A script to rebuild Yemen’s economic base

This article appeared originally in Gulf News: link to original article

They called it the Asian miracle. It all started some time in the 1950s when Japan first decided to move its economy away from being an agrarian one. South Korea followed then with a different example.

Then other East Asian countries followed suit, each with its own success or failure story. So what happened? And why does this matter today? Here it comes.

Japan sent its engineering and other specialists to Germany to acquire knowledge that could be brought back. South Korea did the same but by sending its people to Japan. What these countries realised is that it is okay to start as a raw material exporter, or as a planter and exporter of food staples that are in great demand at the beginning of their paths to accelerated growth and global competitiveness.

However, they knew very well too that this would not be sufficient to catch up with great powers. And they also knew that they are now at an advantage given the abundance of labour and the low manufacturing costs compared to other countries.

As such, an advantage would not last. They needed to introduce different policies that would utilise today’s advantage into a knowledge economy that would sustain itself in the long-term, especially that none had any reserves of natural resources.

So they imposed tariffs on imports, not only to nurture domestic industries but to also stem outflows of foreign currencies while at the same time ensuring that domestic companies, which turned later into conglomerates, have full access to necessary foreign currencies disbursed for the sole use of importing whatever they needed. There was also a condition here.

Companies back then had to show how much they were exporting to be eligible to acquire foreign currencies. This was especially the case in South Korea that went as far as limiting its citizens from travelling to ensure its rapid growth continued uninterrupted.

In addition, countries made sure foreign companies shared their know-how whenever they chose to make an investment. So whether by making it compulsory to partner with a domestic company, or by shopping for foreign companies in mother countries in crisis, East Asian countries succeeded in achieving exactly what they aimed for when they set their growth policies in place.

That’s what happened. And it matters today because that is the way forward for Arab states that have settled for exporting basic goods and for limited capital investments. Instead of talking about all states collectively though, I would discuss here Yemen and why the Asian model could be of great importance for its future reconstruction.

Especially after the GCC states have called for a reconstruction conference once a peace deal is reached. Yemen’s disadvantages can also be its advantages. Unemployment is at 27 per cent (2014) with GDP per capita being at $3,800 (2014). There is no one-to-one kind of comparison here between Yemen’s economy and South Korea’s.

The similarity is in the humble beginning, and as far as I can see, Yemen has not realised its full potential yet. Unlike South Korea, Yemen does have natural resources regardless of how mediocre they seem to be compared to the top 10 producers of oil and natural gas.

South Korea had no such resources when it started. Its focus was initially on agriculture and then on manufacturing before moving into exporting its expertise in construction and other technologies.

Yemen is still in the agricultural era and seems to be stuck because it is not being put to the best of use. One might argue here that the countries that took off from an agricultural basis did so in the early- to mid-20th century and therefore had a first mover advantage.

Well, China did not embark on industrial reforms except later on in the last century and look where it is today. Point is, start with agriculture regardless of the year and the century. And Yemen does have the optimal climate to grow a food commodity that is in constantly increasing demand: coffee.

I had done a study a while ago assessing the agricultural progress and outcome for different countries. Strikingly, Yemen shows huge potential though it does not seem to have progressed much. This could be attributed to minimal investments in agriculture and the economy being more focused on exporting Yemen’s natural resources of oil and gas.

It could also be attributed to agriculture using 90 per cent of all of Yemen’s water resources, which are highly dependent on rain. So to fix agriculture and enhance it, the water issue would need to be resolved and the only way forward is through desalination as rain and groundwater cannot guarantee the success of a water-intensive sector.

The requirement of better infrastructure through new roads, cargo airports and ports with high handling capacities would ensure the money destined for Yemen would be put to its most efficient use. And ensure the creation of more jobs that could be sustained via more infrastructure targeted at improving overall connectivity.

Since Yemen ranked 151 out of 160 countries in the World Bank’s Logistics Performance Index (LPI) in 2014, a lot can in fact be done. With high unemployment and relatively cheaper labour available, the growing and export of coffee can lead to a comparative advantage in the global agricultural markets and pave the way for its next growth phase — manufacturing.

No one is saying that Yemen should come up with the next Galaxy smartphone or the hybrid car. However, a lot of outsourcing could be done to Yemen rather than to other countries. Given the resemblance in language and culture, and appropriate training introduced, there is no doubt that Yemen could turn into a manufacturing hub that feeds the increasing demand of GCC states.

That is, a lot of imported products that seem financially unfeasible to manufacture could be produced in Yemen, along with other low-tech industries until that can be upgraded. For argument’s sake, the cost to manufacture goods in Yemen could easily undercut that of South Asian rivals given the right amount of investments and people training.

And as Yemen is strategically located between East and West, there is no doubt that it is at quite an advantage to manage a huge manufacturing and exporting sector as well as a re-exporting one. The final growth phase should deal with services, but with a customised approach.

Yemen’s tourism can be revived once previous risks are eliminated and with an appropriate framework being set to attract investments that would develop the hospitality sector. The competitive cost of employing Yemenis would ensure that job creation does not come to a halt if more resources are devoted to tourism compared to the previously discussed plans.

The latter could include projects that would increase Yemen’s that would attract more tourists and enable it to host global events.

In a nutshell, and once a peace settlement is reached, the water problem needs to be fixed in Yemen. Then, projects should be sanctioned to improve land fertility and guarantee that Yemen is on a long-term path to be among the top 10 coffee producers.

Whether for agricultural purposes or industrial, infrastructure projects need to be carefully planned and executed to create jobs and increase those on a sustainable basis, making sure that over-saturation, as was the case in Japan, is not reached any time soon.

Though it would be hard to establish a name for itself in a certain manufacturing sector, Yemen could still host many industrial and economic zones where GCC states could invest and to which they can outsource a significant portion of their manufacturing.

This should generally reduce outsourcing costs and reliance on foreign labour. The strategic geographical location of Yemen could be turned into an assembly place, a trading hub, and a thriving cargo handling haven, if Hong Kong and Singapore are any example here.

By having access to the Red Sea and the Arabian Sea and from it to the Indian Ocean, Yemen could be turned into a counter-piracy base and a guarantor of the safety of the world’s shipments, especially that heading for the Suez Canal.

Finally, Yemen could also increase the fisheries component of its economy by better planning and breeding methods being put in use. The last thought that I want to leave you with: can a similar model be implemented in other Arab states?