Bhutan is on the UN's list of least developed countries (LDC) and its government has been shown no particular eagerness to graduate from this status. In 2002, it embarked on its Ninth Five-Year Plan (FYP) seeking to maximize what the King termed "gross national happiness," not gross national income. Bhutan's leaders have adopted a very cautious approach to economic development, putting preservation of the traditional Buddhist culture and the country's spectacular natural environment well ahead of ambitions for economic modernization. Bhutan is a country where immigration is forbidden and tourism is controlled under a strict regime to guard against corrupting influences. The greatest restraint imposed on development by the government in its non-recognition of the majority of the residents in Bhutan as citizens. While the government claims, by its own calculation of the UN's Human Development Index (HDI), counting only the country's 600,000 or so ethnic Bhutanese, to have achieved a medium income status (above 0.5 on the HDI), the UN, counting all the residents, continues to list Bhutan in the low-income group. The subsistence sector remains at over 90%. There are no railroads, helicopters, domestic airlines, or ATMs, and, though hydroelectric power is Bhutan's main export, 70% of the population do not have electricity and depend on firewood for energy (72% of the country is forested, and by law 60% must remain so). Under current plans, full rural electrification is not scheduled to be accomplished until 2020. The shortage of skilled labor and technical expertise is chronic and severe. In 2001, 40% of the government's budget was supplied by foreign grants, and the government, in turn, comprised 40% of the small cash economy.
Nevertheless, since the political reforms of 1998, when King Wangchuk relinquished some of his absolute power, there have been successive years of robust growth with moderate inflation, and the start of a number of potentially far-reaching structural reforms: the creation of a government department on telecommunications (access to foreign television and the internet was restored in 1999 after having been banned in 1990), the abolition of the state monopoly in petroleum distribution, the privatization of public enterprises in banking, trade and cement manufacture as well as the creation of several joint ventures, and the transformation, as of July 2002, of the government power department into Bhutan Power Corporation (BPC), currently the largest corporation in the country.
The driving force behind most economic growth in Bhutan has been India's support for the construction of hydroelectric projects to service its own market, with spinoffs in transportation improvements, the construction industry and energy-intensive manufactures. Since the power projects mainly relied on migrant Indian labor and expertise, the impact on Bhutan's labor force capabilities has been limited.
Under Bhutan's first four development plans, 1961 to 1981, considerable improvements were made in agriculture, irrigation, and forestry, as well as electric power generation and road transportation. Until 1974 when the first tourists were allowed into the country, the main source of foreign exchange was exotic postage stamps bought by collectors. The plans were funded 90% to 100% by India, which contributed more than $197 million over the 20-year period.
Under the fifth economic plan (1981–87), priorities were agriculture and animal husbandry (14% of outlays) and public works (13%). The centerpiece was the construction of the 336 MW Chhukha hydroelectric project (CHEP), completed in 1987 and connected to the Indian power grid. Investments under the Fifth Plan were about 31% financed by India and 30% by UN agencies and other foreign sources. GDP grew briskly in this period, 6% to 8% annually according to the plan, but progress was hampered by the lack of local skills. The Sixth Fiscal Year Plan (1987–91), accordingly, emphasized the improvements in education and personnel training to develop the skills needed for trade and industry, and to reduce dependence on Indian expertise and labor. Other goals included expansion of the tax base to decrease the dependence on foreign grants, encouragement of the private sector to provide local employment, and decentralization to the district ( dzongkha ) level to check excessive rural to urban migration. GDP was targeted to grow at 6.9% a year, with priority given to industry, trade and commerce (20%) and power (13%). The Bhutan Development Finance Corporation (BDFC) was established in 1988 to promote small and medium state industries in various sectors of the economy.
However, by the end of 1988, the King and other traditional leaders had become thoroughly alarmed at the impacts the surge in economic activity was having in Bhutan, as well as in neighboring Nepal, where they witnessed its monarchy being pressured into democratic reforms. Bhutan was closed to individual tourists, who were accused of having desecrated holy places, defiled and stolen sacred objects and having a corrupting influence on the population. In 1989, the King issued edicts imposing a strict Buddhist dress and social code (the Driglam Manzha) and the Dzongka language of northern Bhutan. Bhutanese Hindus of Nepalese origin, just over half of the population, rejected these impositions in the name of a prodemocracy movement. In April 1990, the King ordered fines and imprisonment to enforce the Driglam Manzha, and banned foreign television networks. In late 1990, Hindu residents were essentially declared stateless as the government asserted that only ethnic Bhutanese were rightful citizens. By 1991, an estimated 50,000 ethnic Nepalese had fled the country, including several senior officials, high-level bureaucrats, and other trained personnel.
In the seventh economic plan (1992–1997) the government had shifted goals had to priorities on preserving national identity; preserving the pristine environment; economics, especially food, self-sufficiency; indigenous human resource development, and encouragement of privatization in manufacturing and services. Specific environmental objectives included the promotion of sustainable agriculture through soil erosion control as well as the setting aside of 20% of the country's land area as nature reserves and other areas protected from commercial timber extraction. The personnel problem soon became acute as many as 70,000 ethnic Nepalese joined the exodus to UN-supported refugee camps just outside the country, including the bulk of Bhutan's technocrats, civil servants, police and army personnel. In 1993, GDP growth plummeted to 3%, well below the targets set in the plan. In 1995, however, growth had recovered to 7.4%. A goal to meet all recurrent expenditures from domestic revenues by the end of the planning period, thus reducing Bhutan's dependence on external grants, was achieved in 1996, thanks primarily to revenues from the Chhukha power project.
In the eighth fiscal year plan (1997 to 2002) priorities were on the expansion of the hydroelectric sector, education and training improvements, protection of the natural environment, and further development of the private sector. In 1997 a second commercial bank, the Bhutan National Bank (BNB), was founded, with computerized operations and 49% public participation. In 1998, with the start of construction on the 1020 MW Tala Hydroelectric Project (THEP), GDP growth jumped briefly from 6% to 7.3%, before proceeding at an average of about 6% for the rest of the planning period. Indeed, 6% has been the average growth rate for Bhutan across the last three economic plans, 1988 to 2002.
The ninth fiscal year plan (2002 to 2006) promises a continuation of the same moderate progress, although it calls for a 75% increase in outlays over the revised eighth FYP. A central strategy of the plan is to check what is seen as excessive urbanization, up to 21% in 2002, through, intensive rural development. For the first time the plan includes separate plans for each of the country's 201 local units or geogs. The four priorities of the plan are increasing domestic tax revenue, improving rural quality of life and income, geog-based planning, and enhancing the private sector. The prospect is for Bhutan to continue to proceed at its own restrained pace.