The Economic Conditions of Bahrain - Essay Example

Running Head: Bahrain's Economy Bahrain's Economy of Bahrain's Economy Introduction Bahrain has one of the freest economies in the Middle East. Petroleum deposits were discovered in the 1930s. Oil production and refining have been the major exports of the Bahraini economy. Since the 1970s the government has attempted to diversify its economy by developing other industries. This article provides an overview of the Bahraini economy. It studies the country's standard of living, income distribution, rate of economic growth and infrastructure of the country. It also discusses the problems of unemployment and inflation. Finally it gives suggestions as to how the economy can be improved (Moore, 45). Standard of living Petroleum production and processing are the main exports of Bahrain. The economic conditions of the country have depended on the price of oil. Bahrain's infrastructure is highly developed. Many multinational firms have their head offices in the country. The country also exports petroleum products. The construction industry is also a major source of revenue for the government. Bahrain has a GDP per capita of $20,500 according to research conducted in 2005. It has a purchasing parity of $14.08 billion. Bahrain is a prosperous country by regional standards. It has pursued a neutral foreign policy and is famous for its tolerance. It is the fastest growing economy in the Arab world. It has a large population of international expatriates. Poverty Despite an impressive standard of living, Bahrain suffers from poverty and poor living conditions. At least 20,000 families receive financial assistance from Ministry of Labor and private organizations. Recent studies have found that the poverty income threshold is Bahraini Dinar 209 per month. The poverty level for Bahrain is at least a quarter of the total population. At least 200,000 people suffer from poor living conditions. Many people do not have decent housing. More than 30,000 families with low incomes have inadequate housing facilities. The average income has been increasing but the poverty rate has also increased. The rise in poverty has been attributed to corruption, poor planning, low wages, influx of foreign workers and income inequalities. Further a small group of wealthy and powerful people dominate the economy. These are considered as major obstacles to real reforms. Large areas of land have been taken over by powerful people. This has caused property prices to increase and put tremendous pressure on low income people. Poverty is clearly causing an adverse impact on society. Crime, divorce rate and increase in workers working in poor conditions are direct results of poverty (Moore, 45). Income distribution Compared with other regional countries, Bahrain has a low poverty rate. However most of the wealth is concentrated in the hands of the Sunni minority. The average daily expenditure is US$13.9 per person in Bahrain. This is compared with an average income of 12.8 dollars. The reason is that Bahrain has a negative savings level at the national level. Bahrain's population does not suffer from poverty compared with regional countries. Research has shown that 12 percent of the population has an average income of less than five dollars per person. The expenditure required by a Bahraini to sustain basic expenses is an estimated US$42 per month. Majority of Bahrain's population lives in apartments while the remaining owns their houses. The average Bahraini also has ownership of electronic appliances and amenities which show that the majority of families enjoy an impressive standard of living (National Accountant, 34). Economic growth rate Bahrain's economic growth rate has increased in 2007. It has been bolstered by high oil prices and increase in non oil exports. The financial sector remains the main part of the economy. The government is also addressing issues like unemployment and rising crime. The economy has registered a 7.0% growth in 2007. The growth rate is expected to be 4.8% for 2008. This is based on the assumption that inflation has risen in 2007. The fiscal policy of Bahrain is balanced. Oil prices are expected to be low in 2008. This may have an adverse impact on the economy but public investment would definitely help. Public industrial and infrastructure projects have increased the GDP growth. Bahrain's GDP growth is the highest in the GCC region. Non financial organizations have contributed to 70 percent of the GDP in 2007 (National Accountant, 34). Unemployment rate Unemployment is a major concern for the Bahraini government. Currently the unemployment rate is 10.1 percent. While the rate is not high, it is still a source of concern for the Bahraini government. Young people form the majority of unemployed people. Several programs have been initiated by the Bahraini government to address the problem of unemployment. The labor market has many young Bahrainis trying to obtain jobs. The government resources are also limited. There are no job guarantees for younger people. Bahrain's graduates do not want to work in semi skilled jobs and for low wages. They also face the problem of their inability to obtain high skilled technical jobs. The government assists families with its social welfare programs. However it cannot sustain this in the long term. The government must train and encourage self employment schemes which could help in freeing up resources used in cash assistance programs. Bahrain provides subsidized education and health services to all people. This has resulted in creating a burden for the government. The government must move towards a system where job training and placement of locals would help in generating employment and empowering people (Commerce in Bahrain, 54). Inflation Bahrain has an inflation rate of 2.1 percent in 2007 as compared with 2.6 percent in 2006. Inflation has been minimized by subsidizing the prices of essential goods. Salaries have also been increased by the Bahraini government. The government has increased salaries which have helped in increasing the purchasing power. Essential food items, utilities and petrol prices have been kept a low price. Bahrain has a low inflation rate in the region. Domestic inflation is high because of bank lending and government spending. Local issues have been tied with an increase in market liquidity and loans. An increase in government spending has also contributed to a high inflation rate (Commerce in Bahrain, 54). Infrastructure Bahrain has an excellent road system. The country has two hundred kilometers of paved roads which collect all the major population centers of the island. A causeway connects the country with Saudi Arabia. The causeway is twenty five kilometers long. It is a major connection point for foreigners visiting Bahrain. Another causeway connects the capital city of Manama with the international airport on Muharraq. The Bahrain International Airport is capable of handling major air traffic. Gulf Air is the national carrier of the country. It flies to all major cities of the world (Bahrain Monetary Agency, 64). The port of Mina Salman is the major trading area of Bahrain. It is also home to the US Sixth Fleet. It consists of sixteen berths which are capable of allowing vessels of different sizes. The port of Sitrah is the major centre for the shipment of crude and refined petroleum. There is also a ship repairing dry dock located in Muharraq Island. Bahrain has a modern telecommunications system. It has excellent international connections. The system also provides efficient domestic services. Intelsat, Arabsat and Atlantic Ocean satellite provide telephone and internet links to Bahrain. Developed Economy Bahrain has transformed from an agricultural economy to a diversified economy. Banking, tourism, retail and heavy industries are some of the major sources of revenue. The country is the financial hub in the region. The financial system has been enjoying major success. It is a contributor to the economic growth rate. The banking sector is modern and comprehensive. The signing of a free trade agreement with the US is bound to increase economic benefit for the country. The government has also initiated major programs to privatize key assets of the economy. Tourism is a major source of income for the Bahraini government. Oil and gas remain the major export of the economy. Bahrain has successfully used its oil resources to diversify its economy. The current oil production rate for Bahrain is 40,000 barrels per day. Its oil reserves are expected to last for another fifteen years. Bahrain also operates other industries like Aluminum Bahrain. This organization has an aluminum smelter which produces 525,000 tons. There is also an iron ore palletizing plant. International financial organizations operate in Bahrain with their head offices. There are an estimated 100 banking units and offices in the country (Bahrain Monetary Agency, 64). Bahrain is self sufficient in agriculture. It produces fruits and vegetables which are sufficient for its population. Dates and melons are the main fruits produced in Bahrain. The country also has a large domestic dairy industry. Several small scale industries have been established by the government as part of its diversification program. Plastics and paper products are some of the major factories in Bahrain. Bahrain is a major trading center in the region. Crude oil is imported from Saudi Arabia. Machinery, food and chemicals also form the major imports. Petroleum, petroleum products and manufactured goods are the major exports of Bahrain. Saudi Arabia, India, US and UK remain the major trading partners of Bahrain. Bahrain is also a member of several international and regional economic organizations. The GCC is the main regional body which tries to protect its common economic interests. Open Economy Bahrain's economy is very open due to its strategic location in the Gulf Area. It has been a major access point for European and Asian markets. It has a strong business culture. Bahrain's economic development has been due to its diversification program in response to declining oil resources. Effective and efficient management of the economy has encouraged trade and commerce in the country (Quarterly Statistical Bulletin, 74). Bahrain's legal system is based on international norms. It covers several aspects of business. It also ensures the rights of international investors. Bahrain has an educated workforce and labor costs are cheap as compared with industrialized countries. The country also is relatively tolerant and open towards western expatriates. Bahrain also enjoys a high literacy rate. Another feature of Bahrain's economy is its zero taxation policy. This makes it an ideal place for highly skilled technical and managerial workers. Suggestions Bahrain faces the challenge of improving the level of welfare to its population. It has limited resources. It also has a huge population growth rate. It is also vulnerable to regional and global crisis. The instability of the oil market is another threat to its economy. Bahrain must promote a policy of completely utilizing its well educated workforce. It should initiate job training and placement programs for its population. It should increase efforts to "Bahrainize" its job sector. A tax system should be gradually introduced which would increase the revenues of the government. Social welfare schemes must be designed to ensure that it is given to those who require it. The economy should also be opened for foreign investment. Key assets of the government like utilities should be privatized. This would increase the efficiency and effectiveness of public services. An open and transparent political system would empower each member of society to work hard towards the creation of a stable political system. The government must move towards a democratic and free state which would allow each member of society to contribute towards the development of society. Finally economic diversification must be intensified to reduce dependence on depleting oil and gas resources. Conclusion Bahrain enjoys an impressive standard of living as compared with regional countries. The economy is diversified with finance, retail and tourism as major sources of revenue for the country. The majority of population enjoys and impressive standard of living. However there are numerous problems faced by the government such as unemployment, crime, inflation, social tensions and poverty. Bahrain should open its economy, increase its foreign investment and create a democratic society which would help its transition to a developed country in the world. Increasing political participation would sharply reduce the social tensions inside society. It would lead to the creation of a stable, tolerant and open society. Works Cited Bahrain A New Era, by Philip Moore, published by Euromoney Books in Association with Economic Development Board (EDB), Ernest & Young 2006 National Account, 2002. Ministry of Finance and National Economy, Directorate of Economic Planning, Kingdom of Bahrain. Commerce in Bahrain, An Introduction, Ministry of Commerce, Kingdom of Bahrain, 2003, Akhbar Alkhaleij Printing Press. Annual Report 2006, Bahrain Monetary Agency. Quarterly Statistical Bulletin, Volume 29, Number 2, Economic Research Directorate, Bahrain Monetary Agency, June 2007. Read More