Economic Development in Bahrain - Essay Example

Economic Development in Bahrain This paper is focused on the economic history of Bahrain and its gradual phase of economic development, detailed analysis of its political structure, sectors of the economy, growth potential, and contemporary economic situation. The official name of Bahrain is Kingdom of Bahrain. Her nationality is Bahraini. Languages spoken here are Arabi (official), English, Farsi, and Urdu. Currency of this country is Bahraini dinar (BHD). Capital name is Manama. Year of independence is 15th August 1971 (Bahrain, n.d., p.1). Bahrain covers an area of 711 square kilometers (275 square miles) approximately. Her population is 1.05 million with birth rate of 18 per 1000, death rate 4 per 1000, life expectancy is 74.7 years, birth rate is 2.6 children per woman, and literacy rate is 86.5 percent. It is mainly a Islamic country with 81.2 percent Muslims with ethnic groups like 62.4 percent Bahraini, 37.6 percent non-Bahraini, 9 percent Christian and 9.8 percent others (Bahrain, n.d.) A historical perspective: Bahrain also known as al-Ihsa (Arabic) is a coastal town bounded by the Pursian Gulf on the east with Iraq above and Oman below is famous for its pearls (Nadwi, 1936, p.24). The history of this Arabian country finds it roots back in 2300 B.C. The land of Bahrain was the hub of ancient civilization of Dilmun, a pronominal trading center at that time connecting the civilization of Sumeria in Mesopotamia with the Indus Valley in India. After the degeneration of the civilization of Dilmun in 600 B.C., the most phenomenal incident which took place there was the overtaking of Bahrainian rule by the Carmathians (half-muslim, half -Magians) during the Muslim age and they established this place as their central political arena. The Carmathians were dethroned by the Sunni rulers in 976 and developed a powerful Muslim rule there. The pearl treasure of Bahrain became an immense attraction for the foreign invaders and plunderers as a consequence of which many foreign rulers ruled this place for a significant time period like during the 13th and 14th century the Mongols ruled there who were dethroned from their powers by Portuguese invasion in 1521 who ruled for about a century and then taken over by Bahranian rule which was followed by Omanian rule for some time then for a certain period of time the Persians ruled who were defeated by Al Khalifa clan invasion in 1783. Although the Al Khalifans were removed by the sultanate of Oman for some time they regained power in 1811. On the other hand the colonial expansion of Great Britain imparted its focus toward Bahrain and signed a peace treaty with Bahrain against the condition that they could not dispose any land and enter into any types of agreement with any foreign countries without the prior approval of the British government and in lieu of that the British government promised them protection from foreign invasion through land or sea. As a result they succumbed under pressure towards the British government. But Bahrain declared its independence on 15th August, 1971 after the removal of British troops from the island (Bassiouni et al, 2011, p.12). The Iranian revolution (1979) imparted a deep conservatism in Bahrain and the society moved into the realms of immense conservative environment, where the women gradually lost their independence of wearing western outfits and moved onto wearing their traditional dresses. Heavy riots and tensions along with bombarding followed by stoning of female marathon runners for wearing inappropriate dresses ushered in Bahrain in 1994. After the death of his father Shaykh Hamad bin Isa Al Khalifa became the emir of Bahrain in 1999 who came up with idea of necessary reforms like voting rights of women, released political prisoners, invited exiled Bahranians to return. He also faced great opposition in bringing constitutional rule as it provided for a bicameral legislature with one house directly elected and one house appointed by the ruler. Still the struggle for constitutional reforms is prevalent (Bahrain, n.d). Phases of economic development and different sectors Traditional pearl industry Historically world’s best pearls came from the Persian Gulf especially Bahrain whose history of pearl industry goes back 4000 years. Although Bahrain is chiefly known for its giant oil industry, pearl industry was the backbone of Bahrain before the discovery of oil in 1931. The special luster of the pearls can be attributed to the mixture of sweet and salt water around the island and as it was an archipelago (Pearl Case Study, n.d.). The demand for pearl was highly elastic as during the seventeenth and eighteenth century traders from different regions of Arab infiltrated this region and contributed in molding the social demographics of this place. Thus the pearl industry gave rise to the huge market for shipping and trading (Pandya, 2006, p. 35). The pearl industry was very booming. An insight into the internal mechanics Talking about the industry, a micro analysis of the internal mechanism needs to be given some focus. The pioneers of this business are the divers who risk their lives to explore out these wonderful jewels from the sea bed. Their lives were not so smooth and faced rigorous hindrance in financial matters. Seasons favorable for diving were from June to September. This span of time also coincided with the peak season in both ocean transport and also agricultural productions and due to this seasonal nature the divers and other people in the industry had to be subsidized in one way or the other which came up with the introduction of a mechanism of series of loan , the first of which was known as the “tisqam” paid at the beginning of the slack season to maintain the workers and their families throughout the season ; the second was “silfa” reimbursed at the beginning of the peak season to support the workers’ families while they were out in the sea , and the third was the “khajiyah” paid to the men while at sea to satisfy their personal consumption expenditures from the many sea traders or “floaters” catering to the pearlers while at the sea. But these loans could not be paid off from the pearling income and the pearl workers were hugely indebted. The reason for this is manifold. The loans were not only required by the workers and divers but also for the sea captains i.e, the pilots who recruited them and financed them. Their money came from large merchants and thus this loan mechanism formed a hierarchical structure. Different types of exploitations were encountered as for example when the pilots were insufficiently financed they often had to return to shore in order to receive provision which reduced their effective time and sometimes the workers had to sell their pearls to the ongoing sea floaters who bought them at low prices in exchange of providing them foodstuffs at high prices which reduced their profit margins to a great level. A large number of people involved in this occupation like the puller rowers, pilots, mates, apprentices, cook, singers, crew member and as a result the per unit profit became minimal. Again the divers were not paid in timely basis rather they were provided a share of the total proceeds. It resulted to the serious indebtedness of these people and it has been found that burden of loan were transferred from father to son. The coastal tribes were dominant players in this industry and were very much unified. Certain reforms in the pearl industry were introduced with the recommendations from the British government in 1920s like abolition of hereditary debts, bankruptcy law to protect the pilot’s property and others but they were rather law in pen and paper and did not literally benefited the workers (Nugent, and Thomas, 1985, pp.25-31). However the pearl industry was the chief contributor of the economy of Bahrain till the discovery of oil in 1931.  Gulf countries generated half of their international gross product of the pearls among which Bahrain was the prime contributor. Europe tried its best to establish and enhance pearl business by reserving rights to hunt in the Gulf but they did not gain success in their endeavor. As a result of export of pearls Bahrain established trade relations with offshore countries like India and injected into their society the knowledge of other countries and their new styles of building and gradually became the trade nucleus of the north and east (The Pearl Industry [causes and Effects], n.d). Causes of decline: Pearl industry in the island of Bahrain authorized its supremacy till the 1930s when the discovery of oil and introduction of Japanese pearl captured its market and led to its downfall. Fierce competition was given by Japan in the market of cultured and artificial pearl along with lowering of price of natural pearl by almost ten percent which broke the backbone of Bahrain’s pearl industry. Again great competition also ushered in the labor market from petroleum (liquid gold) and local people found job in the oil industry more secured, with accelerated wage differential compared to the pearl industry and they gradually left the sea. Again various reforms and constraints imposed by the British government on the industry led to its decline but the major part is attributed to the above two reason. By 1950s only a few dhows (pearling ships) sailed compared to earlier times in the sea and proceeded towards its death literally by mid 1960s which also declared with it the end of pearl industry in the entire gulf (Nugent and Thomas.1985, p.25) Pearling is rather an indispensable part of cultural heritage and identity of Bahrain than a business. Pearling project is at present on exhibit among other cultural activities at the ‘Investing in Culture’ exhibition at the Bahrain National Museum. Initiated in 2006 under the patronage of His Royal Highness Prince Salman Bin Hamad Al-Khalifa, Crown Prince and Deputy Supreme Commander this project directed towards promotion of the support given by the private and public sector to the contribution of Bahrain’s cultural identity. Once pristine pearl producing waters of the Gulf is now damaged by the water pollution from oil spill and over fishing of oysters. Today, cultured pearl are forbidden from Bahrain’s pearl market in order to preserve the heritage and pearl diving is practiced as a hobby by individual divers (Bahrain Pearling Industry, n.d). Oil industry and its impact on the economy From its discovery in 1930 the oil industry in Bahrain became the central backbone of the economy of this Middle East archipelago. Bahrain is the first among the Arab states of the Gulf in oil industry. During the decade of 30s the effect of Great Depression and steady decline in pearl industry almost jeopardized the economy’s’ trade and financial sector along with deep recessionary pressure and tremendously high unemployment rate. But on the other side it has been encountered that only Bahrain has rescued the fastest from the recessionary pressure of 1930 than any other nation in comparison and major credit should be given to her oil industry. From 1935 onwards revenues seem to touch sky limits and recovery was inevitable. One third of the royalties went to the government and the remaining amount were spent on public goods, construction, services, payment of salaries for the civil servants and other public welfare works and the residual amount were deposited in the reserve fund of the state. The revenues from oil expanded on a turbulent scale and disbursements reached a figure from 1,313, 900 lakhs of rupees in 1938 to a mammoth 3,212,000 lakhs of rupees in 1945. Oil became the boon of the society leading to huge revenue earnings by the merchants, traders coupled with enormous increase in imports, stylized infrastructure development, enhancement of educational, medical facilities, improvement in communication system through air and land (Al-Tajir, 1987, pp. 177, 178). Oil production and royalties, 1934- 1945 Year Daily average (US barrels) Total annual production of crude oil (US barrels) Royalties received annually by the government in lakhs of rupees 1934 1,000 285,072 1935 3,000 1,264, 807 1936 12,000 4,644,636 1937 21,000 7,762,264 (34,00,000)(a) 1938 22,000 8,297, 998 1939 20,000 7,588, 544 1940 19,000 7,073,919 1941 18,614 6, 794,157 1942 17,000 6,240, 627 1943 18,004 6,571,609 26,60,000(a) 1944 18,344 6,713, 795 1945 20,024 7,308, 938 31,00,000(a) Footnote: (a) Royalty figures in respect of the years 1937, 1943 and 1945 are for the first half of the year only, i.e, January-June. Figures for the second half were not available at the time of compilation of the Administration reports for those years. Normally figures for the second half tended to be slightly higher than for the first half. To obtain a reasonable estimate for the full year the figure shown for the half of the year can be doubled and this is shown in brackets. (Al-Tajir, 1987, p.179) From the above table it can be inferred that the production and royalties from oil increased tremendously within a span of 10 years thrusting the economy to a highly elevated level. As a result of this tremendous growth in oil industry many unemployed pearl divers started to make a stable living by finding a job the oil industry. Bahrain’s external network chain also strengthened and development reached to such a height that when the Italians bombarded on the Iranian oil refineries in 1940 damage was minimal and the disturbances were neutralized very quickly. With the emergence of the oil industry the Siah and Sunni Arabs came together in an unified platform with respect to employment and the country also invited the entry of western culture into her society. Presently the oil industry in Bahrain accounts for 79% of the Bahrain’s exports forming the major part of the country’s economy. The mainland Awali field generates about 11,635 barrels per day and Abu Safah field sharing with Saudi Arabia generates approximately 54,741 barrels per day. But the main problem which has been encountered is that Bahrain’s main oil reserve is expected to deplete in the next 15 years which is a serious constraint (Bassiouni et al. 2011, p.14). The Financial Sector Bahrain’s financial sector forms a predominant part of the Islamic banking sector. The financial sector is integrated and stands on a rock solid financial base with varied conventional Islamic financial institutions, retail and wholesale banks, finance, mutual fund, securities companies along with a well functioned stock exchange executing and delivering the complex financial services leading it to become the apex financial hub in the Gulf arena. About 80 % of the workforce is engaged in the financial sector of Bahrain resulting in the contribution of 27% of Bahrain’s total Gross Domestic product (GDP). The chief regulator of this sector is the Central Bank of Bahrain (CBB) and this sector acts as the propeller of the economy’s growth dynamics (Central Bank of Bahrain, n.d.) Other sectors Aluminum industry also accounts for a large part of Bahrain’s economy and it is considered to be the second largest sector in Bahrain. The leading giant aluminum companies of Bahrain are the Gulf Aluminum Rolling Mill Company (GARMCO) and Aluminum Bahrain (ALBA). Another superbly developed sector in Bahrain is the real estate and construction sectors, which has a close proximity with the financial sector which witnessed a huge growth over the past decade and contributes to approximately 7% of GDP (Bassiouni et al., 2011, p.15) Agriculture is very weak in this country with high humid climate accompanied by desert storms and long phases of droughts accounting for only 1% of the economy Present political scenario Following the constitutional norms (2002), Bahrain is a constitutional hereditary monarchy, where the King is regarded as the supreme hierarchy and the Prime minister is the head of the government presided over by the Prime minister the council of ministers are selected by the king. Since Bahrain’s independence in 1971, HRH Prince Khalifa bin Salman Al Khalifa has been occupying the chief position. Immense executive power is enjoyed by the king which is executed directly or indirectly by him in appointing and dismissing his ministers by Royal Decree. He is also the Supreme Commander of the Bahrain Defence Force (BDF) and presides over the Higher Judicial Council and the Council of Ministers is collectively accountable to the King (Bassiouni et al. 2011, p.13). Current economic growth paradigm There has been a consistent increase in the growth curve of this Middle East country during the past decade with a real GDP rate at 3.1% in 2009 to 4% in 2010. Wealth has been really accumulating at an increasing pace but the distribution of the same has not been equal. This wealth accumulation has been the prime concentration in the hands of few and economically liberal policies have been thriving benefits to the real estate and financial sectors. The situation can be said to be ‘pareto suboptimal’ as according to many the policies of the government is helping only a small segment of the population bringing about great inequality. (Bassiouni et al. 2011, p.15). Literacy rate has been quite high as mentioned earlier that it stands at 86.5% .Although conservative policies have been a common phenomenon but provisions have been provided for western education and also empowerment of women educational policies have also been formulated and adopted. Conclusion Bahrain is an economically developed country with high growth rate and potential. Oil has played the most dominant role in shaping the structure of the economy of this desert country and accelerating her to a sky touching summit in the Arabian Gulf. But the recent threat of oil depletion in next 15 years has shifted the government’s focus toward the financial and real estate sector. As a result, for the past ten years the Government of Bahrain under the direction of Salman bin Hamad bin Isa Al Khalifa (HRH the Crown Prince), has adopted a strategy called “Bahrain Vision 2030”, which aims at the future strategies of development in the country in different eminent sectors like financial, tourism, high tech sectors, education and telecommunications (Logistics Sector, 2010). Thus the government has set a powerful platform from where the flight of the economy will take off at a high velocity. References Al-Tajir, M. A., (1987), Bahrain, 1920-1945: Britain, the shaikh, and the administration, Routledge Bahrain Pearling Industry, (n.d), retrieved on March 12, 2012 from: http://www.gvpedia.com/Bahrain/Bahrain-Pearling-Industry-Top-Heritage-Site.aspx Bahrain, (n.d.), retrieved on March 12, 2012 from: http://images.rca.org/docs/mission/country-profiles/Bahrain.pdf Bassiouni, M. Cheri., Rodley, N., Al-Awadhi, B., Kirsch, Arsanjan, M. H.,(2011), Report of the Bahrain Independent Commission of Inquiry, presented in Manama, Bahrain, on 23 November 2011, retrieved on March 12, 2012 from http://bna.bh/pdf/BICIreportEN.pdf Central Bank of Bahrain,(n.d.), BMA, retrieved on March 12, 2012 from: http://www.bma.gov.bh/page.php?p=overview1 Logistics Sector (2010), 2030, retrieved on March 14, 2012 from: http://www.2030.bh/web/index.php/component/content/article/65.html Nadwi, S. M.(1936), A Geographical History of the Quran, The Other Press. Pearl Case Study,(n.d), Case number: 376, Case Mnemonic: Pearl, retrieved on March 12, 2012 from http://www1.american.edu/ted/pearl.htm Pandya, S., (2006), Muslim womens changing religious practices in Bahrain: ProQuest Nugent, J.B., and Thomas, Theodore H, (1985), Bahrain and the Gulf: past perspectives and alternative futures, University of Southern California. 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