A Yemeni soldier shades himself from the sun as anti-government protesters perform the weekly Friday prayers during a rally the the capital in Sanaa, on April 13, 2012
Yemen’s weaknesses and strengthens are the focus of a recent report by the Carnegie Endowment. On one side, the author stresses the country’s natural resources, with oil and natural gas on the frontline. On the other, the report stresses Yemen’s incapability of managing these same resources (and many others) due to both its political structure and insecurity in the region more generally.
Building a Better Yemen
Charles Schmitz
Carnegie Paper
3 April 2012
It should not all be about the oil. According to the author, the fact that Yemen’s oil has enabled its economic growth over the last few decades created a dependence that will soon destabilize the country’s economy: “[Oil production] has made up about a third of gross domestic product (GDP), provided about three-quarters of state revenue, and accounted for nearly all of Yemen’s export revenue. Currently, Yemeni oil production is declining because the country’s reserves are running out and there is little new exploration for new oil.”
Natural gas is the second more important natural resource in the country. Yemen’s liquefied natural gas (LNG) project is the largest investment project in its history, but according to Schmitz it will only bring about a quarter of the revenue that oil brought to the economy. Specifically, the LNG project will create about $1 billion in wealth for the country each year for the next two decades—but the annual budget is $6 billion.
The country has become so reliant on oil revenues that it has failed to invest in domestic labor, infrastructures or investment. Investment in these areas is required to sustain long-term growth and support the economy when it eventually transitions away from its dependence on oil and gas. In spite of this, Schmitz argues that the main challenge is political—not economic—and political legitimacy will be much more important than having resources or investment. The key for sustainable development lies within the state: “Long-term development depends on a strong Yemeni state to strengthen the domestic labor force, build a healthy investment environment, cultivate the private sector, tax citizens to fund state expenditures, and better manage resources.”
Neighbors in the Gulf also play an important role, particularly because they employ migrant laborers from Yemen, who in turn increase Yemeni income through remittances. While the Gulf states seek long-term stability in Yemen, in the short term the most that can be done to aid the country is to loosen immigration restrictions on Yemeni laborers seeking work in GCC states. However, the author believes labor export is not a solution for Yemen’s troubles: “Long-term sustainable economic growth will depend upon domestic labor’s employment in the domestic Yemeni economy.”
Even if social and living conditions in Yemen have improved, it has failed to fulfill the needs of its population. As a result, there is no trust between the people and the state. The author highlights a crucial failure in Yemen’s labor market: Yemenis do not feel that their labor will be rewarded. As a result, citizens do not have the incentive to work enough to consider personal savings and investments that would further stimulate the country’s economy The report finally notes that “in Yemen today, the first thing that people do when they accumulate any wealth is to transfer it outside the country.”
Yemen does have two potential growth sectors that remain untapped: tourism and mining. Both sectors lack the interest and capital investment needed to promote growth. Many domestic investors left the country, and foreign investors do not feel confident due to the insecurity and instability in the region. Increasing investment is an obvious priority, but it will not be easy to achieve. Yemenis with substantial assets to invest have tended to leave the country due to the regime of Ali Abdullah Saleh. “It was clear to these investors that Saleh wanted to control the private sector for political gains. They will return if they feel that the new government has the capacity to stabilize the country and will allow them to cultivate their businesses.”
Water is a perennial issue in Yemen: per capita water supply in the country is one of the lowest in the world. Schmitz deemphasizes the problem, concluding that the water issue is “less a question of scarcity than they are a question of management, as is true for the economy at large.” One main challenge will be to use water more efficiently – the author uses the agricultural sector as an example, where 90 percent of the country’s water consumption produces only 10 percent of its GDP.
Crisis?
According to Schmitz, despite the political turmoil of the last eighteen mnths, “the Yemeni state is still in relatively good financial health.” This is evidenced by Yemen’s external debt of $6 billion—only 23 percent of its GDP, which is low in comparison with most countries. Yemen is also a country without effective taxation, which shows its external debt in an even better perspective: if the country were able to levy taxes effectively, it would be in a very strong position financially. In order for that to happen, however, the legitimacy issue arises yet again: “Effective taxation, a cornerstone of any state, is dependent upon legitimacy and social cooperation, something the new Yemeni state will need to work hard to gain. If the state is not seen as representing society’s aspirations, taxation in Yemen will be impossible.”