Yemen Must Diversify – But How?

NY Exclusive
By Dr. Christopher Davidson: Reader in Middle East Politics at Durham University and author of ‘Persian Gulf and Pacific Asia: From Indifference to Interdependence’

Yemen largely escaped the effects of the recent global financial crisis, but this was primarily due to the insulated nature of its financial system and its relative lack of integration into the international system, rather than due to any sound economic planning. Moreover, even though its annual GDP growth is still estimated to be around 3 to 4 percent and its economy appears to have bucked the regional trend, with nearby Gulf Cooperation Council states having either fallen into recession or facing years of stagnation, the reality under the surface is a lot less appealing.

Yemen remains a very low income country that is highly dependent on oil exports, the revenues from which account for more than a quarter of the country’s GDP and now make up nearly three quarters of the government’s revenue. In 2009 the vulnerability of such hydrocarbon dependencies was underscored when oil revenues declined by more than a half – to less than $2 billion per annum – due to international price fluctuations. Fully recognised in Yemen’s Strategic Vision 2025 – a long term development plan first outlined in 2006 – the national economy must urgently diversify into other sectors if it is to enjoy sustainable growth in a post-oil future and if the government is to enjoy any future autonomy from the oil industry.

In many ways, the urgency and scale of the problem is now much greater than envisaged in 2006, with some analysts now predicting that Yemen could become a net oil importer as soon as 2015, and with oil production and exploration unlikely to be commercially viable as soon as 2021. Pressure will also increase on the national economy as a result of the country’s mushrooming youthful demographic. With Yemen’s population forecast to grow from its current 30 million to over 50 million by 2025, the unemployment rate – already standing at a precarious 20 percent according to the World Bank – will continue to rise, along with all of the associated economic and political instabilities of having a restless national youth.

As it stands, the Strategic Vision 2025 is not yet working, as non-oil growth has actually fallen – from about 5 percent in 2008 to around 4 percent in 2010. Some of the sectors which have been earmarked for development according to the Vision, such as agriculture and fishing, while certainly important for food security, are unlikely to promote meaningful diversification of the economy as their growth potential and employment prospects will probably remain weak. More dangerously, some of the other sectors emphasised by the Vision, most notably free zones and tourism, may eventually expose Yemen to the same pathologies experienced by some of its closest neighbours.

With increasing free zone activity, most of which is aimed at attracting international investment by relaxing legislation requiring local partners for foreign businesses, there is a fear that Yemen, like Dubai before it, will fall into the trap of promoting the globalisation of its economy ahead of any real commitment to regional integration. In Dubai’s case the regional breakdown of companies operating in its free zones quickly became a non-Middle Eastern majority, which soon led to a feeling among many Arab investors that such free zones were merely ‘foreign enclaves’ and therefore not really tailored to their needs. Without a safety net of regional integration Yemen’s free zones would likely suffer in the event of another global downswing. Dubai is now grappling with a spiralling vacancy rate for commercial space in these zones, as foreign companies have closed down their outposts due to problems at home.

Tourism is equally problematic, as both Dubai and Oman have experienced in the wake of the global financial crisis. Hotel occupancy rates have drastically declined, especially in Dubai, and resorts have had to slash prices in order to remain competitive, with tourism’s contribution to GDP having falling accordingly. Yemen’s tourist industry is likely to be a little more resilient, given the greater emphasis on cultural and historical tourism as opposed to the more basic sun-seeking and shopping tourism in its neighbours, but it nonetheless remains especially vulnerable to increased political instability. Any further deterioration in law and order would undoubtedly reduce tourist numbers, which currently stand at a modest quarter of a million per annum.

Perhaps the best route for Yemen, or at least the best diversification strategy to adopt from its neighbours, is to build up heavy export-oriented industries. These could concentrate on the production of metals, plastics, fertilizers, and petrochemicals, all of which require abundant energy to manufacture and therefore best capitalize on Yemen’s current competitive advantage as an oil producer. They would also provide much better employment opportunities for young Yemenis entering the manufacturing sector which, at present, employs less than 150,000 and still accounts for less than 10 percent of the country’s GDP.

Yemen must also prioritize its role as an entrepôt for regional and international trade. Although discussed at some length in the Vision’s supporting documents, the necessary infrastructure for such a role does yet seem to assume the primacy it deserves. Yemen’s key asset, along with oil, must surely be its geographic location, enjoying both Red Sea and Indian Ocean access. If its ports can be brought back up to international standards, as they once were, then they will be well placed – much better than those in the Gulf Cooperation Council states – to prosper from the fast growing trade triangle between the Middle East, Africa, and the Far East.