Will freedoms translate to growth?
As 2007 draws to a close, Dr Jasim Husain Ali reviews Bahrain’s economic performance in the year gone by

The year 2007 proved to be full of events for Bahrain’s economy. Undoubtedly, there were pluses and minuses. The year witnessed commitment by the highest authority that absence of taxation would remain a key economic policy. Still, in the same year, Bahrain scored mixed results in international reports, notably with regard to other members of the Gulf Cooperation Council (GCC).

No taxation
On October 17, Bahrain’s King Hamad Bin Isa Al Khalifa spelled out key characteristics of the national economy for the years to come. In a speech inaugurating the second term of the 2006-2010 National Assembly, King Hamad ruled out imposition of taxes on corporate income. Instead, he urged people to work hard in order to “attract more local and foreign investments and boost professional aptitudes and productive levels, so that Bahrain can consolidate its status as one of the most preferred investment destinations.”

Ostensibly, the King was responding to demands by some members of parliament calling on the authorities to seriously consider applying taxes on firms generating their revenues from the local economy, such as retail banks. As part of their arguments, these MPs together with other economic commentators argued that Bahrain should broaden its revenue base. Currently, the oil and gas sector accounts for about three-quarters of the country’s treasury income.

Welcome FDI
To be sure, the government considers lack of taxation as a primary competitive edge and as a means for attracting investments. Officials were thrilled to note the increasing global appreciation of the Kingdom’s economic prospects. The World Investment Report 2007, issued by the World Conference on Trade and Development (UNCTAD), has depicted a rather rosy picture of Bahrain when it comes to foreign direct investments (FDI).

Bahrain attracted US$2.9-billion FDI in 2006, registering a staggering yearly growth of 177 per cent. Within the GCC, only Saudi Arabia and the UAE managed to attract more FDI than Bahrain. The Kingdom occupied the 11th place amongst 141 countries on the Inward FDI Performance Index in 2006, thus advancing 12 positions (the best result for any GCC state). The enhancement was made possible through steady economic reforms that saw foreign firms gaining control of power plants and more recently port management.

Freest regional economy
The 2007 Index of Economic Freedom considers Bahrain to be the freest within the GCC and ranked it 39th worldwide. The report, jointly published by the Heritage Foundation and the Wall Street Journal, ranked Oman as the second freest economy within the GCC and 54th globally. The index uses the results of ten variables to rank the countries and these include business freedom, trade freedom, fiscal freedom, freedom from government, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption and labour freedom.

The 2007 report considered Bahrain’s economy 68.4 per cent free, with the best result granted to fiscal freedom thanks to the absence of taxes on personal and corporate income. Also, Bahrain scored well in the financial freedom variable, as the country is home to the largest concentration of foreign banks in the region. Conversely, the worst performance was recorded for labour freedom. The report was not pleased with the Kingdom’s inflexible employment market, as authorities urge firms to hire nationals.

E-government capability
Still, a report by the Center for Public Policy at Brown University in the US considers Bahrain the most capable GCC government in e-governance. The Global E-Government 2007 ranked Bahrain at number 15 worldwide. Qatar, the second best within the GCC, occupied 42nd position globally.

The study analysed a total of 1,687 websites in 198 nations. The study looked into the executive (prime minister), legislative (parliament) and judicial (courts) portals as well as websites related to economic development, business regulation, military, transportation, taxation, tourism and foreign affairs.

The index is based on features related to three main variables, namely online information, service delivery and public access. Features looked into include online publications and databases, video and audio clips, privacy and security, disability access and user fees. Bahrain collected 40.3 points out of 100.

Not very competitive
Against this, Bahrain performed poorly in the Global Competitiveness Report for 2007-2008, published by the World Economic Forum. The latest report covered 131 countries and economies, which together account for 98 per cent of the world’s gross domestic product (GDP).

Countries included in the study are ranked on the basis of their performance on the Global Competitiveness Index (GCI). The index is based on three broad categories of basic requirements, efficiency enhancers and innovation and sophistication factors.

Here, the basic requirements category is subdivided into four pillars, namely institutions, infrastructure, macroeconomic stability, health and primary education. The efficiency enhancers’ category comprises six pillars of higher education and training, goods and market efficiency, labour market efficiency, financial market sophistication, technological readiness and market size. Similarly, the innovation and sophistication factors category are made up of business sophistication and innovation.

The report ranked Bahrain as the least competitive economy within the GCC by being ranked at number 43 globally having earned 4.42 points on the 7-point scale. Bahrain’s key weakness was its market size, ranked number 109 worldwide in the report. With a GDP of around UDS$15 billion, Bahrain’s economy was the smallest in the GCC. But it’s said Bahrain’s major strength lies in financial market sophistication, number 12 worldwide. Bahrain serves as a primary financial services market in the region. The report ranked Kuwait as the region’s most competitive economy, putting it at number 30 worldwide.

Transparency problem
Likewise, Bahrain lost ground in the 2007 Corruption Perceptions Index (CPI), published annually by the Germany-based Transparency International. The CPI is measured on a scale from 0 to 10, with higher numbers indicating less corruption.

The index is compiled on the basis of several surveys and polls. Reviewed economies earn points based on perceptions expressed by business and academic professionals concerning ways of doing business in various countries. The respondents, who include local and expatriate residents, provide views about possible corruptive practices involving public officials with regard to winning business preferences, such as contracts. The study relies on numerous studies conducted by internationally renowned establishments. These include the World Bank, Economist Intelligence Unit, Freedom House, World Economic Forum, Asian Development Bank and African Development Bank, to name a few. As such, the 2007 report was supported by findings of 14 surveys and expert assessments.

A minimum of three studies is required for a nation to be included in the report, and Bahrain allowed for five studies. Unfortunately, Bahrain plunged 10 positions to 46 after scoring 5 points, down some 0.7 points. Qatar topped the GCC list, scoring 6 on the 10-point scale, thereby enabling it to clinch spot number 32 worldwide.

In totality, Bahrain authorities need to reflect on achievements and setbacks of 2007.

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