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Macroeconomic Policies for Growth, Employment and Poverty Reduction in Yemen

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Macroeconomic Policies for Growth, Employment and Poverty Reduction in Yemen Macroeconomic Policies for Growth, Employment and Poverty Reduction in Yemen i Copyright 2006 By the Sub-Regional Resource Facility for Arab States (SURF-AS) United Nations Development Programme (UNDP) UN House, Riad El-Solh Square P.O.Box: 11-3216 Beirut, Lebanon All rights reserved. No part of this publication may be reproduced, stored in a retreival sys- tem, or transmitted in any form or by any means, electronical, mechanical, photocopying, recording or otherwise, without prior permission of UNDP/SURF-AS Design, Color Separation and Printing by Virgin Graphics Email: [email protected] ii Case Study Team Advisory Group Contributing Authors: Flavia Pansieri (Resident Representative, (Authors of background papers) UNDP Yemen) Ahmad Ghoneim: Trade Yahya Al Mutawakel (Vice Minister and Ahmad Kamaly: Fiscal Policy Head of the Poverty Reduction Strategy Anis Chowdhury: Monetary Policy Follow-up and Monitoring Unit, Ministry of Antoine Heuty: Fiscal Policy Planning and International Cooperation.) Farhad Mehran: Employment Moin Karim, (Former Deputy Resident Frederick Nixson: Trade and Industry Representative, UNDP Yemen) Haroon Akram-Lodhi: Agriculture Mohammad Pournik, (Senior Country Heba Nassar: Macroeconomics Economist, UNDP Yemen) Hyun Son: Poverty Ibrahim Saif: Industry Core Team John Roberts: Macroeconomics Massoud Karshenas (Team Leader and Karima Korayem: Agriculture and Poverty Principal Investigator, Professor of Khalid Abu-Ismail: Macroeconomics and Economics, SOAS, London) Poverty Khalid Abu-Ismail (Macroeconomics and Matias Vernengo: Macroeconomics Poverty Reduction Policy Advisor, UNDP, Nanaak Kakwani: Poverty SURF-AS, Beirut) Niek De Jong: Poverty Terry McKinley (Director, UNDP, Rathin Roy: Fiscal Policy International Poverty Center, Brasilia) Saif Al Asaly: Fiscal Policy Terry McKinley: Macroeconomics and UNDP Yemen Country Office Employment Team Walid Mehalaine: Trade Randa Abou-El Hosn (Former Assistant Resident Representative) Readers: Abdo Seif (MDG Focal Point) Ali Abdel Gader (Arab Planning Institute) Gouda Abdel Khalek (Cairo University) UNDP SURF-AS Team Ghada Khoury (Research Assistant) Mona Naguib (Publication Specialist) Nora Khalaf (Office Manager) Peter Stalker (Chief Editor) Rehab Farouk (Layout Specialist) Sonya Knox (Editor) The analysis and policy recommendations of this Report do not necessarily reflect the views of the United Nations Development Programme, its Executive Board or its Member States. The Report is the work of an independent team of authors sponsored in part by the Thematic Trust Fund (Bureau of Development Policy). iii About the UNDP and SURF-AS UNDP is the UN's global development network, advocating for change and con- necting countries to knowledge, experience and resources to help people build a better life. We are on the ground in 166 countries, working with them to strength- en their capacities and create their own solutions to global and national development challenges. 40 years of development experience Programmes in 166 countries 135 offices around the world The Sub-Regional Resource Facility for Arab States is a key player in UNDP's glob- al development network, advocating for change and connecting countries to knowl- edge, experience and resources to help build a better life. Our focus is helping coun- tries in the Arab region build and share solutions to the challenges of democratic gov- ernance, macroeconomic policies and poverty reduction, energy and environment and gender within the overarching framework of the Millennium Development Goals. iv Abbreviations and Acronyms BDS Business Development Support CACB Cooperative Agricultural Credit Bank CBS Central Bureau of Statistics CBY Central Bank of Yemen CD Certificate of Deposit CPI Consumer Price Index CSO Central Statistical Office DRDI Domestic Resources for Development and Investment EFARP Economic, Financial and Administrative Reform Programme EU European Union FAO Food and Agriculture Organization FDI Foreign Direct Investment GAFTA Great Arab Free Trade Area GCC Gulf Cooperation Countries GDP Gross Domestic Product GNI Gross National Income GoY Government of Yemen GST General Sales Tax HACCP Hazard Analysis Critical Control Points HBS Household Budget Survey HDR Human Development Report IFS International Financial Statistics ILO International Labour Organization IMF International Monetary Fund I-PRSP Interim Poverty Reduction Strategy Paper LDCs Least Developed Countries MDGs Millennium Development Goals MEGTWG Macroeconomic & Employment Generation Thematic Working Group MENA Middle East and North Africa MSMEs Medium, Small and Medium Enterprises NABARD National Bank for Agriculture and Rural Development NBY National Bank of Yemen NFD Net Foreign Demand NGO Non-Governmental Organisation NPS National Poverty Survey NSIC National Small Industries Development Corporation ODA Official Development Assistance PCFs People’s Credit Funds PPP Purchasing Power Parity PRSP Poverty Reduction Strategy Paper RBI Reserve Bank of India REER Real Effective Rate SEDU Small Enterprises Development Unit v SEFM Strengthening Economic and Financial Management SFCs State Financial Corporations SIDBI Small Industries Development Bank of India SMEs Small and Medium Enterprises TB Treasury Bills TIFA Trade and Investment Framework Agreement UNDP United Nations Development Programme VBARD Viet Nam Bank for Agriculture and Rural Development VBP Viet Nam Bank of the Poor VTCs Vocational Training Centres WDI World Development Indicators YBRD Yemen Bank for Reconstruction and Development YCR Yemen Country Report YR Yemeni Rials vi Table of Contents ACKNOWLEDGMENTS xv PREFACE xvii CHAPTER 1. METHODOLOGY AND SCOPE 1 CHAPTER 2. GENERALIZED POVERTY IN YEMEN AND ITS MACROECONOMIC IMPLICATIONS 2.1 The Nature of Poverty in Yemen 11 2.2 Domestic Resources Development and Investment under Generalized Poverty 13 2.3 Initial Conditions and Economic Reform 16 CHAPTER 3. GROWTH, INVESTMENT AND ODA REQUIRMENTS FOR HALVING INCOME POVERTY BY 2015 3.1 Growth and Investment Requirements 19 3.1.1 Estimating the growth elasticity of poverty reduction 19 3.1.2 Estimating the required per capita growth rate 20 3.1.3 Estimating the required investments 22 3.1.4 Estimating the requirements for per capita foreign aid 23 3.1.5 The Effect of a More Favourable Savings Path 25 3.2 Aid Efficiency 26 CHAPTER 4. EXPANDING FISCAL SPACE 4.1 Macro-Fiscal Trends 33 4.1.1 Overview 33 4.1.2 Trends in Government Spending 37 4.1.3 Institutional and Strategic Initiatives: Fiscal Components 42 4.2 Yemen’s Fiscal Challenge: The IMF View 43 4.3 A Review of Fiscal Challenges and Recommendations 45 4.3.1 Revenue Challenges 45 4.3.2 Reducing Expenditures 47 4.4 Concluding Remarks 49 CHAPTER 5. FINANCIAL-SECTOR DEVELOPMENT, GROWTH AND POVERTY REDUCTION 5.1 Structure of the Financial Sector 53 5.2 Financial Sector Reforms 54 5.3 Financial Intermediation and Poverty Reduction 56 5.4 Conclusions and Policy Recommendations 61 vii CHAPTER 6: MACROECONOMIC POLICY, INFLATION AND GROWTH: INTERLINKAGE BETWEEN FISCAL, MONETARYAND EXCHANGE-RATE POLICIES 6.1 Introduction 65 6.2 Monetary Policy: Reforms and Regulations 65 6.3 Exchange Rate Regime and Reforms 67 6.4 Monetary, Fiscal and Exchange-Rate Policies and the Inflationary Process 68 6.4.1 The Inflationary Impact of Fiscal Policy 70 6.4.2 The Monetary Causes of Inflation 72 6.4.3 Supply Side Factors 75 6.4.4 Macroeconomic Policy, Savings, Investment and Pro-Poor Growth 80 6.5 Policy Recommendations 86 CHAPTER 7: STRENGHTENING THE EMPLOYMENT NEXUS BETWEEN GROWTH AND POVERTY REDUCTION 7.1 Introduction 89 7.2 Trends in the Labour Force 89 7.3 The Structure of Employment 91 7.4 Trends in Unemployment 92 7.5 The Demand for Labour 93 7.5.1 Micro and Small Enterprises 97 7.5.2 Expected Jobs Gains 98 7.6 Trends in Hours and Wages 98 7.7 Policy Recommendations 101 CHAPTER 8: AGRICULTURE AND LIVELIHOODS IN RURAL YEMEN 8.1 Introduction 103 8.2 Agriculture 104 8.2.1 The Role of Agriculture in the Economy 104 8.2.2 Aggregate Supply: Crop Area, Volumes and Shares 106 8.2.3 Aggregate Demand: External and Internal Drivers of Change? 110 8.2.4 Decomposing Supply: The Productivity Record 113 8.2.5 Decomposing Supply: Land and Labour 115 8.2.6 Decomposing Supply: Water 120 8.2.7 Conclusion: The Agrarian Constraint 122 8.3 Agrarian Constraints and Pro-Poor Policy Considerations 124 8.4 Conclusion: the Political Economy of Rural Relations and Policy Reform 131 viii CHAPTER 9: TRADE AND INDUSTRY 9.1 Introduction 133 9.2 Trade Sector 133 9.2.1 Implications of WTO Accession 138 9.2.2 Policy Recommendations 138 9.2.3 Trade Liberalization and Human Development 140 9.3 The Manufacturing Sector 141 9.3.1 Policies Affecting the Manufacturing Sector 144 9.3.2 Manufactured Exports Performance 146 9.3.3 Challenges to Promoting the Manufacturing Sector 147 9.4 Conclusions 148 CHAPTER 10 SUMMARY POLICY CONSIDERATIONS 10.1 Providing Fiscal Space for Development 151 10.2 Financial Sector Development 153 10.3 Monetary and Exchange-Rate Policies 154 10.4 Policies to Promote Savings, Investment and Growth 155 10.5 The Employment Nexus between Growth and Poverty Reduction 156 10.6 Trade and Industrial Development 157 10.7 Agricultural Development and Rural Livelihoods 160 REFERENCES 163 ANNEXES Annex 1: Notes on the Comparison of the Household Budget Survey (1998) and National Poverty Survey (1999) 167 Annex 2: Methodology for Estimating Growth and Investment Requirements for Halving Income Poverty by 2015 171 Annex 3: Data sources and issues in IMF statistics 175 Annex 4: Financial
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