Economic and Political Relations Between Bhutan and Neighbouring Countries

Economic and Political Relations Between Bhutan and Neighbouring Countries – a Joint Research Project of The Centre for Bhutan Studies (CBS) and Institute of Developing Economies, Japan External Trade Organization (IDE/JETRO


Bhutan is a Himalayan Buddhist Kingdom that is physically small with limited economic dimensions and military might. Unlike its neighbours in the region, it was never colonized; while two world wars and the cold war ushered the world into an atmosphere of instability and alignments, Bhutan was spared such direct impact. Nevertheless, Bhutanese society has traditionally been sensitive to issues of security, and preserving its sovereign independence and territorial integrity has historically been a constant challenge. With the launch of planned development in the 1960s, socioeconomic development and gradual political reforms have been additional and main issues of priority.

While Bhutan had historical ties with Tibet, its less definite dealings with China and the shedding of an isolationist policy gradually led Bhutan to develop political orientation towards India. Since the 1950s, Bhutan’s foreign policy focused on building a close relationship with its southern neighbour, thereby enhancing its territorial security and prospects for socioeconomic development. At the same time, the Himalayas to the Indians were natural barriers that could enhance India’s security vis-à-vis China. The first visit of India’s Prime Minister Jawahalal Nehru to Paro Bhutan in 1958 was the initiation of a “special relationship” between the two countries. Looking back over the decades since then, it is the expansion of Indian assistance in every field of Bhutan’s development that has facilitated Bhutan’s socioeconomic growth. Among all other donors today, India continues to provide the largest economic assistance to Bhutan.

The diversification of Bhutan’s relations began with its entry into the United Nations in 1971, and while external relations continued to be largely confined to India, the establishment of its relations in other areas and at various levels gained momentum over time. This has enhanced the recognition of Bhutan as a sovereign and independent nation, and resulted in the facilitation of economic and development cooperation. As of now, Bhutan has diplomatic bilateral relations with 22 countries. Realizing the need for economic diversification in achieving self-sufficiency and to remove constraints inhibiting its expansion, Bhutan’s interactions at the bilateral and multilateral levels have increased substantively. Today, Bhutan not only looks toward building up a strong export-oriented economy to compete in the regional market, it also awaits accession to the WTO in the near future. Given the realities of its economy, however, Bhutan’s trade and other economic relations are confined to only a few countries in the sub-region, mainly India, Bangladesh and Nepal, and a few countries outside the sub- region. And while most analysts agree that the pattern of Bhutan’s economic growth is highly people-oriented, the pace of growth resulting in necessary diversification of domestic economy is yet to come about. However, the adoption of the unique development philosophy of Gross National Happiness has brought about a distinct position for Bhutan in the region and beyond, and it is this principle that is meant to serve as the guiding philosophy in Bhutan’s socioeconomic development initiatives.

The subsequent chapters mainly reflect on the various facets of Bhutan’s political economy in relation to neighbouring countries in the region. Chapter one provides an overview of Bhutan’s Economy discussing its size and nature, its gradual economic integration, macroeconomic performance and future outlook, as well as its growth profile over the last four decades. These elements have substantively been presented by drawing comparisons with other countries in the South Asian region.

Chapter two looks at Bhutan’s Economic Development Policy with consideration of various economic reforms that have taken place over the years including development strategy and Bhutan’s cautious move towards economic liberalization with its proposed accession to the WTO. Bhutan’s Economic Relations with the Neighbouring Countries and Areas is explored in chapter three by looking at various levels of Bhutan’s involvement in regional integration, and its future outlook in such setting is considered by examining some of Bhutan’s advantageous areas in production and policy coordination. The prominence of Indian involvement in Bhutan’s economic and political affairs is highlighted in chapter four, which covers Economic and Political Relations between Bhutan and India. This section shows that even within regional cooperation and amidst processes of diversification, India remains the most important development partner for Bhutan. It also covers various areas of concern with special emphasis on the issue of militant insurgents from India and their illicit penetration into Bhutanese territory.

In Chapter five, Bhutan’s Perspectives on Regional Cooperation is mainly focused on SAARC and briefs on bilateral relations between Bhutan and the member countries (with the exception of India since this section has been covered abundantly in chapter four). With regard to Bhutan-Nepal relations, the main issue of concern hovering over the verification of people in the camps in eastern Nepal has been attached in the annexes as a backgrounder. In light of the fact that China figures considerably in Bhutan’s regional outlook, some attention has been given to relations with this neighbour in the north.

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