𝐇𝐢𝐠𝐡-𝐈𝐧𝐜𝐨𝐦𝐞 𝐀𝐦𝐛𝐢𝐭𝐢𝐨𝐧 𝐇𝐢𝐧𝐠𝐞𝐬 𝐨𝐧 𝐄𝐟𝐟𝐢𝐜𝐢𝐞𝐧𝐜𝐲 𝐆𝐚𝐢𝐧𝐬

…𝒕𝒐𝒕𝒂𝒍 𝒇𝒂𝒄𝒕𝒐𝒓 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒊𝒗𝒊𝒕𝒚 𝒓𝒆𝒎𝒂𝒊𝒏𝒔 𝒍𝒐𝒘 𝒂𝒔 𝒕𝒉𝒆 𝒏𝒂𝒕𝒊𝒐𝒏 𝒔𝒆𝒆𝒌𝒔 𝒔𝒖𝒔𝒕𝒂𝒊𝒏𝒂𝒃𝒍𝒆 𝒈𝒓𝒐𝒘𝒕𝒉 𝒃𝒆𝒚𝒐𝒏𝒅 𝒄𝒂𝒑𝒊𝒕𝒂𝒍 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕

By Yeshi Dolma

Bhutan successfully graduated from Least Developed Country (LDC) status. The next aspiration is bold: to reach high-income status by 2035, as envisioned in the 21st Century Economic Roadmap. Yet, beneath this ambition lies a critical question: can the nation grow efficiently enough to sustain its progress?

That question is increasingly tied to a single number- Total Factor Productivity (TFP), a measure of how efficiently labor and capital combine to produce goods and services. In recent analyses, Dr. Pema Dorji, Head of the Macroeconomic Policy Division at the Ministry of Finance, revealed that the nation’s TFP has stagnated and remains the lowest among South Asian economies.

“Growth has been strong since the 1990s,” Dr. Pema explained, “but much of it has come from capital investment rather than true efficiency gains.”

He pointed out that while labor productivity grew by around five percent annually, most of this improvement was driven by capital deepening- more machines, buildings, and infrastructure- not necessarily better use of resources.
The data tells a concerning story: despite a 9.5 percent annual rise in capital input, total output has grown by only 6.2 percent, leaving the nation with a high capital-output ratio of four to one. In simple terms, the country now needs four units of investment to generate just one unit of output.

“This is a red flag,” Dr. Pema said. “We are investing heavily, but we are not getting the returns we should. The nation has the capacity to improve its efficiency- to do more with less- but that shift has not happened yet.”

The economic backbone- hydropower- remains a major source of revenue and growth. Yet, Dr. Pema warned that even this flagship sector is not immune to the wider slowdown.

“Hydropower cannot operate in isolation,” he noted. “When the rest of the economy is sluggish, even hydropower will feel the strain. Other sectors must grow and become more efficient for the entire system to remain strong.”

He cited the electricity sector as a telling example. Labor productivity increased significantly when mega-projects like Tala and Mangdechu came online, but capital productivity fell, and TFP stagnated. Without efficiency gains across other sectors, hydropower’s success alone cannot lift the whole economy.

To illustrate inefficiencies elsewhere, Dr. Pema turned to the tourism and hospitality industry, describing it as a mirror of the broader economic pattern.

“When one person opens a hotel and makes a profit, four or five others rush to do the same,” he said. “But since the nation limits the number of tourists, one guest ends up being divided among five hotels. Those who cannot compete drop out, and the cycle repeats.”

This cycle of overcapacity and imitation dilutes returns and weakens overall productivity.
He added that similar behaviors are visible in consumption trends. “When one laptop improves efficiency, we buy more. When one car saves time, we buy more cars. These habits create short-term comfort but long-term inefficiency. We end up using more capital without necessarily producing more output.”

Such examples highlight a deeper challenge- an economy that spends more than it innovates.
Dr. Pema highlighted that one of the biggest drags on productivity lies in the financial sector, which remains over-regulated and archaic in structure.

“For instance,” he explained, “in countries like the U.S. or China, individuals have credit scores that determine their access to loans. Here, we do not have such a system. If you work in the private sector and do not have a pension like civil servants or public employees, you simply do not qualify for credit- whether for buying a car, constructing a house, or even obtaining a basic consumption loan.”

He added that interest rates are among the highest in Asia, further discouraging borrowing and private investment.
“While there’s a lot of talk about transformation,” he said, “we are still stuck with old processes. The system has been rearranged many times, but true process reform or structural reform has not taken place. In many ways, transformation is reverting back to the old order.”

The outdated financial ecosystem not only constrains private sector growth but also weakens the overall productivity of capital. “Without modern credit assessment tools and efficient lending systems,” he noted, “we cannot expect the private sector to thrive or innovate.”

Another critical issue, Dr. Pema observed, is the private sector’s growing dependence on the government.
“For sustainable growth, the government should rely on the private sector for production and innovation,” he said. “But what we see instead is the opposite- the private sector is relying on the government for everything.”

He added that while the private sector often demands autonomy and independence, its financial incentives still depend heavily on state intervention.

“There’s a contradiction,” he noted. “Businesses want freedom from government control, but at the same time, they expect government subsidies, grants, and support. True private sector independence requires a shift in mindset- toward self-reliance and innovation.”

Dr. Pema reflected that Bhutan’s Seventh and Eighth Five-Year Plans stand out as exemplary models of economic planning and execution.

“The 7th and 8th Plans were the best planning documents in our history,” he said.
The Seventh Five-Year Plan (1992-1997) was remarkable for achieving impressive socio-economic progress amidst significant challenges, including threats to national security from anti-national activities in Southern Bhutan. Despite these difficulties, the plan was successfully implemented, resulting in a per capita GDP of US$470, one of the highest in the region at the time. It also achieved substantial social progress- school enrolment reached 72 percent and primary healthcare coverage nearly 90 percent.

The Eighth Five-Year Plan (1997-2002) was particularly successful in perfecting Bhutan’s mixed economic system, achieving a balance between private sector-led production and government-led financing and consumption. This approach shielded Bhutan from the Asian Financial Crisis and ensured stable economic growth.

“These plans showed that when planning, coordination, and execution are aligned, we can achieve balanced growth,” Dr. Pema said. “We need to recapture that spirit of strategic efficiency- not just spending, but spending smartly.”
International comparisons offer valuable lessons. Countries such as India and Bangladesh have seen TFP growth rise steadily over the past two decades, supported by industrial diversification, digital transformation, and export expansion. Bhutan, however, remains largely capital-driven, relying on hydropower revenues, public investments, and domestic consumption to fuel growth.

Economists caution that this model is unsustainable in the long term. Without improvements in efficiency, growth will require ever-larger investments, leading to fiscal pressure, rising debt, and greater vulnerability to external shocks.
Dr. Pema outlined a set of reforms aimed at unlocking the nation’s productivity potential. He emphasized the need to channel limited public resources toward high-impact sectors such as tourism, financial services, and the digital economy. Strengthening the financial sector is equally important- improving access to credit, expanding financial inclusion, and encouraging competition within the banking system.

Private sector empowerment, he argued, is central to sustainable growth. Reducing the state’s dominance in economic activity, promoting entrepreneurship, and attracting foreign direct investment can create a more dynamic economic environment.

Innovation and technology adoption are also crucial. Leveraging digital tools to streamline public services, enhance transparency, and stimulate innovation within both government and business can raise productivity across the board.
Efficient resource allocation underpins all these reforms. Ensuring that both human and financial resources are directed toward projects that yield the highest productivity gains will be critical to breaking the cycle of inefficiency.

“These are not new ideas,” Dr. Pema said, “but we must act on them decisively. The nation has the capacity to improve its efficiency. We have a young, educated workforce, a stable political environment, and a shared commitment to sustainable development. What we need is focus.”

Despite his candid assessment, Dr. Pema’s outlook remains optimistic. He believes the nation stands on the brink of a transformative opportunity.

“The foundation is already there,” he said. “If we can make our institutions, businesses, and public services more efficient, we can achieve not just growth- but quality growth that lasts.”

He emphasized that collaboration between government, private sector, and civil society is vital.
“No single institution can solve this alone. Productivity is not just an economic issue- it’s a mindset issue. It’s about how we use what we have.”

The path to high-income status will depend not on how much the nation invests, but how wisely it invests. The challenge, as Dr. Pema Dorji outlined, is not a lack of ambition, but a need for efficiency, innovation, and smarter governance.

The warning is clear, but so is the optimism. If TFP can improve- even modestly- the multiplier effect could be transformative. More efficient use of capital and labor would free up resources for education, healthcare, and infrastructure, while strengthening fiscal sustainability.

The next decade will test the nation’s ability to evolve from a capital-driven to a productivity-driven economy. But with clear policies, innovative thinking, and a commitment to reform, there is every reason to believe that transformation is within reach.

As Dr. Pema Dorji put it, “We have the capacity to improve our TFP and become a high-income country. The time to act is now.”