ECONOMIC INTERVIEWS IN BHUTAN

UNCLAS SECTION 01 OF 12 NEW DELHI 007159

SIPDIS

SENSITIVE

DEPT FO EB/TPP AND SA/INS
USDOC FOR 4530/MAC/ANESA/OSA/LDROKER/ASTERN
DEPT PASS USTR FOR S.ASIA - AWILLS/BSTILLMAN
GENEVA FOR USTR
E.O. 12958: N/A
TAGS: ECON ETRD IN BT
SUBJECT: ECONOMIC INTERVIEWS IN BHUTAN

REF: NEW DELHI 6903


1. (SBU) SUMMARY. Econoff traveled to Bhutan in late
August to interview several Ministry officials at the
working level and to establish additional contacts with
non-governmental organizations (NGOs). The three day
visit, which included over 15 meetings around Thimphu,
resulted in a number of important introductions.
Econoff met with the folks heading up the World Trade
Organization (WTO) accession bid. The Ministry of
Finance was instrumental in completing a data call from
the Millennium Challenge Corporation, and additional
possibilities for Intellectual Property Rights (IPR)
enforcement training were identified. The Bhutan
Chamber of Commerce, along with the National
Statistical Bureau, furnished some very useful
statistics, including the Statistical Yearbook of
Bhutan 2004. Discussions ranged from Foreign Direct
Investment (FDI) to microfinance. On more than one
occasion, Bhutan presented its view on urban pressure
and the difficulties facing an increasingly educated
and skilled workforce. Refugee and human rights
issues, discussed on the margins, were reported in
Reftel. END SUMMARY.


2. (SBU) During the week of August 22, Econoff
conducted a series of working level visits in Thimphu,
Bhutan. After attending a suite of discovery and
introductory meetings with various Ministries and NGOs
to establish working level contacts, Econoff followed
up on prior visits by other officers, and asked
additional questions. Econoff identified and
interviewed persons with reporting responsibility for
the Millennium Challenge Corporation, IPR and Bhutan's
WTO accession bid. NGOs candidly furnished their
interpretation of the situation on the ground and this
proved a useful barometer for subsequent and follow-up
interviews with the several Ministries.

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CHAMBER OF COMMERCE ON THE BHUTANESE ECONOMY
--------------


3. (SBU) Econoff met with Bhutan Chamber of Commerce
and Industry (BCCI) Vice President Bap Kinga, who had a
very positive outlook on Bhutan's economy. According
to Kinga, Bhutan's GDP has been growing at a steady
rate of about 6.8 percent over the past twenty years.
Imports have been steadily rising and inflation is
around 5.4 percent. Kinga presented statistics showing
US imports rising to $1.3 million in 2002, while US
exports have remained fairly flat at about $330,000.
According to Kinga, the US buys from Bhutan primarily
fishing equipment, lemon grass oil, carpets,
handicrafts, linens, and indigenous red rice. The US
sells Bhutan white rice, soya bean oil, bows, arrows,
mattresses, industrial and textile machinery, sheet
aluminum, furniture and paints. (COMMENT: Archery is
Bhutan's national sport and American-made compound bows
are considered the best. In Thimphu, Econoff noted
several storefronts displaying American archery
equipment. Alternately, Bhutan's hand-tied fishing
lures are prized by American anglers. END COMMENT.)


4. (SBU) Kinga added that the Royal Government of
Bhutan (RGOB) is currently implementing its 2002
Foreign Direct Investment (FDI) policy. Kinga
maintains that FDI is currently limited to joint
ventures in hotels, resources, infrastructure
development, and tourism, with a 70% cap in both
manufacturing and services sectors. In trade
development, the RGOB is also focusing on mineral-based
industries, according to Kinga. He noted that Bhutan
is often referred to as a "geologic museum," and has
considerably large oxidized copper and zinc deposits.
However, Kinga said, Bhutan does not have the
technology for oxidized copper and zinc extraction.
When Econoff asked Kinga about possible additional
trade opportunities with Bhutan, Kinga stated that the
Ministry of Trade and Industry is currently developing
its distribution infrastructure, but that the lower
volume of trade was largely due to Bhutan's landlocked
status.


5. (SBU) Kinga said that BCCI is trying to promote
cottage industries and small scale initiatives. The
BCCI has elected regional representatives to work with
local residents to develop small business. Although
Kinga admitted that there is a gross shortage of
entrepreneurs with adequate accounting skills, he
pointed out that small businesses pay no taxes for the
first seven years of operation. A sub-committee within
BCCI has been created to promote private sector
development. Kinga noted that efforts to promote small
business through exchange programs had met with mixed
results in the past. He specifically mentioned the
Small Business Women's Development Program, which is
administered by Martha Morton (Director, Bringing China
to Arkansas Program). According to Kinga, when this
program was initiated, several of the Bhutanese
participants who went to the US overstayed their visas.
However, Kinga said that those participants had finally
returned. After re-examining this program, the BCCI is
now considering the establishment of a resource center
within Bhutan wherein aspiring women entrepreneurs
would be trained extensively for two weeks before
sending them to the US for hands-on training. Kinga
believes that women who are trained in advance of a US
visit would have more incentive to return to Bhutan to
implement their skills. BCCI is currently seeking
financial assistance to develop the women's resource
center.


6. (SBU) According to Kinga, human resources
development is severely lacking throughout Bhutan.
Most non-government workers are farmers with no
management skills. There are severe funding
constraints and most of the programs currently in place
are subject to donor participation.

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MICROFINANCE SCHEMES FOR RURAL BHUTAN
--------------


7. (SBU) Econoff met with Bhutan Development Finance
Corporation's (BDFC) Managing Director, Nawang Gyetse.
Gyetse described his role as microfinancer. According
to Gyetse, the BDFC was established with help from the
Asian Development Bank (ADB) in 1988 and focuses 80
percent of its resources in agro-rural areas, aiming at
higher yields and efficiency. Gyetse noted that he has
financed everything from home renovations to purchase
of livestock. The BDFC has 24 branch offices (at least
one office in each district). According to Gyetse,
each branch manages its own loans, however he admitted
that two-thirds of BDFC's portfolio ultimately is
managed from Thimphu. ADB's soft loans have
historically been the BDFC's primary source of funding,
but Gyetse noted that the organization has also
received funding from the Kuwait Fund for Economic
Development. The United Nations has also been a
contributor and originally the United Nations Capital
Development Fund (UNCDF) financed BDFC's micro-
operations. Gyetse mentioned that the BDFC recently
had to borrow internally from its pension fund in order
to continue operations. According to Gyetse, less and
less money has been available from the NGOs for BDFC's
micro-finance schemes. This year, the BDFC announced a
savings program for rural Bhutan. Gyetse hopes that,
in the future, the BDFC will be able to operate using
money borrowed from the savings program combined with
additional funds from NGOs. The BDFC, with a staff of
150 people and outstanding loans in excess of $2.6
million, is actively seeking donors.

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TELECOM PRIVATIZATION SLOW-GOING
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8. (SBU) Econoff met with Bhutan Telecom's (BT)
Managing Director, Thinley Dorji. According to Dorji,
although Bhutan Telecom is government-owned, it is
taking gradual steps to privatization. Currently,
several other companies are providing internet service
privately, although this is primarily for dial-up
service. Large volume users, Dorji said, tend to be
the cyber cafes springing up in Thimphu, which actually
lease lines to the BT local area network for better
speed. Dorji was curious to know whether the US would
ever start requiring the URL www.______.co.us for its
US-based websites. He mentioned that, since every
other country is using it, the country ID makes it easy
to identify. Dorji said this would be especially
useful in helping BT to filter junk mail and spam from
its limited LAN capacity. He also mentioned that BT
had received a sizable loan from Denmark recently, but
that no other FDI was currently in the sector. Dorji
said that, even though BT is government-owned, it is
run very much like a private corporation. He added
that there has not been much interest in FDI in the ITC
sector because it is still very small. Infrastructure
is also an inhibiting factor. According to Dorji,
service is currently limited to urban areas--which are
very few.

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ROYAL MONETARY AUTHORITY'S PERSPECTIVE
--------------


9. (SBU) In a meeting with the Royal Monetary
Authority's (RMA) Managing Director, Daw Tenzin, most
of the conversation revolved around Bhutan's impending
labor crisis. Tenzin, like others Econoff interviewed,
was not confident that the cadre of higher-educated
students in the country would be able to find work
easily in Bhutan. Successful education efforts and
increasing urbanization are causing Bhutan's children
to leave the farm for the city. This, according to
Tenzin, has led to other problems such as urban poverty
and homelessness. In spite of Bhutan's recent growing
pains, Tenzin said that skills in ITC, accounting, and
management have increased and diversified. However, a
market requiring many of these new skills has yet to
fully develop, leaving a surplus of disappointed recent
graduates without jobs. In the past, Tenzin noted,
education opportunities were limited such that most
graduates were immediately offered government jobs.
However, even with the shortage of jobs, Tenzin
mentioned that almost 100 percent of Bhutan's
construction labor force comes from India and estimated
that approximately 40,000 Indian men currently work on
construction sites around Bhutan (including road
construction). According to Tenzin, even under a
contract with all its associated administration costs,
Indian labor was still quite reasonable--so much so, in
fact, that the Bhutanese scoff at the wages offered and
avoid the sector altogether. Tenzin said that data,
facts and figures about the RMA are easily accessible
online at its website: www.rma.org.bt.


10. (SBU) Tenzin said that most of the money in
foreign reserves, while in US dollars, is derived from
grant aid and loans. The remainder, $9 to $10 million,
is from tourism revenue. The RMA also manages rupee
reserves and, after a recent slew of counterfeit Rs 500
and Rs 1000 notes ($10s and $20s),the RGOB has
forbidden the use of any rupee notes larger than Rs

100. The Bhutanese ngultrum is pegged to the Indian
rupee and Indian currency has been accepted in the same
manner as Bhutanese currency until this past February,
Tenzin noted. (COMMENT: Tenzin is intending to travel
to Washington from September 20 to October 4 with his
wife and niece, for the annual International Monetary
Fund meeting. On leaving Tenzin's sparsely furnished
office, Econoff noticed one lone framed photo on
Tenzin's wall---a poster sized frame filled with dollar
bills. END COMMENT.)

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ECONOMIC STATISTICS AND THE CENSUS
--------------

11. (SBU) At the National Statistical Bureau (NSB),
Econoff interviewed Director Kuenga Tshering. (NOTE:
In 2003, the NSB was given autonomy from the Department
of Planning and Policy in order to begin work on the
census, which is currently being analyzed. The Census
Bureau is an ad-hoc office of the Census Commissioner;
even though the re-organization is only a paper
exercise--no employees were moved. After the current
census has been processed, responsibilities will be
transferred back to NSB. END NOTE.) Tshering said
that the census was a much larger undertaking this time
and his analysts are putting data through a process of
100 percent validation against errors. The manual
editing and coding phase is almost complete, according
to Tshering.


12. (SBU) Perhaps the most interesting part of
Tshering's discussion on the census was that the RGOB

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believes that it should reach 100 percent of the
population. Local citizens confirmed being asked to
stay in their homes until after being officially
surveyed and wrist-banded. Tshering noted that, for
this census, the RGOB used local guides and entered a
Global Positioning System (GPS) point for every citizen
in the country. The RGOB even surveyed the herdsmen
living in remote mountain caves. Tshering said that
the RGOB plans to use the GPS points to create
Geographic Information System maps, which will help
divide the country into constitutional districts by
population density.


13. (SBU) While the effort is much larger in scope
than in the previous census, Tshering admitted that
this was not a complete survey. A copy of the
questionnaire was unavailable, but Tshering said that
questions about family size, education level, major
sources of income, and other social indicators were
asked. When asked whether questions on religious
preference were in the survey, Tshering had no comment.
(NOTE: However he did confirm that every respondent
was asked whether or not he was happy. END NOTE.)
According to Tshering, once the data is validated
manually, analysts will also quality control the
digital data. They are using CSPro, MS Access and SPSS
for statistical analysis.


14. (SBU) Tshering furnished several useful reports
on Bhutanese society and the economy, and discussed
some of the more relevant statistics. According to
Tshering, Bhutan's current budget deficit is between

SIPDIS
two to three percent of GDP. Tshering said that the
deficit reflects a programmed pay raise for civil
servants. He added that the civil service is in
transition from cadre to position classification at the
moment and he was very interested in learning more
about the USG civil servant position classification
system. (COMMENT: Apart from the census and
employment classification systems, Tshering also stated
that the constitution would be ratified in 2007 and
that the delay is due to having to translate the
document into common Dzongkha. Tshering said the first
draft was too sanskritized to be understood. END
COMMENT.)

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GROWING PAINS IN URBAN AREAS
--------------


15. (SBU) "Education is destroying traditional lore
and knowledge." At least that is what the Ministry of
Works and Human Settlement's (MWHS) Secretary, Tshering
Dorji, believes. Dorji also said that urban migration
leads to lack of infrastructure capacity. According to
Dorji, the goals of MWHS are to prevent the occurrence
of slums and to provide shelter for everyone. He added
that the emphasis has actually been to develop the
rural areas. He noted that most of Bhutan's rural
farming has not yet been mechanized and that the
marketing capacity has also not been developed
adequately to date. According to Dorji, since the
RGOB's recent improvements in education policy,
educated rural children have been flocking to the urban
centers. Whereas formally children were only educated
through grade six, they are now being taught through
grade ten. The result, according to Dorji: hardly any
child goes back to the village. The RGOB is trying to
find ways to promote balanced regional development and
keep the expanding urban centers from encroaching on
rural areas while still making these areas attractive
and desirable destinations for returning educated
Bhutanese youth, Dorji added. In the urban centers, he
went on, housing pressure is causing tremendous
problems. One of the side-effects of this development
pressure is that waterborne disease has increased in
the urban areas. Citing Thimphu as a prime example of
development pressure, Dorji said the area of the city
limits had to be increased from nine square kilometers
to twenty six. In spite of the development pressure,
Dorji said (with some pride) that Bhutan has moved
forward with new urban schemes such as user fees for
water and parking, although he admitted that the public
response to these fees was initially not very positive.


16. (SBU) Dorji stated that industrial development in
Bhutan is limited due to high production and
transportation costs. However, health and education
industries in regional rural areas are being
encouraged. In contrast, the construction industry has
exploded. The RGOB is pushing development to rural
areas in an effort to control the size of the urban
centers. Dorji believes that Thimphu's population
capacity is around 150,000 people. However, the RGOB's
Land Act prohibits overdevelopment of rural areas. The
Land Act does promote farming and reserving land for
agriculture, which has frustrated some developers.
However, Dorji noted that the trade-off between arable
land and mountain slopes had always been an issue.
Soils on steep slopes are equally unsuitable for
construction and farming, according to Dorji. So, the
competition for developable land is growing.


17. (SBU) While other sectors of the Bhutanese
economy have yet to open, Dorji insisted that the
economy is slowly liberalizing. He pointed to the
latest Bhutanese phenomenon, the family car. According
to Dorji, people would rather own a vehicle and rent a
house than the other way around. This trend has at
least been good for trade. On infrastructure, Dorji
commented that road building in Bhutan is very
expensive because of the myriad environmental best
management practices that must be followed in steep
terrain. He acknowledged that the country's road
network was critical and that the Asian Development
Bank (ADB) and World Bank (WB) had been consulted for
further financial assistance. According to Dorji, 202
blocks (similar to counties) had facilities and road
networks or suspension bridges connecting them. He
added that only in the remotest rural areas were
facilities still lacking. Dorji admitted that road
building projects take years to complete. In one
example, Dorji mentioned that the RGOB had just started
the first 70 kilometers of Bhutan's second East-West
highway, which will ultimately be about 300 kilometers
long, but the entire project may take over ten years to
finish. Infrastructure and urban planning are Dorji's
biggest concerns, closely followed by finding
employment for new graduates.

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LEGAL AFFAIRS AND INTELLECTUAL PROPERTY
--------------


18. (SBU) Econoff also met with RGOB's Office of
Legal Affairs (OLA) Director, Kuenlay Tshering and
Legal Officer Ugyen Wangdi. Tshering explained that
OLA is an autonomous arm of RGOB's Executive Branch.
He noted that Bhutan was now divided into 202 blocks
(geogs) and 20 districts (dzongkhas),with OLA
representation in each district. Tshering said that
the OLA included 60 lawyers nationwide at all levels
plus another 164 paralegals (jabmis). According to
Tshering, the legal process in Bhutan has not become

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very complicated yet. There is a list of counselors
currently available, he said, but most of the
representatives in the private sector are only
paralegals. Tshering noted that these paralegals have
licenses for three to five years, and are intended to
fill the void until the law sector is fully
operational. OLA is currently only prosecuting
government offences such as embezzlement, Tshering
stated. According to Tshering, OLA was established in
2000 and will eventually become the Law Ministry,
resembling and functioning like the US Attourney
General's Office. He added that the OLA will have
three specific functions: to provide legal services to
the government; to draft and review laws of the
executive branch and deconflict new with existing
legislation; and to prosecute for and defend the
government.


19. (SBU) Ugyen Wangdi is currently the RGOB point
man for Intellectual Property Rights (IPR) issues in
OLA. The OLA assists with legal opinions for IPR
matters and is working closely with the Ministry of
Trade and Industry's (MTI) IP division. Wangdi said
that Bhutan passed the IP Act in 2001. Both Wangdi and
Tshering understood that adequate IPR protection is a

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prerequisite for World Trade Organization (WTO)
accession and Tshering noted that he was a member on
the WTO accession bid committee.

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ON THE CONSTITUTION, BRIEFLY
--------------


20. (SBU) OLA Director Kuenlay Tshering is also the
member secretary and committee member drafting the
Constitution. After public review, Tshering felt
confident that the Constitution would be adopted in the
National Assembly. An article in the Constitution on
political parties limits the primary round to every
five years, Tshering added. When asked whether
currently banned political parties will be allowed to
operate after the Constitution is ratified, Tshering
could not confirm.


21. (SBU) National Assembly (NA) Deputy Director
Lobzang Dorji stated in a brief meeting in NA offices
that ratification of the constitution will also have a
big impact on the economy. Although liberalization of
the RGOB economy is already underway, Dorji
acknowledged, the new constitution will change
parliamentary procedures in their current form, which
will hopefully fuel economic reforms. According to
Dorji, the NA will be divided into four secretariats:
Research and Development, Legal Affairs,
Administration, and Information Technology and
Communications. (COMMENT: Although the NA was
originally constructed to house a South Asian
Association for Regional Cooperation (SAARC) meeting,
the actual meeting never occurred. The NA is ornately
decorated with numerous Buddhist symbols, murals,
tapestries and flags. The Assembly Hall will have to
be completely re-designed to accommodate the new
members. END COMMENT.)

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FINANCIAL OVERVIEW
--------------


22. (SBU) Econoff met with Ministry of Finance (MF)
Department of Customs and Revenue Director Sangay Zam,
and Department of Aid and Debt Management Director
Sonam Wangchuk, and Program Officer Thinley Namgyel.
Wangchuk explained that the Department of Aid and Debt
Management was created in 2000 to coordinate external
assistance. According to Wangchuk, Bhutan's first
preference is grants, but concessional loans are also
common--both bilateral and multilateral. Denmark,
Japan, Austria, Norway and Switzerland are regular
donors, Wangchuk said. Zam stated that 45 to 50
percent of Bhutan's domestic revenue is used for
current expenditures and the external aid in grants and
loans is used for capital expenditures, e.g.,
infrastructure development. One of the primary reasons
that Bhutan has remained an attractive recipient of
external aid, according to Zam, has been the country's
ability to consistently cover its current expenditures.
Zam added that customs revenue only accounts for two to
three percent of RGOB's total income, although imports
continue to increase. She added that, aside from
alcohol and tobacco, the highest tariff currently is
around thirty percent. However, Zam insisted that most
of Bhutan's tariffs are much lower than that. (NOTE:
Both Zam and Wangchuk agreed to furnish data in
consideration of Millennium Challenge Account funding.
Econoff has since received the data and has provided
this information to the Millennium Challenge
Corporation. END NOTE.)

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FOREIGN AFFAIRS AND WORLD TRADE
--------------


23. (SBU) Ministry of Foreign Affairs (MFA) Under
Secretaries Tenzin Wangchuck and Chitem Tenzin met

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Econoff in the MFA offices at the NA building. Tenzin
reported that his office dealt with multilateral
affairs. He added that, of Bhutan's fifty official
diplomats, twenty were in the MFA. He also noted that
two MFA officials were on the World Trade
Organization's (WTO) accession team. Tenzin was in
Geneva in November 2004 for the first accession
meeting. The second meeting is scheduled for sometime
this fall, probably in November. He said that the US
has been the biggest supporter of Bhutan's accession
and that the US is sometimes the only other country to
show up for Bhutan's accession meetings in Geneva.
Tenzin believes that Bhutan may get final approval as
early as 2007 for WTO accession. He noted that Bhutan
is willing to give some concessions in services and
manufacturing, but that, it will be difficult to do
this for all 300 trade items. Tenzin said that a final
list should be available before the next working party.
He added that Bhutan is the only SAARC member who is
not a member of the WTO. Bhutan already has Free Trade
Agreements (FTAs) with India, Thailand, SAARC, and
SAFTA, and more could be in the works. He cited the
Bangladesh-India-Myanmar-Sri Lanka-Thailand Economic
Cooperation (BIMST-EC) as a prime example of deals in
the pipeline.


24. (SBU) Tenzin believes the US support of Bhutan
has been good for both political and economic reasons.
Tenzin said his focus is on international conventions
and agreements and multilateral issues. (NOTE: Since
MFA is responsible for protocol, Econoff asked Tenzin
about promoting exchange of high level visits. Tenzin
said that, if a Bhutanese professional is invited to
visit the US for professional reasons, such as
training, the MFA needs about two weeks advance notice
to get all the necessary paperwork in order for the
person to travel. END NOTE.)

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NGO VIEWS OF THE RURAL ECONOMY
--------------


25. (SBU) The Tarayana Foundation's (TF) executive
officer, Chime Wangdi and her Director, Tshering
Yangzom, gave a more critical account of the economic
situation outside the city limits. According to
Wangdi, the economic state of affairs for most of
Bhutan's rural children is bleak. Wangdi stated that
the Tarayana Foundation runs its program entirely with
donated funding. She noted that Tarayana has placed
project staff in rural areas with two primary goals:
education and rural economic development at the
grassroots level. Tarayana is currently funding a
program for 265 students, to ensure they have a
complete education through high school. Another
program that has gained momentum, according to Wangdi,
is one that provides care for people in rural areas who
have no next of kin. (NOTE: Wangdi explained that the
Bhutanese do not understand the culture of eldercare
facilities and orphanages. When a Bhutanese citizen is
unable to care for themselves, the responsibility
automatically falls on the next of kin. However, women
that have traditionally born the primary caregiver
responsibility are increasingly entering the workforce.
The economic aspirations of rural Bhutanese women has a
spiraling effect in the caregiver chain. Young teenage
girls in the family are now frequently saddled with
caring for younger and elder relatives. The Tarayana
Foundation routinely receives applications for
assistance from families with severely handicapped
relatives, especially for handicapped children who have
grown too large for the caregiver to move from one
location to another. END NOTE.) According to Wangdi,
Tarayana's goal is not to provide permanent support to
the rural Bhutanese, but to teach life skills and make
them self-sufficient. Wangdi said that Tarayana
enlists teachers from the National Technical School to
assist with more complicated teaching concepts. One of
the more difficult tasks, according to Wangdi, is the
actual trek to the rural locations. She noted that,
during one recent monsoon, staff members had to cross
the same river over twenty times before reaching the
intended village.


26. (SBU) Wangdi highlighted two projects in which
Tarayana is working with locals to develop folk arts
and crafts. Nettle weaving, a traditional skill that
had almost been abandoned and lost to history, has been
revived. Wangdi has been pleased with the success of
the weaving project. Young students are being taught
not only how to weave their products, but also how to
market them and develop entrepreneurial skills. Wangdi
was quick to point out that Tarayana is not promoting
child labor, rather teaching the children early that
they could develop marketable skills. Tarayana is also
helping older Bhutanese by introducing simple handtools
and labor-saving devices that expand and facilitate
traditional craft making skills. Wangdi noted that,
since the urban areas have recently banned the sale of
plastic bags altogether, hand crafted paper bags from
rural Bhutan are used in many of the shops. According
to Wangdi, Tarayana is also experimenting with the use
of hemp (marijuana) as a paper and cloth making input.
She noted that marijuana grows throughout the Himalayas
and eradication campaigns have been ineffective.
Wangdi said there have been several public education
efforts to discourage smoking marijuana, but actually
using the weed for craft making is a recent
consideration.


27. (SBU) Wangdi echoed other interviewees
sentiments: educated children cannot farm and thus
become a liability to the family. Wangdi added that
those children educated beyond tenth grade also are not
able to find good job opportunities in the village and
either eventually revert to farming or move to urban
areas, competing with other educated children for
increasingly limited jobs. Wangdi said that, in her
opinion, there were two limiting factors in the rural
economy. The first was that culture and custom had
created a mindset that was difficult to challenge or
change. She mentioned the next of kin issue as one
example. Another example was the farming practices in
some areas. According to Wangdi, in many areas of
rural Bhutan, when a person dies his accumulated wealth
is buried with him, along with any tools and utensils
that may have been his personal property. The dead are
usually buried in mounds, above ground in flat areas
with rocks piled on top. Wangdi said this uses up much
of the farmable flat land, leaving the Bhutanese to
farm the steep, uncultivated areas. The second
limiting factor, according to Wangdi, is that rural
Bhutanese are beginning to suffer urban scourges such
as alcoholism. Wangdi reported that many Bhutanese
borrow money and drink themselves to death. They then
pass on their debt to the next generation, which custom
and culture require to honor. Wangdi said alcoholism
is particularly pervasive in central and south central
Bhutan.


28. (SBU) According to Wangdi, Tarayana is working
closely with the government and the BDFC on micro-
finance issues. Tarayan's role as guarantor in the
micro-finance schemes allows the Foundation to provide
support and oversight during the loan period--so that
the borrower does not overspend or overdrink. Wangdi
noted that many of the Bhutanese used to go to India to
borrow money, selling their harvest under-ripe and
foregoing considerable efficiency in the process.
Tarayana is also working to document traditional
knowledge, Wangdi stated. According to Wangdi, many
plants in Bhutan have yet to be documented and
classified. Tarayana is working with local guides to
identify the ethnobotanical use of plants. The
enthusiasm for cataloguing the plants is gaining
momentum, said Wangdi. Botanists from the agricultural
Ministry have started participating in the program and
volunteers are growing in numbers. The Bhutan
Foundation, an internationally recognized charity, can
route tax exempt donations directly to Tarayana, if
Tarayana is the designated beneficiary. The program
has been expanding annually, but Wangdi insists the
primary focus for Tarayana is the rural children of
Bhutan.


29. (SBU) UNICEF Representative Anoja Wijeyesekera
reported that the RGOB appears to be committed to
protecting the rights of children. She said that
Bhutan had ratified the Rights of the Child Convention
and that 27 percent of the budget is spent on health
and education, exceptional for a developing country.
Like others Econoff met, Wijeyesekera discussed the
education dilemma. She said that, in spite of the
advances in education that have led to recent
observations that children are abandoning the farm and
crowding the urban areas, many Bhutanese in rural areas
are not being taught. This is especially true for
nomads and rural residents of eastern Bhutan, where the
literacy rate for females is only 27 percent, compared
to better than 50 percent in most other parts of the
country. In response, UNICEF has started an adult
literacy program for women greater than fifteen years
old. But, Wijeyesekera added, the government needs a
catch-up program as well. She said there seems to be
very little child labor, although domestic child labor
seems to be increasing. She noted that this is a
symptom of urbanization and that, as more women are
working, they are enlisting the help of fifteen and
sixteen year olds to serve as nannies.


30. (SBU) Renata Dessallien, Representative for the
UN Development Program (UNDP) in Bhutan, said that
UNDP's role had been to support good governance and
provide international experience quietly and
informally. Dessallien said that Bhutan has done an
excellent job balancing good protection of the
environment with local and rural sustenance and
subsistence issues--especially in protected areas.
According to Dessallien, UNDP is also supporting
Information Technology and Communciations (ICT) efforts
to help harmonize equipment and make some processes
web-based. She noted that the current bureaucractic
constraints are staggering. A permit request from a
rural resident often requires a two day walk to an
urban center, to be filed in person. She added that
UNDP is backing the RGOB's decentralization strategy
and also providing professional audits. On employment,
Dessallien echoed the sentiment that opportunities
currently are scarce. She noted that the production
sector is still largely government-run and certainly
not autonomous. The UNDP wants to promote small to
medium enterprises (SMEs) to generate income
opportunities for new graduates. Currently, according
to Dessallien, there is little or no entry space.
Educated Indian civil servants, who were filling the
gap, have mostly been replaced and neither civil
service nor private sector jobs are now available.

--------------
LABOR PAINS
--------------


31. (SBU) To wrap up the discussion on employment
issues, Econoff met with Ministry of Labor and Human
Resources (MLHR) Chief Officer Tenzin Lekphell.
Lekphell confirmed that, five to seven years ago,
unemployment was not a problem. However, he added, now
it is a big enough concern that a special board has
been created to examine the issue. Lekphell said that
MLHR's mission is to improve working conditions,
generate employment opportunities and help the private
sector grow. He noted that the MLHR is only eighteen
months old itself and that it is divided into four
Departments: Labor, Employment, Standards, and Human
Resources. Lekphell stated that the Labor and
Employment Act, which was drafted before there was even
an MLHR, should be passed in the next NA. He said that
the legislation was widely cleared in the public review
process and that recruitment is already underway to
find inspectors to help implement the Act once it has
passed. Lekphell stated that standards are currently
under development, including occupational safety and
health standards. The MLHR's Department of Labor
administrates foreign worker recruitment, according to
Lekphell. The MLHR's HR Department handles vocational
training primarily. Finally, Lekphell noted that the
Employment Department acts as clearinghouse, provides
job center services, promotes employment and encourages
private sector investment and growth.


32. (SBU) Lekphell said that MLHR is also involved in
the RGOB's current efforts to classify private and
public sector occupations. He is personally helping to
develop a policy that addresses the problems of foreign
workers and rising unemployment levels. Lehphell added
that, according to his official numbers, 37,411 foreign
workers are currently in Bhutan with work permits. Of
those, he said, 34,329 work in the private sector--
mostly in construction. The remaining eight percent
are divided evenly between government, semi-government
and armed forces personnel. The total does not include
Indian workers in border areas who can enter, work and
exit freely. According to Lekphell, Indians are
willing to work for less money than the Bhutanese and,
furthermore, the Bhutanese are not skilled in many
professions--nor do they care to relocate for long
periods. Most of the construction done in Bhutan is
through a labor-cost agreement between a Bhutanese
developer and an Indian contractor. The Indian
contractor, according to Lekphell, will hire for an
average of Rs 80 per day. A Bhutanese, he said, will
never take less than Rs 100, but he noted that most
Bhutanese are still not as desperate as the Indians
working in Bhutan. Lekphell stated that there has been
no minimum wage established in Bhutan yet, but that a
wage study is in draft form and a minimum wage standard
is being developed. The RGOB is proposing Nu 125 per
hour, to cover the basic standard of living. A social
security study has been conducted for the private
sector as well, Lekphell added. The RGOB is trying to
recommend to the private sector the current civil
service model for social security and is hoping that
this will improve the employment standard. When
Econoff asked what impact increasing numbers of foreign
workers is having in urban centers like Thimphu,
Lekphell acknowledged that the amount of pollution and
sewerage has increased. He was surprised by Econoff's
suggestion that MLHR should include in its labor-cost
agreements a provision for trash receptacles, shower
tents and portable toilets for the foreign workers.
Lekphell admitted that the MLHR had never considered
such an idea previously, and said he would consider
creating such provisions in future agreements.
--------------
ON TRADE AND INDUSTRY
--------------


33. (SBU) Ministry of Trade and Industry Director of
Planning and Policy Sonam Wangdi, who was rushing to
meet the RGOB deadline for completing a follow-up WTO
accession package for Bhutan's upcoming second working
party meeting, took time out of his busy schedule to
meet Econoff. Wangdi explained that the Ministry of
Trade and Industry is comprised six primary sectors:
trade, industry, tourism, energy, geology and mines,
and intellectual property rights. Wangdi stated that
Bhutan's arrangement with India is nearly borderless,
as the FTA with India has existed since 1971.
According to Wangdi, 95 percent of Bhutan's imports are
from India and 90 percent of the country's exports are
to India. He mentioned that GOI officials are coming
to Bhutan in September to finalize a new ten-year FTA.
Wangdi added that Bangladesh has a 74-item Preferential
Trade Agreement (PTA),but that Bhutan had no formal
agreement with Nepal for trade. He did say, however,
that Sri Lanka enjoys some duty-free exchanges. Wangdi
added that six meetings had taken place to develop a
free trade area for BIMST-EC. According to Wangdi,
trade accounts for sixty percent of GDP, including
tourism. Wangdi said that the date for the next WTO
working party meeting on Bhutan's accession was set for
October 6. He added that Bhutan is currently doing
outreach for WTO accession with the Bhutanese. Wangdi
said Bhutan is serious about joining the global family
and does not want to stand on the sidelines.


34. (SBU) Wangdi said that, although there is free
circulation of currency between India and Bhutan, hard
currency exchange only accounts for five percent of all
transactions. He also noted that, while the rural,
manufacturing and services sector each account for one
third of GDP, seventy-nine percent of Bhutanese are
still employed in the rural sector. Thus, rural reform
is key to Bhutan's economic future.


35. (SBU) Wangdi noted that hydropower is Bhutan's
ace in the hole. He said that, while the sector will
eventually be privatized, it is currently not eligible
for FDI. Wangdi stated that Bhutan had only exploited
some 1550 megawatts of its hydropower since the mid-
eighties, which is only around five percent of
potential production. Of the power produced, he added,
only fifteen percent is used internally. The rest is
exported. Wangdi admitted that forty percent of the
government revenue comes from hydropower. Rather than
reducing that figure in the future, Wangdi said that
the RGOB plans to have hydropower contribute seventy
percent of its revenue. He noted that the Tala plant
will produce 1020 megawatts once it comes online.
Wangdi noted that hydropower and tourism link up very
well with RGOB's environmental ethic (NOTE: There were
10,000 tourists last year. END NOTE). Wangdi said
that the NA is committed to a minimum of sixty-five
percent forest cover, which is further linked to the
country's Buddhist influence. Wangdi added that mining
accounts for about two to three percent of GDP, and
that a geological survey is forty percent complete.
The survey, according to Wangdi, is focusing on soil
stability and hazard analysis.


36. (SBU) Wangdi said that Bhutan welcomed any
possible technical assistance and capacity building for
IPR legislation and enforcement. He had several
candidates in mind for potential training, if it became
available. Post has informed the US Patent and
Trademark Office, which has conducted IPR training for
Bhutan previously, of the Director's request for
additional training.

--------------
COMMENT
--------------

37. (SBU) If conditions in Thimphu are any example,
the economy in urban Bhutan is undergoing change and
inevitable growing pains. None of the Bhutanese
interviewed seemed to be holding back information.
Questions about education problems and other sensitive
issues were generally answered directly and responses
appeared sincere and consistent. The journey back to
Paro from Thimphu was undertaken on foot, over three
days, through the mountains. Though the rural
Bhutanese are generally quite poor, there seems to be a
basic economy at work in the remote areas of the
Himalayan Kingdom as well. Farmers and their errant
cattle herds dotted several meadows between peak and
valley. The monks from the many monasteries between
Thimphu and Paro were going and coming from various
markets with oil jugs and other shopping paraphernalia
in hand. All of the children encountered were, like
most other children, slightly dirty, very happy, and
busy playing with sticks or balls.


38. (SBU) Images of some of these encounters will be
made available at Embassy New Delhi's SIPRnet site:
http://www.state.sgov.gov/p/sa/newdelhi/, along with
this and other related cables in text format.

MULFORD