CHAPTER 3

ECONOMIC BACKGROUND AND DEVELOPMENT

3.1 The two Yemens prior to unification

At the time of the establishment of the two republics in the early 1970s, there were marked differences between the very traditional economy of the north and the specialized colonial economy of the south

In 1970, the economy of the north was essentially unchanged from mediaeval times. Agriculture was largely subsistence production of sorghum, with sesame and groundnuts grown as cash crops, and coffee for export. Farming systems depended on traditional tools and animal draught. Manufacture was limited to local processing of agricultural products. Commerce was small scale. In the south, by contrast, the dynamic pull of Aden had created a vast pool of skilled labour engaged in marine and related industries and a substantial commercial and administrative class. The colonial government had invested in the hinterland, too, notably in the Abyan spate improvement scheme in the 1950s, and in the ginning and marketing of the cotton produced on the scheme.

In the 1970s, after the establishment of the two republics, contrasting influences drove the two economies in different directions, with the southern state pursuing state socialism

The economic policy of the new PDRY was characterized by a strongly interventionist state and the predominance of state-organized production and marketing enterprises. Attempts to modernize the economy on socialist lines meant nationalization (without compensation), heavy regulation and price control, and state investment. In agriculture it meant expropriation of most farmland and its redistribution on a tenancy basis, the establishment of a cooperative system, state monopolies and price controls on agricultural produce marketing, and investment in state farms. In water resources, government established a state drilling corporation to exploit the new tubewell technology, regulated private water extraction, and invested heavily in developing water and sanitation services.

By contrast, the former YAR followed a less interventionist approach that, with hindsight, seems better adapted to Yemeni leanings

Lacking a driving economic ideology, YAR governments tended to be economically laissez-faire – pragmatic but also inconsistent and reactive. The early era under President al-Hamdi, seen by some as the Golden Age of the republic, witnessed considerable public and private investment in basic infrastructure, particularly roads, irrigation, power and water, together with the very rapid development of health and education. In 1972, in line with the global craze for central planning, the Central Planning Organization (under the same Abdul Karim al-Eryani who later became Prime Minister) elaborated a first Three Year Plan.¹

This era in the north also favoured community-led investment in social and economic infrastructure

Local community associations of many kinds formed to make community investments in schools, roads, clinics, etc. In 1973–6, rural community associations built 5,000 km of feeder roads, in 1977–8 a further 6,600 km, and in 1979–81 more than 17,000 km were built.² Dresch comments: ‘Every hole in the ground … was named a “project”. All things seemed possible, and the future was being built at family or village level.’³ While these associations – often collectively called local development associations or LDAs – did not necessarily conflict with either traditional powers such as sheikhs or with the new institutions of the modern state, they had little to do with them. However, after a brief flowering, attempts were made to co-opt them, and this proved fatal to their essentially popular democratic character. The World Bank recommended that rural development aid be channelled through the associations, the dead hand of government fell on them, and by the 1980s these associations had largely fallen into abeyance.

The oil boom had a transformational effect on both Yemens through migration for work

The most influential economic event of the time – and which had a huge impact on both Yemeni states – was the oil boom of the early 1970s and the consequent migration of hundreds of thousands of Yemenis to modern employment in Saudi Arabia and the Gulf. Lack of natural resources and paucity of human capital limit Yemen’s options for growth, and migration had always been a major economic opportunity, from the early period of migration around the Indian Ocean, through the migrations via Aden to Britain and elsewhere, to the modern emigrations to the richer neighbour countries. The temporary diaspora of the 1970s and 1980s was a far more defining event, and more important than any government economic initiative or donor aid transfer. The migration was on a huge scale. After Saudi Arabia lifted immigration restrictions in the early 1970s, and above all after the oil price increase of 1973/4, labour flooded out of Yemen. They would say: ‘From every household, one.’ The 1975 census already showed an emigration rate of about 9 per cent – about 350,000 men, one-third of the male workforce of north Yemen. Within two years, the total may have reached half a million. Remittances in 1979 reached $937 million to the north, $298 million to the south. In the north this represented about two-thirds of the value of imports.

The effect of remittances on individual and community life in Yemen was enormous

Communities developed electricity, groundwater pumping, roads and schools. Families built new houses or refurbished old ones, acquired electric lighting and television, soft furnishings and motor cars. Meat entered the regular diet of most people for the first time. As Dresch says, the simplest things like thermos flasks, fresh bread, biscuits – things people never had before – became widely available and accessible.⁴ Qat chewing, originally an occasional relaxation of the better-off and the religious, started to become an everyday habit. At the same time, imports and inflation soared. Yemen became a high-wage economy. Trading and commerce expanded rapidly.⁵

Migration and remittances drove wholesale social change…

Social change was inevitable, with so much money spread across so many ordinary individuals, beyond the grasp of either traditional elites such as sheikhs, or of the government. Power shifted between generations and classes, too, as the revenues accrued to young male labourers, often from poorer families, away from older people and heads of household, and away from traditional high-status families.

…and rapid economic modernization

The money from remittances was concentrated in private hands and untaxed. This allowed individuals to make spending choices for the first time. Investment decisions were the responsibility not of government but of individuals. The impact on the lives of ordinary people was thus infinitely greater than in the later oil boom, where revenues went to government. With remittances there was no opportunity for the elite to skim off rent either. Communities benefited, because Yemeni traditional solidarity meant that a share of the remittances was contributed towards community projects. In cities across Saudi Arabia and the Gulf, Yemeni migrant workers would meet on Friday in ‘village’ clubs to talk about their homes and to pool their money for communal projects.

The large amount of money created strong private investment capacity. In an economy still largely agricultural, and with most remittances accruing to farming families, a large share of the inflow was inevitably invested in farming, and particularly in the tubewell technology that was just then being introduced. This was to have a profound impact on Yemen’s water resources management (see Chapters 6 and 9). Other agricultural innovations also came in at this time. Governments in both north and south set up rural development services and provided agricultural research and extension to farmers, and developed farm-to-market roads. Agricultural modernization proceeded rapidly.⁶

The rise in income drove up demand for higher value agricultural products that could be efficiently produced under irrigation. Animal feed, fresh fruit and vegetables, and qat were all in strong demand and profitable to produce under irrigation (Figure 3.1). By contrast, with high wages and land prices and rising standards of living, rainfed agriculture became less important economically. Much rainfed land was left fallow, and grain production plummeted. By 1977 the north, which had historically been an exporter of agricultural produce, was importing 40 per cent of its food needs.⁷

Figure 3.1 The rise in incomes from the 1970s led to the rapid expansion of commercial crops, including the traditional Yemeni grape vine (Bani Hushaysh, near Sana’a). Photograph courtesy of Peer Gatter.

Overall, and in contrast to many countries in the region, remittances did not lead to rapid rural-to-urban migration. Remittances were largely invested in rural areas, the agricultural economy thrived under the impulse of irrigation, and Yemen remained an overwhelmingly rural country.

3.2 The unification era

In 1990, unification and the simultaneous collapse in migrant work and remittances posed exceptional challenges

Unification in 1990, discussed in Chapter 2 from the political perspective, brought together not only two political cultures but also two economic systems. The process of unification and the ensuing civil war brought considerable economic disruption in the south. Large parts of the assets taken over by the PDRY government were re-privatized, but the transition was messy and those who ultimately took control of the assets were not necessarily the rightful owners. State-owned enterprises were slated for privatization but ultimately most of them proved unsaleable and they simply dwindled and died. The economic problems were exacerbated by the fact that unification occurred at the time of the first Gulf War. Yemen’s stance was perceived by the Gulf States as pro-Iraq, and most migrant workers were obliged to leave their host countries. Remittance income plummeted and the unified nation had to bear the costs of absorbing 880,000 returnees.

3.3 The impact of oil

Fortunately, income from oil exports was on the rise…

Oil exploration began in Hadramawt in 1938 but little oil was discovered until 1984. By the 1990s, production rose to half a million barrels a day, and oil became the largest economic sector (28 per cent of 1997 gross domestic product or GDP), accounting for 80 per cent of foreign exchange earnings ($1 billion in 1997), and 70 per cent of government budget (1998). By the time of the 2011 unrest, oil and gas exports were still 20 per cent of GDP and providing three-quarters of export earnings. In that year, however, repeated sabotage of the Ma’rib and Ras Issa pipelines and insecurity on the roads contributed to a 25 per cent drop in production. Oil exploration has continued in recent years but there have been no further major finds. However, proven gas reserves of 13 trillion feet offer comfort, and exports have begun.

…although this shifted economic resources from private to public hands…

These revenues compensated for the lost remittance income – but with important differences. The oil revenues were concentrated in government hands, putting the responsibility on government to make investment choices and spending decisions. The revenues have been used, often very inefficiently, for public investment, for financing the budget deficit, for underwriting the massive consumer subsidies – and for patronage and rent. Investment patterns show signs of Dutch disease, fuelling land speculation, a construction boom and high inflation instead of productive investment.

…and made Yemen economically more vulnerable

Oil also makes the country vulnerable to downturns. The drop in oil prices in the late 1990s, for example (from $18 to $10 in 1998) translated into a shrinking of incomes in the short term, with rising unemployment and impoverishment. At the same time, structural adjustment meant less public spending and employment and a loss of consumer subsidies. Preponderance of hydrocarbons has, however, created some windfalls – oil revenues remained buoyant in 2011 despite the drop in production, as falling quantities were more than compensated for by booming world prices.

3.4 Poverty and demographics

Despite huge advances in both economic and human development, uneven distribution of growth and continuing demographic pressure have kept many Yemenis poor

From the 1970s, Yemenis experienced a very rapid growth in personal incomes, which raised standards of living and reduced poverty. The shocks of the early 1990s – the decline in remittances, the disruption and costs of unification, and poor economic management of the early 1990s – led to growing poverty. By the mid-1990s, there was evidence of individual poverty in the form of slum formation in urban centres, overt unemployment in towns, the emergence of urban crime, growing rural–urban migration, and begging on the street.

Poverty has been exacerbated by the population growth rate, which has long been one of the highest in the world. The population has increased from an estimated 5.9 million in 1971 to 24 million in 2010. Health care and rising living standards have cut the mortality rate, and Yemenis have continued to want large families. The population growth rate – for long as high as 4 per cent – was still an annual 2.7 per cent in 2010 (Middle East and North Africa average 1.9 per cent). The resulting age pyramid and dependency ratio are cause for concern. This rapid increase in the population places a strain on the country’s ability to educate and care for the young, and on the economy’s ability to create jobs for them when they grow up.

Although the rural economy has proved remarkably resilient, demographic pressure is leading to more rapid rural-urban migration, as the capacity of the rural economy to create more jobs and incomes is limited. The urban growth rate is approaching 10 per cent a year. Sana’a is the third fastest-growing city in the world. The strain on urban infrastructure and services is heavy, with a particular stress on the water resource and on the provision of water and sanitation services (Chapter 8).

By 2011, slowing growth, poor distribution and ineffectual government programmes had led to worsening poverty and rising food insecurity

Even before the 2011 unrest, the proportion of people living below the national poverty line was 43 per cent, and Yemen had become one of the ten most food insecure countries in the world. In 2010, about 32 per cent of Yemenis – some 7.5 million people – did not have enough food. Of the food insecure, the vast majority live in rural areas: 6.4 million people, or 37 per cent of the total rural population. About 60 per cent of very young Yemeni children are stunted, and severe (life-threatening) stunting affects one-third of all children in the country. The problem of stunting is predominantly rural, affecting two children out of three in rural areas. The poor mountain agriculture areas of the highlands are a particular problem, with two-thirds of all Yemen’s food insecure living in dry highland areas.

Very reliant on food imports, which account for 62 per cent of cereals consumption (2008), Yemen is also now very vulnerable to external shocks. The global food crisis of 2007–8 led to steep rises in the cost of food and placed stress on the balance of payments. With the average Yemeni only 300 calories above hunger level, domestic price rises pushed many more Yemenis into food insecurity. In 2000, Yemen used 10 per cent of its export earnings to import food; by 2007 it was using 25 per cent, representing a significant deterioration in its macro-level food security.

All these problems worsened with the 2011 unrest, which caused economic activity to contract by 11 per cent, leading to higher unemployment and worsening poverty, estimated at 54 per cent by the end of 2011.⁸