Economic Activity in Bahrain
Bahrain had seen its first case of COVID-19 on February 24, 2020. Since then, a set of preventative measures were implemented to control the spread of the virus. The outbreak has had an unprecedented impact on our economy. In particular, policies were implemented that encouraged workers from both the private and public sectors to work from home.
In economic literature, labour and capital are the core components in the production of output, which is termed Gross Domestic Product or GDP (Solow, 1956). GDP is augmented through productivity, which is measured by the efficiency in which inputs are transformed into outputs.. Productivity is an essential indicator of the health of an economy and is highly correlated with real wage growth (Haldane, 2018; Pessoa and Van Reenen, 2014). It is primarily driven by economic activity within productive sectors, and identifying an economy’s most productive sectors can have important implications for economic policymaking.
Understanding Bahrain’s Labour Productivity
Notes: The table lists Bahrain’s output in each sector (CIO Quarterly Report, 2019) as well as the total number of workers employed in that sector (LMRA, 2019). Productivity is defined as output divided by inputs. In this case, the output per worker is labour productivity. The list is sorted from the most labour productive sector to the least.
The table shows the sectors of Bahrain’s economy, ranked by their productivity of labour for the second quarter of 2019. There are some essential properties of Bahrain's economy that can be identified by studying this list. Namely, the top 70% of Bahrain’s labour productive sectors represent only 5% of Bahrain’s total labour force, while the bottom 30% of Bahrain's labour productive sectors represent 95% of Bahrain's labour force.
It is important to note that there is a distinction between labour-intensive and capital-intensive sectors in an economy. For example, the more capital-intensive sectors like Mining & Quarrying (which includes BAPCO) and Electricity & Water only account for nearly 2% of labour hiring, yet they account for 52% of Bahrain’s productivity. On the other hand, the more labour-intensive sectors of construction and Trade account for 50% of labour hiring, yet only account for 2% of total productivity. This implies that labour, which is still an important factor of production, is not as efficient as capital in creating output for most sectors.
However, the Financial Corporations sector is an anomaly and does not follow this pattern. It is a relatively labour-intensive sector that is also highly productive, accounting for 3% of the labour force on its own and 22% of Bahrain’s total productivity. This is not unusual among other economies, as banks are the nexus in the creation of investment for all sectors of the economy.
Implications of Productivity due to COVID-19
The pandemic has created a dual shock to industrial productivity. Not only has the demand for goods and services declined due to social distancing policies, but the supply of work (and hence productivity) has fallen as well. Many economies are expected to shrink as a result of these changes.
However, the supply-side disruption may not be as damaging to Bahrain's most productive sectors. This is because many of its most productive sectors comprise of capital intensive industries (oil production, power facilities and communication), as well as firms where the possibility of remote work is more feasible (education, personal services and financial institutions). Therefore, these sectors are more capable of mitigating the supply-side productivity shocks caused by COVID-19.
For policy-makers, this has an important implication. There is little that can be done with regards to reviving demand-side activity without compromising public health. Therefore, to ensure that economic activity is shielded from a substantial slowdown, public policy should be aimed at supply-side activity, through encouraging capital-intensive methods of service provision. For example, it is advised that the use of services such as e-banking and distance learning should be increased. There should also be an encouragement for firms to adopt remote working as much as possible in industries where it is feasible. Bahrain has a 94.9% internet coverage rate, and infrastructure in information system technology already exists due to its early investment in cloud computing and network technologies. This makes remote working a practical solution that is likely to assist in mitigating the fall in productivity in these sectors, as well as diffusing public health risks.
To conclude, there is not only rationale, but also scope for a targeted policy response to COVID-19’s economic impact on Bahrain.
SOURCES
Authority, Bahrain Labour Market. "Statistics." 2019.
Central Informatics Organization "Quarterly Report 2019." 2019.
Pessoa, Joao Paulo, and John Ven Reenen. "The UK Productivity and Job Puzzle: Does the Answer Lie in Wage Flexibility?" The Economic Journal, 2014.
Solow, Robert M. "Technical Change and Aggregate Producton Function." The Review of Economics and Statistics, 1957: 312-320.
ABOUT THE AUTHOR
Khaled Bastaki is a graduate from the University of Warwick in a Masters of Science in Economics at the University of Warwick. His main interests relate to economic policy, law and politics. His current research relates to dynamic modelling of the economy and applied microeconometrics.
To contact Khaled Bastaki, please use the following medias:
Email: k.bastaki@bahrainresearchgroup.com