote more sustainable growth and create more employment opportunities, particularly for its youth.

Bhutan’s hydropower industry is rapidly growing its economy in the short-term, and hopefully this can translate into long-term positive effects as well. Increased government revenues, a sustainable power source and jobs for the young and unemployed have the potential to accelerate social development and reduce poverty in Bhutan. The country is also providing assistance to those in need through its own aid programs directed by the King of Bhutan. Hopefully, with a growing hydropower industry, continued domestic aid, assistance from the World Bank and continued cooperation with its neighbors, the Bhutanese government can achieve its ambitious poverty target by the end of its term in 2018.

– Michael Farquharson

Photo: Flickr

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About Author

Michael Farquharson

Michael lives in Madison, WI. His academic interests include international relations, economics, current affairs and politics. Michael was born in France, grew-up in the U.K. and now lives in the U.S.A.. He also has a passion for cooking.

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