The most liberal economy in Arab world
Tax exemption, duty-free imports and exports,
cheap energy attract foreign investors

Few Americans realize that Bahrain has a liberal economy that is one of the world's most free. The country now ranks 24th on a world scale of liberal economies and is the first among Arab and Islamic nations.

According to a study carried out by the Fraser Economics Institute, Bahrain has created a liberal economic environment free of obstructive rules and regulations. More specifically, Bahrain is ranked ahead of Taiwan, Germany, France, Norway, Italy, Greece, Malaysia, Turkey and South Africa in providing the incentives needed for a liberal economy to operate successfully. Results released recently in the review of the world's top economies placed only Singapore, Hong Kong and New Zealand above Bahrain.

In addition, the London-based Gulf Center for Strategic Studies recently singled out Bahrain's revamped economy, and praised it for its stabilized and increased growth and budget surplus. The non-oil sector registered an 80 percent growth over the last year, and trade in general is developing significantly.

While the Government of Bahrain does have a controlling interest in many of the island's major industrial establishments, its overall approach to economic policy is considered helpful, especially regarding policies that affect demand for U.S. exports.

Western businessmen here note that market forces determine the price of commodities in Bahrain, and that distribution of foreign goods and manufactured products is carried out by the private sector.

Owing to its historical position as a regional trading center, Bahrain has a well-developed and highly competitive mercantile sector in which products from the entire world are represented. Import duties are assessed at 10 percent on most products. The Bahraini Dinar is freely convertible, and there are no restrictions on the payment and transfer of capital of profits. Nor does Bahrain tax individual or corporate earnings, aside from petroleum revenues.

Over the past two decades, the government has encouraged economic diversification by investing directly in such basic industries as aluminum smelting, petrochemicals, ship repair, and most recently, tourism. They have done this by creating a secure regulatory framework that has encouraged Bahrain's development as a regional financial and commercial center.

Despite these active diversification efforts, Bahrain's oil and gas sector remains the cornerstone of the economy, which constitutes more than 55 percent of governmental revenues, and oil and related products account for about 80 percent of the island's exports.

The country's budgetary revenues consist primarily of receipts from oil and gas, supplemented by fees and charges for services, customs duties, and investment income. Bahrain has no income taxes and thus does not use its tax system to implement social or investment policies.

In addition, the government actively promotes foreign investment and permits 100 percent foreign ownership of new industrial enterprises and the establishment of representative offices or branches of foreign companies without local sponsors. Other commercial investments are made in partnership with a Bahraini national controlling 51 percent of the equity.

"Bahrain is a very welcoming country," said Mohammed Al-Shroogi, Citibank's Middle East regional director. "Recently the rules and the regulations have been changed to help foreigners. They can now own 100 percent of real estate in Bahrain and can own up to 59 percent of any new issues on the stock exchange.

Al-Shroogi believes Bahrain has a lot going for it. 'It's an extremely well regulated country, and a good place to live because of its lack of crime. From the business point of view, it's very good. From the social point of view, it's reasonably good. Technologically, I think, by far, it has the best technology, which is why we chose Bahrain as Citibank's regional hub.

Al-Shroogi said the importance of having a local work force should not be overlooked. "Not only is the work force well-educated and sophisticated here, but you need locals in time of crisis. During the Gulf War, many of the expats left, but the Bahrainis stayed and worked -- no matter what was happening around them."

The time zone and location of Bahrain is also extremely important. "It will take you 60 minutes to fly from Bahrain to Abu Dhabi, Kuwait, Riyadh, which makes Bahrain a central hub, and we have benefited a lot from that," notes Al-Shroogi.

"Bahrain is very welcoming and the people are very accessible - from His Highness all the way down, here you have access to the emir, the prime minister and the crown prince, which to me is very important."

Developing Bahrain's Non-Oil Industry

Looking to develop its non-oil industry, the Government of Bahrain has set up a framework for foreign companies interested in doing business in Bahrain. It offers attractive tax, duty and ownership incentives; there is no personal, corporate or withholding tax and no restriction on capital and profits repatriation. In addition, there is unrestricted foreign company ownership, free circulation of foreign currency, duty- free imports of raw materials and semi-manufactured goods for development projects, duty free transshipments and re-exports.

Other strong points include low operation costs; the existence of a skilled, English-speaking workforce at a far lower cost than in industrialized countries; and easy air, sea and road access to and from the island via the causeway that joins with Saudi Arabia.

The only low note is the high custom duties put on foreign luxury items. Five percent is leveled on foodstuffs, 10 percent on general luxuries, 20 percent on cars, 50 percent on cigarettes and tobacco, and a whopping 125 percent on alcoholic drinks. But, to the country's credit, alcohol is easily available.

The new duty-free complex at Bahrain Airport for departing, arriving and transit passengers rivals the best duty-free stores in the world. And the complex, where all the world's most select brands and labels are represented, has won international recognition and received several tax-free awards from both countries and various magazines.

And, with more than 40,000 items to choose from, Bahrain duty-free shops offer prices that are among the lowest in the world.

Bahrain is also one of the few airports in the world with a duty-free shop available at the arrivals terminal.

Gulf Air, which is headquartered here, is continually increasing the number of its airplanes and destinations. Bahrain has become quite a regional aviation hub, with 20 other airlines flying into Manama.

"There are a good number of attractive factors that draw people to do business here. To start with, we have an excellent infrastructure, which means there are good offices and housing. Businessmen based here work with the Saudi and Kuwaiti markets, and hopefully, in the future, we will also work with the Iran and Iraq markets," said Murad Ali Murad, chief executive officer and general manager of the Bank of Bahrain and Kuwait.

"From here, you can even go as far as Indian and Yemen markets. All the companies that do business out of Bahrain have the capability to cover a very large area in this region."

Murad said Bahrain's well-educated workforce is extremely helpful. "Just to give you an example, at the Bank of Bahrain and Kuwait over 95 percent of our staff are Bahrainis."

Murad said another important issue is the country's telecommunications system, which "is of very high quality, and is constantly upgraded."

When compared to the European and U.S. markets, Murad said, Bahrain is a relatively inexpensive place to do business. Aside from communications, he noted that Bahrain has an important airport that serves various parts of the world, and "it is not difficult to get in and out of Bahrain from Europe or the Far East."

Businessmen will also be attracted by the operating costs in Bahrain, said Murad. "It is not expensive, and you get very good value for money in Bahrain.

"Bahrain has no taxes, whether individual or corporate tax. There are various services that you pay tariffs for, registration of a company, or a driver's license, but you will find these charges anywhere in the world. Other than that, there are no corporate or individual taxes.

Murad said companies that set up offices in Bahrain do it for a variety of reasons. "Some want to serve this region, others find it more tax efficient to be here, and a third reason is that many want to expand activities outside the U.S. or outside Europe and view this as the best place to be based."

He said the country is also very well regulated, and has excellent laws to help businessmen. "These laws are updated and upgraded all the time, which is an important part of their infrastructure."

Finally, Murad said the region is also very important because of the considerable wealth and "purchasing power" in the area.

Mahmoud Difrawy, Chase Manhattan Bank's managing director of the Middle East, agrees: "Bahrain is an extremely welcoming country and welcoming people. It differs from the rest of the region in the sense that it's very, very civilized. The people are extremely hard working, they're not as wealthy as the rest of the Gulf, so they have to work hard, and they always have. They have to work hard to make ends meet. They participate in the economy, they are highly educated, and they make living for ex-pats very, very comfortable here."

"I hate to say but it's not a hardship post at all, although a lot of the international companies think of it as a hardship post. And the infrastructure is first class, and the ease of doing work here is something. It's really better than anywhere I've lived in the world," says Difrawy.

Still, there is room for change, and businessmen are hoping that the new emir, who is encouraging foreign investment in Bahrain, will continue the economic innovations he has started.

"I think the only way the economy can improve here is by streamlining the procedures with the authorities," says Jamal Al-Hazeem, Arthur Anderson's office managing partner in Bahrain.

"There is no point in saying that there is no taxation, no income on corporate tax, and that the standard of life is good, the social life is good, if you don't meet all that with certain streamlining within the ministries.

"To establish a business here, some businessmen have to deal with four or five ministries. I think there should be one body that exclusively deals with new businesses. There would be more competency to help deal with the system," Al-Hazeem said, adding, "But things are changing, especially since the arrival of the new emir."

Finally, Western businessmen stress that it is important not to generalize when dealing with Bahrain

"Bahrain is a very liberal country, and in many ways the most open in the Gulf," says Michael Fuller, chief executive of Al-Ahli bank in Bahrain.

"I think people who come here, whether from Europe or the States, find the environment much less threatening than what assumed -- without any real knowledge of the Gulf. And, Bahrainis are nice people.

"The tendency for people outside this area to think of the Gulf, and/or the Middle East, and/or the Arab world as representing one monolithic block is as crazy as thinking everyone in Europe is the same, or that even everyone in the States is the same," said Fuller. "There are such huge differences -- just a common language and religion."