Explained | Bhutan’s graduation from the UN list of Least Developed Countries 

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The story so far: “We are taking it with a lot of honour and pride, we are not nervous,” said Bhutanese Prime Minister Lotay Tshering at the United Nations Least Developed Countries (LDC) Summit that concluded on March 9 in Doha, Qatar. Mr. Tshering was referring to the fact that come December, the landlocked Himalayan kingdom of Bhutan will no longer be on the list of LDCs. It will become only the seventh country to graduate from the list.

What is the UN’s list of Least Developed Countries (LDCs)?

The UN in the 1960s began to recognise some of the most vulnerable and disadvantaged countries in the international community, considering factors such as development capacity, socio-economic parameters, lack of domestic financing, and geographical location. In 1971, the UN officially established the category of LDCs to attract particular support for them.

Currently, 46 countries across Africa, Asia, Caribbean and the Pacific are categorised as LDCs. The LDCs host about 40% of the world’s poor. They account for 13% of the world population but for only about 1.3% of global Gross Domestic Product (GDP) and less than 1% of global trade and Foreign Direct Investment (FDI). Some countries on the LDC list are Burkina Faso, Senegal, Rwanda, Bangladesh, Bhutan, Nepal, Solomon Islands, and Haiti.

LDCs typically rely on agrarian economies which can subsequently be affected by a vicious cycle of low productivity and low investment, especially as wealthier countries develop and utilise more productive farming technologies. Generally, LDCs rely on a few primary commodities as major sources of exports and fiscal earnings, causing them to be vulnerable to external terms-of-trade shocks. Due to their geographies, some are more vulnerable to climate disasters or are landlocked, making maritime trade less feasible.

Countries classified as LDCs are entitled to preferential market access, aid, technological capability-building and special technical assistance, among other concessions and international support measures.

Inclusion in and graduation from the LDC category is based on three criteria: Gross National Income (GNI) per capita, Human Assets Index (HAI) measuring health and education outcomes, and Economic and Environmental Vulnerability Index (EVI). To be included in the list, a country must have an average per capita income of below $1,018, have low HAI scores and high EVI levels measured in terms of remoteness, dependence on agriculture and vulnerability to natural disasters.

However, there’s no automatic application process for graduation from the list. The UN Committee for Development Policy (CDP) conducts a review of the LDCs every three years and countries that reach the graduation threshold levels for two of the three criteria in two consecutive triennial reviews become eligible. As an exception, a country whose per capita income is sustainably above the “income-only” graduation threshold, set at twice the graduation threshold ($2,444 for the 2021 triennial review), becomes eligible for graduation, even if it fails to meet the other two criteria. After the CPD recommends graduation for an LDC, a preparatory period of three years, or more in exceptional cases, is prescribed through which the countries continue to receive benefits and assistance, after which it is phased out.

The list of LDCs peaked in 1991 when it had 51 countries. So far, only six countries, namely, Botswana, Cabo Verde, Maldives, Samoa, Equatorial Guinea, and Vanuatu, have managed to graduate from the list. Bhutan was recommended for graduation in 2018 and is due to move out of the list on December 13, 2023.

How did Bhutan qualify for graduation from the LDC list?

Bhutan, a landlocked Asian kingdom in the Himalayas, is often known as the “happiest country” in the world. Hydroelectric power production, agriculture, forestry and tourism are the mainstays of its economy.

One of nine Asian nations on the LDC list, Bhutan saw robust economic growth over the decade from 2010 and 2019, with more than 5% average annual GDP growth. The country meets all graduation criteria and continues to make steady progress on GNI and HAI.

This period of growth and stability has translated into a significant drop in poverty, as the number of people living on less than $3.20/day has dropped from 36% in 2007 to 12% in 2017. Its GNI now stands at $2,982 and HAI at 79.5 while the graduation threshold is 66 and above. Its Economic and Environmental vulnerability levels have decreased to 25.7.

One unique feature of Bhutan’s development journey, highlighted by the UN, World Bank, and World Economic Forum, has been its use of national happiness as an indicator of growth.

The phrase ‘gross national happiness’ was first coined in 1972 by the 4th King of Bhutan, King Jigme Singye Wangchuck,when he declared that “Gross National Happiness is more important than Gross Domestic Product.” The concept envisages a form of sustainable development which takes a holistic approach towards notions of progress, givingequal importance to non-economic aspects of well-being. The GNH Index includes both traditional areas of socioeconomic concern such as living standards, health and education and less traditional aspects like culture and psychological well-being.

The country’s Constitution mandates that a minimum of 60% of Bhutan’s total land remain under forest cover at any given time. The country has exceeded this threshold— the UNDP Human Development Report 2020, which ranks Bhutan highest amongst its LDC peers for overall human development, notes that Bhutan has a total forest area of 72.5%. Owing to low carbon emissions, a high level of carbon sequestration and the export of hydroelectricity, Bhutan is the only carbon-negative country in the world.

Bhutan has developed niche markets for its traditional products despite being landlocked, integrated sustainability into its development plans, and invested in digital infrastructure, making the internet both accessible and affordable. It launched the Thimphu TechPark in 2012, which houses 19 mostly foreign companies and employs 600 people.

The mountain nation also achieved 100% access to electricity. Further, it has engaged in innovative and targeted financing. For example, in 2015, Bhutan mobilised $12 million in impact investment for Mountain Hazelnuts – a social enterprise established to encourage hazelnut production by contracting smallholder farmers across the country. T.

What are the challenges facing Bhutan as it nears LDC graduation?

Bhutan’s export concentration remains high and focused on hydropower, tourism services and the mining sector. Despite recent efforts at diversification, the export market concentration remains extremely high, with more than 80% being destined for India, its largest export market.

Moreover, Bhutan’s graduation from the LDC category will result in the erosion of preferential treatment, making export diversification to larger markets such as the European Union challenging.

The size of Bhutan is also an impediment to its economic development. The small size of the domestic market, dispersed pockets of production and the absence of economies of scale, coupled with its landlocked state and high trade costs may hamper Bhutan’s efforts to be competitive in the global market, especially as a large-scale producer.

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