Governments across the world continue to evolve their approaches regarding how involved they should be to best support the economy based on their own experience and in response to the emergence of new intellectual or academic theories. Bahrain reflects a microcosm of this general trend, as its economic strategy has gradually metamorphosed during the last 30 years. A key feature has been a transition to a more interventionist approach following the state’s successful management of the coronavirus pandemic.

The 1776 publication of Adam Smith’s treatise, “The Wealth of Nations,” launched a debate on economic statecraft. The Scottish philosopher espoused a view – shared by many of his fellow classical liberals – that private businesses and individuals should be the owners of resources and the main actors when it comes to their allocation in the economy, with the government restricting itself to basic functions, such as ensuring law and order. Later philosophers, notably the German Karl Marx, challenged this view with a radical alternative whereby the government would own most of the means of production and would centrally decide what should be produced, how it should be produced, and to whom it should be allocated.

This intellectual duel between the laissez-faire camp, inspired by Smith, and the command-and-control camp, inspired by Marx, spilled over into the policy world during the 20th century as governments began to assume much more authority over the economy.

Prior to the discovery of oil, the Gulf economies were insulated from this debate because they were too small, and their tax base was too limited to sustain an interventionist central government. However, when they became high-volume exporters of hydrocarbons, and after the departure of external powers such as the British, the Gulf economies were presented with a dilemma about how much they should intervene in the local economy. The large windfall associated with the 1970s oil shocks made the choice between laissez-faire and command-and-control especially salient.

Bahrain’s Quasi-Interventionism

For the most part, Bahrain has tilted toward the free-market capitalism pole in the spectrum, especially when compared to its neighboring Gulf Cooperation Council states. Since the 1970s, the government has consistently strived to engender a commercial environment that is attractive to foreign investors and that people enjoy living in.

However, despite these classical liberal leanings, Bahrain’s government has generally seen the state as a strategic venture capitalist. That means actively leading the private sector toward economic sectors that it feels bear growth potential, rather than putting that money in the hands of private businesses and individuals and waiting for them to guide the economy forward in a decentralized and uncoordinated manner, under the auspices of Adam Smith’s “invisible hand.”

Over the last 50 years, many of Bahrain’s most successful enterprises have come out of this quasi-interventionist approach, including the aluminum smelter Alba, Gulf Petrochemical Industries Company, Gulf Air, and the National Bank of Bahrain. In all these cases, the Bahraini government established the enterprise and played an important role in overseeing its operations through the retention of shares and board seats.

The Washington Consensus

At the global level, the dissolution of the Soviet Union in 1991 marked the intellectual, economic, and military victory of the laissez-faire camp over its command-and-control adversary. This helped formalize the “Washington Consensus” – the free-market capitalism-inspired suite of policies promoted by the Washington-based International Monetary Fund and World Bank. The Washington Consensus espoused liberalization and deregulation of the domestic economy, privatization of state-owned assets, and the removal of barriers to the international movement of goods, services, and capital. It was strongly associated with an Anglo-American economic philosophy due to the heavy influence of former U.S. President Ronald Reagan and Former British Prime Minister Margaret Thatcher.

Coincidentally, as communism was collapsing, the Gulf states were considering a change to their economic model due to an extended period of depressed oil prices. As the GCC state with the smallest volume of natural resources, Bahrain was facing significant fiscal pressure, making it more open than its neighbors to radical economic reforms.

Crown Prince Salman bin Hamad al-Khalifa

While this was unfolding, Bahrain’s future crown prince, Salman bin Hamad al-Khalifa, was gaining a distinctly Anglo-American education, starting with a bachelor’s degree from American University in the U.S. capital, followed by a master’s degree from the United Kingdom’s Cambridge University. The crown prince has long had a strong interest in economics and has followed scientific developments across a wide range of fields.

Following his grandfather Isa bin Salman al-Khalifa’s passing in 1999, Salman bin Hamad gradually became the most important economic policymaker in Bahrain. In 2002, he was appointed chair of the Economic Development Board, and he established the Labor Market Regulatory Authority and Labor Fund (Tamkeen) in 2006. In 2013, the crown prince was appointed first deputy prime minister and chair of the Government’s Executive Committee, charged with formulating and implementing policies relating to the kingdom’s economic performance. In 2020, the crown prince was appointed prime minister, significantly expanding his influence over the Bahraini economy.

The crown prince’s education and background appear to have influenced his views regarding Bahrain’s economic strategy. The initial wave of reforms he implemented during the early 2000s were highly aligned with the Washington Consensus, which he witnessed crystalizing before his very eyes as an undergraduate. They included the liberalization of the telecommunications sector and privatization of the Bahrain Telecommunication Company, or Batelco. Economic Vision 2030, launched in 2008, called for the government to transform from a primary actor in the economy to an enabler and regulator of the private sector. Profit-driven businesses were expected to be the main source of jobs, marking a significant departure from the traditional role of the civil service as the default employer of Bahrainis entering the labor market. Restrictions on foreign ownership were relaxed and combined with commercial deregulation, with the goal of increasing inflows of foreign direct investment.

These policies were successful in several respects. The reforms to the telecommunications sector enabled Bahrain to develop one of the best digital infrastructures in the world, contributing to Amazon Web Services’ decision to establish its regional headquarters in the kingdom. Billions of dollars of FDI arrived, much of it in the financial sector, creating thousands of jobs for Bahraini citizens.

However, the crown prince’s affinity for the Washington Consensus was pragmatic rather than ideological, so he was always ready to consider alternatives that might better serve Bahrain. The 2008 global financial crisis had a significant impact on international experts’ views about the optimal level of government intervention in the economy, and this opened the door for a revision of Bahrain’s economic strategy. The near meltdown of the global economy caused by financiers in the United States running amok prompted this reevaluation of the proper mix of government intervention in the economy, not only in the West but also in the Gulf. Economists and policymakers tended toward supporting more regulation and imposing much more structure on the private sector. The Washington Consensus was stress tested and found wanting, just at the moment when Gulf governments began developing and implementing ambitious plans for economic diversification. The early successes of Saudi Vision 2030, for example, where the state was viscerally determining where to allocate a significant proportion of the country’s capital, reinforced the belief among many Gulf leaders that the Washington Consensus was based on a naïve trust in the capacity of private businesses to autonomously drive the economy forward.

Meanwhile, the outbreak of the coronavirus pandemic forced the hand of all governments across the world, as the depth of the health crisis meant that civil servants had to immediately relearn how to heavily intervene in the economy. For example, interagency public health committees were regularly providing detailed directions to businesses, such as retail outlets and restaurants, about when they should open, what goods and services they could offer, and so on. Similarly, in many countries, government intervention in the labor market increased sharply, with governments disbursing subsidies and imposing tight restrictions relating to workplace safety.

Bahrain’s government operations underwent a rapid and deep transformation during the crisis, with the crown prince taking a highly hands-on approach. The results were generally positive, especially in the health domain, where the kingdom registered approximately 1,000 coronavirus deaths per million people up to the end of 2022, compared to almost 2,500 in France and well over 3,000 in the United Kingdom and United States. This was primarily due to the low mortality rate for people infected with the coronavirus: In Bahrain, there were 2,200 deaths per million cases, compared to 10,200 deaths per million cases globally. The government’s proactive preparations for the pandemic that began when the first cases were reported in China in late 2019, as well as its effective delivery of primary care and procurement and distribution of multiple vaccines, helped ensure high rates of recovery for those unfortunate enough to suffer from infection.

Bahrain’s government had adopted an unprecedented level of control over all sectors. While the kingdom remained a long way from the 1940s Soviet Union when it came to the degree of centralized direction, the level of intervention was considerably higher than anything previously experienced by the thousands of Bahrain’s civil servants. Much of the Washington Consensus was expunged from Bahrain’s economic strategy, and in a very short period of time.

Post-Coronavirus Economic Reform

As Bahrain and the rest of the world began to see light at the end of the coronavirus tunnel, the time for preparing a new economic strategy arrived. From 2021-22, Bahrain’s government launched its new 5-year industrial strategy followed by its post-coronavirus economic recovery plan. The language of both indicated a clear departure from the approach adopted under the first 15 years of the crown prince’s economic stewardship. In particular, there was a reconceptualization of the government’s role away from being merely an overseer and regulator of economic activity toward the state leading strategic investments. Equivalently, the private sector went from being the main driver of the economy to being the government’s partner, occasionally riding on its coattails.

For example, previous incarnations of Bahrain’s industrial strategy tended to highlight very broad sectors, such as manufacturing or logistics, with no explicit reference to the government’s role in their development. In contrast, the 2022-26 industrial strategy designated specific sectors, such as pharmaceuticals, hydrogen, and fine electronics, as the targets of government support, with the government the lead investor, providing both capital and regulatory support for the private sector.

Part of the inspiration for this reformulated approach to economic growth has been Bahrain’s positive experience with reforming its housing sector. Extensive use of public-private partnerships has yielded much higher rates of housing construction and ownership than in the past and demonstrated how the state can work alongside the private sector to promote economic growth. The coronavirus pandemic played a role, too, by providing a successful proof-of-concept for how the government can be a more active contributor to the economy.

Bahrain’s own approach to economic policy over the past decade and a half has mirrored many of the global ebbs and flows in economic thinking, both in response to its own experience and as a consumer of the changes in intellectual paradigms. Today, the recent memory of the positive role that the state played in managing the coronavirus pandemic is contributing to a rehabilitation of the interventionist approach. Where the pandemic pushed, the heightened ambitions of Gulf countries’ Vision 2030 plans have pulled them – in many instances quite forcefully – to be more interventionist. Until the next paradigm shift, the carefully modulated interventionist approach is likely to remain dominant in economic management in Bahrain and throughout the Gulf.