Bahrain's economy is heavily dependent on oil. Its oil reserves, however, are much smaller than that of its neighbors and it is estimated that they will soon be exhausted. Recognizing this fact, Bahrain's leaders have tried to diversify the country's economy. Their efforts, however, have produced mixed results. Outside of the oil sector, the most successful industrial enterprise has been aluminum production. In cooperation with British, French, Swedish, and U.S. companies, the government built Bahrain's first aluminum smelter in 1969. The company, known as Aluminum Bahrain (ALBA), has been the most successful non-oil industrial venture. In January 2002, ALBA opened a coke calcining plant in Bahrain; heat produced by the calcining process will be recycled, contributing to a seawater desalination operation that contributes fresh water to Bahrain's water supply. There are several industries that further process ALBA's output, including a joint venture between the government of Bahrain and a German firm that produces atomized aluminum for export.
Another successful industrial venture has been the Arab Shipbuilding and Repair Yard Company (ASRY). Jointly owned by the members of the Organization of the Arab Petroleum Exporting Countries (OAPEC), ASRY began operation in 1977 and two floating docks were added to the operation in 1992.
Bahrain has also achieved success in the service sector. The oil boom of the mid-l970s transformed Bahrain into the financial capital of the Gulf. By 1988, 65 international commercial and investment banks had established branches in Bahrain. By the late 1990s, Bahrain had become the Gulf's Islamic banking center. Islamic banks either charge no interest or only minimal interest in an attempt to reconcile modern banking practices with Islam's prohibition on interest.
The oil income has enabled the government to rapidly expand social services. Bahrain's Constitution provides for free education and health service for all citizens, although fluctuations in oil prices adversely affect these social programs.
The main domestic challenge facing the new emir in 1999 came from Bahrain's Shi'a community. Although the Shi'as constitute a majority of the population, they are underrepresented among the political and business elite. In the 1990s, "fundamentalist" elements in the Shi'a community, possibly supported by Iran, challenged the regime. The situation was further complicated by a rising unemployment rate (estimated to be as high as 18% for Bahraini citizens), demands from across the religious and economic spectrum for greater citizen participation in the functioning of the government, and resentment of the large number of foreign workers in Bahrain. In 1994, a charity-sponsored running race, whose participants were mostly foreign workers, was violently disrupted by villagers who were upset by the participation of women. Some of the villagers were arrested. A month later, rioting erupted all over the main island when cassette tapes of sermons by a Shiite imam from Manama began to circulate. These tapes condemned the presence of women in a foot race, the large number of foreign workers in Bahrain, and the decline of moral standards. They called for a revival of the 1973 Constitution, which had allowed for a representative assembly.
Under King Hamad's leadership, the country seems to be rapidly transitioning from a repressive state to a more open political system. In early 2002, King Hamad agreed to constitutional changes that would create a two-house Parliament, and called for national elections in October 2002. The changes were nearly unanimously approved in a referendum in February 2002; as a result, Bahrain guarantees freedom of expression and religion and extends universal suffrage to all citizens (men and women). Under the new constitutional provisions, women have the right to run for public office for the first time in the country's history. Dissident leaders of opposition parties were guardedly optimistic that elections would be free and fair, noting the governments wide-ranging powers.
The Parliament, elected in October 2002, held an opening session in December 2002. It was the first meeting of the 40-seat legislative body since the mid-1970s. Election turnout was as high as 53%, a figure taken as a sign of the health of Bahrain's new democracy. The elections were, however, boycotted by Islamic Leaders and their followers. The Leaders objected to women participating in the elections.