Strategizing Economic Recovery Using a New Computable General Equilibrium Model for Bhutan

Just as the pandemic has precipitated a rejuvenation of physical infrastructure in some countries, it is also providing an opportunity to upgrade tools for economic policy making. Professor Selim Raihan of the University of Dhaka has developed a computable general equilibrium (CGE) model for Bhutan with support from the Asian Development Bank (ADB), Bhutan’s Ministry of Finance, and United Nations Development Programme (UNDP).

CGE models are not new. They have been used in economic policy analysis for over 6 decades. But this is the first CGE model developed for Bhutan. The key ingredients for a CGE model are:

• Data on economic relationships among sectors of the economy.
• A set of rules governing how households and firms make consumption and production decisions.

The former is the basis for the Social Accounting Matrix, which provides a snapshot of the input–output relationships among sectors of an economy. Combining the matrix with the behavioral rules for economic actors, the CGE computes how the equilibrium of an economy will shift in response to potential changes in the economy that are chosen by the model user. This allows analysts to run policy experiments and simulate how policy decisions will reverberate through the modeled economy. Policy makers can thus move beyond economic models based on historical trends and account for complex relationships among economic variables.

CGE models are valuable for policy making because they allow analysts to assess trade-offs between economic efficiency (how total economic output is affected by a policy or shock) and economic equity (how groups within an economy are affected differently by a policy or shock). They estimate how key economic indicators like GDP, unemployment, and inflation will evolve under alternative policy scenarios (such as imposition of a new tax), which is useful for both backward-looking and forward-looking economic analyses.

Looking backward, how would the Bhutanese economy have fared in 2020 and 2021 had the government not undertaken countercyclical expenditure programs, like His Majesty the King’s Relief Kidu Program, which transferred over $70 million to households? The CGE model suggests that those transfers were spent largely on agriculture-related sectors, clothing, and telecommunication services, and that GDP would have declined by an additional percentage point in the absence of the social protection program. The model confirms that Bhutan’s social safety net was critical for preventing thousands of people from sliding into poverty during the pandemic.

Looking forward, how might economic recovery be supported by targeted investments in subsectors? The CGE model estimates the economy-wide impact of expansion of a single subsector, as quantified by the Social Accounting Matrix multiplier factors.

Figure 2: Sector-wise GDP Share, Employment Share, and Economic Multiplier

Note: Sector marker size is proportional to sector share of GDP.
GDP = Gross Domestic Product, SAM = Social Accounting Matrix.
Source: Authors’ calculations based on Haver Analytics and Social Accounting Matrix for Bhutan (Raihan 2022). Chart produced in Flourish by Rowena Espiritu-Borromeo.

While the industry and services sectors grab the most attention because of high-profile, export-oriented subsectors within them (electricity and tourism, respectively), it is agriculture that has the highest economic multiplier, with a slight edge over services. The model shows that every dollar invested in agriculture production returns $1.47 because of the extensive linkages of the agricultural sector with the rest of the economy.

Furthermore, investments in agriculture would have additional benefits that are not directly captured by the model—boosting food security and promoting economic growth by increasing labor productivity in agriculture, which still employs over half of Bhutan’s workforce.

Among service subsectors, transport is notable for its high multiplier effect. The model suggests that a doubling of land transport services would increase Bhutan’s GDP by 10 per cent, confirming the importance of building connectivity in a landlocked country with low population density.

In February, the Ministry of Finance officers participated in a training program on the CGE model for Bhutan. As Bhutan navigates a still-volatile global economic environment, the new model will be an additional tool for data-based decision-making by the Royal Government of Bhutan and its development partners. The CGE model yields insights that are useful for maximizing the multiplier effects of public investments and designing economic diversification strategies, both of which will be essential for guiding the country into an economic recovery that generates gainful employment for all its citizens.

The model underscores that the agriculture sector cannot be neglected, with much to be gained from mechanization, modernization of inputs, shifting to higher value crops, and improved rural connectivity due to the sector’s high share of employment and high Social Accounting Matrix multiplier. It also highlights the importance of formally institutionalizing relief and social protection programs, not only for social protection, but for promoting economic growth, as the Relief Kidu Program did in 2020–2022.

However, it is important to understand the limitations of the CGE model, especially as the government drafts its long-term plan for the coming decade. Because a CGE model is based on a snapshot of the economy at a single point in time, it takes the structure of an economy as given. That makes it a relevant tool for short- to medium-term analysis and for planning the response to emergencies, such as natural disasters or the COVID-19 pandemic.

Over decades, the sectoral structure of an economy and underlying economic relationships change. That makes CGE models less appropriate for policy simulations over long-term horizons because secular shifts (for example, due to economic structural transformation and climate change) are likely to alter the core economic relationships and assumptions on which the CGE model was built. This shortcoming can be addressed using complementary planning tools that take a more qualitative and explorative approach to anticipating opportunities and challenges for economic growth over longer time horizons, such as strategic foresight.

The views expressed in this article are those of the authors and do not necessarily reflect the views of the ADB or UNDP.

Asian Development Bank, Bhutan Ministry of Finance, and United Nations Development Programme. An Economy-wide Assessment of the COVID-19 Pandemic and Bhutan’s Response. Unpublished policy note.

M.E. Burfisher. 2021. Introduction to Computable General Equilibrium Models. Cambridge: Cambridge University Press.

S. Mehta. 2022. The Dragon Economy. Thimphu: Kuensel Corporation Limited.

National Statistics Bureau of Bhutan. 2022. Labor Force Survey Report 2022.

S. Raihan. A Manual on the Bhutan CGE Model. Unpublished.

Ministry of Labour and Human Resources of Bhutan and United Nations Development Programme. 2022. Bhutan Workforce Futures: Stepping Stones to Industrial Strategic Propositions for Agriculture, Creative and Digital Sectors. Thimphu: Bhutan MOLHR and UNDP.