GRM 2010 GRM 2011

Abstract Details

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Yemen's Economy in Context
Paper Proposal Text :
Concerns about Yemen’s economy mostly focus on dwindling natural resources, growing population, and failing governance. Yemen’s oil resources are running out and the water table is falling rapidly. Though not as dramatically high as it was in the 1990’s, Yemen fertility rate is still one of the highest in the world. Moreover, the Yemeni state cannot even secure the oil pipelines or keep the lights on, much less provide a secure investment environment. With these factors in mind, efforts to address Yemen’s economy focus on lowering the fertility rate, educating and training Yemen’s rapidly growing labor force, finding new sources of natural resources such as mining, building effective state institutions, and promoting water conservation (or fighting the spread of qat). While these are all worthwhile efforts and progress on any of them would be more than welcome in Yemen, there may be better ways to approach an understanding of Yemen’s economic issues, particularly when thinking about the long-term development of the economy.

For instance, growth is not strongly correlated with natural resources. Natural resources can be as an economic curse as a blessing. Even in the more powerful economies of the developed world, natural resources can induce the ‘Dutch Disease,’ raising prices of non-tradable goods and undermining domestic manufactures. Furthermore, some of the most productive economies in the world, Japan, for example, have no domestic natural resources. Labor productivity made Japan rich, not natural resources. In the developing world, not only do economies suffer from dependence upon natural resources, but natural resources can also attract powerful multination business interests that can sway local elites to take short-term gains detrimental to long term development of the country. Natural resource endowments can increase the likelihood of corruption and weaken state institutions through patronage and clientism.

In the post WWII period, those developing economies that have done best are not those based upon natural resources but economies that have managed to create an “investment transition,” a long period of sustained investment, that significantly raises labor productivity and transforms the economy. These are neither the most open economies nor economies based upon exports, but economies that are able to harness domestic capital and labor in a virtuous cycle of investment and reinvestment that raises the level of productivity of domestic labor, the true source of wealth.

Since the overthrow of the Imamate in 1962, Yemen’s economy has been driven by factors other than domestic labor. In the aftermath of the Yemeni civil war, the Yemeni economy was transformed by the export of labor to Saudi Arabia and the remittances sent home. Remittances funded the importation of consumer goods from abroad and international development assistance funded infrastructure development that allowed consumer goods to travel more easily to Yemen’s remote countryside. In the late 1990s, oil revenues replaced worker remittances as the fuel of the economy. Passing through the state in the form of purchase contracts and public employee salaries, oil revenues maintained the flow of consumer goods into the country’s commercial networks.

Yemen’s private sector grew and adapted to this new environment. Capital in Yemen is mobile, invested not in fix assets but commercial goods that can be quickly liquidated when necessity dictates. Yemen’s private sector seeks to control key commercial opportunities through political connections. The famous fifteen families that prosper in Yemen do so through receiving state purchasing contracts, obtaining lucrative licenses for mobile phone companies, for example, or controlling key import opportunities. Investment is done outside the country, not inside. Savings are put in foreign banks far from the jurisdiction of the Yemeni state.

Such a development path is no longer sustainable in Yemen, at least not without impoverishing most of the Yemen people. Growth in the future, if there is to be economic development, must include the employment and development of Yemeni labor. The key for Yemen is the creation of an environment in which Yemenis feel they can invest in their future, whether through education or long-term economic investment. The paper will evaluate the prospects and problems with achieving such an investment environment given Yemen’s current political economy.

Finally, discussions of Yemen’s economy focus on the role of the state in inducing private sector growth, but the broader context of the Yemeni economy is also a critical factor to consider. While there have been successful “investment transitions” in the developing world since WWII, they have been rare, and often geopolitically significant. Yemen is geopolitically significant and interested foreign states have tremendous influence in Yemen. The role of foreign states and international actors in both facilitating and hindering Yemeni’s economic growth is important to consider. This paper will evaluate the broader context of the Yemeni economy to identify hindrances and opportunities for Yemen’s economic future.