Economic Diversification: Case Study of the Kingdom of Bahrain

Abstract

The global financial and economic crises exposed one of the major weaknesses of a Bahrain and its reliance on too few export commodities and one or two sectors. Such dependence makes Bahrain vulnerable to fluctuations in commodity prices and demand.

The purpose of this study looks at how the government of Bahrain can diversify its economy and analyze Bahrain’s economic diversification profiles in particular. The paper begins by examining some of the major determinants of diversification and will also look at how the private sector plays a key role by being at the forefront of innovation, research and development and production. Good governance is needed to create an enabling environment for investment and trade; to manage natural resources; and to set policies to develop strategic sectors. A regional approach to economic diversification is particularly important, especially given the small size of Bahrain’s economy and the benefits of economies of scale from regional initiatives. Lastly, infrastructure and human resources help to facilitate trade, productivity and innovation and are key drivers of diversification.

Diversifying the Bahrain economy is not an easy task. One of the key challenges is how to overcome over-specialization. The country has a developed systems and know-how in oil and gas sector but may find it difficult to transfer these to other sectors and activities. Also, significant trade barriers exist and Bahraini firms may not be able to compete against their peers in other parts of the world because of a lack of access to finance, administrative hurdles, weak productive capacities, and other impediments to competitiveness. These challenges need to be addressed if diversification efforts are to gain traction.

The study is important because when the financial crisis hit, it affected the economies of almost all countries worldwide. In this crisis however, the countries with a poor economic diversification suffered more than those where they have a relatively well diversified economy. It is therefore important for an emerging country like Bahrain, although relatively wealthy, to diversify its economy.

Keywords: Competitiveness, Diversification, Emerging Country, Economic Crisis

JEL Classification: F01, L60, L93, M13, M31, N15, N75