Traders, Dealers and Survivors

By James Kelly

The U.S. prepares a warm welcome for the gulfs "poor cousin "

The country is just one-seventh the size of Long Island, but its puny proportions belie its importance. Over the past decade, the 240-sq.-mi. state of Bahrain has emerged as the banking and trading capital of the Persian Gulf, a sort of Arabian Hong Kong. Only 15 miles off the coast of Saudi Arabia, the island nation is a strategic steppingstone in the defense of the oil-rich gulf. As one of the rare gulf nations that allow the U.S. Navy to use their ports regularly, albeit quietly, Bahrain enjoys a warm relationship with Washington. For those good reasons, Sheik Isa Bin Sulman al-Khalifa will receive the sunniest of welcomes this week when he becomes the first ruler from Bahrain to pay an official visit to the U.S.

Bahrain (pop. 300,000) occupies a special place in the Middle East. It was one of the first Arab countries in the region to strike oil, and it will also be the first to run out, probably in about ten years. The natives never tire of calling themselves the "poor cousins of the gulf," despite the fact that their economy is well planned and diversified. Although Bahrain is not quite so prosperous as some of its neighbors, its citizens enjoy a healthy per capita income of $9,000. As a result, Sheik Isa's government is able to offer an array of social services, including free education and medical care, no less generous than that of many European states.

The island first began pumping oil in 1934, but its reserves were small, and output peaked in 1970.* About 15 years ago, Bahraini officials wisely anticipated that oil revenues would dry up, and they began transforming the economy. The country now boasts 143 banks, most of which are offshore banking units that thrive in Bahrain's tax-free environment. In the capital of Manama, bank offices open at 7 a.m. to handle traffic from Tokyo, and do not shut their doors until twelve hours later, to catch the New York markets. Some 4,000 people work for the banks, compared with 4,900 in the oil industry.

The country also branched out into heavy industry, mostly by persuading its wealthier neighbors to locate a clutch of plants on Bahraini soil. Saudi Arabia is a partner in an aluminum smelter built in 1968, while a consortium of Arab governments built a major shipyard in 1977. Future joint Arab ventures already approved include a $106 million plant to produce aluminum and a $220 million iron-ore-pellet factory.

The Bahrainis are spoiled by Saudi Arabia, which acts as a sort of wealthy big brother to its tiny neighbor. Aid from Riyadh paid for more than 50% of Bahrain's national budget of $1.3 billion last year. The Saudis are building a 15-mile-long, four-lane causeway that will provide the first land link between the two countries. The project is a pharaoh's dream: some 1,200 workers are busy sinking concrete piles into the sea floor and then placing slabs of roadway the length of football fields on top of them. By the time the causeway is finished, in late 1985, the bill could reach $600 million.

Ostensibly, the road is being built to facilitate trade between the two countries, but the consequences may be more far-reaching. Saudi Arabia, like most other gulf states, bans alcohol as well as such Western pleasures as dancing and nightclubbing. Reflecting the tolerant views of Sheik Isa, Bahrain is more relaxed: liquor flows freely in its hotels, and supper clubs offer the best in gulf entertainment. Already, many Saudis fly to the island looking for fun; some members of the austere Saudi royal family fear that Bahrain will turn into a gigantic weekend resort once the road is open.

Until the country began redeveloping its economy in the late '60s, skilled and unskilled Bahrainis alike went abroad for jobs. Now most stay home. Bahrain still uses foreign labor, but the proportion of immigrants in the national work force is much lower than in other gulf states. (Less than 60% of the island's 140,000 workers are from other countries.) Bahrain, moreover, carefully screens out potential troublemakers. Unlike many other Arab states, it has granted work permits to only a few hundred Palestinians. The vast majority of foreign laborers are docile Filipinos, Indians and Pakistanis hired on two-year contracts.

Sheik Isa's main worry centers on a religious schism within his people. The royal family, along with most of the nation's decision makers, are Sunni Muslims, but some 60% of the country, including most of the poor, belong to the Shi'ite branch of Islam. Bahrain thus is an inviting target for an Islamic revolution imported from Iran, where the Shi'ites are dominant. The island in fact was part of Persia until Sheik Isa's ancestors, who came from Qatar, drove out the Persians in 1783. Since the revolution that brought Ayatullah Ruhollah Khomeini to power, Iran has stepped up its claims to Bahrain. In 1979 a prominent ayatullah loudly proclaimed that Bahrain was Iran's 14th province. In 1981 the government foiled a plot to assassinate Sheik Isa and key members of his government. About 70 people were arrested; though details remain murky, Bahraini officials blame Tehran.

Still, Bahrain remains an oasis of serenity in the turbulent Middle East. Much of the credit belongs to Sheik Isa, 50, the short, slightly pudgy Emir who has ruled the country since 1961. The sheik, whose cherubic face always seems to be breaking into a smile, truly delights in dealing with people. Anyone with a grievance can come to the palace and complain to His Highness in person. If a foreigner has trouble with the royal name, the sheik is likely to joke, "Call me Jake." Although he is wealthy, he and his wife avoid extravagances; the sheik is often spotted driving around in a vintage gray Chevrolet rather than a gleaming Rolls. Largely by dint of his benevolent personality, Sheik Isa succeeded in dissolving the badly divided parliament in 1975 without incurring much opposition. He now rules by decree, though he leaves the day-to-day business of governing to his brother, Prime Minister Khalifa Bin Sulman al-Khalifa.

Between 1949 and 1973, the U.S. Navy's Middle East force was headquartered at the Bahraini port of Jufair. After the 1973 Arab-Israeli war, however, Sheik Isa heeded the mounting criticism of his Arab neighbors and negotiated a new arrangement, which considerably reduced the American presence. The U.S. Navy maintains an administrative support unit at Jufair, and its five ships are allowed to call at Bahrain on a limited basis.

If Bahrain were willing, the Reagan Administration would explore ways of expanding its military ties with the island. But Sheik Isa is not likely to agree unless he decides that Bahrain's livelihood as an international merchant is at serious risk. "We trade, we deal, we survive," says a Ministry of Finance official. "We've been here for 5,000 years, and I hope we'll be here for another 5,000."

--By James Kelly.

Reported by Barry Hillenbrand/Bahrain

* Bahrain now pumps a modest 44,000 bbl. per day, compared with Saudi Arabia's 5 million bbl. per day.

With reporting by Barry Hillenbrand This file is automatically generated by a robot program, so viewer discretion is required.