منتدى استراحات زايد - The economic implications of overthrowing Bahrain's Monarchy

I want to argue in favour of the "royal family" under the framework of a constitutional monarchy. I understand this is a controversial topic and I may get a lot of stick for this but you must at least try to understand the point I am trying to make.

From the onset I must stress that theoretically there shouldn't be a genuine political or socio-economic benefit from a royal family. This is particularly the case with strong democratic institutions as the rule of law, private property institutions and efficient and strong law enforcement agencies. Indeed, in such a scenario, the role of a royal family becomes redundant or, at best, merely ceremonial. In fact, even without those institutions, having a hereditary monarchy is an insult to human dignity; having a paternalistic figure imposed on a nation could be quite patronising.

However, beyond the somewhat Greek/Roman interpretation of how a democratic republic should, as in the example of say Ireland, there are pragmatic considerations that must be contemplated in the unique case of Bahrain. In analysing this small island in the Persian Gulf, one must recognise the economic and, perhaps as a result, geopolitical implication of turning the country into a republic. Perhaps most importantly, Bahrain will inevitably be dismissed from the Gulf Co-operative Council which fundamentally has two functions: political and economic. The political aspect of this council was as a NATO/Warsaw-Pact style alliance of monarchies primarily to defend themselves from foreign threats, as in the case of the Iraq-Iran war, but also to defend the monarchies from being overthrown by a populist movement as in the case of Bahrain in March 2011. This political aspect of the GCC came in the aftermath of the revolution witnessed in Iran in 1979. As for the economics, and beyond the micro and macro factors of a trade hub, the GCC acted as mini-OPEC not only to exert pressure on other members of the cartel but also control the volatile oil prices in the case of limited compliance from other OPEC members. The focus here should be on the economics of the GCC as I genuinely believe the political story of the GCC is widely exaggerated.

The exit of Bahrain form the GCC reduces Bahrain’s oil refining out by 150,000 barrels per day – i.e. the amount “donated” by Saudi Arabia - from the 190,000 barrels per day, which is more than 2/3rds of overall production. Through a (extremely) simple calculation, a $ 3.3bn will be wiped out of Bahrain’s economy every year (assuming oil stabilises at $100/bbl) – that is roughly 15% of total nominal GDP wiped out. This means, government revenues will be reduced by at least 50%. Even adjusting for royal family spending, the amount is too great to support the current fixed exchange regime. Deposits and investors, anticipating a nominal depreciation of the Bahraini currency there will be a sudden, capital outflow from Bahrain. The common practice of short-selling will ensure that process of depreciation will become instantaneous. The level of depreciation depends on a myriad of factors and the lack of macroeconomic data from the country makes the task of calculating how overvalued the Bahraini dinar will be in the case of 2/3 decline in oil production is overwhelming. Suffice to say, however, that wholesale banks’ balance sheet totals around $132 billion and therefore constitute more than 550% of GDP – a sudden withdrawal of foreign liabilities is likely to cause a run on these banks. The Central Bank of Bahrain has $ 4.2bn in FX reserves, meaning that it can cover only 3% of the total outflows. The government can therefore, either raise that amount through bonds, and is unlikely to sufficient amounts in this scenario, or suspend convertibility – that is to say prevent depositors from withdrawing – which will have significant long-term implications. The government may ultimately allow the bank runs to occur and thus causing a significant decline in the currency of Bahrain. It is worth noting that Bahrain has little dinar denominated tradable goods (Oil and Aluminium are traded in dollars) the depreciation is unlikely to have a positive impact on growth while significantly reducing real wages.
It must be stressed that this isn’t a worse-case scenario. Rather it is a realistic outcome given Bahrain’s reliance on its oil and gas industry and its financial sector. This “balance of payment crisis”, as Krugman called it in a wonderful paper published in 1979, usually leads to a prolonged period of social unrest. A similar example was the case of Argentina during the 2001 crisis which led to double digit drop in output. Bahrain is unlikely to recover as easily as Argentina did, given that the economy does not share the same depth, being focused on two main sectors (hydrocarbons and finance).

There is a pragmatic way of achieving a genuine democracy that does not involve the overthrow of the monarchy and suffering the economic and socio-economic implications as result. A solid, united opposition for a genuine constitutional monarchy not only alleviates the adverse economic implication but is also appealing to a wide range of Bahraini society.