Delivering Manama’s economic vision

29 October 2009

Bahrain’s Vision 2030 masterplan offers a new model for the economy, and its National Economic Strategy sets out how it can be achieved. Now it is up to government to ensure the changes are made

It has been easy to write off Bahrain over the past few years for lacking the ambition of some of its neighbours. The kingdom has not had the resources of Riyadh and Abu Dhabi, and has appeared overly cautious compared with Dubai.

But it has not always been like this. At times, Manama has been a regional leader – for example, it diversified into financial services before most other Gulf countries saw the opportunity.

Bahrainhas a National Assembly (parliament) in which the lower house is democratically elected, and the state is generally seen as one of the most liberal and well-educated in the Gulf.

But as the oil boom of 2002-08 bolstered the coffers of governments elsewhere in the region, Bahrain, which has little oil of its own, seemed to lose the initiative.

“Somehow, when everyone else was improving and developing, Bahrain took a holiday,” says Atif Abdulmalik, chief executive officer (CEO) of Bahraini investment bank Arcapita.

“Bahrain had been a leader in regional banking, education, healthcare and the arts, but somehow we lost that cutting edge.”

With the government’s Vision 2030 master-plan, launched in October 2008, Bahrain hopes to revive some of that progressive spirit. The plan maps out three main areas for reform: the government, economy and society. Ultimately, though, it has one simple aim: to double household income by 2030.

Developing skills

Under the masterplan, this will be achieved through shrinking the public sector, attracting more private sector businesses to Bahrain as a hub for the Gulf region, and educating the Bahraini workforce to be a higher skilled and better paid engine of growth.

The driver and architect of the Vision 2030 plan is Crown Prince Sheikh Salman bin Hamad al-Khalifa, who chairs the Economic Devel-opment Board (EDB). Kamal Ahmed, chief operating officer of the EDB, says the organisation’s role is one of “trying to institutionalise change”.

In practice, this means co-ordinating all the different arms of government around the goals set out in the Vision 2030 strategy, and shifting the government from being a direct participant in the economy to acting more as a regulator.

But gaining widespread acceptance of these reforms has not been easy. In early 2008, the crown prince sent an open letter to his father, King Hamad bin Isa al-Khalifa, complaining about obstacles to reform, which was widely interpreted at the time to be a reference to Prime Minister Sheikh Khalifa bin Salman al-Khalifa.

Some 18 months later, the EDB has succeeded in forcing the pace of change in Bahrain. In one of its most ambitious moves, it supported the development of the National Economic Strategy, which was published in mid 2009 and outlines 144 initiatives that government ministries must take to meet the Vision 2030 targets.

“Bahrain had been a leader in many areas, but somehow we lost that cutting edge”

Atif Adbulmalik, CEO, Arcapita

Ahmed says the EDB has no intention of superceding government ministries. “It is the ministries that have the technical knowledge,” he says. “We are not better than they are and we are not here to take the credit when things get fixed. We are just here to help them achieve the goals outlined.”

Part of this includes making government departments more transparent, efficient and accountable. To take a lead on this, the EDB, along with the finance, works and education ministries, will become subject to performance-based budgeting, which should reveal exactly what each dinar of their budgets achieves. This will eventually be introduced across the government.

“We do not want to spend a single dinar unless it is aligned with the National Economic Strategy,” says Ahmed.

While the crown prince’s reforms are broadly supported by the general public, Bahrain remains a country battling with some serious domestic problems.

The Shia majority often complain about discrimination in favour of the ruling Sunni elite. This has led to tensions that, at times, have resulted in protests on the streets. Nor is this the only reason people have been protesting – the lack of housing for poorer Bahrainis is another area of concern that has led to demonstrations in the past.

According to the government’s own figures, the number of families waiting for low-cost housing or state housing loans to help them secure accommodation is as high as 50,000. To add to the frustration, many Bahrainis see luxury private sector developments for wealthy expatriates as a sign of the government failing to meet its domestic obligations first.

The EDB plans to address this by getting private sector firms to develop more affordable housing. Ahmed says money and land has been allocated to address the housing shortfall and private companies will be invited to bid for contracts to build new homes in October.

The ambition of the project is to bring the waiting time for housing down to five years by 2014, from about 12 years today.

Whether the people in need of housing will be satisfied by these promises is unclear.

“The government has promised before that it would meet housing demand, but with the huge inflation in real estate values this has benefited the private sector and priced out the local population,” says one former exile who returned to the country in 2001 following political reforms. 

“The indigenous population do not feel like they are being looked after by the government, which is what causes the disturbances on the street.”

Falling unemployment

However, significant progress has already been made. Following reforms to the labour market, unemployment has dropped from 16 per cent in 2002 to about 3.5 per cent in August 2009.

“All the work we have been doing over the past 12 months is to prevent unemployment rising above 4 per cent,” says Labour Minister Majeed al-Alawi. “For the past 30 years, unemployment has been the biggest cause of demonstrations in Bahrain.”

The EDB hopes that by addressing the housing issue and providing better education, it can get these people off the streets and into jobs, predominately in the private sector. Part of this goal involves shrinking the public sector.

“The wage bill for government employees was equivalent to 10 per cent of GDP [gross domestic product] in 2008,” says Ahmed. “This is high and we have to bring it down.”

By contrast in Singapore, another small island state, just 5 per cent of GDP is spent on government employees. Bahrain has set itself a target of bringing the figure down to 8 per cent of GDP, which will involve significant levels of outsourcing and privatisation, although a deadline for that target has yet to be set.

Bahrain’s plans are undoubtedly ambitious, and there is some scepticism about its ability to deliver on these promises.

“There is not one Bahrain, there are many,” says the former exile. “There is the Bahrain of the EDB, the Bahrain of the prime minister, and the Bahrain of the Rulers Court, and they are not all working together.”

He adds that while most people support the EDB, it still faces obstacles from some within government who are opposed to its plans.

Abdulmalik agrees that implementation is now the most important feature of the Vision 2030 strategy. He says that when it was introduced “there was a fear that this would be a challenge to the authority of the ministries, but now they are all speaking the same language”.

As more of the government ministries embrace the EDB’s aims, the chances of success increase, but implementing every part of the plan will be difficult.

“There are so many elements involved in trying to achieve the vision, and because humans are involved and we are fallible and prone to making mistakes and being led by emotions and politics, achieving the whole vision may be difficult,” says Al-Alawi.

“Some ministries may believe in it 100 per cent, and some may be hesitant or misunderstand parts of it, so the jigsaw may not complete 100 per cent, but you will recognise the picture when you see it.”

While the EDB insists that the economic crisis has intensified the need for reform, developing the private sector during a major economic slowdown will be difficult.

The EDB is forecasting that real GDP growth will be about 3-4 per cent in 2009, down from 5.2 per cent in 2008. The International Monetary Fund (IMF) anticipates 2009 growth of just 2.6 per cent.

The key to achieving the aims of the EDB is attracting foreign direct investment. Although it has been relatively successful at doing this in the past, there is a serious potential challenge in the longer term – many businesses use Bahrain as a hub for servicing the populous Eastern Province of Saudi Arabia, but as Riyadh continues to open up its economy to inter-national investors, many will find the rationale for basing themselves in Bahrain has been weakened.

For now, though, many businesses continue to choose Bahrain as a base for the region. For example, international consultant Ernst & Young recently relocated its global energy practice from Houston in the US to Bahrain.

The EDB has been conducting a high-profile ‘Business Friendly Bahrain’ marketing campaign around the world to persuade others to follow.

For Vision 2030 to be achieved, initiatives like these will need to succeed not just in getting private investment into Bahrain, but also in attracting businesses away from alternative centres such as Dubai. At the same time, it needs to secure the support of the local pop-ulation and the existing elite, at least some of whom feel threatened by the power and influence of the EDB.

With an economic environment that will challenge the growth rate to which Bahrain has become accustomed over the past few years, and that could force the government to increase its debts, swift progress will need to be made to placate the critics of reform inside the country.

Vision 2030 is perhaps the boldest of the strategic documents published by any of the Gulf governments, addressing not just dev-elopment and planning issues, but also mapping out a future direction for economic, governmental and social progress over the next 21 years.

If the EDB succeeds in bringing it to fruition, it will have brought Bahrain back to the forefront of the economy of the GCC, and cemented its future as a service hub for the oil-rich Gulf. If it fails to achieve this, Manama could find that its dwindling oil reserves mean it has lost the opportunity for good.

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