The Second Yemeni Economic Conference
Sana'a  18 - 20 April, 1998

Abstract 8:

Economic Reform Between Planning and Market Economy: The Yemeni Case
Dr. Huda Ali Al-Bann
Assistant Professor
Dept. of Economics
Aden University

The Republic of Yemen since its inception on the 22^nd of May 1990 had to face problems and difficulties that have accumulated during the former separate states, as well as to carry a heritage burdened with political, economic, and social disputes. At the same time, the new Republic was expected to embark on constant and decisive steps towards constructing the modern Yemeni state. Unfortunately, the united state slipped into un-destined roads and directions - locally and regionally - which have exhausted the enthusiasm for building a better future.

The Government’s attempt to implement an economic, financial, and administrative reform program that fosters a shrinking role by the state in economic activities while relying on a market-based economy, has been the motive behind writing this paper which includes the following four major parts:

Nature, characteristics and size of current economic problems in Yemen.

Analysis of the basic goals of the Economic Reform Program and of the achieved results, as well as highlighting flaws and shortcomings .

The planning role of the state and the justification for its continuity.

Conclusion and recommendations.

In looking into part one, it clarifies the wide expansion as well as the depth of the economic problems in Yemen represented in the suffering resulting from sharp structural imbalances, recession and slow economic growth, increased inflation rates, deterioration in the value of the currency, higher unemployment, and growing deficit in both the budget and the balance of payments. The paper also explains that the unstable Yemeni economy has been swinging between partial application of planning and no planning. This swing is considered the first fault in the economy leading to weak and slower economic growth and deterioration in real incomes.

The paper then analyzes the basic goals of the Economic Reform Program. It reviews the contents of the first phase (March - December 1995) and the second phase (January 1996 - June 1997), as reflected in the resolutions, policies and monetary and fiscal measures that aim at stopping the deterioration in the national economy. In sum, these include reducing subsidy to some goods and services, liberalizing economic activity to imply a lesser interventionist role for the state in economic activities, leadership to the private sector in accordance to market mechanism, in addition to freeing foreign trade and money market and floating the Yemeni Rial.

Accordingly, some questions have been rising. The most important is that the frame of the program as envisaged by cabinet resolutions is, by no means, considered a scientific and practical document in the eyes of either official, legislative, or academic institutions.

The program has been characterized as swift and incomprehensive in resolving important economic problems, with some overlapping between the first and the second phase, which rendered tax reforms impotent. Also, phase three (July 1997 - December 2000) is considered a complementary phase for the previous two phases, during which lifting of what remains of subsidies to wheat and flour and some oil derivatives is going to take place. However, it is inappropriate to prejudge this phase as it has only recently come into effect.

The paper argues the importance of continuing the planning role of the state while taking into consideration the trend towards market economy and the peculiarities of the Yemeni situation. It is also believed that the IMF’s prescription has not been suitable for the situation of political and economic development Yemen is undergoing, particularly when the state is trying to rebuild the destruction brought by the 1994 war.

The state is facing many challenges: improving the performance of its institutions with emphasis on upgrading conditions and mechanisms for a market-oriented economy, providing a conducive environment for private sector initiative, encouraging individuals to invest, and protecting consumers from cheating and monopoly. Hence, only through planning mechanism we can achieve short-term goals as well as a strategy for a comprehensive reform process in Yemen.

The paper concludes with some conclusions and recommendations. The most important are: the need to continue the role of the state with gradual movement towards market economy based on planning. Competition should be encouraged, while the operation efficiency of public enterprises should be improved instead of transferring these enterprises to the private sector. In sum, and in view of the characteristics of the Yemeni society and its social structure of tribal features, and given the current economic structure, the role of the state in economic development should remain a demanding and vital request for a long period. Such role should work in a framework of new mechanisms capable of adapting to the nature of current and future economic changes.

the government operating production and service units.