A short analysis of the Pay Hike 2014

By Phub Dorji

As the People’s Democratic Party rose to power in 2013, the people who voted them into power, had the fantasy that with its promises, a much liberal Economy will be put in place. The previous government’s approach to Economy was seen as very conservative with limited Business Vision. Where the previous government did show their business vision, it was seen as a risk too many and the new government, at the helm of power, reversed projects like the Bhutan Education City where close to 150 Million Ngultrums had already been spent.

This paper is one of observation about the Bhutanese economy and the path it is headed down. As the inspiration for this paper is the recent list of recommendations by the Pay Commission, it will focus on the pay raise and make observations thereon. Since the paper’s targeted audience is the lay public; the author has seen it fit to reduce the figures mentioned. And the other Economic ideas that lay crucial to this paper, the author has explained them in terms understandable by the average Bhutanese.

As the PDP rose to power, most observers noted that it was a populist government that lay its principles to what the people wanted. It was criticised for the lack of a founding idea; for the previous government it had been the concept of a sustainable development guided by GNH.

In 2014, the pay commission at the nomination of the PM came up with a list of pay hike recommendations that seems unpopular among the public. The highest of pay revisions was provided to the PM who receives a 131% hike on his salary that had been set in 2009 (A very short 5 years back. In fact, given the state of economy, it can be said that a reduction in his salary had been in order.) The general civil servants receive a 20% increase. But the most surprising was the increase for the MPs who received raises in their benefits. But the Pay Commission was not all about raises as it recommended the liquidation of about 1000 pool vehicles currently being “misused” by the Government. The driver of a cabbie this author travelled in after the news was made public asked him what would happen to those who work as drivers to the 1000 government vehicles. Since, the author had not read the full report then, it was difficult to answer; firstly it was importantly to understand how many of those vehicles employed singular drivers.

Let us start by making our observation of the Pay Raise on the principles of GNH that it violates. Bhutan has been marketing the concept for years now and a lot of different countries around the world have bought into it. To start with, it is be reminded that the very basic founding principle of GNH is sustainable development. Sustainability isn’t just balancing Economic policies for the future; it is also about finding that sweet spot where wealth is distributed as fairly and equally as possible in the Economy. With this pay raise, the income of close to 3.6% of the Bhutanese population is increased (Civil Servants to population ratio) or close to 10% of the population (People in families of civil servants to Population ratio.) But the principles of Microeconomics (how you behave in economy that gradually builds up to form the behaviour of the economy) state that money isn’t stagnant and so, it travels from one person to another, and so, the other sections of the population are also benefitted. But the state of the Bhutanese economy as it is now is mostly based on invincible goods which is to say that most of our people make a living based on marketing goods that are essential for survival. As is common knowledge, Bhutan- whilst developing- is still heavily dependent on agriculture. Given the nature of agricultural goods, an increase in the salary of civil servants wouldn’t yield that much increase in the income of the other folks. This is because, food items are consumer products that face the lowest elasticity when it comes to changes in demand. Also, it is essential to remember that Bhutan’s agriculture is still very immature and its produce fail to meet the demands of its own public, so, even if the demand increases, there is very little chance of increases in supply in short run!

On the other hand, since the raise is only 20%, more than putting their extra monies in banks, it is likelier that the earners will use to buy more consumer products- this time, the products are non-essential and guided by trends in the society. What this means is, every one is looking to buy newer phones, newer computers, take fancier trips and so on. And this trend will now only accelerate because few people receive the raise and they use their money to indulge their consumer behaviour. This is analogous to two people walking side by side and pushing each other to walk faster towards a destination: consumerism!

Socially speaking, the rest of the population who are left out, are mostly made to remain unhappy because of unequal developments in the society! This is not GNH!

Inflation is, in simplest terms the rising inability of money to buy anything. This is most apparent in our Bhutanese society and it is also very fast. In 2008, a packet of betel nuts that had 5 servings would cost Nu. 5. Now, it has reduced to 2 servings for Nu. 5. This happens because as the business owners in the economy understand that civil servants have had their pays raised, in order to increase profit, the businessman increases prices for his services/goods. While inflation is vital to the growth of an economy, it is also the greatest enemy as slight increases in it, will cause vast changes to the structure of a society. In 2009 when the last government implemented a pay hike, the PM’s request to the business community had been to not allow for inflation to rise. However, this request was unheeded and inflation did rise. House rents across the country increased and the prices of products soared! There was very limited to what could have been done after the pay hike. However, it is essential to note that, it wasn’t completely disastrous as the economy is still limping forward. But, the author notes that more than calculated, it was a risk that ended with the whole country being lucky. The question now is to understand if it’ll be lucky the second time around.

Deflation is, in simplest terms, the rising power of money where very little money can buy a lot of things. In recent memory, the only time something came close to a deflation in Bhutan was during the time of the infamous “Rupee Crunch”. Unfortunately, the only power that deflation provides went to the Indian Businessmen who worked at the border towns. The scarcity of Indian currency meant that although the governments have an economic pact to maintain a 1:1 transaction ratio, in smaller terms, the businessmen raised the transaction fee to 1 INR: 1.2 BNU. With this, for every 1 INR, anyone who had Indian currency, they made .2 Ngultrums more. This apparent power given to INR is an example of deflation. Deflation and Inflation can maintain the vigour of an economy by ensuring that money does not gain or lose too much power in small terms.

As must have become apparent by now, inflation is caused by the increase in income of a lot of people instantaneously as will be when the pay hike comes into power! The problem with inflation (more than what must be very clear by now) is that, if people who have increased incomes don’t spontaneously invest into the economy in non-liquid assets (infrastructure, etc), it can be viewed suspiciously as a sign to tell us that these people don’t value the goods/services of the market in equal terms as the rest of the population. This means, that money- which is a personification of trust and equal valuations loses its own value within a society. So that now, people with more money don’t think of it as importantly as would someone with no/little money! This creates a rift in the society that can lead to the formation of classes; mostly the bourgeoisie and the proletarian.

As it currently stands, Bhutan is in a “hangover” from its feudal times and so, while capitalism is beginning to take hold, there is no clear formation of classes. If Bhutan does decide to fall into the pit of a greedy capitalism as most of the world has, it will be known that, it was as a result of accumulation of a lot of economic mistakes on the part of the government. It must be known that Bhutan had a choice of which road to lead itself on, and it chose the wrong path!

As is the case with most developing economies, Bhutan has a lot of debt on its hands as of now. In fact, one of the platforms the present government ran on was the amount of debt the previous government had accumulated. So it seems confusing that a government that is larger than life in a small country can be so visibly hypocritical in its standing! Bhutanese debt is forever increasing it seems as of now.

Most Civil servants make their residence in popular and large towns like Thimphu, Paro, Phuntsholing, etc. Also, most businesses are found in these places. So, when the pay hike becomes active and most money is spent in these towns, development is accelerated here. But since an Economy is essentially a zero sum game due to the limited total budget, developments in already urban settings come at the expense of rural areas. There is no stronger motive of Rural-Urban migration than economic. The dangers of migration to urban settings is self evident and standing. But more covert dangers lie at their end. To start with, rural-urban migration has been found to cause brain draining in rural settings. All of this is well documented in case of Bhutan (Like Zhemgang 2006.) Brain draining is not only limited to emigration to other nations and of people with professional skills. In terms of small agrarian economies like Bhutan, it can be used to mean unskilled labor moving from employment opportunities. This leads to well document decrease in work and produce efficiency of agriculture. This is made worse by the fact that the government has already reduced the percentage spendings in Agriculture for the next five years (11th FYI, 2013) As the supply of labor in urban areas increase, even with no increase in demand, there is a slight rise in the total employment statistic. But most of these increases happen in secondary and tertiary industries. This process, normally called Industrialisation is actually an indicator of a developing nation. However, given the fact that this process will be accelerated by actions like the pay hike mean that Bhutan will have very less time to prepare itself. Moreover, Bhutan has always had a lot of regulations in these two industries (it is a consequence of GNH). With more pressure to solve unemployment, the government will have to reduce regulations and loosen sanctions on manufacturing and service industries. This is a highly dangerous thing as, it can lead to the formation of an Industrial class of businessmen whose precedent have been set by those in other developed countries. Tourism will have to regulated less, tariffs will have to be reduced which provides the added confusion of if we want more money from less people or less money from more people.

At the same time with more people coming into urban settings, these cities tend to get overcrowded. And while unemployment’s disastrous effects are apparent for all to see, what is more secretive is the increased trend of consumerism in those areas. With the coupled effect of reduced employment, export of agricultural produce and increased import of consumer products, the trade deficit which is already overwhelming increases. As time runs out on loans and debts and deficits, the country will have to decide between liquidating its assets and allowing for less “fabulous” FDI ventures.

Whilst it may seem that most of these words are speculative and based on predictions made from empirical and crude data, it must be understood that economics is a large science and the best that we can do at any given moment is assume the small gaps and predict the bigger ones!

But what can we do?

First of all, let us examine the Bhutanese constitution. While it is wonderful piece of document produced from years of consultation and research from other sources and our own, there are some flaws in it. For this Pay Hike, a clause that can be added to the constitution is one that states that any Parliament in the Kingdom of Bhutan will not be allowed to pass bills concerning their own pay and benefits. Instead, each Parliament should be allowed to only pass those kind of bills for the next. This will ensure that no one who is put in a power of position does so guided by greed. Some people have noted that the increase in the pay is one of the reasons why “smarter” people choose to go into politics and that, a country needs its smartest minds leading it. It has also been noted that Business communities- with more money can control the actions of politicians if the latter aren’t paid as much. The first point is valid- but not for a country that markets Altruism. The author understands that trusting for Altruism from politicians seems naive, but it must be understood that “smarter” minds need to be educated in morals that teach them things more important than money. It is possible to do so, because throughout history, “smarter” minds have always been guided by passion not money. Scientists are never paid that well, however they still maintain their quest because of the passion they possess. If the Politicians aren’t guided by passion, what good is there to put them in powerful places? The latter point is almost farcical as it assumes that there is limit to a person’s greed if it exists in the first place? In fact, years of research and experience will show that it is the top 10% who try to increase their profits exponentially every term.

FDR- the greatest US president of all time, once proposed the idea of a Maximum wage. We are all aware of the minimum wage which is the least legally allowed wage for a person. For Bhutan, it has been set at Nu. 165/day. Maximum wage is therefore the maximum legally allowed wage for a person working in the Kingdom for Bhutan. The author notes that Maximum wage in this sense will not apply to the business community. Since the public has made it clear that it wants its brightest minds as its leaders, the maximum wage can be given to the Prime Minister and his cabinet and maybe even the MPs. Setting up a maximum wage ensures that more money is left in the hands of a few and therefore it increases the rates of a deflation. The maximum wage is always monitored as a factor of the minimum wage, so that if any changes in maximum wage is attempted, the minimum will also have to be altered. Minimum wage, if increased ever, means that more money is in the hands of the many at the bottom so that inflation is increased. Therefore, a strict maximum wage law will ensure three things: 1. A veritable and fair wealth distribution in the society. 2. Combined with suggestion number 3 (in the following paragraph), creation of classes is not allowed. 3. Deflation from Max wage and Inflation from Min Wage gives the market a strong controlling factor that does not allow it to easily crash.

A newer tax system. Lets face it, Bhutan has stop being a donor-driven country very soon. A good way to start on a journey to becoming economically self reliant is to introduce a stronger tax system that will tax the richer heavier. Most “successful” countries like Germany, France, Nordic states, etc have a wonderful tax system where the richest are taxed very heavily. When America was the best Economy in the world, the thing that made their economy so strong had been their tax system where it wasn’t uncommon to tax the richest 90%. If such a tax system (not necessarily one where the max tax bracket is taxed 90%) is instituted in Bhutan, not only will it stop Politics from being run by a lot of money (taxing the business communities higher) but also, richer will stop becoming more powerful thereby removing the dualistic concept of money and power. However an argument for this form of tax system needs to be more refined and hence will be discussed in other articles.

Another thing the author suggests is that instead of allotting million Ngultrums to each MP for vehicles, the government can institute a practice of coupons or tickets for these MPs. There coupons will allow for any MP and 4 of their entourage members to travel anywhere in this country using the existing public transport system. This isn’t provocative but instead a serious suggestion.

However, not matter what is done, the most important stakeholders in this issue has to be the public themselves. The author notes that public dismay is widespread on social media. However, the next step has to be for the people to do what is necessary- and legal- to not allow for the Parliament to pass this bill. As this article stands a small prophecy to, if the pay hike commences, Bhutan will face troubles economically and politically!

Adopted from writer’s blog