Gross National Happiness and Foreign Direct Investment in ... · Gross National Happiness and Foreign Direct Investment in Bhutan 260 Happiness, they also act as the guiding principles

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Gross National Happiness and Foreign Direct Investment in Bhutan By Saugata Bandyopadhyay

Introduction Bhutan is one of the landlocked countries in South Asia along with Nepal, Laos, and Mongolia, and also among the low-income countries of the world. Like other Least Developed Countries (LDCs), Bhutan remained largely dependent on bilateral and multilateral aid for her development strategies. However, since 1990 total Overseas Development Assistance (ODA) in the LDCs has dropped by more than half and Bhutan will also not be an exception to this trend. Much greater importance is now being placed on alternative sources of capital to finance national development (ECOSOC 2000) and Foreign Direct Investment (FDI) emerges as the largest source of foreign private capital reaching developing countries. If we talk about Gross National Happiness (GNH) of Bhutan, we have to talk about economic development of Bhutan as measured by GDP and the economic development requires investment and capital formation. Investment may be either from the internal capital formation of Bhutan or it has to come from abroad either in the form of grant, aid, loan or FDI. Another important factor is that investment does not only mean fund inflow but also inflow of technology, knowledge and expertise without these, investment in capital project will go down the drain. FDI is the most important form of investment that brings together the required capital fund and also technology, knowledge and expertise. In this paper, I will only focus on the effect of Foreign Direct Investment (FDI) in the sustainable development of Bhutan to achieve GNH in the long term. The paper will try to analyse the policy environment required for attracting FDI in Bhutan as a landlocked country, the present FDI policy environment and FDI portfolio and potential of Bhutan before developing a FDI strategy plan. Finally, the paper will try to establish linkages between FDI and GNH in terms of a normative model.

GROSS NATIONAL HAPPINESS In the late 1980s, His Majesty King Jigme Singye Wangchuck, the fourth king of the Royal kingdom of Bhutan, propounded a unique concept of the maximization of Gross National Happiness (GNH). The concept of GNH is distinctively Bhutanese and new in the conventional theories of development economics. The concept has its roots in the Bhutan’s Buddhist traditions that human sufferings can be avoided by the adequate provision of satisfaction of four necessities

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– food, shelter, clothing and medicine but ultimately satisfaction/ happiness is attained through a sense of material detachment and spiritual fulfilment. In simple terms, the concept of Gross National Happiness underlines that development of a country has many more dimensions beyond those linked to Gross Domestic Product as defined by the modern economics. Moreover, development should be viewed as a process that seeks to maximize happiness rather than economic growth. The concept places people at the epicentre of all development efforts and it recognizes that people as an individual has material, spiritual and emotional needs. The concept of Gross National Happiness rejects the notion that there is a direct and close relationship between wealth and happiness. However, in the words of Nobel Laureate economist Amartya Sen, if such a relationship existed, a grumbling rich man will not be less happy than a contended farmer. As it is experienced that those in the richest countries are not necessarily the happiest in the world. Thus, happiness may be subjective but it is enduring. Let us now look what the word “Gross National Happiness” connotes. Gross reflects “totality and holistic” approach, National refers to Bhutanese Nationals across classes and Happiness refers to prosperity and fulfillment within the cultural, social and environmental boundaries. Thus, the concept of GNH is more totalistic and holistic in terms of approach and it relates the focus of the development of the country to the fulfillment of the aspirations of all the nationals of Bhutan across the board while promoting and preserving the rich social, cultural and environmental possessions of Bhutan. The concept brings in a paradigm shift in the focus orientation of Government Policies from the money side to the human side of the development. As an objective the concept has been very unique in approach. The complexity starts while attempting to detailing a roadmap for achieving a GNH and setting measure sticks to delineate in clear terms the progress path and achievements. The concept is so qualitative that it is difficult if not impossible to develop quantifiable milestones for achieving a sustainable level of National Happiness. Before we proceed further it would be wiser to look into the efforts at the government level to broad base the concept of “Happiness” to set as the basis for all future fiscal, monetary and development policies of Bhutan. According to National Planning Commission of Bhutan, the multi-dimensional character of the concept lends itself to many priorities but the most important priorities for achieving GNH can be classified under five thematic headings that provide powerful objectives as follows: human development, cultural and heritage, balanced and equitable development, governance and environmental conservation. These five main objectives not only give very tangible expression to the central tenets of Gross National

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Happiness, they also act as the guiding principles for future development, sovereignty and security.

Human Development To maximize the happiness of all Bhutanese and to enable them to achieve their full and innate potential as human beings within the framework of traditional values and ethics. This means achieving sustainable improvements in standards of living, the quality of life, and levels of well-being and welfare.

Culture and Heritage To articulate an unambiguous cultural imperative in the nation’s future development that recognizes, promotes and inculcates an appreciation and awareness of the importance of the nation’s rich cultural heritage and rich fund of social philosophy. This involves meeting spiritual and emotional needs, maintaining distinctive Bhutanese identity, and cushioning from negative impacts of modernization.

Balanced and Equitable Development To ensure that the benefits of development are shared equitably between different income groups and regions and in ways that promote social harmony, stability and unity and contribute to the development of a just and compassionate society.

Governance To further develop national institutions, human resources and system of governance in ways that enable us to reduce our dependence on others, to manage an increasingly complex process of development, and enlarge opportunities for people at all levels to participate more fully and effectively in decisions that have a bearing on their lives and livelihoods and the future of their families, communities and the nation. Institutional development must also promote transparency and accountability, and be supported by the force of law. Environmental Conservation To ensure the development choices embody the principle of environmental sustainability and do not impair the biological productivity and diversity of the natural environment.

Foreign Direct Investment (FDI) Foreign Direct Investment (FDI) refers to “long term investment of a “parent” enterprise from “home” economy into a subsidiary, affiliate, or branch enterprise in a foreign “host” economy. FDI flows include assets, property (e.g. parent company’s technology, branding, skills) and/or capital investment (greater than 10% of total shares in a company), reinvested earnings (retained profits in an affiliate, or intra company loan/debt transaction, long term borrowing/lending) between firm and affiliate enterprises. In the sphere of International


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economics, the most significant growth has been of Multinational or Transnational Corporations(TNCs). FDI is predominantly the investment flows of these TNCs in a Host country. The main criteria for FDI are ‘controlling interest’ and ‘long term interest’. If it is seen from the point of LDCs, technology inflows may be the only foreign inflows instead of capital. As per the perception, foreign direct investment are believed to increase domestic capital formation, to augment host country’s stock of technology and managerial know how, to improve access to export markets and to provide a comparatively stable source of external financing. Gross National Happiness does consider economic growth as an important first step. GNH starts where GDP ends. Economic growth as measured by GDP is a precondition for attaining governance, social and cultural standards, environmental conservation and the overall happiness. Thus, GDP is an important means for achieving higher goals, GNH. The challenge is to strike a balance between material and non-material dimensions of development. Gross National Happiness must be translated into a model so that conventional GDP can be translated into non-material components of developments contributing to national happiness and well being and this process must ensure that non-material aspects are not overwhelmed by the negative forces of modernization. It is also to be noted that the concept of Gross National Happiness is a dynamic one and is evolving with the time, keeping the main focus on the human development and environment. So far GNH is more in the mind of the Bhutanese policymakers and on the paper as a theory than as an Economic Model. But one thing is clear that GNH requires a long term rather than short-term perspective of development. In this section, I will try to develop a normative model of GNH from the perspective of FDI linkages. In the model, I will consider the level of FDI in Bhutan, the resultant GDP per capita of Bhutan, externality effect on Human and Social Development measured by Human Development Index(HDI), and the domino effect on environmental conservation as captured by Environmental Development Index(EDI). The total effect on the society in terms of fulfillment of aspirations given the GDP level, HDI level and EDI level as fuelled by FDI will optimize the GNH. I have used four graphs in the four quadrants to capture the linkages between FDI and GNH through the process path of GDP per capita (purchasing power parity - PPP), HDI and EDI. In the first graph the effect of FDI per capita is reflected on GDP per capita. The underline law is that a unit of FDI per capita will induce a more than proportionate growth in the GDP per capita (β>∝) and this is reflected


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by the steeper slope of the GDP Line (β/∝ > 1). This is mainly due to the reason that FDI creates production externalities on the Domestic production and introduces a multiplier effect in the economic system. In the second graph, I have extended the GDP per capita to capture its effect on HDI. It may be seen that given the same level of GDP per capita, a higher effect on HDI (K∝ > β) can be achieved and this is also reflected in the slope of the HDI Line ( but β/∝ > β/ K∝ i.e the slope of GDP line is higher than that of HDI line) where K is a constant multiplier and greater than 1. This also shows that an ∝ FDI per capita can translate into higher level of K∝ HDI. Now let us briefly understand this relationship between GDP per capita and HDI. Figure 1

e 1

GDP/cap

FDI HDI

GDP/cap

HDI

EDI

HDI Line

GDP Line

EI Line

FDI

GNH ∝ kα

kα α

β β

mβ

0.33β+0.33β/k

GNHI


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HDI is based on three factors – Life expectancy at birth measuring the health factors in the economy, Educational Attainment measuring the human awareness and human quality, Standard of living as measured by GDP per capita(PPP in $). In the HDI, Educational Attainment of the economy, a compound variable, which is measured by adult literacy(with two-third weight) and combined enrolment ratio reflecting the combination of primary, secondary and tertiary enrolment ratios( with one third weight) Now each of these three indicators are calculated in the form if sub-index using the interpolation formula with the following range values for each of the indicators ; Indicators Range Value

(Minima- Maxima) Bhutan’s Level

Life expectancy at Birth 25 years – 85 years 66.1 years Adult Literacy 0% - 100% 54.4% Combined Enrolment Ratio

0% - 100% 44.0%

Real GDP per Capita(PPP $)

PPP $ 100 – PPP $ 40000

1534

HDI is the simple average of these three sub indexes. And the Bhutan’s HDI is 0.550 in 2003 ranking 137th out of 175 countries in the world, moving into as per UNDP’s Human Development Report 2003. The component value of index are as under : HDI(0.550) = {Life Expectancy Index(0.683) + Education Index (0.507)

+ GDP Index(0.460) }/3 Thus it may be observed that in the HDI the pull factors are Life expectancy Index and Education Index. Thus given a GDP per capita (standard of living) it will have higher effect on the other two factors Health and Education leading to its effect on HDI. With the improvement in standard of living, the effect on the Health and Education will be at an increasing rate. Now I will try to develop an Environmental Development Index(EDI) on the same format of using range values and interpolation formula. EDI will have five positive indicators : Green Cover Index, Environmental Health Index, Pollution Control Index, Urbanisation Index, and Cultural and Heritage Index; and one negative indicator : Environmental Pressure Index. Green Cover Index will be the combination of Forest Cover Index, Biodiversity Index, Watershed Index. Environmental Health Index will be the combination of Safety Drinking Water Index and Healthy Sanitation Index. Pollution Control Index will be the summation of


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Air Quality Index, Water Quality Index and Industrial Pollution Control Index. Urbanisation Index will sum up Growth Centre Index and Electrification Index for equitable and sustainable development. Cultural and Heritage Index will have to be quantified in terms of growth in number of heritage sites and cultural expositions. Pressures on the natural environment will be fuelled by a complex array of forces : population pressures, agricultural modernization, hydro power development, mineral, development, industrialization, urbanization, sewage and waste disposal, and the provision for physical infrastructure. These are the environmental destabilizing factor and as such have been considered by me as a negative factor. This is taken in the EDI as a negative factor. Environmental Pressure Index is the sum of Population Growth rate and Industrialisation rate. In the third graph the HDI level is extended to relate to EDI and it is shown that HDI (nee GDP nee FDI) can create a positive EDI but a less than proportionate rate due to the presence of negative pressure factor as discussed above. The same level of HDI will achieve a relatively lower EDI (K∝ > Mβ) and this is also reflected in the flatter slope of the EDI Line (β/∝ > β/K∝ > Mβ/ K∝ i.e the slope of GDP line is higher than that of HDI line) where M is a constant multiplier and greater than 0 but less than 1. This also shows that an ∝ FDI per capita can translate into higher level of m/K∝ EDI but less than HDI level. Finally by extending the FDI level to the fourth graph, we can link FDI Index with GNH Index (GNHI). The GNHI is the average of three main indices GDP Index, HDI , and EDI. It may be seen that the same ∝ level of FDI will achieve manifold higher GNHI { 0.33β(1+1/k + m/k) > β> Mβ> ∝} and this is also reflected in the steepest slope of the GNHI Line {0.33β(1+1/k + m/k)β/∝ > β/∝ i.e the slope of GNHI line is higher than that of GDP line}. I have used a simplistic model to present the case that Capital formation(FDI being a catalyst) in the economy is a must for achieving the GDP growth, the Human Development in all its totality and Environment Conservation and Development. It establishes a model that a small level of continuous impetus in the form of FDI can bring in manifold increase not only in the Economy of the Country but also a very positive effect on the overall society in terms of Health factors, Education reach and quality, standard of living, conservation of Culture and Heritage, awareness on Environment preservation, proactive control on Pollution, self-check on population growth, propagating Gender Equality and spreading the feel good factor across the country and among people without being restricted in pockets. If this process continues then Bhutan can think of optimising the level of Gross National Happiness.


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FDI and its effects on Bhutan

1. Effect on National Economy FDI can contribute to GDP, Gross Fixed Capital Formation (total investment in a host economy) and balance of payments. FDI can also contribute toward debt servicing repayments, stimulate export markets and produce foreign exchange revenue. However, the impact of FDI will largely depend on the conditions of Bhutan, e.g. the level of domestic investment/savings, the mode of entry (merger & acquisitions or Greenfield (new) investments) and the sector involved, as well as a Bhutan’s ability to regulate foreign investment. 2. Effect on Social development FDI can help stimulate employment, raise wages and replace declining market sectors. However, Bhutan from the point of GNH, should ensure that benefits like employment and trainings are given to the deserving ones and not only to typically wealthy elites or with an urban emphasis. Cultural and social impacts may occur with investment directed at non-traditional goods which may affect the cause of GNH. This needs to be balanced and properly directed. 3. Effect on Infrastructure development and technology transfer “Greenfield” investments into new business sectors can stimulate new infrastructure development and technologies to the Bhutanese economy. These developments can also result in social and environmental benefits (ECOSOC 2000). Investment in research & development (R&D) from parent companies can stimulate innovation in production and processing techniques in Bhutan. Foreign technology or organisational techniques may actually be inappropriate to local needs, capital intensive and have a negative effect on local competitors, especially smaller business, which needs to be factored. 5. Impact on Domestic Industry FDI can create “Crowding in” effect that can stimulate growth in domestic businesses within the national economy. In contrast, Bhutan should avoid the “Crowding out” effect where TNCs may dominate local Bhutanese market, stifling local competition and entrepreneurship in specific sectors due to Exclusive production concessions and preferential treatment to TNCs (ECOSOC 2000). 6. Impact on Environment factors It may be difficult for the Royal Government of Bhutan to regulate and absorb rapid and large FDI inflows, with regard to regulating the negative impacts of large-scale production growth on social and environment factors (WWF 1999). In the short term, being a low-income economy Bhutan will have less capacity to mitigate environmental damages or take protective measures but since starting late the country can take care of these in the medium and long term. However, with proper Industry selection, FDI can also create international standard compliance of environmental norms.


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7. Effect on Sustainable Development FDI is to take a greater role in building sustainable development of Bhutan’s economy, national legislation can support better investment security for local markets, fair competition and corporate responsibility through defining equitable, secure, non-discriminatory, transparent investment practices. There is a concern that increased regulation could deter new foreign investors. However, evidence such as in Eastern Europe, also shows that tighter regulation of corporate, environmental and labour standards has not affected FDI growth (ECOSOC 2000). Box 1: Factors affecting FDI in Bhutan and the equation Now let us try to bring the above factors in an empirical model adapting and extending the model developed by Yinggi Wei and Xiaming Liu(2001), to measure the effect of FDI in a LDC, say Bhutan FDI = f( RFR, RGDP, RCCR, RBOT,RIR, RCR, TCS,GP) Where, RFR = Ratio of real Bhutanese Factor rates to home country real

Factor rates RGDP = Ratio of real Bhutanese GDP to real home country GDP RCCR = Ratio of Cross Currency exchange rate between Bhutan and home country RBOT = Real Bhutanese Balance of Trade with the home country(i.e Net Real export outflow and import inflow) RIR = Ratio of Bhutanese lending interest rates to the interest rates in the home country RCR = Ratio of country risk rating for Bhutan to country risk rating of the home country TCS = Total Cultural similarity between Bhutan and the home country GP = Geographic Proximity of Bhutan to the home country Now let us convert this linear relationship into log-linear form since any extreme values of FDI and variables can be counteracted statistically by logarithms : LFDIit = β1 LRWRit + β2 L RGDPit + β3 L RCCRit + β4 L RBOTit + β5 L RIRit + β6 L RCRit + β7 L TCSit + β8 L GPit + Vit where L = Logged Values Home countries (i) = 1, 2, 3, …., N Time (t) = 1, 2, 3,…., M Regression Co-efficients βi = Measures FDI elasticity in relation to variables Vit = Composite term both intercept and error term = ui + εit ( where u is a constant and εit is the usual error in the regression and is assumed to be normally distributed with mean zero and constant variance)


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It may be observed that FDI can have both positive and negative impact on the various facets of development of Bhutan. However, only the positive impact of FDI can bring about series of linked development for achieving a sustainable level of GNH. Now very briefly I will focus on the country characteristics of the Bhutan that will determine the nature, structure and flow of FDI into the country. The main characteristics of the LDCs that can stand out as the FDI determinants in case of Bhutan has been captured in terms of a function as given in Box 1.

Lessons from the Neighbours of Bhutan - FDI policy, incentives and framework The neighbouring countries of Bhutan viz., China, India, Singapore, Thailand, Philippines and Malaysia, have established that FDI can be a powerful means to supplement the development strategy of the country. These countries have developed numerous policies to attract, control, and utilize FDIs towards economic growth retaining simultaneously their local economic autonomy. In the nineties, all these countries have been registering a GDP growth rate of 5- 10% p.a. on an average and Table 2 shows that surge in the FDI flows also coincide during the same period. In case of Indonesia and to a certain extent Malaysia witnessed economic turmoil due to Asean Crises in 1997, which also affected FDI inflows adversely. On the other hand, China registered a spectacular GDP growth of over 12% in 1990-94 considering the large GDP base mainly due tremendous 10 times increase in FDI inflows during the same period. This shows the correlation between the economic development and FDI.


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Table 2: FDI inflows in the neighbouring countries of Bhutan over last three decades

INDICATOR FDI Inflows

YEAR

COUNTRY_GROUP

1970 1975 1980 1985 1990 1995 2000 2001

China - - 57 1,659 3,487 35,849 40,772 46,846

China, Hong Kong SAR

50 377 710 -267 3,275 6,213 61,938 22,834

China, Taiwan Province of

62 34 166 342 1,330 1,559 4,928 4,109

India 45 85 79 106 237 2,151 2,319 3,403

Indonesia 83 476 180 310 1,092 4,346 -4,550 -3,277

Malaysia 94 350 934 695 2,611 5,816 3,788 554

Philippines -25 98 -106 12 550 1,459 1,241 1,792

Singapore 93 292 1,236 1,047 5,575 8,788 5,407 8,609

Thailand 43 86 189 164 2,562 2,068 2,813 3,759

Source: UNCTAD (2003) The most common characteristics of foreign policy of these countries is the remarkable degree of continuity in creating a stable FDI environment with consistent and fair application of the FDI policy. In addition, the existence of sound infrastructure facilities and favourable labour laws. To attract FDI Bhutan does not need to have low labour cost but disciplined labour force. This is the reason why Malaysia is preferred over Indonesia and Philippines. Now if we consider India at this stage we will get the idea why India in spite of attracting FDI since 1948 lagged behind its potential – the main reasons are lack of continuity in FDI policy, poor infrastructure facilities, restrictive labour laws and other industrial and commercial laws. All these countries have utilised tax policies to ensure the maximum volume of FDIs committed for a maximum period of time. China is the most attractive because of investor friendly tax policies followed by Singapore, Malaysia, India and Philippines. The next important issues are tax treaties for avoiding double taxation incidence, which are most important for foreign trade and FDI. In tax treaties, India is leading followed by China, Singapore and Philippines. The next most important factor is the political system and stability of the Government. India and China have almost the same economic conditions with same pattern of economic problems up to 1980s when India is ahead of China in terms of FDI inflows, but the political system is radically different – China is the world largest communist country and India is the world largest democracy. The policy implementation has been easier in communism than in democracy. China opened up her economy in 1978 while India took another 13 years to liberalise. The other factor is the systems of administration


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– China has a highly decentralised system while India has a centralised administration with a complex Centre-Sharing Power sharing matrix. The success of China, Singapore and Philippines is due to the command nature of their economy which allowed them to make quick changes and elimination of unnecessary bureaucratic red-tapism. In India the possibility of quick changes are limited.

Bhutan and FDI At this stage it would be appropriate to evaluate the possibility of FDI attractiveness of Bhutan and also to understand how FDI can be used in the economic development of Bhutan and finally in the achievement of unique economic philosophy of “Gross National Happiness”. Bhutan does not attract much foreign direct investment in spite of policy reforms initiated in the 1997 in line with India and Nepal to attract FDI. This is partly because a small, least developed, landlocked, mountainous country has little to offer to investors. Still, other similarly situated landlocked countries are receiving more investment than Bhutan. By now, it has been established that there are many issues between the cup and the lips when it comes to FDI. Even if a country copies all the best attractive incentives for FDI it may not be able to attract FDI and achieve the economic development goal. FDI policy needs to be country specific taking into account country’s inherent characteristics and regional competitiveness as explained earlier. It is also important to understand that with the emergence of a large number of claimants of FDI in South and South East Asia, Latin America and Africa, wooing FDI today is highly competitive game and no country can set her policies in isolation from her neighbours. In case of Bhutan, we will see the attractiveness and competitiveness of Bhutan in comparison to her closest neighbour Nepal (also having some political dissension), another LLDCs. Bhutan has the potential to improve her FDI performance. The main advantages of Bhutan are :

1. Privileged access to a neighboring country like India and Bangladesh with large markets; If FDI can reach Indian shore, given the attractiveness it can also travel a few miles to Bhutan;

2. Best Political stability in the region as compared to India, Bangladesh, and Nepal

3. Almost negligible social problem with strong social bond and patriotic feeling

4. Corporate Like Government structure with non-existent political party system and Low corruption level. The country’s political set-up is gradually moving towards participative representation of the common people in the country’s assembly with decentralized development and authority structure.


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5. Least Power Cost in the region equivalent to INR 0.90 per KWH and abundant power supply

6. A low wage, trainable English-speaking workforce; 7. A flourishing local entrepreneurial culture in both small and

large business; 8. A growing international recognition in terms of tourist

landmarks 9. Unique temperate climate suitable for work and also ideal for

cultivating medicinal herbs and horticulture with great market potential.

These advantages can make attractive investment packages. However, there are serious weaknesses in the investment framework that warrant prior attention. There is scope for tax, regulatory and administrative reforms. The challenge before Bhutan is to compete with Nepal and is to put in place an investor-friendly business climate that will complement her small bureaucracy. There is need for an economy-wide shift from red tape to red carpet. Table 3: FDI Comparison in LLDCs in South Asian Region Per Capita

GDP, 1999 (Dollar)

Population, 1999 (Thousands)

FDI 1989-1994

US $

FDI 1995-2000

US $ Lao PDR 259 5297 19.0 72.2 Mongolia 345 2621 6.9 25.6 Nepal 210 23385 4.3 11.0 Bhutan 1534 678 2.0 3.9 In terms of per capita GDP (PPP) and population, Bhutan is well ahead of Nepal and other LLDCs. However, still it failed to attract FDI inflow. Interestingly, Nepal formally opened up the economy in 1990. This has resulted in major inflow of FDI from India using the Bilateral Trade Agreement with India. The other major source countries are USA, and China. FDI Inflow History in Bhutan In sharp contrast, Bhutan has not been able to attract the private sector FDI inflows from India despite having the similar Bilateral Free Trade Agreement with India as that of Nepal. The country rather prefers grant and aid from Government of India and also does not recognize any inflow from India as FDI. There has been some problem in the definition of FDI in Bhutan. However, in this paper I will try to focus on all those instances involving Investors from outside Bhutan without actually considering the official database.


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(Nu in millions) 1990/91 1991/92 1998/99 2001-02 FDI Inflows 7.00 22.32 45.20 86.80 Source: Selected Economic Indicator, Royal Monetary Authority of Bhutan March,2003 If we analyse the FDI inflows in Bhutan it would appear to be erratic and irregular in nature. The flows are not automatically emanating from policy attractiveness but mainly case specific and supportive in nature with Government’s direct involvement and approval. In the absence of specific policies and supportive bureaucratic structure, FDIs are only available to those who have access to the higher echelon of the government.

FDI instances in Bhutan Financial Sector Bank of Bhutan – The first instance of foreign direct Investment in Bhutan is the participation of State Bank of India in 1971 to develop Banking Sector in the country. SBI invested in 40% equity while RGOB invested 60%. BOB has become Bhutan’s largest Commercial bank with 27 Branches Network represented in all dzongkhags of the country with 438 employees and a profit level of Nu 243.80 million in 2001 with over Nu 10 billions in assets. The management of the company was handed over to Bhutanese Nationals in 1997 by SBI and it also reduced its holdings to 20%. Bhutan National Bank - The second instance of FDI in financial sector was in the case of Bhutan’s second Commercial Bank. The equity participation and technical assistance had been provided by Asian development Bank and later participated by Citibank, in 1997/98. The ADB held 21% while Citibank held 19% aggregating a FDI investment of up to 40%(even by Indian Standard the level of 40% FDI in financial sector is too high till 2001). The balance shares were widely held by private sectors and individuals while Government held only 27%. In a span of 6 years the Bank has established itself as the fastest growth oriented institution in the country and achieving an asset size of half that of BOB’s. In 2001, Citibank withdrew by offloading its share to NPPF. BNB’s shares are most actively traded scripts in the bourse with over very high price-earning ratio. However, the impetus in the financial sector is not reflected in the other sectors of the economy as is normally expected. Another interesting trend has been observed that after the proper establishment, the Government encouraged reduction in the Foreign Investor’s holding almost the same mistakes committed by India in 1970s. Manufacturing Sector Bhutan Ferro Alloys Limited (BFAL): BFAL was established in December 1990, and began operations in 1994. The company is a


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joint venture among RGOB (30% equity participation), Tashi Group of Companies (the number one Business Group of Bhutan) holding 32% and Marubeni Corporation of Japan (holding only 12%). Marubeni invested Nu 30 million. Utilizing Bhutan's low-cost electricity, hugely rich water resources, and abundant deposit of silica, in 2002, it produced 21,172 tons of ferro-silicon, 14 per cent more than the initial plan. Out of which the total shipment to India in 2002 stood at 20,830 tons with a sales figure of Nu 654 million and a pre-tax profit of Nu. 130 million. Beverage Industry In this segment, Bhutan witnessed FDI in the form of franchise activity and technical and operational support: Drangchu Beverages had been established in 1992 with a franchise agreement with Pepsi India Ltd. The bottling plant was setup and the operations have been carried with the complete assistance of Pepsi. Around 90% of the production is sold to Pepsi India Ltd as part of Distribution agreement. This company was set up with the members of the Royal family. Bhutan Beverages Company Ltd had been established in 2002 with a franchise agreement with Coco-Cola Company Limited, USA. The company is promoted by Tashi Group. The bottling plant has been set up and started functioning in 2003. In this case also 90% of the production has been tied up for shipment to Eastern India as part of a distribution agreement with Hindustan Beverages Company Pvt Ltd (Coco-cola India). However, these are not considered as FDI in Bhutan by RMA in its statistics. Hydro-Electric Power Industry In case of Hydro-electricity projects, which are generally funded by Indian Government, “Build-Transfer-Operate” kind of FDI flows are observed. Chukha Hydro-electricity project (360 MW) – The first large hydro-electricity project funded by Indian Government by way of 60% grant and rest loan. However, the fund used to be directly paid to the selected Indian principal contractor by the Government. The Indian Principal Contractor did the planning, and construction. After Construction they transfer the plant to a Hydro-Power Authority specially established for the purpose. The operation and maintenance of plant remains with the contractor. In case of Chukha project, the principal contractor is Hindustan Construction Company Ltd. The project was commissioned in 1986. 90% of the power is exported to India at Nu 1.5 per unit. In this way India ensures supply of low cost power for the eastern and northeastern states and also assures her own Industries the project implementation order.


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Tala Hydro-electricity project (1020 MW) – After the successful completion of the Chukha project, Indian Government invested in the Tala Project which is three times the Chukha Project Capacity. The hydro-electricity project was funded in the same form. In case of Chukha project, the principal contractor is Jaiprakash Industries Ltd. The revised project cost is around Nu 37,250 million (as of 2002) and is expected to be commissioned by September 2005. As planned, the majority of Power generated will be exported to India at Nu 1.75 per unit. Kurichu HydroPower Project (60 MW) - Indian Government invested in the Kurichu Project in 1995. The hydro-electricity project was funded in the same form. In case of Kurichu project, the principal contractor is National Hydro Power Corporation. The revised project cost is around Nu 5,760 million (as of 2002). Three units of 45 MW have already been commissioned in 2001 and the final unit commissioned in 2002. The project is exporting the power generated to India at Nu 1.75 per unit Tourism Druk Group of Hotels: The only star hotel in Bhutan. This chain of Hotels was established by renowned Hotel Chains of India, Oberoi Group of Hotels. However, in 1990s, they left Bhutan by transferring the management and ownership to Tashi Group. After a long Gap in 2001, on a case specific basis, Government approved three FDI projects relating to hotel and resorts in Bhutan as follows: Bhutan Resorts Corporation Limited (BRCL) : The joint venture is between Bhutan Tourism Corporation Ltd(BTCL), leading tourism company of Bhutan and the famous Maha Aman Resorts of Singapore. This project is considered to be the largest FDI in the tourism sector with project cost of US $ 14 million. The project plans small luxury resorts in Bhutan for the “Celebrated Aman Yankees”. In the first phase, resorts will be established in Paro, Thimphu, and Punakha by 2003 with 72 rooms capacity. In the second phase resorts at Gantey Gompa, Trongsa and Bumthang will be established. Maha Aman will introduce 60% Equity. Thus Bhutan will be Aman’s 12th destination. Bhutan Eco ventures Ltd: This is a joint venture between Bhutan International Limited and the Como Hotels and Resorts, UK. The Como groups are known for their Halkins and Metropolitan Collection of hotels and resorts in UK. The company will establish a Five Stars Hotel, Hotel Uma Paro in Paro Town. The third approved FDI JV in the tourism sector is with Hotel Property Ltd of Singapore. However, no concrete plan is yet to be reported.


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Courier Service DHL Limited – DHL has established two offices at Thimphu and Phuentsholing. The most important fact to be observed is that all these instances of FDI are very irregular in nature and completely case specific and these are all contacted before the Government finally has come out with a FDI policy in December 2002. In comparison, if we look at Nepal then we will observe the flow of FDI in various sectors of the economy. The major Investments are in the Hotels, Manufacturing – Consumer goods, Engineering, Sugar, Paper, Jute, Tobacco, Beverages and Mineral Water, textiles, Garments and Leather. Interestingly, Nepal opened up Mining, Hydropower sector, Construction, Education and Health, Software, Air-service and Packaging. There are 292 foreign affiliates in Nepal. Foreign investors hold majority ownership in the affiliates. Another observation is that Indian FDI in Nepal is by way of equity participation at a very high level of at least 50% to 100%. It shows that without controlling Interests Indian Investors will not be interested. Thus, Nepal learned a lot from Indian experience and is opening up their economy for creating attractiveness and they have been partly successful in their policies. On analysis we shall observe that Nepal Tax structure is ahead of Bhutan in terms of structuring tax incentives for attracting FDI. Bhutan has to provide incentives in terms of Corporate Tax rates as it is shown in Table 4. In providing rebates, it should be made automatic and condition based and not dependent upon the whims of bureaucracy. The most important fact is that differentiation between National Industrialist and Non-National Industrialist should be removed and should be given the same status. Depreciation rate is one of the incentives for Industries to make Capital Investments and the rates prevailing in Bhutan create disincentives for the Industry. Tax Incentives need to be related to Employment, Investment, Research & Development, Backward Area Development, and Industrial Area Development. Tax Rebates and Tax Relief for New generation Industry and Export Oriented Industries need to be in place.


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Table 4: Comparison of Tax Structure of Bhutan and Nepal Nepal

(Regime from 2002) Bhutan

(Regime from 2002)

Corporate Tax Rate - Standard 25% - Financial Services 30% - Only Manufacturing

20% * Special Fee of 1% on all the above

- Only one tax rate for all Industries at the rate of 30%

Corporate Tax Rebates

- 10% rebate for local employment more than 600 workers in Manufacturing Industry up to 10 years

- 20 to 30% rebate for manufacturing industry in backward areas

- No Tax rebate for Industry

Depreciation rate

- 5 % for Buildings;

- 15%-25% for Other Assets - Accelerated Depreciation for Manufacturing Industry, power sector and infrastructure BOT

- 3% for Buildings - 5% for Plant &

Machinery - 15% for Other Assets - No Accelerated

Depreciation

Withholding Tax - 10% tax on dividends; - 15% on Foreign Service,

fees and Royalties

- 10% tax on dividends - 5% on Interest,

Royalties Rent, - 3% on Fees & Services

Like the FDI-pro countries in South and South-East Asia, Nepal has also entered into Double Tax treatments as exhibited in Table 5. While Bhutan could not enter into a single tax treaty till date even with the friendliest nation like India. Table 5 : Withholding Taxes in Nepal’s Double Taxation Treaties

Thus, without tax treaties, or even Tax Credit in the absence of tax treaties, there will be difficulty in attracting foreign investments. Especially the quantum of FDI will remain low and will not economically effective. The other important factor is the maturity and pro-activeness of the industry forum in Bhutan. The sole chamber of commerce, Bhutan Chamber of Commerce and Industries (BCCI) is still in its formative stage. In comparison Nepal has well established Federation of Nepalese Chamber of Commerce & Industries (FNCCI) in line with FICCI of India. FNCCI is very active and fully organised in terms of industry data collation and problems representation, industry


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development, guiding government in policy formulation, and incentives structuring. FNCCI has eight Bilateral Chambers of Commerce with Britain, France, India, Japan, Korea, Russia and USA for attracting the FDI flow from these Countries. Another concern area for foreign investors are the protection for their Intellectual Property Rights. It may be noted that all FDI attracting LDCs in the South Asian countries have in place legislative framework for Intellectual Property Rights and these countries are members of various international conventions on intellectual property protections. In line with this trend, Bhutan joined the 178-member WIPO in 1994, and now is considering first ratifying the Berne convention for the protection of literary and artistic works to give the Bhutanese products would receive international protection. Bhutan also acceded to the Madrid System for the International Protection of Marks and Member of Paris convention for Industrial property. Subsequently, Bhutan enacted the Industrial Property Act in 2001 in substitution of Industrial Property Regulation, 1997 for Trade Mark, Patents, and Industrial Design. According to the Act the patent is protected for 20 years from the date of application. Trade Marks validity will be for 10 years from the date of application. At the same time the Copyright Act 2001 was also enacted. Under the Copyright Act 2001, all literary

Box 2 : Conservation of Environment in Bhutan "Throughout the centuries, the Bhutanese have treasured their natural environment and have looked upon it as the source of all life. This traditional reverence for nature has delivered us into the twentieth century with our environment still richly intact. We wish to continue living in harmony with nature and to pass on this rich heritage to our future generations."

His Majesty the King Jigme Singye Wangchuck The National Environment Commission (NEC) was established as a National Environment Committee in 1989 as part of the Planning Commission under the Royal Command of His Majesty the King. During the 7th Five-year Plan (1992-1997), the NEC was given the mandate of "coordinating all environmental activities and monitoring the environmental impact of development". Long-term policy objective: To develop a path that will allow the country to meet the pressing needs of the people, particularly in terms of food, health care and education, without undermining the resource base of the economy. New industries, new agricultural markets and new forestry products need to be carefully developed with respect to their broader environmental ramifications. Medium Term policy objectives: To ensure that use of natural resources in Bhutan is sustained; biological diversity and essential ecological processes and life support systems are maintained Immediate policy objectives: Role of environmental adviser, Implementation of National Environmental Strategy through the National Environmental Action Plan; Institutionalisation of Environmental Impact Assessments; Enforcement of Environmental Assessment (EA) Act, 2000; Establishing water and air quality standards;


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and artistic works, which are original creations, are protected. They include books, articles, speeches, photographs, music, audio-visual productions, dramatic and musical performances, choreographic performances and other works created for stage productions, and works of fine art. The other area of concern for FDI investors in Bhutan is the urge of Bhutan for maintaining their unique culture and environment. This has also in a sense created restrictions, reservations and concern for foreign investment participation in Bhutanese Industries. The government need to clear these doubts and make the policy transparent and link it to the attainment of GNH. The Government should assure the foreign investors that if the environmental rules and regulations are complied with there should not be any worry rather this will also help the foreign investors in terms of productivity and work culture and also allow them to participate in a Green Environment Revolution.

Economic Liberalisation in Bhutan The Royal government has embarked upon a programme to gradually liberalise Trade, Industries and financial policies to encourage and facilitate the development of the private sector. As so far discussed, there has been an effort to create an enabling legislative framework. Starting in 1996, Government introduced Customs Tariff Schedule representing a significant reduction of customs duty on range of imports from third countries. To support trade liberalisation the RGOB introduced Foreign Exchange Regulations in 1997, removing several restrictions on foreign exchange transactions. An important element of the liberalisation process has been the development of legislations and transparent rules and procedures. RGOB has also focussed on policy rationalisation in different Sectors. Several legislations have been enacted and adopted to strengthen the legal framework. These, among others, include: Box 3 : Bhutan and WTO

Bhutan has finally decided to join the World Trade Organisation. In February 2003, Bhutan handed over the Memorandum on the Foreign Trade Regime (MFTR) to WTO. The commitment also calls for preperation in number of areas from the competent authorities.

It is afraid that Bhutan will invariably be swept along by the bigger powers and their larger interests. But Bhutan has no choice but to “belong” to this world organisation which calls the shots in global economic behaviour and, therefore, overall international relations.

Outside involvement and pressure need not necessarily mean a threat. On the contrary, Bhutan will be forced to raise the internal standards and will hopefully see a higher quality of trade and industry. Like Bhutan’s liberalised neighbour, India, or the more remote Mongolia, the country will enjoy a greater variety of all goods and services. Over the past few decades, the country has seen very little progress and now that the country is on the brink of change. The WTO membership, with all the requisite legislation, would probably provide some safeguards.


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• The Bankruptcy Act, 1999 • The Moveable and Immovable Properties Act 1999 • Companies Act, 2000 • Sales Tax, Customs & Excise Act 2000 • Income Tax Act 2001

The proposed legislations pending for enactment: Foreign Investment Act, Business Licensing Act, Occupational Safety and Health Act, Consumer Protection Act, Contract Act, among others. Now let us also assess the adequacy of these acts in the opinion of the Industry professionals as per the research carried in this regard. Source : Summary of Editorial in Kuensel, the national Newspaper December 6, 2002

The attitude is changing in Bhutan towards opening up, development and private sector. Bhutan in her 9th Five-year plan has kept high economic development target in pursuance of the Bhutan Vision 2020 and Millennium Development Goals.

Foreign Direct Investment Policy of Bhutan In a landmark decision on December 3,2002 the Royal Government of Bhutan approved the FDI policy 2002 that will provide the overall framework for approval and regulation of foreign direct investments in Bhutan.

“Foreign investment should broaden employment and training opportunities, allow technology and skills transfer, broaden the revenue base, and enhance foreign currency earnings”.

Foreign Investment has been defined as investment made in convertible foreign exchange of at least 20% of Equity Holding by Non-national and Citizen of other countries or Enterprises registered outside Bhutan. As a beginning FDI will be allowed in the Manufacturing and Service sectors that hold potential opportunities for profitable investment. Form of Entry: Joint venture. All foreign investments must register with the Companies Act of the Kingdom of Bhutan, 2000.

Minimum FDI investment (total project cost) In the manufacturing sector the minimum limit is set at US$ 1.00 million (i.e Nu 46 -48 million at 2003 exchange rate). The manufacturing sector broadly includes

• Mineral processing, • Agriculture and agro-processing, • Forestry and wood based industries, • Livestock based industries, • Light industries including electronics,


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• Engineering and power intensive industries.

In the Service industry the minimum investment is US $ 500,000 (i.e. Nu 23-24 million at 2003 exchange rate) and will be encouraged in

• Tourism, including hotels, • Transport Services, • Roads and Bridges, • Education, • Business infrastructure, • Information technology, • Financial services • And Housing.

Agricultural processing, wood and wood-based industries, tourism, and information technology have been identified as having significant potential for development along internationally competitive lines. Foreign Holding : Foreign investors will be allowed to hold majority shareholdings up to 70 percent in both the manufacturing and service sectors. The FDI investments will be governed by specific sector policies and regulated through a simple and transparent registration system. The registration certificate will be issued within 2 weeks of application. The policy also allows collaboration in different forms like technical, marketing and franchise for use of trade names, patents and trademarks with permission of the ministry of trade and industry. Land for the project will be available on Lease either from RGOB or from the private sector promoters. Foreign Exchange Regulation Applicability Foreign Exchange Requirement Foreign Exchange Source Import of Capital Goods in FE Out of Foreign Equity Repatriation of profits/Dividends Out of Foreign Exchange

Earnings Repatriation of Foreign Currency Loans

With the approval of RGOB

Repatriation of Capital(Including Capital Gain)

Allowed in FE as per provision of Income Tax Act and Foreign Exchange Regulation

Royalties, Technical Services Fees and Management Fees

Allowed in FE after proper evaluation of governing agreement

Foreign investors will be accorded the same treatment, including investment incentives and exemptions, given to local investors


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engaged in the same business. The policy also guarantees that the interest of a foreign investor will not be nationalised but in cases where expropriation is considered, prompt and full compensation, at market rates, will be paid to the foreign investor. There are also no restrictions on local borrowing by foreign investors. As part of the employment policy, companies will have to phase out expatriate personnel and recruit Bhutanese nationals but will be allowed to bring in expatriate personnel in areas where there are shortages of Bhutanese with the required skills. Restriction on Expatriates has been linked to Investment amount as under:

Investment Size Number of expatriates USD 5 million and above 5 expatriates USD 1 million to below 5 million 3 expatriates USD below 1 million 2 expatriates * Additional Expatriates will be with approval of RGOB

The trade ministry will constitute a foreign investment facilitation committee which will be represented by Secretary Ministry of Trade and Industry (MTI), MD of RMA, Head-Department of Immigration, Head-Department of Revenue & Customs, General Secretary BCCI, Head Environment Impact Assessment (EIA) Division, Secretary-NEC to promote future foreign investments in the country. The FDI regulation and Foreign Exchange Regulation 1997, both are very brief and simple in their contents. However, in the process of making the legislative framework simple, many important issues are not properly addressed. Thus it remains a subject of interpretation and gray areas for foreign Investors. Source: Summary of Editorial in Kuensel, the National Newspaper, and December 6, 2002 The main observation is that still the FDI policy is very sketchy. The need for the creation of some form of investment promotion capacity, and review is still to be addressed (refer Box 4). As usual this may benefit small number of affluent-influential businessmen without a proper all-round growth of private sector. However, beginning has been made. As often doubted that all this legal and professional jargon would mean nothing to the average Bhutanese entrepreneur to whom business sometimes means obtaining a license from the trade office and hiring it out to someone (generally Indian). It is also expressed that Bhutanese Industrialists do not care for a compatible trading


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regime with industrial giants. Thus, there will be questions, doubts, scepticism, disbelief and above all blind nationalism and protective instinct. The same feeling and sensitivities have also dominated the FDI scene in India. The only way out is – strong belief at the highest level in the Government – with the courage, vision and optimist attitude. What will be the outcome of FDI regime will depend upon the answers to these questions.

Box 4 : Reactions on FDI Policy in Bhutan According to Lyonpo Yeshey Zimba, then Finance Minister, “The impact of the FDI policy will not be immediate, Potential investors will first want to get to know Bhutan better, its logical difficulties, and prospects of doing business.” The Minister further added, “This must now be followed up by a foreign investment act that should boost investor confidence as well as protect our domestic firm”.

“The government is very clear on the policy. FDI will bring in the much needed capital, know-how and access to foreign markets which is crucial because we do not have a domestic market,” said the then Minister for Trade and Industry, Lyonpo Khandu Wangchuk. According to him, a rich mineral resource base, a clean environment, access to a large regional market are other advantages.

Political stability and cheap hydropower are Bhutan’s comparative advantages according to Karma, Bhutan National Bank (BNB), Deputy Managing Director, “Otherwise other factors, inputs such as high transportation costs and lack of skilled labour are drawbacks that a foreign investor will consider.” He also added “With so many countries vying for FDI and given our constraints, the government should provide tax incentives to encourage investors,”

“Given the constraints we might have to go in for high value low volume goods like assembling watches,” said a Senior Manager of a Bhutan based industry.

“It is very encouraging and an opening to entrepreneurs willing to take the risk and the initiative,” feels Samdru Norbu of Bhutan travel bureau (BTB). “FDI will definitely raise standards in the service industry and inject professionalism in other related sectors. The Bhutanese will have to gear up, start specialising in certain fields and become serious about investment.”

A policy alone is not good enough to attract investors, as per Sonam Wangdi of Bhutan Builders “We also need to have the legal structure that will protect the investors. The investor must have confidence to invest in Bhutan.”

According to Penjor, Chief Research and Statistics Division with RMA, there would be just a few local companies with the technical and managerial capacity to be viewed as “acceptable” by the foreign investors. He explained “As a result the same local companies might appear repeatedly as partners in new foreign invested enterprises (FIEs) and deprive a majority of the people of the benefits of private sector development.” Penjor also acknowledged that, basically, the government is taking a very cautious approach. “Our policy makers want to ensure that the policies framed are stable and not ad hoc so that FDI in Bhutan is in the Bhutanese context and we establish and maintain our credibility in investors’ eyes right from the beginning.”

Finally according to Kipchu Tshering, Managing Director of Bhutan National Bank, 100 percent ownership should be allowed to foreign investors, the mandatory requirement for “local equity” of 30 percent might also discourage FDI because “there is really nothing to protect in Bhutan”. He also said, “Government policies should be free of impediments such as ownership and Investors should be allowed to come anytime they like and leave anytime they like. Investors must be allowed to own property here. Clear-cut and transparent policies must be framed so that it boosts the investor confidence.”


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Before a FDI strategy is drawn, let us look at the various results of the survey of Bhutanese Industrialists and businessmen. The entire survey has been discussed in details in Appendix 1. In this section, we will try to understand the inherent complexities in the minds of participants in the FDI process. The contradictory and conflict views have been reflected in the answers as are usual in a under developed and maturing economy but the most important realisation felt is that the spontaneity towards FDI. However the surprise factor is that they are not unanimous in making FDI policy friendlier and in giving special benefits to FDI Industries. Thus these are blockades still exist at the mind of the top Industrialists and Professionals. Overall FDI Attractiveness Index (OFAI) shows that a lot of spadework needs to be done. The Government has to address these notions of doubts to create the transition from Red Tape to Red Carpet. FDI STRATEGY FOR BHUTAN Bhutan as mentioned at the start has certain comparative advantage to attract significant FDI. Compared with most other very poor countries it has a surprisingly long list of advantages. But this potential is severely constrained – not properly leveraged - by the poor investment framework. There is something missing in the policy preparation and attitude towards FDI – thrust, continuity and cohesion. It is almost similar to India’s trend of “one step forward and two steps backward” before 1991. Bhutan's FDI strategy must consist first and foremost of a firm and orderly process of relieving the constraints in the investment framework. But the problems lie in not just at policy level but also in deep-seated administrative practices and attitudes towards business. It will take time for any reform in this area. Accordingly, special measures should be created to tap immediate FDI potential wherever it exists. Thus, Bhutan should adopt a focused strategy for FDI with a core committee at the highest level to push the reforms forward through the ministries and to structure special conditions as required to gain early entrants. The FDI strategy should include: • Developing a proper start in the investment framework at the

Highest Level • Creation of Industry Promotion Packages to gain early winners. • Formation of a Single Window investment agency within the Government. Following the UNCTAD model of FDI Potential in any LDC as shown in Figure 2, Bhutan’s FDI potential will also follow the same pattern of FDI potential Development. Bhutan’s FDI strategy will be determined by this potential pattern.


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Figure 2 : UNCTAD’s model of FDI Potential in LDCs

Utilising the conceptual approach in Figure 2, a short, medium and long-term view of Bhutan’s potential to attract FDI may be drawn. Short-term (1-3 years) : The Government should try to build up a long term strategy in the short term and utilize the potential within the given framework - • Infrastructure – the most essential for FDI and also for

development, so it should be supported with proper strategic focus; • Tourism, • Manufacturing for regional and global markets with privileged access • Horticulture and Herbal Sector for medicines and cosmetics Medium-term (3+ years): Consolidation of the FDI potential in the above areas. In addition there could be opportunities for FDI in: • Hydro Power Sector generation for export and domestic heavy industry • Other agro-based industries • Banking & Financial Services Long-term (10-20 years): A long-term planning will be more Goal Oriented given the opportunity available in the economy and the overall absorption capacity. Bhutan Vision 2020 may be one of such documents, which needs to be reviewed. As of now the following additional areas can be opened up: • ICT based services • Privatisation of Utilities and Other Corporations • Health� Services.


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FDI potential in the short-term In spite of the difficulties Bhutan experiences in attracting FDI in any appreciable amount, there are some sectors where FDI currently comes in. These are sectors where FDI can be accelerated if right promotion packages are created.

1. Tourism Tourism already plays an important role in Bhutan’s economy. It remains one of the country’s most promising sectors for attracting FDI because of its incomparable environmental assets and possibilities of religious and therapeutic tourism. Three initiatives are required to generate more effective promotion of FDI in this important sector: a. Removal of the restriction of overseas tour operators and travel

agencies from ownership of operations in Bhutan b. Promotion of Bhutan Tourism in India and South East Asian

countries for all the year round tourism traffic in order to reduce seasonality.

c. Structuring of tourism development zones at Sites with strong potential for tourist development.

2. Infrastructure Infrastructure is one of the most required factors for attracting FDI. In Bhutan, Infrastructure is below the desired level. The Government needs to open up immediately FDI participation in the infrastructure development - a) Roads: The Tourism Development Centres and Industrial Zones

should at least be linked with express highways and Infrastructure Corridor

b) Power: power grid should be set up for transmission of power to Special FDI zones especially for medium to heavy industries;

c) Telecommunication: A broadband optical fibre network for reliable data transmission network and to reduce the international telephony cost is required.

d) Airports: In the short term Bhutan has to open up her Airports to Foreign Airways, which are essential pre-requisites for easy movements of highflier private foreign investors. Furthermore, presently the Airport is utilised much less than its servicing capacity. The Government can earn a lot of foreign exchange by allowing foreign Airways even by maintaining the profitability of Royal Bhutan Airlines, Druk Air. There are 14 foreign airlines operating from Nepal and this shows the opportunity missed by Bhutan and bottleneck created by her present policy of seclusion and reserving her air space.


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e) Aalternative Air-Transport within Country: for faster movement within the country the Government should encourage setting up of helicopter services, small Airports and helipads by private FDI participation.

f) Medical Infrastucture : The structure and facility in Bhutan is far

from satisfactory. This will create major bottlenecks for the best brains to come to Bhutan for a longer period of time without a proper health infrastructure. There is a very good scope of FDI for Private Medical Facilities.

g) Education: There is a vast scope of FDI possibility in this Field.

Especially in the field of professional Studies such as Medical, Engineering, Accountancy, Management, and Software. This is very essential for qualified skills in all the other sectors of the economy.

h) Dry Port in Phuentsholing,(the corridor town to India and Calcutta

water Ports) is very essential for handling increased traffic of export goods – helping both time and money.

FDI in Infrastructure will be required in all the phases but its requirement will gradually evolve.

3. Manufacturing under trade preferences Bhutan will not in the foreseeable future attract large inflows of FDI in manufacturing based on the classic determinants of domestic market size or efficiency gains. Manufacture accounts for roughly 10 per cent of the GDP and firms are mostly small-scale business involved in serving Bhutanese market. However, Bhutan should take advantage of Bilateral Free Trade Agreement with India which has been renewed till 2005, Trade and Transit Agreement 2002 with Bangladesh under which a basket of products are given duty concessions, South Asian Preferential Trade Agreement (SAPTA) with other SAARC countries. A decisive break through in the existing policy approach needs to be changed. The government should adopt the policy of “Import substitution and Export promotion”. The Balance of payment deficit of the country shows that the high import components and hardly there is any policy to counter this spurt in Imports. The government should assess the possibility of the import substitution and initiate a very specific package of measures. A more manageable approach is required for creating heavens of good facilities and practice to investors as under : • Special Economic Zones with substantial administrative autonomy

under the control of a zone authority needs to be created in the line of China.


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• Industrial Estates (IEs) need to be developed with proper infrastructure and tax incentives. The Government in its 9th FYP has planned for 5 such IEs in Chukha, Sarpang, Samdrup Jongkhar, Mongar and Zemgang. These estates need to be developed through Private FDI. 4. Horticulture and Herbal Sector Horticulture and Herbal products are showing great promise due to ideal growing conditions in the hills and mountain regions. Bhutan has hundreds of plants with medicinal and aromatic properties. Demand for herbal products for cosmetic and health uses is rising in key markets like India and in other Asian, Middle East and Western countries as well. Bhutan trades most of her medicinal and aromatic plants in raw material form.

FDI potential in medium-term( 3+ to 10 years) 1. Hydropower for the Indian and domestic market In the power sector, Bhutan has a good potential for hydropower generation. The growth in this segment is also very much Government initiative and grant driven but if there is spurt in the manufacturing capacity more power is required and the growth in this sector in comparison to its potential is very insignificant even with the proposed completion of Tala Project. Power is a long-term requirement and there is a time element involved. Bhutan will be constrained by power supply once manufacturing facilities are developed. Private investment is badly needed to harness hydropower and would be useful in improving transmission and providing storage solutions. 2. Agro-based industries Agro-based industries may be the leading forces in Bhutan’s manufacturing sector, and thus agro-industries should be promoted as potential opportunities for foreign investment. With much of the country’s GDP and labour force tied into agriculture, its prosperity is a major determinant of economic growth, and foreign investment could be critical in this process. Bhutan has potential for producing vegetable and flower seeds. It also has an ideal climate for cut flowers, strawberries, mushrooms and other crops. This potential can be realised if (1) there are adequate transport facilities such as economical Cargo linkages and (2) Government policies that obstruct investment are removed and (3) Adequate number of quality Cold Storages. 3. Banking and Finance Services The country is boasting of sound financial system with only two Banking Institutions, one insurance company, one Developing Financial Institution with almost negligible competition. In the


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medium term, Bhutan needs to open up; otherwise the country will have some financial bottlenecks. In contrast Nepal’s financial market is deep rooted with required width with as many as 7 foreign Banks, 4 Foreign Financial Institutions and 6 Foreign Insurance Companies. This needs to be addressed by the Government by opening the sector to FDI.

FDI potential in the long-term( 10+ to 20 years)

1. Information and Communication Technology (ICT) based services At present the FDI potential in this sector is near zero. However, the presence of a low-wage trainable labour force and widespread use of English language point to the possibility that this sector can be developed, with the adoption of farsighted policies. Personal computer ownership and Internet usage has grown quickly but is still below the standard. Back office processing, medical transcriptions, business process outsourcing may offer initial potential. A more likely possibility is subcontracting with Indian firms once these firms gradually change their focus to high value-added services in IT. 2. Privatisation of Government Corporation and Utilities Bhutan does not have specific privatization program and targets like India and Nepal. The Government is reluctant to privatise Government Owned Enterprises (GOEs) that are profit-making and thus bringing revenue to the Government. For example, the three public utilities, Bhutan Power Corporation (BPC), Bhutan Telecom (BT), Chukha Hydro Power Corporation, need to be privatised in due course. Like wise Royal Bhutan Airlines, Druk Air, also needs to be privatised for better commercial performance and to reduce the burden on Government Exchequer. The following GOE’s appear to have the most potential for attracting foreign investors and could be prioritised for privatisation: · Penden Cement Authority Limited · Bhutan Food Products · State Trading Corporation · Bank of Bhutan · Bhutan Agro Industries Ltd Unless there is a serious change of heart on the part of the Government in pursuing privatisation and making crucial changes in the way the privatisation is carried out, there is little scope for private capital (and FDI) to participate. 3. Health Services This sector is also affected by approach of the Government. It is required to be understood that the Government should only provide free medical services to “the have nots” and not to “the haves”. The


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scarce government resources are unnecessarily wasted and valuable foreign exchange resources are also expended on health services outside the country. The Government should open up this sector to foreign investment participation, which can change the scenario at a fastest speed. Inflows of FDI to Bhutan have been accelerated after the liberalisation in 1999 but remained very low and erratic with no annual trend. This is mainly due to the fact that Bhutan has generally failed to offer investors satisfactory standards of policy and administration of taxes and regulations that are of vital interest to business community. A pro FDI policy initiatives are required at the policy and operational level as detailed under: 1. Remove the key obstacle in the investment framework

Major steps required, in order of priority are: • Liberalise the foreign investment law and administration

Relax entry restrictions especially in services. Draw-up Sector Specific and Industry Specific guidelines for FDI Abolish FDI screening except for negative list proposals Improve foreign investor treatment and protection provisions Remove the local arbitration restrictions Conclude bilateral investment treaties with India and

Bangladesh as early as possible Most importantly there should be coordination between all the

Ministries

• Improve administration and design of taxation, in particular

Taxation should be made the corner stone for attracting FDI and Industrial development

Sector Specific Tax Incentives for Industries & Services Clear-cut provisions for tax Holidays and Tax Relief upon

fulfillment of conditions Specific provisions for Investment, research & development,

recruitment and Training costs, Accelerated Depreciation, and Carry-forward of Business Losses

Simplify the Import Duty for Export-oriented Industries Rationalise withholding tax on dividends, Fees and Royalties Redesign corporate taxation to internationally competitive

levels Commit to reasonable stability in tax policy Conclude Double taxation treaties with India , Bangladesh,

Thailand and with other Developed Countries;


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• Modernise labour regulation

Adopt modern hire and fire provisions to aid investment and employment

Reduce Government intrusion in setting conditions of employment at economy and firm level

Introduce independent industrial dispute resolution mechanisms

Reduce the mandatory labour bonus or make it consensual.

• Establish a Single-window Foreign Investment Promotion Cell within MTI so as to assist investors in dealing with red tape and to establish projects at a fastest pace and with reasonable certainty. This cell will also publish FDI Data at periodic Intervals to make growth visible to the interested parties.

2. Create Industry Promotion packages to tap immediate FDI

potential

A tax and regulatory relief package and structuring of Tourism Development Zones and industrial estates should be given top priorities. Government should plan non-fiscal incentives to provide private estate developers the incentives to commit finance and to solicit new manufacturing investment. Τhe conditions to attract new investments needs to be created. 3. Draw an Infrastructure Development Plan with a detailed road

map 4. Land Ownership should be made available in the Tourism

Development Zones and in Industrial Estates or Long Term lease of at least 99 years need to be available from the government side.

4. Change of Attitude in the Government Level and at the

Industry Level - Government should realize that Foreign Investor would like to do business and earn profit only when they will found that environment is congenial. They are ready to follow ideology and all national reservations if their own interest is taken care of. Investor friendly attitude should be projected before the International Investor forum. The Government should understand that there role is to create enabling environment. In this regard, Government should organize symposium to educate the local investors in collaboration with BCCI on the plans and opportunities

5. Chamber of Commerce needs to be strengthened. Chamber has

to play a crucial role in attracting FDI and educating its members. Country specific Forums need to be established for attracting FDI


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from each country and these forums should be used as the Investment Corridor with that country. Industry specific forums also need to be prepared for information dissemination, review and monitoring, establishing incentives and collating data.

There is no clear-cut success formula in case of FDI attraction due to the existence of too many factors - both internal and external, affecting FDI Flows. But the result can always be positive if the direction is one-way. There should be an all round effort to project Bhutan as a “Best FDI Destination among Land-Locked Countries” before the foreign Investors and this lineage needs to be maintained in the years ahead. CONCLUSIONS The importance of FDI in the economic development of the Bhutan is beyond doubt. But the degree of effectiveness of FDI on the economy will depend upon plans and implementation. Thus, if Bhutan starts her FDI policy with an air of suspicion in her mind then Bhutan will be loosing the opportunity that her closest friend India has already lost so far to China and other South East Asian Countries. India being attractive in her offerings in terms of market, has been gradually changing the mistakes it already committed, but it will be too late for Bhutan, once the wrong signal is given to the foreign investor. It is also contended that “Is more FDI always better for the economic growth of Bhutan especially whether it will help in achieving Gross National Happiness?” The answer is in the negative. The quality of FDI is equally important as its volume. Policy should target FDI with potential to create economic growth rather than FDI per se. At the overall policy framework stage a successful FDI policy must have strong linkages with domestic trade reforms and real urge for privatization. For a country like Bhutan, which is a late starter, it would be easier to attract FDI if they concentrate on their own comparative advantage and maintain their own country characteristics. This does not mean opening up of the economy with a back-gear in place. Bhutan should first create an enabling environment and then can think of “control gears” for proper implementation and guidance towards economic growth. The government has to balance between the private economic goals of the foreign enterprises and the public goals of Bhutan. But control as envisaged is more relevant and required in the long term when FDI inflows will be somewhat stable and the government will have something to strategise, not now at the initial stage when FDI is only a possibility. The next issue is the linkages of FDI and GNH. As it is established in the model at the start, that FDI inflows are utmost required in Bhutan for bringing about economic development, human and social development and environmental preservation. Since ultimately grants


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and aid are going to be dried up, FDI and the internal capital formation are the only source of attaining economic growth. The policy and direction needs to be one directional towards achieving GNH without imposing the same on investors. The next important conclusion is that required volume of FDI for economic growth varies with Countries. Each country has a Capital Absorption Capacity given her internal state of economy. Bhutan also has a very limited FDI absorbing capacity at the present moment. The regional competition for FDI is very high and it is very difficult for a country like Bhutan to attract FDI on a sustainable basis. It is to be realized that Bhutan is already lagging behind almost ten years in comparison to her nearest competitor Nepal and her policy needs to have some more attractiveness than as presently contemplated. Before I conclude, like all LDCs Bhutan also have some positive characteristics that can attract some type of Investors. Bhutan has only to package these positive characteristics in a deliverable form before the Investors without any strings attached. Given Bhutan’s core strength of political stability, lower corruption and very small population set, it is quite certain that economic development will follow if a stable level of FDI source in the relevant sectors can be established. The moderate level of growth in GDP will lead to savings and capital formation in the hands of the people, there will be all around awareness about education, health, social life and people will be motivated to care for the environment. This will lead to healthy deployable surplus in the hands of the Government to invest more on society building, culture promotion, heritage preservation and environmental conservation. This process of value creation, value sharing and value preservation will continue to the attainment of the Bhutan’s goal of optimizing “Gross National Happiness” for her citizen.

Bhutan: Investment Environment Review

Appendix 1 In order to bring in more views on the Investment vis-à-vis Business Environment prevailing in Bhutan, around 28 Chief Executive Officers/ Managing Directors of Private Sector Companies, Corporations, and Financial Institutions have been interviewed on the basis of a structured questionnaire, “Industry Opinion on Foreign Direct Investment in Bhutan”. On the basis of these questionnaires, Review of Investment Environment has been carried in this paper. The results of the study are discussed in this Annexure.


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Figure 1.1 : Business Environment for FDI in Bhutan

1.41.8

2222

3.83.8

4

3.63.63.6

3.43.23.23.23.2

3332.8

2.82.82.8

2.82.62.62.62.62.62.4

2.42.42.42.4

2.22.22.22.22.2

0 1 2 3 4 5

Export tariffsBusiness Culture

Overall security problemWater supply to Industry

Waste disposal Language/cultural factors

IT AwarenessGovernanceTax regime

Power supply to IndustryRegional markets (India, Bangladesh)

BureaucracyCorruption

Openness to new ideasApproachable bureaucracy

Investment/business establishment procedureFunctioning of the judicial system

Transferability of fundsTelecommunications Services

Implementation of policiesDispute settlement procedures

Investment incentivesFinancial system

Industrial securityLack of information

Import tariffsReliable and trustworthy local partners

Work CultureLocal capital

Co-ordination between AgenciesGovernment circular Contrary to existing policies

Labour legislation and practicesInfrastructure (roads)

Natural resourcesQuality of transport ServicesManagement skills & Quality

Labour skills and availability (Bhutanese)Qualified Bhutanese Personnel

Infrastructure (Airways)Access to land and titling (to Foreign Investor)

Unfavourable Favourable

Figure 2.1 sums up the overall views expressed by the Industry professionals in a four-point scale format on all the parameters. Factors like favorable “Export Tariffs”, “Business Culture” and High “Overall security”, good “Water Resources” are considered most helpful factors, while “No Land Ownership by foreigners”, inadequate quality Human Resource Pool and skills and poor infrastructure have been pointed as major disadvantages. If we just glance through the performance of different parameters in the scale ladder, the areas of advantages and disadvantages will be clear. Let us first evaluate the favourable elements in the Investment Environment of Bhutan. The most favourable elements have been selected as those elements which got at least 75% favourable weightage and are ranked in the order of their advantages: Political Stability, Favourable Export tariffs, pro-investment Business Culture, high overall Security Level, Water supply to Industry, proper Waste disposal systems and Practices, friendly and indifferent Language/cultural factors, moderate degree of IT Awareness, good Governance - at high


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Level, cheap Power supply to Industry, almost barrier free Regional markets (India and Bangladesh), Bureaucracy - favourable to Industry, low Corruption Level and openness to new ideas and change.

Figure 1.2 : Strongest Favourable Elements in Bhutan

4.04.0

3.83.8

3.63.63.6

3.43.23.2

3.23.03.03.0

0.0 1.0 2.0 3.0 4.0 5.0

Political StabilityFavourable Export tariffs

Business CultureOverall Security Level

Water supply to IndustryWaste disposal (Environmental)

Language/cultural factorsIT Awareness

Governance - At high LevelCheap Power supply to Industry

Regional markets (India, Bangladesh)Bureaucracy - favourable to Industry

Low Corruption LevelOpenness to new ideas

Thus it may appear that almost everything is favourable. But this is not so and the problem is in the area of implementation and consistencies. The weakest elements not favourable to the Investment environment are those, which fall below the 60% favourable limit. The weak elements point to certain key areas - foreign investors cannot have their ownership on the project Land- this is viewed as the most negative attitude of the Government; Lack of Infrastructure - whether it is Airways and Airports, or Roads and this has been multiplied by poor quality Transport Services; the third area of weakness is Human resources like inadequate qualified personnel for the white colour job as well as low availability of skilled labours and lack of Management skills & quality with inadequate Labour Laws; the fourth area is poor Mineral resources, as mined till date; The fifth one is related with implementation machinery - poor co-ordination between Agencies and inconsistencies in Government circulars highlighting the problem area.


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Figure 1.3 : Weakest Elements In Bhutan

1.41.8

2.02.02.02.0

2.22.22.22.22.2

0.0 0.5 1.0 1.5 2.0 2.5

Poor Co-ordination between AgenciesInconsistencies in Government Circulars

Inadequate Labour LawsInsufficient Infrastructure (roads)

Low Mineral resourcesPoor Quality Transport Services

Lack of Management skills & QualityLabour skills and availability (Bhutanese)

Inadequate Qualified PersonnelLack of Infrastructure (Airways)

Access to Land and Titling

On the basis of our detailed analysis of the trend in the Investment Environment, an Overall FDI Attractiveness Index(FAI) has been drawn up. FAI is presently at 2.86 scale i.e 71 percentage level with lot of scope for Improvement in four factors in the Index : Tax and Tariff Index, Infrastructure Development Index, Bureaucratic Support Index and Business Culture & Environment Index.

Figure 1.4: Overall FDI Attractiveness Index

2.622.66

2.73

2.953.33

2.86

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

Overall FDI Attractiveness Index

Security Index

Tax & Tariff Index

Infrastucture Development Index

Bureaucractic Support Index

Business Culture & EnvironmentIndex

Low High

In order to attract more FDI in this competitive global scenario, the Index should be close to 3.8 i.e., 95 to 100 percentage points with as little bottleneck as possible. The target is quite high given the present level, but due to political stability and the scope of one-way directions, this is achievable.

REFERENCES

“How to use Foreign Direct Investment for the economic development of countries like Bhutan”, by Dr Alok Ray and Saugata Bandyopadhyay, Indian Institutute of Management Calcutta, International Business Paper, June 2003.


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Bhutan 2020 : A vision for Peace, Prosperity and Happiness, Planning Commission, RGOB

Foreign Investment Policy 2001, RGOB and Foreign Exchange Regulations of Bhutan, 1997

Gross National Happiness Edited by Sonam Kinga, Karma Galay, Phuntsho Rapten and Adam Pain.

Ninth Five Year Plan Document of Bhutan (2002/03 – 2006/07) National Human Development Report 2000, Bhutan Poverty Assessment Report 2000, Gender Pilot Study, June 2001, The Planning Commission, RGOB

National Accounts Statistic Report (1980-2001), and National Census of Manufacturing Industries, Central Statistical Organisation, Planning Commission, RGOB

National Environment Strategy 1998 and Environment Assessment Act 2000, National Environment Commission, RGOB, Copyright Act 2001 and Industrial Property Act, 2001

Manoj Pant, “Foreign Direct Investment in India – The Issues Involved”(1996) Yinggi Wei and Xiaming Liu , “Foreign Direct Investment in China” (2001) Dipak R Basu, “Capital Flows and South East Asia” William R DiPietro and Bansi L Sawhney, “Foreign Investment, Externalities,

and Growth in less Developed Countries” Robert Dickie “Foreign Investment/Government Policy in Third World” Wanda Tseng and Harm Zebregs, “Foreign Direct Investment in China :

Some Lessons for other Countries”, IMF Policy Discussion Paper, PDP/02/3

“Investment Policy Review – Nepal” UNCTAD/ITE/IPC/MISC/2003/1 Alexander Lehmann, "Foreign Direct Investment in Emerging Markets :

Income, Repatriations, Financial Vulnerabilities" IMF Working Paper, WP/02/47

FDI Confidence Index, Global Business Council, September 2002, A T Kearney, Inc. http://www.atkearney.com “Foreign Direct Investment: A Lead Driver for Sustainable Development?”

Earth Summit 2002, Economic Briefing No.1, “Foreign Direct Investment - Who Gains”, ODI Briefing Paper 2002, http://www.odi.org

Selected Economic Indicators 2002 and 2003, Quarterly Review by Royal Monetary Authority of Bhutan

ICC (2000) International trade and Investment Policy. ICC Business Bulletin April 2000

UNCTAD (1999) World Investment Report 1999. Foreign Direct Investment and the Challenge of Development

“FDI: Is more always better”, Raghubendra Jha, Economic Times of India, 28th July 2003.

Notes from United Nations Conference on Trade & Development (UNCTAD), http://www.unctad.org

Notes from International Monetary Fund (IMF) http://www.imf.org Notes from World Bank http://www.worldbank.org Notes from http://www.kuensel.com.bt Notes from http://www.fncci.org.np Notes from http://www.rma.org.bt Notes from http://www.mof.gov.bt Notes from http://www.mti.gov.bt Notes from http://www.nec.gov.bt Notes from http://www.iras.com.sg


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ECOSOC(2000)Financial resources and mechanisms ECOSOC (1999) Report on the seventh session, Tourism and Sustainable Development, http://www.un.org/esa/sustdev/csd8 UN Commission for Sustainable Development (UN CSD) UN Division for

Sustainable Development (UNDSD) http://www.un.org/esa/sustdev United Nations Industrial Development Organization (UNIDO)

http://www.unido.org WWF-UK (1999) Foreign Direct Investment and the Environment. From

Pollution Havens to Sustainable Development A report by Mabey, N & McNally, R. http://www.wwf-uk.org/news/fdi.pdf

Notes from World Trade Organisation (WTO) Annual Report 1996, Vol. 1, Trade and Foreign Direct Investment, http://www.wto.org/

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Measuring Genuine Progress - Indicators for Enlightened Society By Dr Tashi Colman and Dr. Julia Sagebien1

Sakyong Mipham Rinpoche, Head of the Shambhala Mandala, offers his warmest greetings, friendship, and best wishes to His Majesty the King of Bhutan, to the people of Bhutan, and to the directors and participants of this Seminar that is dedicated to manifesting the principles of Gross National Happiness in the world. The Shambhala Mandala, established in the last century by Vidhyadara, the Venerable Chogyam Trungpa Rinpoche, the father of Sakyong Mipham Rinpoche, shares close historical links and an exceptional spiritual connection with the Kingdom of Bhutan. It was here in Bhutan, at Taktsang, that one of the most profound root texts of the Shambhala Mandala - the Sadhana of Mahamudra - came to the Vidyadhara. The Shambhala Mandala has also been blessed with the profound teachings of His Holiness Dilgo Khyentse Rinpoche, His Eminence Dzongsar Khyentse Rinpoche, and others great teachers from Bhutan. The name Shambhala has come down through history as an evocation of the archetypal human belief in enlightened society. Today the Shambhala mandala takes the form of a global network of meditation centres devoted to the creation of sane human society, based on the profound wisdom of Shambhala Buddhist teachings. Shambhala is often spoken of as a kingdom, of which the Sakyong (whose title literally means “Earth Protector”) is the temporal and spiritual head. The Sakyong has asked me to express his deep appreciation of the the auspicious potential of this gathering to create a genuine path toward world peace and the cessation of global suffering. He sees this conference as an excellent and timely initiative that will speed the flowering of the sanity and brilliance of His Majesty Jigme Singye Wangchuk’s daring proclamation that the Kingdom of Bhutan is more interested in Gross National Happiness than Gross National Product. This view embodies the fundamental wisdom and compassion at the heart of both the Buddhist and Shambhala teachings, and is at one with the intention of the Sadhana of Mahamudra to overcome the materialism that now dominates the world. The Sakyong sees the view of Gross National 1 Special Representatives of the Shambhala Mandala to the International Seminar on 'Operationalizing Gross National Happiness', Bhutan

Dr. Tashi Colman and Dr. Julia Sagabien

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Happiness as a primary foundation for the realization of enlightened society. The Sakyong looks forward to close cooperation between Shambhala and Bhutanese scholars and leaders in developing practical indicators of wellbeing and progress that can be used here and internationally in the years to come. He is confident that the shared social vision of this seminar will radiate sanity and compassion far beyond the borders of Bhutan and bring immeasurable benefit to countless sentient beings. At this time of global violence, environmental degradation, and social confusion, this important endeavour can pave the way toward a new model of development that reflects the world’s precious natural, cultural, spiritual and human resources.

Our Measures Reflect our Values Our goal at this gathering is not just to share our vision. It is to begin to put it into practice. In order to do so, we have to be specific about the basic requisites of an enlightened society and dare to say clearly what we mean by Gross National Happiness. What are our objectives? And how do we measure our progress in getting there? Every measure of progress, by definition, is based on values, because it raises the question "progress towards what?" What we count and measure, therefore, reflects our deepest social values, and in turn determines the policy agendas of governments and other institutions. In contributing to this gathering on behalf of the Shambhala Mandala, I am also bringing to it my own experience as the Director of the Canadian Non-governmental organization Genuine Progress Index (Atlantic) which has been working for a number of years to establish indicators that may be helpful to developing a practical basis for implementing the notion of Gross National Happiness. So maybe we should begin by saying what Gross National Happiness is not, and by looking closely at the values and goals represented by our conventional measures of progress. Then we can more easily identify the values, goals, and measures appropriate to an enlightened society based on Gross National Happiness. How do world leaders currently assess how "well off" we are? Throughout the world, we currently measure our progress and gauge our wellbeing according to a very narrow set of materialist indicators – our economic growth rates, which in turn are based on measures of Gross National Product or Gross Domestic Product (GDP). The more we produce, sell,

Measuring Genuine Progress - Indicators for Enlightened Society

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and buy, the more the GDP grows, and the "better off" we are supposed to be -- or so the conventional wisdom tells us. Yet vital social and environmental factors remain invisible in these measures. The more trees we cut down, the more fossil fuels we burn, and the faster we deplete our natural wealth, the faster the economy grows. This is poor accounting, like a factory owner who sells off his machinery and counts it as profit. Our growth rates also make no distinction between economic activity that creates benefit and that which causes harm. So long as money is being spent, the economy will grow. Crime, pollution, accidents, sickness, and natural disasters all expand the economy. The economy can grow even as inequality and poverty increase. At the same time, many of our most valuable assets, like generosity, volunteer work, unpaid caregiving, and our spiritual wealth are not counted at all, because no money changes hands. So economic growth does not necessarily mean we are better off. In fact, as Robert Kennedy said 30 years ago, Gross National Product measures “everything except that which makes life worthwhile.” Fortunately, there is a better way forward, and the Kingdom of Bhutan is the nation to embrace it publicly by declaring openly that Bhutan is more interested in Gross National Happiness than Gross National Product. The Shambhala mandala, too, is dedicated to the creation of an enlightened society in which all beings may realize their true potential. If we can identify some of the foundations on which such a society might rest, we can measure our progress in getting there.

Pillars of human dignity The Shambhala and Buddhist path recognizes not only that all people want to be happy and free from suffering, but that they are inherently decent and good by nature. All human beings - whatever their culture, ethnicity, religion, gender, or age - have the complete ability to lead dignified lives, to realize their innate wisdom, and to create a brilliant, vibrant society based on kindness and compassion. This is not a theory or mere wishful thinking. It is the profound understanding that comes from the careful study and contemplation of the human mind and the nature of existence. What are the pillars of such an enlightened society based on human dignity, and what are the measures by which we can assess the health of a society and its progress towards Gross National Happiness?


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Respect and care for all beings First, the Buddhist and Shambhala teachings tell us that we are not, by nature, isolated, egoistic, and self-centred creatures, but rather that we are completely connected with and dependent on all other beings – an insight also increasingly appreciated by modern science. This understanding leads to the most profound appreciation of our environment and respect for our fellow beings and for all species. Because we know that our environment provides the life-support systems on which we depend, we do not recklessly plunder the natural world for our own short-term gain, but rather nurture and care for it, so that it may continue to sustain beings for generations to come. We appreciate and enjoy the services provided by nature without degrading it. How do we measure that? We can carefully monitor the health of our forests, our soils, our water, our air, and our other natural resources - and the countless species of birds, animals, and insects they contain. Instead of counting the depletion of our natural wealth as economic gain, as the GDP does, we regard this wealth as natural capital that is subject to depreciation. Maintaining and enhancing the value of our natural capital is genuine progress. How are we doing? Sadly, our children are inheriting a world that is not as rich as the one we found. There are fewer fish in the oceans, fewer old trees in the forests, fewer species of flora and fauna, and more pollution of air, water, and land. An enlightened society that protects its natural wealth and the quality of its environment, that restores its forests and soils, that protects the habitat of birds and animals, that conserves energy and reduces pollution and greenhouse gas emissions, will contribute greatly not only to Gross National Happiness but to Gross International Happiness. That same care and protection extend to the human realm. The Buddhist and Shambhala teachings tell us that all beings without exception are blessed with basic goodness and bodhicitta, and that a poverty-stricken mind can be transformed into the wisdom of equanimity that enriches the world. An enlightened society therefore respects all cultures, peoples, languages, and communities; treats them with equal dignity and complete tolerance; and finds it own strength in openness and diversity. Equity is a core principle of the Genuine Progress Index. The Mahayana teachings go beyond a passive acceptance of others and teach us to give selflessly. Generosity is the first paramita. How do we measure that? Volunteers continuously extend themselves without expecting anything in return - caring for the sick, elderly, disabled, youth in need, and those less fortunate than themselves; teaching the Dharma


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and other genuine traditions and maintaining and beautifying places of spiritual practice and worship; and enriching and improving their communities and environment in countless ways. In the Genuine Progress Index, we carefully monitor the strength of the volunteer sector, because it contributes so greatly to our wellbeing, quality of life, and standard of living. How are we doing? In Canada, we found a dramatic 12.3% decline in the level of volunteer work in the last ten years. In Nova Scotia, the capital of Shambhala, we now have 30,000 fewer volunteers today than in 1997. Imagine if the GDP had fallen by 12.3%. That would be a national emergency; Cabinet would be meeting around the clock; we would call that a major Depression. But the sharp decline in volunteer work is not a blip on the radar screen of policy makers, and has never been discussed in any legislature in Canada, because unpaid work counts for nothing in our GDP-based measures of progress. By contrast, an enlightened society appreciates and nurtures its volunteers and recognizes their contribution as a manifestation of generosity. Even though they contribute nothing to the Gross National Product, our volunteers contribute greatly to our Gross National Happiness.

Basic security To realize their full potential and their innate wisdom, human beings require basic security. If people live in fear and poverty and are overly afflicted by illness - if their lives are not free and well-favoured, and if they are tormented by the hell and hungry ghost realms - they cannot easily practice the Dharma. Some measure of basic security is essential to wellbeing. How do we measure that? Safe communities free from crime; a healthy population free from sickness; prosperous communities free from grinding poverty and hunger signify genuine progress. How are we doing? It is a mixed picture. In Nova Scotia, we are much safer than in most U.S. cities, but we still three times more likely to be victims of crimes than 25 years ago, and we are more likely to lock our doors than our parents were. We are living longer and smoking less, but we are still afflicted by high rates of preventable diseases fueled by an epidemic of obesity and physical inactivity. Our children have more stuff than we dreamed off at their age, but they are not more economically secure. In 1989, the Canadian Parliament vowed to abolish child poverty by the year 2000. But in 2000, rates of child poverty were higher than in 1989.


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A society that strives for Gross National Happiness recognizes that material and financial wealth alone does not ensure true security, wellbeing, and human dignity, but that basic livelihood security is an essential component of wellbeing. In the face of excessive materialism, people yearn for the true wealth that comes from contentment, simplicity, and community. An enlightened society will encourage the cultivation of many forms of richness, including healthy family lives, strong and safe communities, an equitable distribution of resources, and support and care for those in need. It will invest in improving the health of the population and in ensuring that everyone has access to a standard of living that sustains their health and wellbeing as well as that of their families and dependants. That security is not an end in itself, but creates a supportive environment that encourages all citizens to realize their full potential.

Education The attainment of true knowledge and wisdom for the benefit of all beings is the ultimate goal of the Buddhist and Shambhala paths. Education in this sense does not merely refer to a set of curricula for the classroom or for job training. It includes a deep exploration and understanding of the way the world works - our minds, bodies, and the society and environment in which we live - and it involves great respect for the wisdom of our teachers, elders and traditions. How do we measure that? Just as we described care for our environment as an investment in natural capital and in our natural wealth, so services and programs that foster true education are not just a "cost" (as in most government ledgers) but a profound investment in human capital and in the future. Education is not only essential for human beings to achieve their full potential, both individually and collectively, but it is also key to dealing with the environmental, social, health, and economic challenges mentioned above, and to resolving conflicts in peaceful ways. A good education will promote respect for diversity and for other cultures, and will promote peaceful and mutually respectful relations between peoples holding widely divergent views. How are we doing? This depends entirely on what we mean by "education." The schools and universities of our world are turning out an unprecedented number of graduates, but it is questionable whether our wisdom or understanding as a society is growing as a result. Of all the components of the Genuine Progress Index, we have therefore found the education component the most challenging in terms of indicator development, as good indicators must assess the quality of the education and its outcomes, not just the number of graduates. To take a crude example, we might well put greater trust in a Finance Minister who had


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never studied conventional economics than in one with a graduate degree in the kind of economics that takes economic growth as its unquestioned paradigm and dogma. The sad reality is that most economics texts still take an insular view of the economic system as separated from social and environmental realities. True education must be directed towards the full development of human capacities. It must encourage students to express their innate wholeness, strengthen their kindness and ability to help others, and stimulate them to participate in the evolution of a humane and decent society. Such an education will promote a culture of resourcefulness, initiative, and cooperative effort. Because of the challenges in devising indicators capable of measuring these outcomes, we have left the development of the education indicators to the very end of our Genuine Progress Index development. In fact, we currently have researchers working on this very issue, with the help of a research grant from Canada's Social Sciences and Humanities Research Council. Certainly we see education as a life-long process, not just as something that happens to young people in schools, and we therefore see free time as an essential prerequisite for further education and human development over the life-time. In measures based on the Gross National or Domestic Product, free time has no value. The more hours we work for pay and the more busy and stressed we are as a result, the more the economy will grow, and the "better off" we are supposed to be. The Genuine Progress Index, and a society based on Gross National Happiness, will give explicit value to free time, without which study, contemplation, and meditation are not possible. Interestingly, as women have entered the paid labour force in ever greater numbers, their free time has shrunk dramatically, since women still bear the lion's share of unpaid household work. Women's total work burden of paid and unpaid work and their growing time stress are never acknowledged in GDP-based measures of progress, which ignore both unpaid work and free time. While the Gross National Product only counts paid work time, enlightened measures of progress for a society based on Gross National Happiness will account for all of people's time - their paid work, unpaid work, free time, and education. In the work of Genuine Progress Index, we therefore use time use surveys and time stress surveys as key measures of wellbeing.

The Nova Scotia Genuine Progress Index These are a few of the key pillars of an enlightened society based on Gross National Happiness. The list above is by no means exhaustive, and serves only to illustrate some of the key elements of our human, social,


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and natural capital - our innate wealth - that are ignored by our current GNP and GDP-based measures of progress. Fortunately, there are better ways to measure progress that do take these vital dimensions of wellbeing into account. Nova Scotia's new Genuine Progress Index or GPI assigns explicit value to environmental quality, our natural wealth, population health, livelihood security, equity, free time, and educational attainment. It values unpaid voluntary and household work as well as paid work. It counts sickness, crime and pollution as costs not gains to the economy. The GPI methods can help provide a more complete and accurate picture of how societies are really doing in ways that more accurately reflect humanity’s deepest values. At this conference and in the months and years to come, we look forward to exploring with our Bhutanese colleagues whether and how any of the GPI measures are relevant to Bhutan, how they can be adapted to Bhutanese conditions and circumstances, what additional indicators important to Bhutan might be needed, and how they could be measured in practical ways that can help guide day-to-day policy making. To this end, and to initiate this further dialogue, GPI Atlantic has prepared a separate, lengthy (180 pages), and detailed technical report for the Centre for Bhutan Studies and the Inner Asia Centre for Sustainable Development. This document suggests a potential framework for measures of Gross National Happiness, and discusses methodologies, data requirements, reporting systems, strengths and limitations of expanded capital accounts that include measures of human, social, and natural capital, and other technical details. It also reviews our own work developing wellbeing and sustainable development indicators in Nova Scotia and attempts to summarize some of the lessons we have learned as well as potential directions for future research. While some of this technical discussion may be premature here, and while this document is far too long and detailed to present to this seminar, we have suggested that it might be posted on the Gross International Happiness web site for those interested specifically in measurement issues. Here, the main point is to appreciate the profound importance of what the Centre for Bhutan Studies and the Inner Asia Centre for Sustainable Development have undertaken with this initial seminar. Bhutan has clearly, directly, eloquently, and profoundly challenged the dominant materialist ethic embodied in our GNP and GDP-based measures of progress. That places Bhutan in the forefront of the community of nations on this issue, able demonstrate a new path forward that can be a model of development for many countries in the world.


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The ripples from this seminar will spread far and wide, helping to lay the basis for enlightened societies worldwide, so that the confusion engendered by measures based on Gross National Product will be transformed into the wisdom of Gross International Happiness.

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Finding Happiness in Wisdom and Compassion – The Real Challenge for an Alternative Development Strategy By Dr.

Ross McDonald

Abstract The underlying development philosophy of globalisation seeks to maximise happiness through the cultivation of a narrow materialist self-interest and competitiveness, both at the level of the individual and at the level of the nation-state. Despite voluminous evidence that this growth-fixated model of material economy polarises global well-being and seriously undermines environmental security, most, in the developed world at least, seem perfectly content to continue achieving happiness in irresponsible ways. This paper explores the deeper dynamics of an economic ideology of which GNP is only the most visible aspect and asks whether Bhutan’s search for an alternative approach really entails the search for a more responsible form of happiness – one that inherently involves a more compassionate mode of being in the world. Using the Four Pillars of Gross National Happiness as a framework, if argues that the cultivation of a deeper happiness lies in ensuring that the inter-dependent realms of culture, good governance, economy and the environment remain in sustainable balance. If Buddhist understandings are accurate, then on-going happiness can only be truly found through this critical balancing. Thus, if a means for measuring the vitality of these four components can be developed then Bhutan can build a strong foundation for genuinely advancing beyond the irresponsible and unsustainable means employed by others in their search for a more fleeting form of satisfaction. But it is argued, if the maximisation of happiness at any cost is allowed to become the overarching goal then the errors of western development might be unintentionally replicated and Bhutan’s unique potential to forge a more valuable direction be unfortunately squandered. The Kingdom of Bhutan has long resisted being integrated into other culture’s alien systems of priorities and much of the widespread appeal of Gross National Happiness as an alternative indicator of social development comes, I believe, from an increasing appreciation throughout the world that current priorities and in particular the growth fetish of the Western economy, are misplaced and detrimental to our collective well being. That this is so is apparent when one broadens ones gaze to consider the impacts of a globalising economic ideology on the twin issues of social justice and environmental integrity. It is becoming clear that modern economic thinking, with its singular focus on

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maximising material consumption, is creating lamentable outcomes for many in the poorer world, for the generations that will follow us and for our fellow creatures on this planet. The dynamics of ‘aid’ and international trade are misallocating resources and polarising the world into an increasingly concentrated group of super-rich and a growing mass of ultra-poor. As we add another three billion people to the global family in the coming decades, this polarisation seems set to deepen with increasingly troublesome consequences for the most vulnerable regions of the planet. And at an equally fundamental level, the tyrannies of a changing climate and increasing environmental decline are set to eradicate large portions of the global ecosystem. A recent report in the conservative science journal Nature for example, suggests that in less than fifty years if current ideologies of growth continue to hold sway, we will cause the extinction of at least one quarter of all of the animal and plant species that currently inhabit the earth. We find ourselves then, at a critically important juncture in human history, a point at which a profound rethinking of our priorities is required and required urgently. It is against this larger backdrop that our meetings here this week gain some of their deeper and larger significance and Bhutan is to be commended for forging an alternative vision of how we ought to direct our energies and measure our success in this rapidly polarising and deteriorating world. I think that all here sincerely hope that Bhutan’s attempts to chart a different direction for itself will be successful and be of genuine assistance in facilitating a wiser and more compassionate appreciation of our place and purpose in the world. Having said this however, we need to recognise that this is a profoundly challenging endeavour and one that requires a considerable clarity of mind. The potential pit-falls are legion and success will depend upon patience, broad consultation and deep reflection among many other things. This paper is written above all in the hope that it might be of some assistance in the latter domain When I first learned of Bhutan’s intention to create a measure of Gross National Happiness I was deeply impressed but I must confess to a feeling of rising foreboding as I immersed myself in the western literature on happiness and its relationship to standard models of economic development. Happiness has an intuitive appeal as an outcome of ultimate value, but the more I have read and pondered the phenomenon the less faith I have found myself having in its sole legitimacy as a primary, unqualified aim for social policy. The roots of my concern lie in an increasing appreciation that happiness can come in many forms and be derived from many courses of action and states of being – including, as I believe is the case in the privileged world, from recklessly irresponsible collective actions that deprive others of essential resources

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and cause extensive damage to the prospects of future generations. Ultimately, I find myself faced with a worrisome dilemma that can be summarised as follows. If happiness can be successfully found in the active exploitation of others and in the despoilation of the natural system we live within, can it constitute an acceptable measure of success? The answer to this basic question is of the utmost importance to our current deliberations and the way we answer it will determine, at least for me, the legitimacy of happiness as a worthy arbiter of policy formation. In personally answering this question I must say that I believe there are other outcomes that are of more importance than a simple maximisation of personal and national happiness at any cost. If for example, some find great pleasure in enacting racist values, or in stealing, the happiness that accrues does not justify the actions. Similarly, if destroying things of natural beauty, or senseless killing brings happiness, then again I do not believe that even a very high level of resultant happiness can justify such actions. It is in such instances that the potential conflict between responsibility and happiness becomes apparent. Many in the modern world achieve happiness in ways of being and consuming in the world that are profoundly unwise and I believe in such instances that this irresponsibility has to be challenged regardless of whether it brings them happiness or not. The western economy, seemingly fixated on achieving continual growth at any cost, is deeply non-compassionate, but as we shall see, it seems by standard measures at least, to be correlated with the broad generation of happiness. If we accept happiness in this form as the ultimately important outcome, such irresponsibility is forgiven, or indeed blessed, as a merely subsidiary means of achieving the all-important goal of happiness. In the process, all ethical considerations of social justice, ecological responsibility and personal duty are sacrificed in the name of an inconsiderate hedonism. I wonder then if at heart, Bhutan’s aim is not to directly cultivate a more responsible form of happiness, one that is grounded in deeper Buddhist values of enacted wisdom and compassion. If this is indeed the case, as I believe it is, then we have a much clearer agenda to build upon and a clearer distinction as to how we might conceive of a genuine advance from the unwise and heartless search for the more superficial happiness that can be gained by merely maximising material consumption. Aiming to maximise a deeper form of happiness based on responsible being in the world seems to me to be an eminently worthy aim. Aiming to maximise a more superficial happiness based on irresponsible being in the world on the other hand, does not. And it is exactly this distinction between responsible and irresponsible means of finding happiness that western economic culture seems to have so much difficulty discerning. In the ideology of western economy, this

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force which seems to inexorably dissolve alternative cultures into its sphere, happiness and economic growth have become equivalent terms, and GNP as a measure has gained its pre-eminence from this illogical equivalence. With this in mind, we should remain aware at all times that the measurement of Gross National Product is for all intents and purposes, the westernised measure of Gross National Happiness. So, in the dominant ideology of globalisation, it is not as many seem to assume, that happiness is deemed to be irrelevant to economic expansion, but rather that happiness is deemed to be equivalent to economic expansion. For the architects of modern free-market ideology any expansion in economic activity is an expansion in human happiness. But is this really the case? To answer this it is instructive to briefly consider the voluminous evidence that has been accumulated to date on the relationship between economic growth and self-reported happiness. It is interesting to note that this evidence has not been collected by economists themselves who seem little motivated to test the foundations of their assumptions. Rather, the primary evidence we have comes from the endeavours of a legion of academic psychologists who have been paying increasing attention to the relationship between the two phenomena. Anyone who has forayed into the voluminous literature that has accumulated around the connections between economic development and self-reported happiness will be aware that there are numerous schools of thought as to the relationship between these two factors. However, the preponderant opinion seems to be that the correlation is not nearly as simple nor compelling as some would have us believe. In order to make sense of the varying claims and counter-claims it is useful to focus on four essential relationships that ought to be strongly upheld if indeed economic growth is the major determinant of felt happiness. These are as follows.

1. At any given time looking across nations, the populations of rich countries should be clearly happier than the populations of poor countries.

2. Within any given country and across time, increases in economic growth should produce clear increases in happiness.

3. Within any given country at any given time, rich people should be clearly happier than poor people.

4. Within any given country and across time, increases in personal wealth should clearly produce increases in happiness.

By considering the evidence relating to each of these relationships we should be able to assess the degree to which economic growth does translate into increasing happiness. Let us consider each in turn.


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To begin with cross-national comparisons, there is some evidence that increasing national wealth is somewhat associated with increasing happiness. In general, wealthier nations seem to be slightly happier than poor nations but this relationship is far from perfect and there are many exceptions that undermine the simple conclusion that economic growth automatically confers greater national happiness. In the most recent global study for example, the relatively poor nation of Nigeria comes out as the happiest nation, reporting far higher levels of general happiness than a great many significantly richer nations. Other anomalies point to a similar complexity – Ireland for instance seems to have a happier population than Germany despite not being as wealthy, and the Philippines report higher levels of happiness than both Japan and Taiwan ( e.g. Hamilton, 2003, Inglehart, 1990). Further caution is called for when one appreciates that the weak positive relationship that has been established breaks down after a certain level of development, with economic capacity beyond that point bringing no effective increase in national happiness (e.g. Myers, 2000, Schyns, 2000). This has led many to conclude that growing GNP is of value as a facilitator of basic need satisfaction but that once these basic requirements have been met, other non-monetary satisfactions such as meaningful work, a positive sense of purpose and close social relationships become much more important means to achieving fulfilment (e.g. Baumeister and Leary, 1995, Emmons, 1986, Myers, 2000, Perkins, 1991). Weakening further the legitimacy of any simplistic conclusion that more money means more happiness is the mounting body of opinion that argues that wealthy nations are often also characterised by higher levels of political freedom, personal autonomy, public health, gender equality and accessible educational opportunities among other phenomena - each of which may in part explain the slightly higher levels of reported life satisfaction found across a number of studies (e.g. Eckersley, 2000, Diener and Diener, 1995. Veenhoven, 1997). Finally, there are also a number of potent criticisms of the methodologies used to create such data including important doubts as to the validity of the various means of measuring happiness (which often involve narrow measures of personal happiness alone and exclude satisfaction with the state of society for instance) and serious questions over the representativeness of the samples used to construct the data sets (which often over-emphasise convenient samples of college students for example) (e.g. Diener and Lucas, 2000, also Veenhoven, 1996). But in conclusion, it does seem that there is a weak but far from perfect relationship between economic growth and national happiness up to a moderate level - but that this is probably involves a whole nexus of factors of which national income is only one. Turning to the evidence relating changes in economic wealth within the nation state over time to reported happiness, the data is again far from clear. However, with regard to the wealthier and more documented

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nations, it is quite apparent that over time, despite enormous growth in material economy, happiness does not seem to increase significantly (e.g Myers, 2000, Oswald, 1997). This may be related to the previous observation that beyond a certain point, economic growth yields diminishing returns for felt well being. In the United States for example, where rigorous surveys have been conducted since the mid 1940s, real incomes have increased over 400% yet there has been no increase in measurable happiness. In fact if anything, there has been a slight drop in the proportion of people reporting themselves to be happy with life (Hamilton, 2003). Similarly in Japan, between the 1950s and the 1990s real GNP per person rose six fold, yet reported satisfaction with life has not changed at all. So again, considerable doubts are raised as to the veracity of any simple claim that growing economy is equivalent to growing national happiness. Turning to the third expected relationship, which should show that within any nation state, richer people are happier than poor people, again there is no compelling evidence to show that a simple relationship obtains. In fact, the preponderance of data seems to suggest that a similar relationship exists to that between rich and poor nations. That is, gains in material riches help happiness but only to a very basic level after which no significant contribution is to be found. Thus, several studies show a difference between the very poor in society and the rest, but any clear relationships break down after this point as the moderately poor and the reasonably well off appear to be just as happy as the rich and the very rich. For instance, in studies of the richest people in America, evidence shows them to be only marginally happier than the average American - and interestingly none of the very wealthy when asked about the groundings of their happiness mention money as a major source of happiness (e.g. Argyle, 1999, Diener, Horwitz and Emmons, 1985, Inglehart, 1990, Lykken, 1999). The relationship between personal income and happiness only seems to be of major significance in poor countries with high levels of polarisation, such as Bangladesh and India where a whole host of other contributing factors, such as severe privation and caste are likely to contribute significantly to the reported correlations (e.g. Ahuvia, 2001, Argyle, 1999). Finally, in the context of changes in material well being as experienced by individuals over time, it is very difficult to find evidence to support the basic assumption that more money brings greater happiness. Rather over time it seems that increases in personal income beyond the level of basic need satisfaction do not produce significant increases in felt well being (e.g Duncan, 1975, Myers, 2000). And further, even rapid changes in material circumstances seem capable only of producing rapid and very short-lived ‘spikes’ in felt happiness before the person returns to a basic


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‘set-point’ of pre-existing well being (e.g. Cummings, 2000. Silver, 1982, Stone and Neale, 1984, Suh, Diener and Fujita, 1996). In sum then, it appears that the economic assumption that equates increasing material consumption with increasing happiness is deeply flawed even in its own limited terms. Beyond a certain level, increased economic expansion does not seem to translate into increased happiness for either individuals or nation states. What linkages do appear to gain most empirical support involve the connections between economic growth and poverty. Thus, below a certain level of development, poverty eradication does make a difference. In general though, it can be reasonably concluded that Gross National Product is not the measure of Gross National Happiness it purports to be and accordingly a more applicable and discerning approach to the problem of maximising human happiness needs to be developed. However, there is a deeper and less visible aspect of the data which has been summarised above - one that reveals a more serious flaw in the economic logic of western economics and one that returns us to the concerns outlined at the beginning of this paper. It is as follows – although there is little compelling evidence to show that growth in economy alone produces growth in felt happiness, the fact remains that in the highly developed world, most people report being genuinely satisfied with their consumptive lives and lifestyles (e.g. Inglehart, 1990, Myers, 1993, Myers and Diener, 1996). Thus, national happiness levels remain high despite the mounting evidence that demonstrates the destructive nature of our economic priorities. In a very important sense then, the literature on happiness and its connection to the expansion of economic consumption can be read as being indicative of a willing cultural negligence within which most appear to remain happy despite the realisation that in a world of strictly limited resources, our material aspirations are deeply inappropriate in an ethical sense. Put simply, it seems that we find our happiness in diminishing the present and future well being of others in the global family. And it is here that we can begin to discern what I believe to be the central issues underlying our current deliberations. The dominant order’s happiness with negligence appears to me at least, to emanate from a basic selfishness and narrow-mindedness that has been cultivated slowly but surely throughout the history of western economic development. Viewed in this way, it is not happiness or even the equation of happiness with GNP that is the most fundamental problem, but the mode of self-indulgent being in the world that modern economic philosophy cultivates and condones. In a deeply polarised world of declining ecological health this stunted form of human non-development needs to be urgently redressed even if it does correlate with high levels of

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reported happiness. If we are to survive our future and achieve sustainability we need to find an equivalent happiness in much more mature conduct. It is here then, in this context, that Buddhism offers a genuine alternative and where Bhutan’s search for a different vision for development gains its greatest traction. But before considering the positive potential of what might be developed here, it might be useful to briefly survey a few of the most important foundations that serve to support the irresponsible happiness that seems to be the aim of much of the present order. Central to all of this is the maintenance of illusion – an illusion that claims selfishness to be an acceptable or even admirable route to true happiness. This moral myopia lies at the heart of the whole cultural worldview that supports GNP as a singularly appropriate measure of collective advance. For most of the world’s cultures, untrammelled selfishness and competitiveness are appropriately viewed as unworthy and maladaptive attitudes – orientations harbouring the constant potential to endanger the larger collective interest. Accordingly most cultural systems go to great lengths to de-legitimise and dis-empower them. But in western culture, these essential vices have been transformed into veritable virtues and this is particularly true within the realms of economic thought where they are praised as being of unique value in forging our collective advance towards happiness. In order to fully appreciate the nature of this counter-intuitive belief system we must understand at least in brief form, its aetiology. Of course, there have been numerous strands that have historically come together to elevate selfishness and competitiveness beyond the realms of condemnation, but central in the process have been the inordinately influential conceptions of Adam Smith, the first and foremost articulator of free-market theory. Smith’s influence has been incomparable and it was he who first formed an effective moral justification for competitive selfishness as an essential means to our collective advance. Arguing in his foundational text, known popularly as ‘The Wealth of Nations’, Smith noted that, ideals aside, much of humanity is motivated to action by baser instincts than generous altruism. As such he argued, if nations wish to obtain the fullest fruits of coordinated action, selfishness should be permitted a far greater freedom than it had previously been granted under the religious systems of authority that preceded the arrival of the secular western Enlightenment. Contrary to the general conception then, Smith reframed selfishness as an enormously pro-social force, one capable of creating great good despite its amoral or immoral intentions. Thus, in his seminal outlining of free-market economics he showed how it is through selfishness and not altruism that the greatest productive


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energy is unleashed. It is the prospect of personal gain that drives most in society to undertake the exertions necessary to produce, market and sell the material goods and services that bring benefit to a society. It is then above all, selfishness that creates the collective wealth of nations. But Smith understood the many tyrannies and injustices that an unbridled selfishness might bring in its wake and in his broad theorising the harmfulness of freeing up this mode was to be balanced by a countervailing force, that of competition. Again writing in the Wealth of Nations, he argued that competition in the marketplace would act to prevent exploitation and excessive harm as each player is forced to increasingly conform to the greater good through producing the most desired goods and services at an ever-increasing quality and an ever-decreasing price. Thus, competition would act as an ‘Invisible Hand’ to guide intentional selfishness towards an unintended general benefit. Those that acted with excessive greed would be forced to curtail their exploitativeness or be excluded from the marketplace. Hence, selfishness and competition working in concert would unfailingly ensure that the greatest public happiness would be obtained, at least in the material economic realm. It is these twin notions that have formed the basic moral justification of a free-market economy ever since, one in which the least moral of motivations become blessed as a forgivable means to the valued ends of maximising national wealth and happiness. However, it needs to be pointed out that this inheritance was originally not as simplistic as it has now become in the hands of more modern economic purists. Smith’s conceptions had an enormous influence partly due to their own partial truth but largely because Smith was one of the pre-eminent moral philosophers of his age - a reputation gained through his previous writings on the Moral Sentiments. For Smith, the model of the free market within which selfishness and competition could be allowed greater reign, was premised upon his overarching belief in the power of sympathy and ‘human heartedness’. Writing in the Theory of Moral Sentiments the first of his major works, he revealed a firm belief in humanity’s capacity for sympathy, an emotion that prevents us tolerating excessive heartlessness in our conduct towards others. Thus, he argued, society is dominated by an over-arching human heartedness and it is this above all that will prevent selfishness from creating a morally irresponsible economy. If modes of economic action begin to create excessive exploitation or deprivation, then a prevailing sympathy will come to the fore and insist upon restraint and reparation. Needless to say, it did not take long for the rising business class to marginalise these essential assumptions and isolate the selfishness and competitiveness defended in his later work from their wiser and more compassionate roots.

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With an emerging ideology that came to see selfishness as acceptable and competition as essential the modern irresponsible economy was well on its way to empowerment. An active compassion was unnecessary, as the Invisible Hand of competition would unerringly correct all injustices. And it must be noted, the potential for large-scale environmental destruction was literally unimaginable to the founders of our modern ideology living as they did in a historical epoch dominated by a sense of limitless resources and a distinctly underdeveloped capacity for their exploitation. In the selectively conceived world of Smith’s cultural converts then, selfishness and competitiveness become sufficient means for forging our collective progress. There is no need for an enacted compassion or environmental wisdom, as an active irresponsibility will be magically transformed into responsible outcomes for all. This essential faith lies at the heart of modern economic theory and it has been subsequently compounded by two equally simplistic and unwise rationalisations – the simple equation of economic activity with the satisfaction of all important human needs, and an unfortunate econometric cynicism that declares that humanity is in fact incapable of genuinely considerate or generous action. In this latter formulation the theory of human nature reaches an unfortunate dead-end in a formulation that sees being in the world as necessarily involving the rational search for maximum personal gain. The centrality of this misconception can be witnessed by consulting any introductory economic textbook where persons are formally judged to be “rational self-maximisers.” In this stunted conception, western economic thinking reaches its nadir as the potentials for genuine individual development, for compassion, self-sacrifice and intentional service are theoretically banished from the realms of possibility. With the acceptance of this anti-ideal the dominant force of globalisation moves beyond a simple moral defence of competitive selfishness, to see it as an inevitable and unavoidable condition. In revealing these underlying assumptions, we can see clearly that the problem with GNP is not one of measurement alone, but one that involves a much deeper nexus of maladaptive beliefs. Put simply, the forces of globalisation that are knocking on the doors of Bhutan have at their heart, a series of inter-connected misconceptions. Most importantly these involve assuming that selfishness and competitiveness are morally responsible, that environmental wisdom is unnecessary, that compassion is impossible and that economic outcomes are the only ones that count towards defining collective progress. It is this combination of deep beliefs and assumptions that empowers the irresponsible happiness of the current global order. Needless to say, each of these foundational beliefs


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runs counter to the traditional Buddhist conception of our proper place and potential in the world. I believe then, that we need to be quite explicit in understanding what it is that needs to be resisted if a more responsible socio-economic system is to be developed by any society including Bhutan. If a more responsible alternative is truly desired then each of the above dead-ends must be studiously guarded against. In other words, achieving a responsible Gross National Happiness must necessarily entail clearly maintaining that self-restraint and cooperativeness are morally responsible, that environmental wisdom is necessary, that compassion is possible and that economic outcomes are not the exclusive measures that count in defining our collective progress. That the above elements are already present in Bhutanese developmental thinking is apparent in the various writings that have been produced to date and particularly in the framework that has been articulated under the heading of the Four Pillars of Gross National Happiness. In this useful conceptualisation, economic vitality becomes only one of several essential elements that together facilitate a genuine and responsible progress. Economic outcomes are tempered by active concerns for good governance, cultural vitality and environmental responsibility. A wise integration of these interconnected concerns represents a clear advance towards a more just and sustainable philosophy. And at the heart of Buddhist teaching is the central understanding that human nature reaches its greatest potential and happiness in the flowering of compassion, self-restraint and cooperation. Accordingly, the foundational principles of a living Buddhism revolve around the practicalities of achieving the wisdom and compassion of a genuinely mature human development. In a very real sense then Bhutanese Buddhism already has all of the elements in place to maintain a much more responsible social growth that in much of the world dominated as it is by the myopic ideology of a self-sufficient material competitiveness. The question is how can these elements be maximally empowered to bring to fruition comfortable and happy social existence? The answer I believe lies in finding what might be termed a middle way between these often-conflicting priorities. Now there is clearly much less of a need to explain the fundaments of Buddhist social thinking to this audience than there has been to explore the depths of western economic ideology but the essential understanding that the deepest happiness can be attained only through the cultivation of a relatively selfless and non-materialist orientation deserves a clear reiteration. Unlike the secular economic conceptions of the west, the highest and deepest forms of happiness are to be found not in endless material accumulation but through moderation and a detachment from

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excess craving. Ultimate happiness we are told comes from a spirit of service and compassion for others and not from exploitation and care-lessness towards others. And the greatest happiness entails a communion with the natural world and not a separation from it. To fail to comprehend this is, in Buddhist thinking, to live in an illusory world of false and ever-precarious happiness. It is only when this seemingly real but deeply false sense of happiness is overcome and a more responsible maturity is realised that the folly of our initial confusion is revealed. Buddhism at heart, is all about finding ways to grow beyond the illusion that a narrow, uncaring, materially grasping competitiveness can hope to bring a genuine or lasting happiness. It is then, all about challenging the unfortunately confused ideologies of material fixation at all levels not just at the most obvious level of GNP as an inappropriate indicator of our true well being. In the classical formulations of the Four Noble Truths and of the Eightfold Path, Buddhism outlines in precise detail the means by which a compassionate, wise and ultimately happy condition might be achieved on the individual level and it is important to note that the emphasis here is upon the ‘right’ means to ‘right’ happiness. It is then a mode of being in the world that does not perceive of any practical separation of desirable ends from desirable means and in this it is clearly distinguishable from the dominant western approach to achieving economically-derived happiness. As we have seen already, in the dominant western approach to economic development, the maximally responsible social outcome of the greatest good for the greatest number is, it is argued fully attainable only through the perfection of a maximally irresponsible mode of conduct. For Buddhism, as indeed for most of the worlds cultural systems, this disjunction between ‘wrong’ means and ‘right’ ends is absurd. If we desire the greatest potential good as an outcome, then it is only attainable through the cultivation of the greatest goodness as the means to its attainment. In other words to achieve wise and compassionate outcomes we need to cultivate wise and compassionate attitudes. At an individual level all of this has long been understood and is quite straightforward. How to apply these understandings to social policy, particularly in light of the challenges and temptations of an insistent globalisation is a far more complex matter. But I believe the realisation of such positive outcomes including Gross National Happiness begins with the cultural empowerment of the central tenets of traditional wisdom. In other words, the profound insight that exists in Buddhist culture must retain its authority to guide social policy if a realistic balancing of the elements of a healthy economy, a just society and a sustainable environment is to be possible. This means that social governance has to be performed in light of these insights and that good governance is


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defined by its allegiance to, and capacity for empowering the compassionate principles that define and give value to the culture. If Buddhist culture in Bhutan is in part characterised by an appreciation of the importance of self-restraint and balance for example, then good governance is by definition, governance conducted in a spirit of self-restraint and balance. Or if a central cultural value involves cultivating respect for the natural world, then good governance is defined by placing respect for nature at the heart of policy making. The maintenance of culturally priorities is only possible if those who have the greatest influence embody and empower the values their societies hold to be of the greatest importance and value. In the instance of Bhutanese development then, as in the case of indigenous development anywhere, cultural vibrancy and the good governance that follows from it must be diligently monitored and constantly revitalised as the primary goal. If this is not done, as the pattern of global change worldwide amply illustrates, indigenous cultures and alternative frameworks collapse as they succumb to the dissolving anarchy of modern economic individualism and competitiveness. To vigilantly adapt and implement indigenous values is the only way to ensure cultural self-determination in the face of a dissolving globalisation that is equally determined to force their dissolution. In case after case, fragile cultural systems are replaced by alien forms of poor governance singularly oriented towards an unwise obsession with GNP and the whole nexus of troublesome assumptions it represents. As for the other specific elements of Bhutanese development - the pillars of environmental sensibility, economic development and I would add, social justice - I believe from all that I have learned about this country that the wisdom necessary to effectively achieve balance certainly exists in the cultural values that sustain society here. This however, will involve as a primary task, the operationalisation of measures capable of accurately monitoring developments in each of these critical areas to ensure that a growing economic capacity does not, as it has elsewhere, cannibalise the equally essential realms of social justice and ecological balance. The specific criteria that will be aimed for within the realms of economic, social and cultural outcomes can only be determined by the people of Bhutan themselves and only in reference to their own distinct cultural priorities. And so in conclusion I must return to my original concern regarding the ultimate aim of maximising and operationalising Gross National Happiness per se. I firmly believe in Bhutan’s desire to forge its own path in the modern world and not to succumb to a mindless adoption of alien priorities and I believe that a greater happiness is only attainable through such a strategy. However, I remain doubtful that an unqualified

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and perhaps hurried search for a maximal measurable happiness is the best first step forward. To operationalise happiness without first operationalising the foundations upon which it can rest, runs the distinct risk of minimising the importance of the right means of attaining that happiness. As is the case with any form of measurement, it can quickly become a narrowed focus that causes us to lose sight of the wisest means to its attainment. If the profound wisdom of Buddhism is correct, then the cultivation of a genuinely wise and compassionate attitude will produce a profound happiness as it has always done. Happiness then has its grounding in a respectful balancing of personal concern with the interests of others and of material concerns and the immaterial interests of personal and spiritual development. I would humbly suggest then that the Government of Bhutan put it energies at this stage into articulating the states it wishes to see obtain in each of the areas from which balanced development springs – society, culture, good governance, economy and the environment. In the realm of the environment for example, it might be appropriate to create a set of measures related to trends in biodiversity and the well-being of critical indicator species, the sustainability of forestry, the creation of inorganic wastes, carbon dioxide emissions, water quality, cropland fertility and other such critical indicators of ecological health. In the realm of societal functioning, specific measurable criteria relating to levels of personal indebtedness, nutrition, the distribution of land, standards of housing, income polarisation, opportunities for education, population growth and access to basic healthcare might be constructive among other indicators. Similarly specific criteria can be developed to monitor the health and vitality of culture, good governance and the economy. If goals and limits can be rigorously articulated for each of these various pillars of GNH then Bhutan can develop first and foremost, the consciously responsible form of development so badly needed by the current global order. Once a desirable form of appropriate development has been formalised then attention can rightly shift to achieving happiness within this essential pattern of social advance. Buddhist culture has long maintained that the truest and deepest happiness comes from thinking, acting and interacting in ‘right’ ways – ways characterised by maturity, wisdom and compassion, and specifically not by a crass self-interested materialism. If the population as a whole can appreciate the essential rightness of being a responsible part of the global order then this can provide the ultimate sense of pride, self-respect and contentment. To facilitate the blossoming of such a collective happiness in responsibility however, there will need to be a constant re-affirmation of the truths of Buddhist teachings on compassion, moderation and respect. Equally importantly there will need to be a constant critical invalidation of the


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insidious ideology that would excuse un-moderated material greed and seek joy in destroying the prospects of future generations. It is clear that Bhutan wishes to avoid the latter option and I believe the only way of avoiding succumbing to its cynicism is to set in place specific targets and measures capable of monitoring any cracks that might appear in the pillars or foundations upon which a responsible happiness rests. Following this, the cultivation of pride and happiness in what has been attained can be sought as the ultimate outcome that represents both the end and the on-going means by which it vitality is sustained. But to aim for a national happiness without first ensuring that practice reflects an essential wisdom and compassion runs the distinct risk of undermining the right conduct Buddhism has long seen as leading to the only true and worthy happiness.

References

Ahuvia, A.: 2002, ‘ Individualism/collectivism and cultures of happiness: A

theoretical conjecture on the relationship between consumption, culture and subjective well-being at thee national level’, Journal of Happiness Studies, 3, 23-36.

Argyle, M.: 1999. ‘Causes and correlates of happiness’, in D. Kahneman, E.Diener and N. Schwartz (eds), Well-being: The foundations of hedonic psychology. New York, Russell-Sage Foundation.

Baumeister, R.F and M.R. Leary.: ‘The need to belong: Desire for interpersonal attachments as a fundamental human motivation’, Psychological Bulletin, 117, 497-529.

Diener, E. and C. Diener.: ‘The wealth of nations revisited: Income and quality of life’, Social Indicators Research, 36, 275-286.

Diener, E. and R.E. Lucas: 2000. ‘Explaining differences in societal levels of happiness: Relative standards, need fulfilment, culture an evaluation theory’, Journal of Happiness Studies 1, 41-78.

Diener, E., Horwitz, J. and Emmons, R.A.: 1985. ‘Happiness of the very wealthy’, Social Indicators, 16, 263-274.

Eckersley, R.: 2000.’The mixed blessings of material progress: Diminishing returns in the pursuit of happiness’, Journal of Happiness Studies, 1, 267-292.

Emmons, R.A.: 1986. ‘Personal strivings: An approach to personality and subjective well-being’, Journal of Personality and Social Psychology, 51, 1058-1068.

Cummings, R.: 2000. ‘Normative life satisfaction: Measurement issues and a homeostatic model’, in B. Zunbo (ed) Methodological developments and issues in quality of life research (Kluwer Academic Press, Dodrecht, Netherlands).

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Duncan, O.: 1975. Does money buy satisfaction? Social Indicators Research 2, 267-274.

Inglehart, R.: 1990. ‘Culture shift in advanced industrial society’, Princeton, N.J, Princeton University Press.

Lykken, D.: (1999). ‘Happiness’, New York, Golden Books. Myers, D.G.: 1993. ‘The pursuit of happiness, Avon, New York Myers, D.G.: 2000. ‘The funds, friends and faith of happy people’, American

Psychologist, 53, 56-67. Myers, D.G. and Diener, E.: 1996. ‘The pursuit of happiness, Scientific

American, 274, 54-56. Oswald, A.J.: 1997. ‘Happiness and economic performance, Economic Journal,

107, 1815-1831. Perkins, H.W.: 1991. ‘Religious commitment, yuppie values and well-being in

post-collegiate life’, Review of Religious Research, 32. 224-251. Schyns, P.: 2000. ‘Wealth of nations, individual income and life satisfaction in

42 countries: A multilevel approach.’ In B. Zumbo (ed). Advances in quality of life research, vol 2 (Kluwer Academic Publishers Dorecht, Netherlands).

Silver, R.L.: 1982. ‘Coping with an undesirable life event: A study of early reactions to physical disability. Doctoral dissertation, Northwestern University, Evanston, Illinois.

Stone, A.A, and J.M. Neale.: 1984. ‘Effects of severe daily events on mood’, Journal of Personality and Social Psychology, 46, 137-144.

Suh, E., E. Diener and F. Fujita.: 1996. ‘Events and subjective well-being: Only recent events matter’, Journal of Social and Personality Psychology, 70, 1091-1102.

Veenhoven, R.: 1996. ‘Happy life expectancy: A comprehensive measure of quality of life in nations’, Social Indicators Research, 39, 1-58.

Veenhoven, R.: 1997. ‘Advances in understanding happiness; Revue Quebecoise de Psychologie, 18, 29-74.

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Happy Life Years: A Measure of Gross National Happiness By Ruut Veenhoven

Summary Happiness is defined as the degree to which a person enjoys his or her life-as-a-whole. Accordingly ‘Gross National Happiness’ is defined as the degree to which citizens in a country enjoy the life they live. Individual happiness can be measured by self-report on a single standard question. Hence Gross National Happiness can be measured by the average response to such questions in general populations surveys. Survey data on average self-report of happiness can be combined with estimates of life expectancy based on civil registration. The resulting index denotes how long and happy people live in a country and can be expressed in a number of Happy-Life-Years (HLY). Comparison across present day nations shows huge differences on this indicator, HLY varying between 63 (Switzerland) and 21 (Moldavia). About 80% of these differences can be explained by variation in societal characteristics, such as economic development, political democracy and mutual trust. HLY varies also over time. During the last decade it rose in western nations but plunged in the former Soviet nations. It is argued that HLY is the best available indicator of Gross National Happiness.

1 INTRODUCTION The concept of 'Gross National Happiness' (GNH) was introduced in the political discourse in the 1960s by the late king of Bhutan, Jigme Dorji Wangchuck. In 1971 the idea was articulated by the present King Jigme Singye Wangchuck is his famous statement that "Gross National Happiness is more important than Gross National Product" (Priesner 1999: 28). In 1991 the idea was mentioned in the Five Year Plan (7th 5-year plan pp. 22) and in 1998 the Prime Minister elaborated the idea in an international address (Thingley 1998). These statements did not aim at scientific precision in the first place, but served to indicate a political direction. The motto worked well to that end and appeals also outside Bhutan. This success now calls for measurement of the matter. Once we accept the idea that the country should aim at Gross National Happiness we need tools to assess how successful the country is in realizing that end.

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Measuring Gross National Happiness requires first of all that we define what happiness is. To that end I start in section 2 with a review the various meanings of the word and select the meaning that fits best with official statements on the matter. That is the meaning of 'life-satisfaction'. In section 3 I will consider the available measures of life-satisfaction in nations and conclude that this can best be measured using self-reports. In section 4 I will argue that survey data on subjective life-satisfaction can be combined with data on life-expectancy and that the resulting estimate of 'happy life years' indicates how long and happy people live in a country. Finally in section 5 I review the available data on that matter and consider the merits of that measure on that empirical basis.

2 CONCEPT OF HAPPINESS The word happiness is often used interchangeably with the term 'quality of life'. When used in that sense it is an umbrella term for different notions of the good life. These notions can be ordered on the basis of the following two distinctions: Chances and outcomes A first distinction is between opportunities for a good life and the good life itself. This is the difference between potentiality and actuality. I refer to this as 'life-chances'1 and 'life-results'. Opportunities and outcomes are related, but are certainly not the same. Chances can fail to be realized, due to stupidity or bad luck. Conversely, people sometimes make much of their life in spite of poor opportunities. This distinction is quite common in the field of public-health research. Pre-conditions for good health, such as adequate nutrition and professional care are seldom mixed up with health itself. Yet, in social policy discussions means and ends are less well distinguished. Outer and inner qualities A second difference is between 'external' and 'inner' qualities. In the first case the quality is in the environment, in the latter it is in the individual. Lane (1994) made this distinction clear by telling 'quality of society’ from 'quality of persons'. This distinction is also quite common in public health. External pathogens are distinguished from inner afflictions. Yet again, this basic insight is lacking in many social policy discussions.

1 In sociology, the term 'life-chances' is used in the more limited meaning of access to scarce resources in society.

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2. 1 Four qualities of life The combination of these two dichotomies yields a fourfold matrix. This classification is presented in scheme 1. The distinction between chances and results is presented vertically, the difference between outer and inner qualities horizontally. In the upper half of the scheme, we see two variants of potential quality of life, with next to the outer opportunities in one's environment, the inner capacities to exploit these. The environmental chances can be denoted by the term livability, the personal capacities with the word life-ability. This difference is not new. In sociology, the distinction between 'social capital' and 'psychological capital' is sometimes used in this context. In the psychology of stress, the difference is labeled negatively in terms of 'burden' and 'bearing power'. The lower half of the scheme is about the quality of life with respect to its outcomes. These outcomes can be judged by their value for one's environment and by value for oneself. The external worth of a life is denoted by the term utility of life. The inner valuation of it is called appreciation of life. These matters are of course related. Knowing that one’s life is useful will typically add to the appreciation of it. Yet useful-lives are not always happy lives and not every good-for-nothing really cares. This difference has been elaborated in discussions on utilitarian moral philosophy, which praises happiness as the highest good. Adversaries of that view hold that there is more worth to life than just pleasures and pains. Mill (1861) summarized that position in his famous statement that he preferred an unhappy Socrates to a happy fool.

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Scheme 1 Four qualities of life Outer qualities Inner qualities Life chances Livability of environment Life-ability of the person Life results Utility of life Enjoyment of life

2. 1. 1 Livability of the environment The left top quadrant denotes the meaning of good living conditions. Formerly, the term 'happiness' was often used for this particular meaning, especially in social philosophy. Currently, this matter is mostly called 'quality-of-life' or 'wellbeing'. Other terms are 'welfare' and 'level of living' 'Livability' is a better word, because it refers explicitly to a characteristic of the environment and does not have the limited connotation of material conditions. One could also speak of the 'habitability' of an environment, though that term is also used for the quality of housing in particular. Elsewhere I have explored that concept of livability in more detail (Veenhoven 1996:7-9). Ecologists see livability in the natural environment and describe it in terms of pollution, global warming and degradation of nature. Currently, they associate livability typically with environmental preservation. City planners see livability in the built environment and associate it with sewer systems, traffic jams and ghetto formation. Here the good life is seen as a fruit of human intervention. In public health this all is referred to as a 'sane' environment. In the sociological view, society is central. Firstly, livability is associated with the quality of society as a whole. Classic concepts of the ‘good society’ stress material welfare and social equality, sometimes equating the concept more or less with the welfare state. Current communitaristic notions emphasize close networks, strong norms and active voluntary associations. The reverse of that livability concept is ‘social fragmentation’. Secondly, livability is seen in one’s position in society. For long, the emphasis was on ‘under-class’ but currently attention shifts to ‘outer-class’. The corresponding antonyms are ‘deprivation’ and ‘exclusion’. 2. 1. 2 Life-ability of the person The right top quadrant denotes inner life-chances. That is: how well we are equipped to cope with the problems of life. This aspect of the good life is also known by different names. Doctors and psychologists use the terms 'quality of life' and 'well-being' to denote this specific meaning.


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There are more names however. In biology, this meaning is referred to as 'fitness'. On other occasions, it is denoted by the medical term 'health', in the medium variant of the word2, or by psychological terms such as 'efficacy' or 'potency'. Sen (1993) calls this quality of life variant 'capability'. I prefer the simple term 'life-ability', which contrasts elegantly with 'livability'. The most common depiction of this quality of life is absence of functional defects. This is 'health' in the limited sense, sometimes referred to as 'negative health'. In this context, doctors focus on unimpaired functioning of the body, while psychologists stress the absence of mental defects. This use of words presupposes a 'normal' level of functioning. Good quality of life is the body and mind working as designed. This is the common meaning used in curative care. Next to absence of disease, one can consider excellence of function. This is referred to as 'positive health' and associated with energy and resilience. Psychological concepts of positive mental health involve also autonomy, reality control, creativity and inner synergy of traits and strivings. A new term in this context is 'emotional intelligence'. Though originally meant for specific mental skills, this term has come to denote a broad range of mental capabilities. This broader definition is the favorite in training professions. A further step is to evaluate capability in a developmental perspective and to include acquisition of new skills for living. This is commonly denoted by the term 'self-actualization'; from this point of view a middle-aged man is not 'well' if he behaves like an adolescent, even if he functions without problems at this level. Since abilities do not develop in idleness, this quality of life is close to the ‘activity’ in Aristotle’s concept of eudaimonia (Ostenfelt, 1994). This quality concept is also currently used in the training professions. Lastly, the term 'art of living' denotes special life-abilities; in most contexts this quality is distinguished from mental health and sometimes even attributed to slightly disturbed persons. Art of living is associated with refined tastes, an ability to enjoy life and an original style of life (Veenhoven 2003). 2. 1. 3 Utility of life The left bottom quadrant represents the notion that a good life must be good for something more than itself. This presumes some higher values.

2 A problem with this name is that the utilitarians used the word utility for subjective appreciation of life, the sum of pleasures and pains.

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There is no current generic for these external turnouts of life. Gerson (1976: 795) referred to these kinds as 'transcendental' conceptions of quality of life. Another appellation is 'meaning of life', which then denotes 'true' significance instead of mere subjective sense of meaning. I prefer the more simple 'utility of life', admitting that this label may also give rise to misunderstanding3. Be aware that this external utility does not require inner awareness. A person's life may be useful from some viewpoints, without them knowing4. When evaluating the external effects of a life, one can consider its functionality for the environment. In this context, doctors stress how essential a patient's life is to its intimates. The life of a mother with young children is valued as higher than the life of a woman of the same age without children. Likewise, indispensability at the workplace figures in medical quality of life notions. At a higher level, quality of life is seen in contributions to society. Historians see quality in the addition an individual can make to human culture, and rate for example the lives of great inventors higher than those of anonymous peasants do. Moralists see quality in the preservation of the moral order, and would deem the life of a saint to be better than that of a sinner. In this vein, the quality of a life is also linked to effects on the ecosystem. Ecologists see more quality in a life lived in a 'sustainable' manner than in the life of a polluter. In a broader view, the utility of life can be seen in its consequences for long-term evolution. As an individual's life can have many environmental effects, the number of such utilities is almost infinite. Apart from its functional utility, life is also judged on its moral or esthetic value. Returning to Mill's statement that he preferred an unhappy Socrates to a happy fool, Mill did not say this just because Socrates was a philosopher whose words have come down to us; it was also because he admired Socrates as an outstanding human being. Likewise, most of us would attribute more quality to the life of Florence Nightingale than to that of a drunk, even if it appeared that her good works had a negative result in the end. In classic moral philosophy this is called 'virtuous living', and is often presented as the essence of 'true happiness'.

3 A problem with this name is that the utilitarians used the word utility for subjective appreciation of life, the sum of pleasures and pains. 4 Frank’s (1946) logo-therapy aims to make people believe in meanings of their life they do not see.


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2. 1. 4 Enjoyment of life Finally, the bottom right quadrant represents the inner outcomes of life. That is the quality in the eye of the beholder. As we deal with conscious humans, this quality boils down to subjective appreciation of life. This is commonly referred to by terms such as 'subjective wellbeing', 'life-satisfaction' and 'happiness' in a limited sense of the word. Humans are capable of evaluating their life in different ways. We have in common with all higher animals that we can appraise our situation affectively. We feel good or bad about particular things and our mood level signals overall adaptation. As in animals these affective appraisals are automatic, but unlike other animals it is known that humans can reflect on that experience. We have an idea of how we have felt over the last year, while a cat does not. Humans can also judge life cognitively by comparing life as it is with notions of how it should be. Most human evaluations are based on both sources of information, that is: intuitive affective appraisal and cognitively guided evaluation. The mix depends mainly on the object. Tangible things such as our income are typically evaluated by comparison; intangible matters such as sexual attractiveness are evaluated by how it feels. This dual evaluation system probably makes the human experiential repertoire richer than that of our fellow-creatures. In evaluating our life, we typically summarize this rich experience in overall appraisals. For instance, we appreciate domains of life. When asked how we feel about our work or own marriage, we will mostly have an opinion. Likewise, most people form ideas about separate qualities of their life, for instance how challenging their life is and whether there is any meaning in it. Such judgments are made in different time-perspectives, in the past, the present and in the future. As the future is less palpable than the past and the present, hopes and fears depend more on affective inclination than on cognitive calculation. Next to aspects of life, we also judge life-as-a-whole. 2. 2 Happiness and other enjoyments Even when we focus on subjective enjoyment of life, there are still different meanings associated with the word happiness. These meanings can also be charted in a fourfold classification. In this case, that classification is based on the following dichotomies: Life-aspects versus life-as-a-whole Above, we have seen that appraisals of life can concern aspects, such as marriage or work-life, and one's life-as-a-whole. The word 'happiness' is used in both contexts. Obviously, such appraisals are linked. Enjoyment of

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aspects of life will typically contribute to the satisfaction with life as a whole (so-called bottom-up effect), and enjoyment of one's life-as-a-whole appears to foster the satisfaction with life-aspects (top-down). Still, these are not identical matters. One can have a happy marriage but still be dissatisfied with life-as-a-whole, or be satisfied with life-as-a-whole in spite of an unhappy marriage. Passing delight versus enduring satisfaction The experience of enjoyment can be short-lived or enduring. Again, the word happiness is used for both phenomena. Sometimes it refers to passing moods and at other occasions for stable satisfaction. Once more, these matters are related but not the same. When combined, these distinctions produce the fourfold classification presented in scheme 2. The difference between part and whole is presented vertically, and the distinction between passing and enduring enjoyment horizontally. Scheme 2 Four kinds of satisfaction

Passing Enduring

Life aspects

Instant satisfactions (instant utility)

Domain-satisfactions

Life as a whole Top experience Life-satisfaction (Happiness)

2. 2. 1 Pleasure The top-left quadrant represents passing enjoyments of life-aspects. Examples are the delight of a cup of tea at breakfast, the satisfaction with a chore done or the enjoyment of a piece of art. Nobel laureate Kanahan (1999) calls this 'instant-utilities'. Frequent experience of such passing pleasures is probably a necessary condition for enduring satisfaction with life-as-a-whole, but probably not a sufficient one since life-satisfaction requires also a sense of meaning. The term happiness is used in the sense of pleasure, especially by critics of utilitarianism5 who thus denounce that moral philosophy as superficial hedonism.

5 Utilitarian moral philosophy holds that the good and bad of all actions should be judged by its effects on human happiness, the morally best action being the one that provides the 'greatest happiness for the greatest number'. Jeremy Bentham (1798) is a spokesman of this view. When applied on public choice, this theory is known as 'rule-utilitarianism'.


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2. 2. 2 Domain satisfaction The top right quadrant denotes enduring appreciation of life-aspects, such as marriage satisfaction and job-satisfaction. This is currently referred to as domain-satisfactions. Though domain-satisfactions depend typically on a constant flow of instant-satisfactions, they have some continuity of their own. For instance, one can remain satisfied with one's marriage even if one has not enjoyed the company of the spouse for quite some time. The term happiness is sometimes used in this sense, in particular to denote satisfaction with one's career. That use of the word is mostly also polemic and serves to denote that such rat-race happiness is not very worthwhile. Satisfaction with major domains of life obviously ads to satisfaction with ones life-as-a-whole. Yet these things are not the same. One can be satisfied with one's work and marriage, but still be dissatisfied with one's life-as-a-whole because one has failed a cause. 2. 2. 3 Top-experience The bottom right quadrant denotes the combination of passing experience and appraisal of life-as-a-whole. That combination occurs typically in so-called 'top-experiences', which involve short-lived but quite intense oceanic feelings. Mystics and poets use the term happiness often in this sense. Yet this meaning should not be equated with enduring enjoyment of life-as-a-whole; these phenomena are in fact antithetical, people who go through top-experiences most often are typically not the most satisfied with life. 2. 2. 4 Life-satisfaction Lastly, the bottom-right quadrant represents the combination of enduring satisfaction with life-as-a-whole. This is happiness in the sense of life-satisfaction. This meaning is clearly the most relevant for policy makers and comes closest to the notion of Gross National Happiness. 2. 3 Likeness with the Bhutanese notion of 'Gross national Happiness' Close reading of statements of the Bhutanese government on 'Gross national Happiness' learns that happiness is seen as a state of an individual and not as a state of society. The goal is to promote the happiness of citizens, and the development of society is one of the means (Thingley 1998: 14-15). Happiness as such is distinguished from its presumed determinants, such as 'material wealth', 'Enlightenment education', 'natural environment' and 'good governance' (Thingley 1998 15-

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22). This means that the concept belongs in the right half of scheme 1; in the column of 'inner' qualities of life. The first official document speaks about the 'emotional wellbeing of the population' (7th 5-year plan pp. 22) and in later statements the term is used interchangeably with 'good mood' and 'contentment'. This means that the concept addresses experienced outcomes of life and fits the right-bottom quadrant in scheme 1, which denotes 'satisfaction'. The texts make also clear that happiness is seen as a lasting state of mind, and not as a passing mood. The aim is obviously not at creating short-lived thrills. So the concept must be placed in the right half of scheme 2 that denotes 'enduring satisfaction'. Likewise, the texts leave no doubt that happiness is seen as an appraisal of life-as-a-whole rather than as satisfaction with a particular domain of life. So the Bhutanese notion of happiness fits the right-bottom quadrant of scheme 2; that is life-satisfaction. 2. 4 Definition of individual happiness In this line, happiness can be defined as the degree to which a person evaluates the overall quality of his present life-as-a-whole positively. In other words, how much the person likes the life he/she leads. Scope of evaluation The concept of happiness denotes an overall evaluation of life. Therefore, the appraisal that life is èxciting' does not mark it as `happy'. There may be too much excitement in life, and too little of other qualities. The overall evaluation of life involves all the criteria figuring in the mind of the individual: how good it feels, how well it meets expectations, how desirable it is deemed to be, etc. Kind of evaluation When we appraise how much we appreciate the life we live, we seem to use two sources of information: Affectively, we estimate how well we feel generally, and at the cognitive level we compare 'life as it is' with standards of 'how life should be'. The former affective source of infor-mation seems generally to be more important than the latter cognitive one (Veenhoven 1996a: 33-35). The word happiness is commonly used for these 'subtotals' as well as for the comprehensive appraisal. I use the terms 'overall happiness' or 'life satisfaction' for the comprehensive judgment and refer to the affective and cognitive sub-appraisals as respectively 'hedonic level of affect' and 'contentment'. These concepts are delineated in more detail in Veenhoven (1984: chapter 2).


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Temporal range Appraisals of life can concern different periods in time: how life has been, how it is now, and how it will probably be in the future. These evaluations do not coincide necessarily; one may be positive about past life, but negative about the future. The focus of this paper is on satisfaction with present life. I am not sure that this definition fully fits with the notion that authors of Bhutanese government texts had in mind. Possibly some of them aimed at a specific Buddhist variant and thought of serene contentment in the first place. If so, I would still prefer the above definition, since it has several advantages. One advantage is that this concept of happiness is broad enough to encompass such local variations. Another plus is that this concept has proven to be well measurable and comparable across cultures. 2. 6 Definition of Gross National Happiness Following the above definition of individual happiness, Gross National Happiness can be defined as the degree to which citizens in a country enjoy the life they live. Gross National Happiness is then an aggregate concept, like the concept of Gross National Product that sums goods and services. If every citizen counts equally much in this sum, the concept can be quantified using the average of individual happiness in the country.

3 MEASUREMENT OF HAPPINESS In Bhutanese statements about GNH it is commonly assumed that happiness cannot be quantified and compared across time and nations like GNP. Yet the kind of happiness defined above can be measured using surveys in which a representative sample of citizens is asked how much they enjoy their life-as-a-whole. Since the 1960s this is common practice and this research has yielded much information about the usefulness of this method. Measurement has long been understood as òbjective' and èxternal' assessment, analogous to the measurement of blood pressure by a doctor. By now, we know that happiness cannot be measured that way. Steady physiological correlates have not been discovered, and probably never will be. Nor have any overt behaviors been found to be consistently linked to inner enjoyment of life. Like most attitudinal phenomena, happiness is only partially reflected in behavior. Though some social behaviors tend to be more frequent among the happy (active, outgoing, friendly), such conduct is also observed among unhappy persons.

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Likewise, non-verbal behaviors such as frequent smiling or enthusiastic movements appear to be only modestly related to self-reports of happiness. Consequently, estimates of someone's happiness by his peers are often wrong. Suicidal behavior is probably more indicative of happiness. Almost all people who attempt or commit suicide are quite unhappy. However, not all the unhappy seek resort to suicide. In fact, only a fraction does. 3. 1 Survey questions on happiness Inference from overt behavior being impossible, we must make do with questioning. That is, simply asking people how much they enjoy their life-as-a-whole. Such questions can be posed in various contexts; clinical interviews, life-review questionnaires and common survey interviews. The questions can be posed in different ways; directly or indirectly, and by means of single or multiple items. A common survey question is: Taking all together, how satisfied or dissatisfied are you currently with your life as a whole? 1 2 3 4 5 6 7 8 9 10 Dissatisfied Satisfied Since the 1970's, such questions have been included in many 'Quality-of-Life' surveys all over the world. There is now a growing body of data on happiness in nations. Presently there are comparable surveys in 67 nations. The data are brought together in the 'World Database of Happiness' (WDH 2003). 3. 2 Doubts about happiness self-reports Yet there are many qualms about such simple self-reports of happiness. Elsewhere I have considered the objections and inspected the empirical evidence for claims about bias. I will summarize the main points below. For more detail and references, see Veenhoven 1984 chapter 3 and Veenhoven 1993, chapter 5. 3. 2. 1 Validity Critics have suggested that responses to questions on life-satisfaction actually measure other phenomena. Rather than indicating how much the respondent enjoys life, answers would reflect his normative notions and desires. No notion One of the misgivings is that most people have no opinion at all about their happiness. They would be more aware of how happy they are


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supposed to be, and report that instead. Though this may happen incidentally, it does not appear to be the rule. Most people know quite well whether they enjoy life. Eight out of ten Americans think of it every week. Responses on questions about happiness tend to be prompt. Non-response on these items is low; both absolutely (± 1%) and relatively to other attitudinal questions. `Don't know' responses are infrequent as well. A related assertion is that respondents mix up how happy they actually are, with how happy other people think they are, given their situation. If so, people considered being well off would typically report to be very happy, and people regarded as disadvantaged should characterize themselves as unhappy. That pattern is observed sometimes, but it is not general. For instance, in The Netherlands, good education is seen as a pre-requisite for a good life, but the highly educated appear slightly less happy in comparison to their less educated counterparts. Colored answers Another objection concerns the presence of systematic bias in responses. It is assumed that questions on happiness are interpreted correctly, but that responses are often false. People who are actually dissatisfied with their life would tend to answer that they are quite happy. Both ego-defense and social-desirability would cause such distortions. This bias is seen to manifest itself in over-report of happiness; most people claim to be happy, and most perceive themselves as happier than average. Another indication of bias is seen in the finding that psychosomatic complaints are not uncommon among the happy. However, these findings allow other interpretations as well. Firstly, the fact that more people say to be happy than unhappy does not imply over-report of happiness. It is quite possible that most people are truly happy (some reasons will be discussed below). Secondly, there are also good reasons why most people think that they are more happy than average. One such reason is that most people are like critical scientists and think that unhappiness is the rule. Thirdly, the occurrence of headaches and worries among the happy does not prove response distortion. Life can be a sore trial some times, but still be satisfying on a balance. The proof of the pudding is in demonstrating the response distortion itself. Some clinical studies have tried to do so by comparing responses to single direct questions with ratings based on depth interviews and projective tests. The results are generally not different from responses to single direct questions posed by an anonymous interviewer.

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3. 2. 2 Reliability Though single questions on happiness seem to measure what they are supposed to measure, they measure it rather imprecisely. When the same question is asked twice in an interview, responses are not always identical. Correlations are about +. 70. Over a period of a week, test-retest reliability drops to circa +. 60. Though responses seldom change from `happy' to ùnhappy', switches from `very' to `fairly' are rather common. The difference between response-options is often ambiguous. The respondent's notion about his/her happiness tends to be global. Thus, the choice for one answer-category or the next is sometimes haphazard. Because choice is often arbitrary, subtle differences in interrogation can exert considerable effect. Variations in place where the interview is held, characteristics of the interviewer, sequence of questions and precise wording of the key-item can tip the scale to one response or the other. Such effects can occur in different phases of the response process; in the consideration of the answer as well as in the communication of it. Much of these biases are random, and balance out in large samples. Therefore, in large samples, random error does not affect the accuracy of happiness averages. Yet it does affect correlations, random error 'attenuates' correlations. Random error can be estimated by means of multipletrait-multiplemethod (MTMM) studies, and correlations can be corrected (disattenuated) on that basis. Some biases may be systematic, especially bias produced by technique of interrogation and sequence of questions. Bias of that kind does affect the reliability of distributional data. In principle it does not affect correlations, unless the measure of the correlate is biased in the same way (correlated error). To some extend, systematic error can also be estimated and corrected. 3. 2. 3 Comparability Another common qualm is that self-ratings of happiness cannot be meaningfully compared between persons and certainly not across cultures. Interpersonal comparability It is commonly assumed that happiness is a matter of comparison of life-as-it-is with standards of how life-should-be and it is also assumed that these standards differ highly across individuals. Together, these assumptions imply that happiness is not comparable interpersonally; score 6 on the above mentioned scale may mean something quite different for person A than for person B.


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If happiness is so idiosyncratic an appraisal indeed, it is unlikely to be correlated to hard differences in income, health and companionship. However, that prediction is not confirmed in empirical studies. In poor countries at least, income does matter to happiness. Happiness is also firmly related health, not only does good health add to happiness, but reversely, happiness also sustains physical health and is even a strong predictor of long-term longevity (Danner et. al. 2001). Likewise, happiness is universally related to marriage and friendship (Diener 2000). The available data fit better with the theory that happiness depends on the gratification of inborn needs and in that context it is likely that the experience of enjoying one’s life has a very similar meaning for all humans, comparable to experiences of pain and hunger. I have discussed this matter in more detail elsewhere (Veenhoven 1991, 1997). See also Ng (1997) on this issue. Comparability across nations Average happiness differs markedly across nations. In scheme 3, we will see that Russians score currently 5. 4 on a 0-10 scale, while in Canada the average is 7. 7. Does that mean that Russians really take less pleasure in life? Several claims to the contrary have been advanced. I have checked these doubts elsewhere (Ouweneel & Veenhoven, 1991, Veenhoven 1993b). The results of that inquiry are summarized below. Language: The first objection is that semantic differences hinder comparison. Words like `happiness' and `satisfaction' would not have the same connotations in different tongues. Questions using such terms would therefore measure slightly different matters. I checked that hypothesis by comparing the rankorder produced by three kinds of questions on life-satisfaction: a question about `happiness', a question about `satisfaction with life' and a question that invites to a rating between `best- and worst possible life'. The rankorder appeared to be almost identical. I also compared responses on questions on happiness and satisfaction in two bi-lingual countries, and found no evidence for linguistic bias either. Desirability: A second objection is that responses are differentially distorted by desirability-bias. In countries where happiness ranks high in value, people would be more inclined to overstate their enjoyment of life. I inspected that claim by checking whether reported happiness is indeed higher in countries where hedonic values are most endorsed. This appeared not to be the case. As a second check, I inspected whether reports of general happiness deviate more from feelings in the past few weeks in these countries, the former measure being more vulnerable for

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desirability distortion than the latter. This appeared not to be the case either. Response styles: A third claim is that response-styles distort the answers dissimilarly in different countries. For instance, collectivist orientation would discourage `very' happy responses, because modest self-presentation is more appropriate within that cultural context. I tested this hypothesis by comparing happiness in countries differing in value-collectivism, but found no effect in the predicted direction. The hypothesis failed several other tests as well. Western concept? A related claim is that happiness is a typical western concept, which is alien to people in non-western nations. Unfamiliarity would lead to lower scores. If so, we can expect more `don't know' and `no answer' responses in non-western nations. However, that appeared not to be the case6. Still another way to check the misgivings about cross-cultural comparability of happiness is to consider the correlation between average happiness in nations and characteristics of these nations. If conceptions of happiness are so different and responses so differently distorted, we will find little correlation with actual wealth, freedom and peace in the country. Yet comparative research has learned that about 75% of the observed differences in average happiness can be explained that way (Veenhoven 1993, see also section 5. 3. 7). So the unique cultural variance is at best 25% and probably less. Measure of Gross National Happiness Gross National Happiness was defined as the degree to which citizens in a country enjoy their life-as-a-whole (cf. Section 2. 4) and next we have seen that individual happiness can be adequately measured by self-reports. Hence Gross National Happiness can be measured by the aggregation of individual happiness ratings as observed in surveys of the general population. Gross National Happiness can then be quantified by descriptive statistics of general tendency, such as the mean. 3. 3. 1 Average happiness in nations This is in fact common practice and at this we know the average happiness in 67 nations in the 1990s. Some illustrative cases are presented below in scheme 3. The full list is on appendix 1. Scheme 3

6 In Japan do we see a higher non-response indeed, though still below 5%. Still this not a general non-western pattern. In India and Nigeria non-response is at the same level as in western nations.


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Happiness in nations in the 1990s. Average self-reports on scale 0-10

Source: World Database of Happiness 3. 3. 2 Happiness in Bhutan Happiness has not yet been assessed in Bhutan. Though a few surveys have been conducted in that country, none of these involved questions about happiness. This lack illustrates that the concept of Gross National Happiness has served to express an intention in the first place. For the time being, we can only speculate about the level of happiness in Bhutan. Yet the available data on other countries allow an educated guess. Comparative research has revealed strong links between average happiness in nations and several societal characteristics and on that basis I predict that current Bhutan will score in the lower middle range between 6 and 5. I do not expect a high level of happiness in present day Bhutan because the material standard of life is still too low and the culture is collectivistic. Another reason for my expectation is that the country faces major social change. The dramatic fall of happiness in the post communist world illustrates that this may reduce happiness temporarily. On the other hand Bhutan scores well on quality of governance and the country is in peace. Possibly its distinct culture also has a positive effect on average happiness. So I do not expect that unhappiness prevails in the country.

COMBINED MEASURE OF 'HAPPY LIFE YEARS' The concept of Gross National Happiness can also be operationalized by combining the above-discussed measure of average happiness in the country with data about longevity. Together that provides an estimate of how long and happy people life in a country. 4. 1 Why combine?

Top >7,7

Middle range ± 6,0

Bottom <4,0

Switzerland

8,1 Bolivia 6,2 Russia 4,2

Denmark 8,0 Poland 6,2 Georgia 4,1 Iceland 7,8 Bangladesh 6,0 Armenia 3,7 Luxembourg

7,8 Turkey 5,9 Ukraine 3,3

Canada

7,7 South-Africa 5,7 Moldavia 3,0

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This combination has two advantages: A pragmatic advantage that the duration of happiness is taken into account. Next a theoretical advantage is that this combination fits an evolutionary perspective on the good life. Taking duration into account One could imagine that people live happy in a country but not long, possibly as a result of too much indulgence. If so, many would opt for a less happy but longer life. This illustrates that we should not only consider the degree of happiness, but also its duration. A similar problem exists with the use of life-expectancy as a social indicator. If growing older means that we spend more years ailing, the rise of longevity does not mark real progress. That problem was solved by introducing the measures of 'Disability Adjusted Life Years', which count only the number of years spend in good health. Similarly we can compute 'Happiness Adjusted Life Years'. In section 4. 2 I will show how. Significance for biological adaptation Longevity is an indicator of successful adaptation for all creatures; any organism perishes if it fails to meet the demands of its environment. Survival is the only indicator of good adaptation for most species, but in higher animals successful adaptation also reflects in affective experience. The basic function of feelings is probably to inform the organism whether it is in the right pond or not. Since this faculty is only required in organisms that can move from one environment to another, it exists probably only in higher animals and not in plants Morris 1992). Like other higher animals humans are also endowed with the faculty of affective experience. Research has shown that our affective reaction typically precedes cognitive appraisals (Zajonc 1980), which suggests that the development of reason in the human species did not replace the earlier affective orientation system but came to function next to that. There is also evidence that human judgements of their life-as-a-whole draw on affective information in the first place (Schwarz & Strack 1991) and that is another indication that this orientation system still works. In this view, happiness is another signal of good adaptation, which can be meaningfully combined with longevity. If people live long and happy in a society, that society is apparently successful in meeting the needs of the human species. This brings me to the wider point that the outcome of life in happy life years also indicates how well the living conditions in the country fit with the life-abilities of its citizens. That link is visualized in scheme 4 This scheme presents the same fourfold as in scheme 1, with addition of key words from biological adaptation theory. The added arrows signify that


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both happiness and longevity in the right bottom quadrants are the result of preconditions depicted in the two top-quadrants and in particular an outcome of the fit between demands of the environment and life-ability of the individual. Hence the realized number of happy life years in a country indicates the chances for a life and analysis of variation in HLY can therefore help to identify the conditions that are most crucial for human thriving. Scheme 5 Biological view on relations between qualities of life uter qualities

Inner qualities

Life chances Livability of environment (biotope)

Life-ability of the person (Fitness)

Life results Utility of life (ecological function)

Survival Feeling

4. 2 How combine? The number of years citizens live happily in a country can be measured by combining information about length of life drawn from civil registrations of birth and death with data on overall appreciation of life as assessed in surveys. The following simple formula can be applied:

Happy-Life-Years = Life-expectancy at birth x 0-1 happiness Suppose that life expectancy in a country is 50 years, and that the average score on a 0 to 10-step happiness scale is 5. Converted to a 0-1 scale, the happiness score is than 0,5. The product of 50 and 0,5 is 25. So the number of happy life years is 25 in that country. If life expectancy is 80 years and average happiness 8, the number of happy life years is 64 (80 x 0,8). Theoretically, this indicator has a broad variation. The number of Happy Life Years is zero if nobody can live in the country at all, and will be endless if society is ideal and its inhabitants immortal. The practical range will be between about 20 and 75 years. Presently at least, life expectancy at birth in nations varies between 30 and 80, whereas average happiness is seldom lower than 0,4 on a 0 to 1 scale and seldom higher than 0,8. The number of happy-Life-Years will always be lower

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than standard life expectancy. It can equal real length of life only if everybody is perfectly happy in the country (score 1 on scale 0 to 1). High HLY means that citizens live both long and happily, low HLY implies that the life of the average citizen is short and miserable. Medium HLY values can mean three things: 1) both moderate length-of-life and moderate appreciation-of-life, 2) long but unhappy life, and 3) short but happy life. I have described this indicator in more detail elsewhere (Veenhoven 1996, 2000). It scored highest in a scholarly review of social indicators (Hagerty ea. 2001).

5 FINDINGS ON HAPPY LIFE YEARS IN NATIONS Happy Life Years can be compared across nations and over time. Such comparisons reveal striking differences and these differences can be linked to societal development. Below I present some illustrative findings.

5. 1 Difference across nations Data on Happy-Life-Years in nations are published on the World Database of Happiness (WDH 2003). This continuous register of research on subjective enjoyment of life is updated regularly. Currently it provides data on 67 nations in the 1990s. These data are presented on appendix A. Scheme 6 presents some illustrative cases. Scheme 6 Happy-Life-Years in nations in the 1990s Top

> 58 years

Middle range ± 41years

Bottom <30 years

Switzerland 63,0 Philippines 43,7 Georgia 29,7 Iceland 61,8 Greece 41,4 Russia 27,8 Denmark 59,9 Turkey 40,4 Armenia 26,2 Sweden 59,9 Hungary 38,5 Ukraine 22,5 Ireland 58,4 Bolivia 37,5 Moldavia 20,5 We cannot compute HLY for Bhutan, since we do not yet know average happiness. If we assume that average happiness is about 5. 5 in Bhutan (cf. section 3. 3. 2) the number of happy life years would be about 347.

7 Life expectancy in Bhutan was 61. 5 in 1999 (Human Development Report 2001, pp. 143)


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5. 2 Trend over time Time series are available for a few nations, for the USA since 1948, for Japan since 1958 and for the first member states of the European Union since 1973. All these nations witnessed a rise in the number of happy-life-years. This is mainly because life expectancy augmented in all these nations, but in several cases HLY was also boosted by a rise in average happiness. The most spectacular case of that kind is Italy, where HLY rose 12 years since 1973. Scheme 7 presents the longest available time series, that of the USA 1948-1998. Americans gained 7 Happy-Life-Years over these 50 years. Since average happiness remained at the same level over that period, this rise in HLY is entirely due to the rise in life expectancy. In this case, the proportional rise of HLY illustrates that this rise in length of did not go at the cost of lower quality of life. If the extra years added were spend in misery, HLY would have lagged or could even have declined. HLY went down in the former Soviet Union after the velvet revolution. Both happiness and life-expectancy plumped after 1990 and especially during the economic crisis in 1996. The latest data show a gradual recovery. Scheme 7 Happiness Adjusted Life Years in the USA 1948-1998

United States

Time

2000199019801970196019501940

Hap

py li

fe y

ears

70

65

60

55

50

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5. 3 Societal correlates of HLY The next question is of course whether there is a system in these differences and in particular whether the differences fit current conceptions of what a good society is like. To answer that question I inspected the statistical relationship between HLY and five societal qualities that are currently on the political agenda. These qualities are: 1) material wealth, 2) freedom, 3) social equality, 4) brotherhood, and 5) justice. The indicators used for that purpose are enumerated in appendix B. The analysis involves three steps: The first step is assessing how each of these societal characteristics relates to HLY. For that purpose I plotted scattergrams and computed zero-order correlations. Next I inspected to what degree the observed correlations could be attributed to differences in economic development across nations. For that purpose I computed partial correlations, controlling wealth of the country. Lastly I considered how much of the variance in HLY across nations could be explained by these societal characteristics together. An overview is presented in scheme 8. Below I will expand on the main findings.


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Scheme 8 Societal Qualities and Happy-Life-Years in 67 nations in the 1990s Condition in nation Correlation with HLY Zero-order Wealth

Controlled N

Wealth Purchasing power per head * +. 73 - 66 Freedom Economic * +. 71 +. 38 64 Political * +. 53 +. 13 63 Personal +. 61 +. 31 45 Equality Disparity in incomes * -. 10 +. 37 62 Discrimination of women -. 46 -. 12 51 Disparity in happiness -. 64 -. 37 54 Brotherhood Tolerance +. 72 +. 43 55 Trust in compatriots +. 20 +. 20 37 Voluntary work +. 40 +. 31 53 Social security +. 34 -. 27 34 Justice Rule of law * +. 65 +. 20 64 Respect of civil rights * +. 60 +. 20 60 Corruption -. 73 -. 32 40 Explained variance by variables marked with *

66%

60

Indicators described on appendix B 5. 3. 1 Wealth Until recently, quality-of-life in nations was in fact equated with material prosperity and measured by GDP per capita. It is now acknowledged that money is not everything, but wealth is still prominent in quality-of-life indexes such as the Human Development Index (UNPD 2001) and Estes' (1984) Index of Social Progress. How does this hallmark of 'assumed' quality-of-life relate to our measure of 'apparent' quality-of-life? The relation between income per head and HLY in nations is presented in scheme 9. That scattergram shows a strong correspondence, the correlation coefficient is +. 73. This result fits the common assumption that wealth is essential to quality-of-life. Yet at a closer look one can see that there is a limit to the benefits of material wealth. In the scattergram one can recognize the curve of diminishing returns. The correlation is mainly in the left segment of the scattergram among nations with an income per head below $ 15. 000. There is hardly any correlation among the richer nations (r = +. 18). Scheme 9 Wealth and Happy-Life-Years in 66 nations in the 1990s

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1995 Purchasing power p/c

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5. 3. 2 Freedom Opinion about the blessings of freedom is mixed. Individualistic social philosophy assumes that people themselves know best what they need, and hence that they will thrive better if they can follow their own prefer-ences. Conservatives doubt that people really know what is best for them and rather stress the wisdom of tradition and experts. Some schools of thought see different effects of different variants of freedom. Currently the New Right is quite positive about economic freedom, but at the same time it is critical about freedom in the private sphere of life. Free sex and the legalization of soft drugs are seen to as a treat to the quality-of-life. Likewise a common view in South-East Asia is that economic freedom will improve the human lot but not political freedom. The relation between political freedom and HLY is presented in scheme 10. Again we see a positive correlation, but the shape of the relation is linear in this case, which suggests that freedom has not yet met its limit. Similar patterns appear in the relation of economic freedom and personal freedom with HLY. These findings support the liberal position. I have discussed this matter in more detail elsewhere (Veenhoven 1999, 2000b). Free nations are typically also rich nations and hence the partial correlations in table 1 are considerably lower than the zero-order correlations. This could mean that the zero-order correlations are largely spurious and that wealth is the main determinant of HLY. Yet is it also


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possible that freedom and wealth affect HLY equally much or that freedom affects HLY through its effects on the growth of wealth. By lack of good time series we cannot disentangle these effects as yet. For the time being, the partial correlations mark a minimum. Scheme 10 Political freedom and Happy-Life-Years in 63 nations in the 1990s

political freedom

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GuatemalaGreece

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Colombia

China

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Azerbain

Argentina

5. 3. 4 Equality There is also difference of opinion on the significance of social equality for the quality-of-life in nations. Egalitarians claim that social inequality is antithetical to quality-of-life, not only because it is morally unjust but also because of its detrimental effects on self-respect and social bonds. Conservatives rather stress the positive functions of inequality and expect that enforced equality will go at the cost of quality-of-life. The discussion focuses very much on income-equality. The evidence in mixed in this case, since not all kinds of equality relate in the same way to HLY. Surprisingly there is no statistical association with income inequality. The scattergram on scheme 11 shows that people live equally long and happy in nations with small income disparities, such as Japan, as in nation with great income differences, such as Mexico. Statistical control for wealth of the nations suggests even a positive effect of income inequality.

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The correlation with inequality between males and females is more in line with egalitarian supposition; HLY being higher in nations were women are least discriminated. Yet the partial correlation is quite small, which could mean that gender equality works out less beneficial after all. HLY relates most strongly with difference in happiness as measured by its standard deviation and this correlation remains robust after control for wealth of the nation. Elsewhere I have argued that social inequality in nations cannot be measured inclusively by adding differences in access to different matters and the disparities in access to relevant resources (inputs) reflect best in the dispersion of happiness (output) (Veenhoven 2002). If I am right in that, these correlations mean that inequality still matters, though apparently not the specific inequalities that figure most prominently on the political agenda these days. Scheme 11 Income Inequality and Happy-Life-Years in 62 nations in the 1990s

1990s Gini index: income inequlity

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Denmark CostaRica

Colombia

China

Britain

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Bolivia

Belarus

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5. 3. 5 Brotherhood Next to freedom and equality, ‘brotherhood’ figured in the slogan of the French revolution (Liberté, egalité, and fraternité) and social solidarity is still seen as a prerequisite for a good life. In this analysis I considered two aspects of brotherhood in nations, first interpersonal respect and cooperation and second ‘organized solidarity’ in collective systems of social insurance.


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The indicators of interpersonal relations relate positively to HLY. The strongest correlation is with ‘tolerance’ as measured by acceptance of minority group members as a neighbor. There is also a positive correlation with self-reported trust in compatriots and with activity in voluntary organizations. All these correlations are largely independent of wealth of the nation. The case of ‘organized solidarity’ is different however. The zero-order correlation between social security expenditures and HLY is positive, but control for wealth of the nation reveals a negative relationship. I have investigated that matter in more detail elsewhere and found indeed that people are not happier and healthier in nations with lavish social security systems than in equally rich nations where Father State is less openhanded (Veenhoven 2000c). Apparently we can live equally well in a residual welfare state. This finding illustrates that ‘presumed’ qualities of life do not always match ‘apparent’ quality-of-life. 5. 3. 6 Justice Righteousness is also commonly mentioned as prerequisite for a good life. In this analysis I consider three indicators of justice in nations: rule of law, respect of civil liberties and prevalence of corruption. The relation between corruption and HLY is depicted in figure 5. The scattergram reveals a strong negative relationship with this aspect of injustice. The other indicators of justice in nations are also strongly related to HLY. See scheme 12. The partial correlations are also positive, but much smaller. Like in the case of freedom this does not necessarily mean that the independent effect of justice is small, since the common variance of justice and wealth can be due to an effect of the former on the latter. Scheme 12 Corruption and Happy-Life-Years in 40 nations in the 1990s

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corruption

1086420-2

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Italy

Greece

Denmark

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China

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Bolivia

5. 3. 7 Explained variance As a last step I considered how well these societal inputs predict the output of years lived happily. I limited that analysis to the variables of which we have at least 60 cases. This left me with wealth, economic freedom, political freedom, income inequality, rule of law and civil rights. Together these six societal qualities explain 66% of the variance in HLY in nations. Consideration of more variables in smaller nation sets yields R2 values of . 85 and more. This implies that much of the things policy makers aim at do indeed matter for Gross National Happiness. Why then bother about measuring that matter? One reason is that not everything deemed required for a good life is really necessary. We saw this in the cases of income equality and social security. Secondly some of the things that are required today may loose relevance tomorrow. This is illustrated by the diminishing utility of wealth. Thirdly, HLY is more easily measured than current indexes of presumed quality-of-life and lastly the concept of Happy-Life-Years is also easier to understand.

CONCLUSION The concept of Gross National Happiness can be operationalized as the degree to which citizens in a country live long and happily and can be quantified in the number of Happy Life Years (HLY) per capita.


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HLY differentiates well across nations and the pattern of differences makes sense. HLY differentiates also over time and can therefore serve to monitor long-term progress. This indicator pairs public appeal with theoretical relevance and has many advantages over current indices of social progress such as the Human Development Index.

Appendix A Apparent quality-of-life in 67 nations in the 1990s

Nation

Enjoyment of life1

(scale 0 - 1)

Length of life2

(in years)

Happy

Life Years3

Argentina 6,8 72,6 49,1 Armenia 3,7 70,9 26,2 Australia 7,3 78,2 56,9 Austria 6,1 76,7 47,0 Azerbaijan 4,9 71,1 34,7 Bangladesh 6,0 56,9 34,2 Belarus 4,4 69,3 30,3 Belgium 7,3 76,9 56,4 Bolivia 6,2 60,5 37,5 Brazil 7,0 66,6 46,3 Britain 7,2 76,8 55,4 Bulgaria 4,3 71,2 30,5 Canada 7,7 79,1 60,6 Chile 6,9 75,1 52,0 China 6,74 69,2 46,7 Colombia 8,14 70,3 57,1 Costa Rica 7,94 76,6 60,8 Croatia 5,5 71,6 39,6 Czecho-Slovakia 5,9 71. 7 42. 3 Denmark 8,0 75,3 59,9 Dominican Rep. 6,8 70,3 47,9 Ecuador 6,4 69,5 44,5 El Salvador 7,4 69,4 51,7 Estonia 5,0 69,2 34,6 Finland 7,5 76,4 57,1 France 6,4 78,7 50,5 Georgia 4,1 73,2 29,7 Germany 6,7 76,4 51,4 Ghana 7,74 57,0 43,9 Greece 5,3 77,9 41,4

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Guatemala 7,2 66,1 47,3 Honduras 7,0 68,8 48,0 Hungary 5,6 68,9 38,6 Iceland 7,8 79,2 61,8 India 6,2 61,6 38,5 Ireland 7,6 76,4 58,4 Italy 7,0 78,0 54,6 Japan 6,3 79,9 50,0 Latvia 4,8 68,0 32,5 Lithuania 5,0 70,2 35,1 Luxembourg 7,8 76,1 59,2 Macedonia 5,2 71,9 37,6 Mexico 7,3 72,1 52,5 Moldavia 3,0 67,8 20,5 Netherlands 7,5 77,5 58,3 Nicaragua 7,6 67,5 51,2 Nigeria 6,34 51,4 32,6 Norway 7,4 77,6 57,5 Panama 7,1 73,4 52,3 Paraguay 6,8 69,1 46,7 Peru 6,0 67,7 40,4 Philippines 6,5 67,4 43,7 Poland 6,2 71,1 43,8 Portugal 6,7 74,8 50,5 Romania 5,4 69,6 37,7 Russia 4,2 65,5 27,8 South-Africa 5,7 64,1 36,7 South-Korea 6,3 71,7 45,3 Slovenia 6,0 73,2 43,8 Spain 6,5 77,7 50,8 Sweden 7,6 78,4 59,9 Switzerland 8,1 78,2 63,0 Turkey 5,9 68,5 40,4 Ukraine 3,3 68,5 22,5 Uruguay 6,7 72,7 49,0 USA 7,4 76,4 56,9 Venezuela 6,4 72,3 46,0

Technical details Average enjoyment of life assessed by means of surveys in general public samples. This list is based on responses to questions on life-satisfaction. Most scores are based on responses to the following question: "All things considered, how satisfied or dissatisfied are you with your life-as-a-whole now? 1 dissatisfied …………………. 10 satisfied".


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Scores on this 1-10 scale were transformed linearly to range 0-10. This transformation in explained in the introductory text, chapter 7. 3. Scores of most Latin American nations are based on responses to a somewhat different question. "In general, would you say that you are satisfied with your life? Would you say that you are…very satisfied (4), quite satisfied (3), satisfied (2) or not very satisfied (1)?" Scores on this 1-4 scale were transformed to range 0-10 by means of expert weighing of response options. This so-called 'Thurstone procedure' is explained in chapter 4/3 of the introductory text. Since the above 1-10 questions have also been used in five of these Latin American nations, I could check whether this transformation yields comparable results. The transformed scores appeared to be slightly higher and were therefore corrected by subtracting 0,5 point. This combination of scores on two slightly different questions results in a list of 67 cases. The number of cases is smaller if one restricts to responses on identical questions. Restriction to a common question on 'happiness' yields 60 cases and limitation to the above 1-10 life-satisfaction item 54 cases. Life expectancy is estimated on the basis of civil registrations of birth and death. Source: Human Development Report 2001, table 1. Life-satisfaction scores may be inflated in some countries, due to under sampling of rural population or inexperience with anonymous interviewing. Dubious cases are China, Colombia, Ghana and Nigeria.

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Appendix B Characteristics of nations, used in correlational analysis Wealth Income Purchasing power per head in 1995

Human Development Report 1999, table 1 (UNDP) Freedom Economic Index of economic freedom 1999.

Heritage Foundation Political Index of suppression of political rights 1994-95 (reversed)

Karantnycky et. al. 1995 Personal Index of freedom in personal life. Involves absence of

restrictions to traveling, religion, marriage, sex and suicide. Both legal restrictions and public acceptance Veenhoven 2000b

Equality Income equality Gini index

Human Development Report 2001 table 12 (UNDP) Gender equality SIGE index of gender inequality.

Dijkstra 2000 Equality in happiness Standard deviation of life satisfaction.

Veenhoven 2002 Brotherhood Tolerance Responses to survey questions about the kind of people one

would like to have as a neighbor. World Value Surveys 1990-1995, items 51-60

Trust in compatriots Responses to survey question World value Surveys 1990-1995, item 41

Voluntary work Responses to survey questions World value Surveys 1990-1995, items 28-35

Social security Expenditures in percent of GDP ILO 1995

Justice Rule of law Index of Institutional Quality 1997-98

IMF, World Economic Outlook October 2000 Violation of civil rights Index of suppression of civil rights 1994-95

Karantnycky et. al. 1995 Corruption Rating by foreign businessmen and journalists

Transparency International

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