한국예멘교류센타

Yemeni Studies: Korean Journal of Yemeni Studies 

 한국예멘교류센타   Korea-Yemen Center

Korea-Yemen Center


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Yemen Unity : Economic Prospects

Prof. Dr. Yahya Y. Almutawakel (Sana'a University)


 

Contents

I. Introduction

1.1 Similarities

1.1.1 National Accounts

1.1.2 External Payments

1.1.3 Foreign Trade and Aid

1.1.4 Public Finance

1.2 Owenership

1.3 Complementarity and Scale Economies

1.3.1 Complementary

1.3.2 Economies of Scale and Transportation Cost

1.4 Conclusion

 


 

Introduction

Yemeni unity, although it has been called for since 1967 (with the independence of the south from colonialism) , nonetheless, it was never thought to be declared so unexpectedly. Thus, what prospects does it hold for the economy? Would it improve chances for development and in particular for industrialization? Or, would it instead worsen the existing problems and create new obstacles?

This paper is intended to highlight the most important issues while attempting to foresee the new and integrated economy from an economic point of view. Two major issues need to be focused on. First, how similar (or different) were both economies? Second, what economic advantages are to be realized as a result of unity?

The revolution of 1962 in the North produced a `capitalist' regime in the YAR, while that of the PDRY, beginning in 1967 was considered `socialist'. By contrast, YAR had a `free' economy with few legal barriers to either trade or investment. With a semi-feudal interior and the absence of political parties YAR was dominated by tribal, Islamic, and leftist fronts overtly and covertly supported by external Arab regimes. The South, which experienced colonialism by Great Britain and was better equipped with basic infrastructure, was subsequently governed by a single socialist party with close Soviet ties. However, there was a gradual reduction of the sharp contrast between North and South, as the revolutionary state of PDRY embarked on gradual liberalization in the 1980s.

The devastation caused by the 1986 civil war in the South, and the desperate need to attract foreign aid, along with the changing politics in the Kremlin, have much to do with the late pragmatic domestic and foreign policies followed by the PDRY. In 1987 a series of summits were held between the presidents of the two parts of Yemen, and events started to unfold much faster compared to the previous experience. It was not until two years later, when upon the heels of the joint Yemeni oil company which signed a production agreement with an international consortium, that the political unity accord was achieved.


1.1. similarities

Despite differences of regime orientation, the two economies shared certain features characterizing the whole of the Yemen. Both the YAR and the PDRY were among the less developed economies of the world, with a labour force depending on agriculture (farming, herding, and fishing) as the main employer. Furthermore, the two countries were even becoming increasingly similar. The proximity to the Gulf economies afforded an outlet for surplus labour, where about a third of Northern manpower, and perhaps an even greater proportion of Southerners migrated to the neighbouring oil-countries during the oil boom (1974-83). This situation resulted in labour shortages and wage increases in both parts of the Yemeni economy.

Table1. Basic Indicators for the Two Yemens (1989)

 


YAR

PDRY

ROY

000 ㎢)

195

333

528

Population(mn, mid-1989)

10.1

2.5

12.6

GDP($mn in 1988)

5,631

1,275

6,906

Remittances ($mn)

264

173

437

External Debt ($bn)

3.3

2.5

5.8

Exchange rate (=$)

9.76

0.345

----

Sources: World Bank, World Development Report, 1990; IMF, International Financial Statistics Yearbook, 1990.

Thus, the most prominent characteristic of both economies was that of labour migration which was expected to provide finance for development projects through workers⹔ remittances. However, despite efforts by both regimes to mobilize them, private transfers fed growing consumption mainly in the form of imported goods, or favoured real estate and retail trade over risky manufacturing and other productive investment.

Separately, the YAR and the PDRY embarked on economic planning beginning with a three year development plan (1971-74 for PDRY and 1973/74-75/76 for YAR). Subsequent five-year plans followed in consultation with the Would Bank, UN, and IMF. Both the YAR and PDRY were small. lower-middle income countries with per capita GNP of $550 and $470 respectively (1986). The following year South Yemen, according to the same Would Bank classification was downgraded to the category of low-income economy with a per capita GNP of $420, whereas the North remained a lower-middle income economy. Both experienced chronic balance of payments (current account) deficits as early as 1968 in the in the South and 1979 in the North. Another commonality lies in the Governments' inclination to rely on deficit spending and soft international credits to finance development and huge military expenses.

The highly significant connection as well as similarity within the whole of Yemen was only recently highlighted. The major oil finds of the mid-eighties (1984 in the North and 1986 in the South) were discovered in the North-South border region and were jointly developed by the two states in cooperation with multinational firms. Both Yemeni national oil corporations relied on foreign firms for exploration and exploitation. Moreover, geologists suspect that the YAR's Marib field and that in Shabwa in the South are part of the same basin (Unido, 1989b : 89).

Therefore, the bottom line is that the basic similarities in their productive potential, their access to capital, and their investment strategies, imply similarity in the literal sense. Hence, in the absence of clear joint data, therefore, the following discussion will look mainly at the northern and southern parts in their own right as far as the economy is concerned.


1.1.1. National Accounts

At $5,631 mn in 1988, the YAR's GDP was more than four times higher than the PDRY's, for about four times as many people. Real GDP growth averaged 6 to 7 percent a year in the year from 1978 to 1983 in North Yemen. Economic activity subsequently slowed down before surging in 1986 to achieve a real GDP growth rate of over 9 percent. In 1988 the economy in YAR registered real growth of 19 percent, largely due to a massive rise in oil production. In the PDRY, GDP in 1988 stood at $1,275 mn, after having fallen by almost a fifth over 1985-86 (in 1986 due the abrupt civil war). Recent official figures estimate the South's 1989 GDP at $1.3 bn with a real GDP growth of 2 percent.

Table 2. Trend of GDP

 


1984

1985

1986

1987

1988

YAR:GDP(mnYR)

24,756

30,969

38,389

43,559

54,959

real growth %

3.3

4.6

9.4

4.7

19.2

PDRY:GDP(mnYD)

350

510

400

430

440

real growth %

8.8

-6.6

-11.8

3.2

0.3

Sources: IMF, International Financial Statistics Yearbook, 1988; World Bank, World Tables,1990-91.

In this section, the percentage table below shows the high contribution of services at the expense of agriculture in both economies. The structure of GDP exhibits two economies both heavily oriented towards the tertiary sector. Agriculture was the lead employer but services generated the most GDP value. Services accounted for well over half (55% and 61%) of 1988 GDP in North and South respectively.

Table 3. Origin of GDP (% in 1988)

 

Sector

YAR

PDRY¹

Agriculture & fisheries

22.5

14.1

Mining & quarrying

9.5²

...

Manufacturing

12.7

9.5³

Electricity & water

0.9

...

Construction

2.7

11.8

Trade, hotels & restaurants

13.0

9.7

Transport & communications

10.8

11.0

Finance, insurance & real estate

7.8

1.0

Public & other services

13.0

29.6

Indirect taxes less subsidies

7.1

13.3

GDP at market price

100.0

100.0

Sources: CPO, Statistical Year Book, 1988; UNIDO, PDRY: Enhancing Industrial Productive Capacity, 1989.

¹:1989 estimates, ²:including oil production, ³:including mining, quarrying, manufacturing, electricity & water.

Agriculture generated almost a quarter of GDP in the North and 14 percent in the South; in industry (manufacturing, mining & quarrying, electricity & water) , the proportions were also quite different, with the YAR retaining an edge : 23.1 percent compared to 9.5 percent in the South. The most recent significant decline was registered in construction, whose share of GDP fell to 2.7 and 11.8 percent in the North and South respectively. By contrast transport and communications retained their respective shares in national output around 10.8 percent in the North. The oil sector accounts for an increasing share of GDP although no precise figures are available for the PDRY (9% in YAR in 1988).

However, agriculture, was still by far the largest employer, with one out of every two working Northerners (1986), and a little over half (52% down from 57% in 1980) of the PDRY's labour force in 1988. Industry is still in its infancy, with around 12 percent of the work force in PDRY. The service sector (including education, health, and civil service) was beginning to rival agriculture as the major employer. More important, is that unemployment rate in South Yemen mounts to around 11.7 percent.


1.1.2. External Payments

The new Republic of Yemen is facing major economic and financial difficulties, particularly in its external payments, position. Both the North and the South have had large current account deficits alleviated by a combination of workers' remittances and foreign aid. The combined current account remains deep in the red. Separate statistics for North and South Yemen show that their combined current account deficit in 1989 was nearly $995.6 mn compared with a deficit of $1,098 mn in 1988 (Table 4 below).

Table 4 Balance of Payments($mn)

 


YAR

PDRY

1988

1989

1988

1989

Merchandise exports

447

606

82

113

Merchandise imports

1,309

1,282

596

553

Trade Balance (-)

862

676

513

440

Workers' remittances

314

264

255

173

Current Account (-)

694

579

404

416

Direct investment & long-term capital

449

493

257

334

Short-term capital

26

17

57

68

Errors & omissions

-58

57

62

-2

Changes in reserves (- = increase)

260

5

5

0

Source : IMF, Balance of Payments Statistics Yearbook, 1990.

During the decade after the rise in oil prices in 1973 / 74, both economies' most prominent characteristic was labour migration to the Arab Gulf, which peaked around 1979-80 when remittances to the North topped a billion dollar a year and the South took in an estimated $347 mn. Thus, for both Yemens, the most valuable `export' was labour, for remittances were the major source of hard currency. However, after a period in which foreign reserves had been rising in both countries, a noticeable decline set in after 1980 (North) and 1983 (South), and by 1989 holdings of foreign

reserves had fallen to $279 mn and $45 mn respectively, providing for less than three months worth of import in the North and about a month in the South. Remittances, the major source of foreign exchange, have witnessed a drastic fall over recent years in both countries: in the North they fell from $763 mn to $264 mn between 1985 and 1989, compared with a decline from $429 mn to $173 mn in the South.

Although both experienced chronic balance of payments (current account) deficits throughout the 1980s, the YAR's current account deficit of over $579 mn in 1989 was only marginally higher than the PDRY's $416 mn (however in previous years the North's deficit used to be several times greater than PDRY'S (1987 and before) , reflecting higher consumption pattern and explaining much of the difference in per capita GDP. Also, despite YAR's total remitted earnings in 1989 ($264 mn) , as in most years, was higher, like the North the South's workers' remittance ($173 mn) was far from covering the current account deficit.

The slight improvement in the external payment deficit in 1989 was thus, due to a narrowing merchandise trade deficit. Visible exports rose by 36 percent and 39 percent in value terms in the North and South respectively (mainly oil exports) , while the cost of imports declined marginally, by two percent in the North and, significantly, by eight percent in the South. However, the resulting reduction in the visible deficit was largely offset by the deterioration in the invisible balance. The combined services, income, and transfer accounts registered a 58 percent drop in the surplus in the North, and an even more pronounced 79 percent fall in the South, largely due to the decline in remittances.


1.1.3. Foreign Trade and Aid

Until 1986 YAR suffered from a huge trade deficit, usually over $1 bn. The recent significant improvement in the trade balance was largely due to sharply rising oil exports. The trade deficit narrowed by 24 percent in 1988 (to $862 mn), and by a further 27 percent (to $676 mn) in 1989 Oil exports alone registered a 36 percent increase during that period, rising from $397 mn to $539 mn. In 1988, 28 percent of the import total consisted of foodstuffs, followed by manufactured goods (35%), machinery and transport equipment (22%), and mineral fuels and other primary commodities (14%).

Exports from the North are increasingly being dominated by crude oil, providing around 90 percent of the total in 1988. Foodstuffs, and other primary commodities contributed the remaining 10 percent. Oil exports had a major impact on the balance of trade, not only in generating export revenues, but as oil accounted for nearly 20 percent of imports in 1987, also helping partly to offset the acceleration in import growth.

Total exports of PDRY in 1988 were just over $82 mn. Of this total, 59 percent was accounted for by mineral fuels and lubricants; 28 percent by food and beverages; and 8 percent by crude materials. Exports from the fisheries sector could bring up to $59 mn in 1990. Official estimates put exports in 1989 at $113 mn and imports at $553 mn. The trade deficit stood at $440 mn. Oil exports from the South will only start in 1991.

Both Yemens were aid-recipient economies with a growing service sector close to overtaking agriculture as the main investment and employment sector (Table 3). The principal source of financing for infrastructure, industrial, and agricultural projects was international aid in the from of grants and loans. By the 1980s their overall patterns of external financing were remarkably similar. Both were classified as least developed, thus qualified for concessional loans. As a consequence, they depended on the same donor countries, creditor agencies, and financial institutions. Moreover, both countries obtained massive last two decades (rural development projects, public sector manufacturing firms, etc.). Thus, the character of both economies was remarkably similar.

Most fixed capital formation came from concessional or so called `soft' loans with low interest payments (average 2.3% for the South and 3.8% for the North) and long repayment schedules (average 20 years maturity period and 5 to 10 years grace period). Therefore, external debt accumulated roughly in proportion to the amount of aid provided. Both countries borrowed from a variety of sources, where the YAR was relatively favoured by the multilateral (with 32% of debt compared with 22% for the PDRY), while the PDRY's debt was 78 percent bilateral. The new republic would be facing a substantial foreign debt mounting to $5.8 bn ($3.3 bn due on the North and around $2.5 bn on the South ). The debt service ratio (to exports) of 16 percent for the North in 1988 more than doubles to 35.8 percent for the South.

However, looking at the combined debt burden in 1989, total debt service as percentage of exports of goods and services is 11.6 percent while interest payments alone account for about 4.7 percent of those exports. These ratios would rise further when grace periods of some loans expire, thus representing a real limitation to investment financing. Moreover, the prevalence of concessional loans reflect an average interest rate of 2.4 percent; an average maturity of 27 years; and an average grace period of seven years (World Bank, 1991).

The Soviet Union would be listed as the largest creditor with over 40 percent of the foreign debt, granted in the form of easy long term credit to both governments for its military and other equipment. Other major donor countries are Saudi Arabia, Iraq, and China. Official figures underestimate the value of assistance and grants received from Saudi Arabia. Sizeable grants were given to YAR besides military aid and grants to tribes. While neither government faced default, yet more credits are extended on concessional as well as commercial terms. Both governments were falling further into debt.

Thus, despite substantial increased earnings from oil exports and slow growth in imports, the reduction in Yemen's merchandise trade deficit on a combined North-South basis would be offset by a declining invisible account balance. The loss in remittances, the sharp drop in official aid, and the growing debt servicing contribute to this outcome.


1.1.4. Public Finance

In both budgets, current costs greatly outweighed development expenditures. In 1988, over half the YAR's budget went to defense and security, and another 20 percent for administration. In South Yemen, administration, defense, and debt financing costs totalled 68 percent in 1988. North Yemen invested much more heavily on roads (9%) and other infrastructure, while agriculture and other services amounted to only a small fraction of budget. For YAR, total expenditure amounted to 36 percent of GNP, while the overall deficit equalled 13 percent of GNP (World Bank, 1990)

State budgets have depended largely for their ordinary revenues on customs duty and such direct taxation as the zakat (religious tax) and a more recent profit tax. In the last two years an increasing role has been realized for non-tax revenues in the North (40% in 1988), mainly resulting from oil revenues. Meanwhile, the increased throughput at Aden refinery and start up of commercial oil production had a similar effect in the South. A note of caution is that figures from different sources do not tally. A further complication is the omission of government revenues from oil production in many sources.


1.2. Ownership

Theoretically, the most significant difference between capitalist (the North) and socialist (the South) economies ought to be exemplified in the pattern of private and public ownership. Table 5 below shows the ownership pattern in the industrial sectors in both of Yemen.

Table 5. Industrial Firms Organized by Ownership (1988)

 

Total

South

North

Sector

48

33

15

Public

9

8

1

Cooperative

13

11

2

Mixed

132

23

109

Private

202

75

127

Total

Source : CPO, Statistical Report, 1991.

Only fifteen of the 127 industrial establishments in the North were publicly owned; but with 3836 employees, the public sector employed over one-quarter of the modern industrial labour force. Most of the large industrial plants, including power and water stations, textiles, tobacco, cement, oil refinery had sole or majority state ownership. However there were hundreds of medium to small, private, mostly metal or non-metal related `workshops' in the cities and small towns, as well as weaving and other crafts persisting in the countryside.

The story is reversed in the South, where the majority of the firms are public enterprises. This pattern is also much evidenced in terms of employment, where the public sector alone provides 75 percent of all industrial jobs. Similar to the above analysis these figures pertain to firms under the supervision of the Ministry of Industry (excluding small scale privately owned firms).

This picture, would support the expected contrast between the YAR and PDRY economies. However, differences in ownership right after the nationalization wave in the South in the early 1970s, were greatly reduced by the commonalities of sources of invested capital. Domestic private capital was financed through remittances which enhanced private ownership, while government sources in the from of revenue taxes, grants, and foreign aid mobilized investment in large scale industries, rural development plans, and vital infrastructure project.

Table 6. Sources of Development Financing (selected years)

 

South Yemen

North Yemen

Source

1988

1987

1986

1988

1987

1986

0.97

0.96

0.96

0.67

0.63

0.61

Public

0.03

0.04

0.04

0.33

0.37

0.39

Private

Sources: CPO, 1988 Statistical Year Book: 384; Unido, PDRY: Enhancing Industrial Productive Capacity, 1989: 8.

In North Yemen, despite liberal investment incentives, the public sector has (since the SFYP) consistently provided the bulk of investment funds. The PDRY was even less successful in mobilizing private investments in large scale manufacturing, where the public sector controlled almost all the investment financing.

As a result, the private sector (in both parts of Yemen) contributed considerably less to what might be considered development purposes compared with either governments (the public sector). Thus, by the late 1980s, the largest modern enterprises, in any branch, were run by a state corporation. Nonetheless, both governments continued to encourage private and mixed investments (EIU,1991).

Also, despite the higher number of private industrial firms in YAR, the largest factories were government funded. The majority of private ventures concentrated in light and easy assembling manufactures. The relative importance of the public sector has, moreover, increased steadily between 1987 and 1989, with the total output of public enterprises achieving a growth rate several-fold that of the private sector (586%, and 29% respectively).

Table7. Percentage of Industrial Production According to Ownership(1987-1989)

 

1989

1987

Sector

ROY

South

North

ROY

South

North

65

72

64

31

70

25

Public

0

5

0

1

5

0

Cooperative

4

17

3

10

19

8

Mixed

31

6

33

58

6

67

Private

100

100

100

100

100

100

Total

Source : CPO, Statistical Report, 1991.

Most of the public sector industrial activities are characterized by their large scale and capital intensive operations, while private sector enterprises (especially in PDRY) tend generally to be small scale, limites to the production of clothing, leather, and food production, or to the traditional craft workshop. In the foreseeable future, the public sector would continue to be responsible for the large majority of investment, especially large or strategic projects (including oil).

Therefore, the merged economy of the ROY combines elements of a market system with majority state participation. In all three sectors (industry, services, and oil), there are both public and private roles. The large public sector, hoping for new private participation, continues to employ more people than the private sector (47% and 43% respectively).

The most visible effects of the opening up of the united state, may attract new investors, but the impetus for such activity must come from massive improvements to the investment climate. Even if industry and services were heavily shifted to the private sector, nonetheless, oil, the leading GDP sector in the coming few years, will still have majority state, and minority foreign investment.

Finally, as the two parts of the homeland have or less the same economic structure: basically agriculture, with relatively weak although growing industry, an important tertiary sector, and economic policies largely influenced by balance of payments problems (and more recently by unemployment and inflation) ; what benefits can be reaped out of this unity? One priority for unity is the development of interregional trade which accounted for a small share of total foreign trade. The discussion of the theory of regional integration and its implementation in the new republic will be left to the next section.


1.3. Complementarity and Scale Economies

1.3.1. Complementarity

Since the mid-1980s, both YAR and PDRY had already embarked on several joint ventures that were seen to be economically feasible and would also complement the needs of each part of the homeland.

Such partnership involved cooperation and coordination in order to maximize economies of scale reducing economic costs, and avoiding duplication of important economic projects within the broad Yemeni context. The signing of the most significant agreement on the production of oil in Marib-Shabwa basin reflected the fact that neither government could single-handedly exploit oil, and had to request the other's cooperation.

As far as the geographical distribution of trade is concerned, PDRY's principal trading partners were industrialized nations: the European Economic Community, centrally planned Economies, and East Asian NICs, supplying over half total imports. However, the distribution of exports changed considerably in the later years. Exports to Japan, which accounted for total exports in 1980 had fallen to 8.6 percent in 1989. YAR as an export market was gaining particular importance in assuming a greater share (17%) and ranking second after West Germany (22%). Similarly, the trade pattern was drastically changed by oil exports from YAR. While until 1987 the main destination for North Yemen's exports was Saudi Arabia, taking nearly 40 percent of the total, in 1989 West Germany took the lead with over 29 percent, followed by USA (26%), Italy (12%), Japan (10%), and Singapore (6%). Figures on foreign trade were often inaccurate due to unrecorded trade passing through PDRY, or treatment of recorded transit as imports from South Yemen. Table 8 below presents YAR's imports from, and exports to, PDRY. The table also calculates the share of trade with the South in the total foreign trade.

Table8. Trade Flow Between North and South Yemens(1988, in 000 YR)

 

as % of

foreign trade

Total

Exports

Imports

Category

2

63406

58649

4757

Agriculture

1

20622

7318

13304

Food

1

21356

1464

19892

Metal products

1

14254

13993

261

Chemicals

1

898

8

890

Leather

0

240

0

240

Wood products

0

582

0

582

Paper

1

2640

1100

1540

Textiles

0

412

412

0

Non-metal

0

0

0

0

Other

1

124410

82944

41466

Total

Source : Customs Department, Annual Report, 1989b.

Notwithstanding large investments directed towards agriculture throughout the years since the early development plans. agriculture, long failed to live up to expectations. The civil war in the 1960s, emigration resulting in high labour cost, growth in population and in per capita consumption, changed Yemen from a net exporter of agricultural products into a major importer of wheat, flour, rice, and other foodstuffs. Food imports in 1988 accounted for 28 percent of total imports in the North, and for 16 percent in the South. According to published statistics, the main cereal crops produced were sorghum/millet, wheat, barley, and maize, as well as some vegetables and fruits, in the North. Similarly, the South produced less quantities of millet, maize, vegetables and fruits.

Table 9. Agriculture Production(000 metric tons)

 

ROY's self

sufficiency (%)

PDRY

YAR

Produce

1988

1983

1988

1983

1988

1983

100

100

85

80

575

248

Sorghum & millet

12

6

10

10

132

34

Wheat

91

84

16

16

101

61

Barley & Maize

108

99

118

111

465

326

Vegetables

99

70

52

50

273

163

Fruit

127

89

1

1

4

3

Coffee

107

140

15

10

2

4

Cotton

Sources : FAO, Production Yearbooks, 1983 & 1988; FAO, Trade Yearbooks, 1983 & 1988.

As we have seen, both countries had been unable to feed their population, although they invested in improving agriculture with the aim of reducing the dependence on imported food. In spite of some disappointments, in the 1980s, there was improved production in most crops as a result of the irrigation and other major investment as well as increased efficiency (mainly in the North). Other factors that had an effect on increased production were agricultural policies (import ban, distribution, etc.).

By 1988, the county as a whole increased the production of its food grain by around 100 percent from 1983 production, nonetheless production would remain far below self sufficiency. The greatest progress had been made in the production of vegetables and fruits, where the country is almost self sufficient, and more, with a surplus of some fruits (banana, water melon, grapes) and vegetables (okra, potatoes) destined for exports.

There are nonetheless, products which cannot be grown in the country and which have become staples, and these will continue to be imported (rice, sugar, and tea). However, in the medium term, the ROY government should look to increasing home production of cereals since the increasingly high cost of food imports weighs heavily on the country's balance of payments.


1.3.2. Economies of Scale and Transportation Cost  

A major handicap which hinders the development of the economy, and is particularly acute for industrialization, is the scale factor which is of utmost importance. Small economic size is a result of small population and/or low income per capita. A united Yemen will have increased YAR's population by 20-30 percent, and GDP by 23 percent. Per capita GNP on a combined basis would have fallen by about 8 percent to $594 (1988).

However, as market size increases (which could be due either to rising population with constant per capita income, or to only rising per capita income, or to both), industries that previously found costs too high to meet competition from imports in small domestic markets could being to find it profitable to produce for the domestic market. Nevertheless, the limited size of the ROY market and the destination of almost all manufacturing output to the domestic market, can still represent a serious constraint on industrialization where some industries such as basic steel products need markets several times greater than the current demand in Yemen.

The 23 percent enlargement of the internal market will however, provide some scope for the production of more commodities under an import substitution strategy, such as: a paper factory based on the use of waste paper, a privately owned ammonia and nitrogenous fertilizer plant that would use associated gas from Marib oil fields, a plant producing steel pipes, and a few more projects.

The manufacturing market in YAR was estimated at about $1,627 mn in 1988 or $130 per head per year including the market for sophisticated goods which could not be manufactured locally: the estimated market for sophisticated goods which could be manufactured locally by import substitution is a very limited one. Thus, the advanced modern industries producing goods at cheap unit prices are out of reach unless they were developed for exports. But, other features of the Yemeni economic situation such as having no cheap resources and with relatively expensive labour, render the country uncompetitive for this. For most goods, imports are cheaper than local products could ever be, and it is in this context that an emphasis on resource based activities is to be considered.

However, in some industries there are substantial internal economies of scale (either in the short term because of excess capacity or in the longer run because of the plant size economies). Also efforts should be made to expand the exports of locally manufactured products to neighbouring countries, mainly Somalia, Djibouti, and Ethiopia, which are the most likely markets given their proximity and their own level of industrialization, thus providing openings for the county's limited export potential.

Another pending issue that should be examined is that transportation costs must be set against the economies of scale generated by mass production. These scale effects should not be related simply to the size of the market. The extent to which economies of scale can be exploited relies also on the dispersion of the population and on transportation costa which, itself is subject to economies of scale (Bennathan, 1982 : 209).

In a relatively vast area (528,000 ㎢ ) such as the ROY, with a poorly developed infrastructure, the cost of transport between the major urban centres must be high : YD 26 per ton between Aden in the South and either Mukalla or Sayun (UNIDO, 1989a: 34 ). There are no railways. Asphalted roads stretch basically between the major cities, where the total asphalt road length was estimated at 3,359 km in the North and only 2,073 km in the South (5,432 km across the whole Yemen, that is around 10 km of roads per thousand ㎢ of area). Other centres are far from the industrial locations with long travelling time and very roads, often little more than tracks in the desert. Furthermore, many of the industrial enterprises undertake their own distribution in lorries which often return empty after delivering to the distant governorates.

Table 10. Distances Between Main Cities of the ROY (KM)

 

Alghaid

Mukalla

Ataq

Zingubar

Alhota

Aden

Sa'adah

Hajjah

Dhamar

Hodeidah

Taiz

Sana'a

City

1612

1090

784

482

454

427

242

127

100

226

256

-

Sana'a

1356

834

528

226

198

171

498

383

156

272

-

256

Taiz

1628

1106

800

498

470

443

433

174

326

-

272

226

Hodeidah

1512

990

684

382

354

327

342

227

-

326

156

100

Dhamar

1739

1217

911

609

581

554

269

-

227

164

383

127

Hajjah

1854

1332

1026

724

696

669

-

269

342

433

498

242

Sa'adah

1185

663

357

55

27

-

669

554

327

443

171

427

Aden

1212

690

387

82

-

27

696

581

354

470

198

454

Alhota

1130

608

314

-

82

55

724

609

382

498

226

482

Zingubar

837

317

-

314

387

357

1026

911

684

800

528

784

Ataq

522

-

317

608

690

663

1332

1217

990

1106

834

1090

Mukalla

-

522

837

1130

1212

1185

1854

1739

1512

1628

1356

1612

Alghaidh

Source : compiled from CPO official data.

Although it is of highest importance to be precise about the nature of this problem, particularly as distribution costs between major industrial locations and remote areas and isolated villages are much higher and frequently are several times those between main population centres, transportation costs would most likely block the benefits generated through economies of scale in such situation. Obviously, improved transport facilities and a greater concentration of population in large cities would permit large enterprises to emerge and reduce the relative importance of small scale firms.


1.4. Conclusion

The above analysis provides a broad overview of the two economies (YAR and PDRY) , but clear comparisons are much more difficult due to differing indicators and variables adopted by the various country and international institutions. Despite the limitations, statistical presentation highlighted similarities and contrasts, especially as several indicators have been used.

The Republic of Yemen inherited an economy with agriculture still employing half the country's labour force ; an industrial sector, with more than a hundred large, mostly capital intensive factories ; and overall, exhibiting a mixed economy. Unlike its parents, the ROY is to be a low-income oil exporter, thus depending on oil rather than labour migration for foreign exchange.

The unified Yemen faces enormous economic difficulties which over a decade have built up in both parts. In lacks any major source of foreign exchange (save moderate oil revenues). As a result the country's balance of payments would remain in serious deficit. This deficit used to be covered from two sources which have fallen drastically : emigrant workers' remittances, and international aid.

At the same time, ROY suffers from compounded disadvantages of still limited domestic market, a poor resource base including a weak agricultural economy, producing a problem of labour absorption, high internal transport cost, and various other linked effects. The noteworthy achievement up to date of the ROY should not obscure the great difficulties which it still confronts. Nevertheless, there are opportunities for new projects both along the lines of import substitution and though the exploitation of local resources, particularly in the construction material sector.

The ultimate target remains balanced growth and the development of an industrial sector (including oil sector) that can play a central, perhaps even leading, role in an integrated national economy. Small scale industry in general has the advantage of being dispersed, often local resource-using, and reduces rural-urban migration. Dispersed small industry reduces internal transport costs where those are especially high because of dispersed population, underdeveloped roads and low value of goods transported relative to distance.

However, by all standards, a united Yemen would be economically viable in a way that the South on its own is not, and although there os no prospect of the country becoming a major agricultural producer, it may be able to satisfy most of its needs, at least in fruit and vegetable, and even be able to expand its exports in these products, particularly towards the neighbouring oil-exporting countries. Also oil and gas exports, will be an important factor in determining the balance of payments situation.

Finally, we can (with confidence) conclude that the two economies exhibited close similarities, despite the previous ideological differences. The overwhelming comparative advantage for both parts until recently had been work essentially in Saudi Arabia. But this engine of development had begun to run its course.For further growth, ROY will have to look elsewhere.


* REFERENCES

Bennathan, E. (1982) "A Note on Transport Issues in Small Economies" , in B. Jalan (ed.) , Problems and Policies in Small Economies, London, Croom Helm.

CBY, Annual Books, 1975, 1981, 1984, 1986, 1987, Sana'a CBY.

CPO, Statistical Year Books, 1976, 1982, 1988, Sana'a, CPO.

---------. (1991) "Statistical Report" , a mimeo, Sana'a, CPO.

Customs Department, (1989a) The Statistical Customs Report 1987, Sana'a, Ministry of Finance.

--------. (1989b) The Statistical Customs Report 1988, Sana'a, Ministry of Finance.

EIU, (1991) "Oman, Yemen : Country Profile 1990-91" , The Economic Intelligence Unit, London.

FAO, Production Yearbooks, 1983, 1988, Rome, FAO.

-------. Trade Yearbooks, 1983, 1988, Rome, FAO.

IMF, International Financial Statistics Yearbooks, 1983, 1988, 1990, Washington D.C. , IMF.

------. (1990) Balance of Payments Statistics Yearbook, Washington D. C., IMF, Vol. 41, People's Democratic RePart 1.

UNIDO, (1989a) Republic of Yemen : Enhancing Industrial Productive Capacity, Industrial development review series, PPD.122.

------. (1989b) Yemen Arab Republic: Diversifying the Industrial Base, Industrial development series, PPD. 130/Rev. 1.

World Bank, World Development Report, 1983, 1985, 1987, 1990, 1991, New York, Oxford University Press.

------. (1991) World Tables 1990-91, Washington, The Johns Hopkins University Press.

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