BAHRAIN
Rank: 39 Regional Rank: 2 of 17
ahrain’s economy is 68.4 percent free, according to our 2007 assessment, which makes it the world’s 39th freest economy. Its overall score is 2.6 percentage points lower than last year, partially due to new methodological detail. Bahrain is ranked 2nd out of 17 countries in the Middle East/North Africa region, and its economy is ideal in several respects, such as tax and banking freedom.
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The economy is 68.4% free
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Bahrain’s economy is very free for the Middle East, with high scores in several of the 10 factors of economic freedom. Business freedom, fiscal freedom, monetary freedom, and financial freedom all rate well but are tempered by a score of only 40 percent for labor freedom, based on government regulations mandating the hiring of Bahrainis. The complete absence of income or corporate taxes in all industries except oil gives Bahrain a competitive commercial advantage globally. Despite some high scores, however, overall freedom has declined consistently since 1999. The main areas in which the country could improve are labor freedom and freedom from government. Specifically, the economy would do well if state-owned enterprises were not so dominant, generating three-quarters of government revenue. BACKGROUND: Bahrain has become one of the Persian Gulf’s most advanced economies and most progressive political systems since gaining its independence from Great Britain in 1971. Under a constitution promulgated by Sheikh Hamad bin Isa al-Khalifa, the country became a constitutional monarchy in 2002, and the government has sought to reduce dependence on declining oil reserves and encourage foreign investment by diversifying the economy. Because of its communications and transportation infrastructure, regulatory structure, and cosmopolitan outlook, Bahrain is home to many multinational firms that do business in the region. In 2005, the U.S. and Bahrain ratified a free trade agreement.
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40
Mideast/North Africa Average = 57.2 World Average = 60.6
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2007
QUICK FACTS
Population: 0.7 million GDP (PPP): $14.9 billion 5.4% growth in 2004 5.6% 5-yr. comp. ann. growth $20,758 per capita Unemployment: 14.0% (2004 estimate) Inflation (CPI): 2.3% FDI (net inflow): –$170.3 million Official Development Assistance: Multilateral: $0.2 million Bilateral: $111 million (0% from the U.S.) External Debt: $6.1 billion (2004 estimate) Exports: $9.2 billion Primarily petroleum and petroleum products, aluminum, textiles Imports: $7.1 billion Primarily crude oil, machinery, chemicals
How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
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BAHRAIN’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 80 69.6 99.6 56.7 80.1 50 90 60 58 40
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prises or existing government-owned or parastatal companies. All significant investments, whether by Bahraini or foreign firms, are subject to a lengthy and complicated government approval process. Gulf Cooperation Council (GCC) nationals may own 100 percent of the shares of domestic enterprises, but non-GCC nationals are allowed only 49 percent ownership of most companies. The stock exchange restricts ownership by non-GCC firms and persons to 49 percent of listed companies. Bahrain has no restrictions on the repatriation of profits or capital, no exchange controls, and no restrictions on converting or transferring funds, whether associated with an investment or not.
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BUSINESS FREEDOM — 80%
Bahrain’s commercial law system is relatively straightforward, but starting, operating, and closing a business can be hindered by a regulatory environment that lacks coordination. Obtaining a business license is difficult because of complicated bureaucratic procedures. In recent years, steps to streamline licensing and approval procedures have been taken.
FINANCIAL FREEDOM — 90%
Bahrain aims to become a regional financial hub, and both foreign and local individuals and companies have access to credit on market terms. Of the 25 commercial banks operating in 2006, 15 were branches of foreign banks. Some 52 offshore banking units, which use Bahrain as a base from which to conduct banking operations in other countries, dominate the financial sector. The Arab Banking Corporation and the Gulf International Bank control 45 percent of total offshore banking unit assets. The International Monetary Fund has praised Bahrain’s financial supervision as effective and its regulation as modern and comprehensive. The stock exchange is small but active. In March 2004, Bahrain lifted the requirement that foreign insurance brokers and loss adjusters have at least 51 percent Bahraini ownership. They may now operate with 100 percent foreign ownership.
TRADE FREEDOM — 69.6%
Bahrain’s simple average tariff rate was 5.2 percent in 2005. There are few non-tariff barriers, but a limited number of products are subject to import and export prohibitions and licenses, and discrepancies between legislation and practice reduce transparency and predictability and may increase the scope for administrative discretion, particularly at the border. Consequently, an additional 20 percent is deducted from Bahrain’s trade freedom score to account for non-tariff barriers.
PROPERTY RIGHTS — 60% FISCAL FREEDOM — 99.6%
Bahrain imposes no taxes on personal income. Most companies are not subject to corporate tax, but a 46 percent corporate tax rate is levied on oil companies. In the most recent year, overall tax revenue as a percentage of GDP was 7.6 percent. Property is secure, and expropriation is unlikely. The judiciary is not fully independent, because the king has the right to appoint judges and amend the constitution. Nevertheless, the legal system is well regarded, and foreign firms have been able to resolve disputes satisfactorily through the local courts. There are no prohibitions on the use of international arbitration to safeguard contracts.
FREEDOM FROM GOVERNMENT — 56.7%
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 28.7 percent of GDP, and the government received 72.1 percent of its revenues from state-owned enterprises and government ownership of property.
FREEDOM FROM CORRUPTION — 58%
Corruption is perceived as present. Bahrain ranks 36th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — 40%
The labor market operates under inflexible employment regulations that hinder overall productivity growth. Government regulations require businesses, by law, to employ Bahrainis, and this practice hinders job creation as the government tries to micromanage decisions by private businesses. Rigid regulations about dismissing a worker are also a burden to the private sector.
MONETARY FREEDOM — 80.1%
Inflation is relatively low, averaging 2.5 percent between 2003 and 2005. Relatively low and stable prices explain most of the monetary freedom score. An additional 10 percent is deducted from Bahrain’s monetary freedom score to adjust for price control measures that distort domestic prices for electricity, water, and petroleum.
INVESTMENT FREEDOM — 50%
The government welcomes foreign investment, except in cases that involve competition with established local enter-
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2007 Index of Economic Freedom