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The Effect of Arab Spring on Yemen

The demonstrations and protests materializing in the Arab World are occurring in an attempt to draw attention to the repression felt by citizens of these countries.  Yemen is no exception.  Yemen’s protests, commencing in January 2011, called for the resignation of President Ali Abdullah Saleh after 33 years of authoritarian rule.  Although the resistance is intended to ignite a social revolution, the consequences of these movements have larger implications for Yemen’s economy and the macroeconomy as a whole.

Yemen is one of the poorest countries in the Arab World and is heavily dependent on oil resources for revenue.  According to the Central Intelligence Agency’s World Factbook, “petroleum accounts for roughly 25% of GDP and 70% of government revenue.”  However, Yemen faces diminishing resources, largely responsible for the country’s further decline.  Although the government has taken steps to bolster non-oil sectors of the economy along with foreign investment, they must still battle longterm challenges such as dwindling water resources and a high population growth rate in addition to Arab Spring.

The political turmoil caused by Arab Spring has exacerbated rising unemployment.  The most recent estimate of the unemployment rate reached 35%.  This in turn results in a loss of income and therefore a decline in standards of living.  This is accurately reflected in GDP per capita, estimated at $2,500 in 2011.  The population below the poverty line was also listed at 45.2%.  This is no surprise as political turmoil often demands that attention be focused elsewhere, rather than on the current state of the economy.

Rising unemployment also has the property of a domino effect.  Those people facing unemployment will have less demand for goods and services, thus affecting the employees in the sector that provides those goods and services.  A decrease in demand means that the marginal product of labor decreases.  A chain reaction ensures, causing more workers to be laid off.  In addition, the decrease in wages implies a decreasing money multiplier.  If people do not have money to save and invest, the banks cannot create more money by distributing loans.

Yemen, already a suffering country, is experiencing a loss of national output as well.  If people are spending their time protesting rather than working, resources are being wasted, which also decreases GDP.  The government must also focus on welfare spending despite foreign aid they receive for development projects and humanitarian needs, which increases deficits.  An increase in government spending results in a decline of national savings, raising the interest rate and discouraging investment.  In addition, government spending is heightened even more as the government attempts to stifle more protests and uprisings.  The corrupt government, heightened by Arab Spring, extends into the judicial system as well.  This insinuates that contracts are not enforced and private property rights are not respected.  This limits economic security and freedom, and discourages foreign investment.

Yemen has also experienced surging inflation rates since Arab Spring, ranking as one of the highest rates in the world, now at 20%.  This is a significant increase from the 2010 inflation rate of 11.2%.  This inflation occurs as the government issues large quantities of money to pay for expenditures.  With this, seigniorage occurs, which can be thought of as a tax.  Inflation tax hurts those who hold the money because old money in the hands of the public becomes less valuable.  The difference between the value of money and what it costs to print the money is seigniorage and goes to the issuer of the money.  In countries experiencing hyperinflation, this is often the government’s primary source of revenue.

Further, the Fisher effect explicates a one-to-one relation between the inflation rate and nominal interest rate (the rate the bank pays).  Thus, when inflation is high, nominal interest rates are high as well.  This lowers the demand for real money balances, the quantity of money in terms of the quantity of goods and services it can buy.  In other words, it measures the purchasing power of the stock of money.  If demand decreases, there is a decreased desire among the population to hold assets in the form of cash or bank deposits because of it’s decrease in value.  This is true for Yemen, as it experiences high inflation.

Arab Spring has negatively affected Yemen’s already poor economy.  The adverse effects are intertwined, leading the country farther into poverty.  These multiplier effects not only travel through Yemen’s economy, but through the macroeconomy as a whole.  The World Bank experienced interrupted projects during the political crisis in 2011 is just one example.  Thus, Arab Spring is not only a crisis for the Arab World, but the world in its entirety.

Yemen: Will freedom lead to economic freedom?

Removal of Mr. Saleh was a prerequisite for economic reforms in Yemen. In this article, I will try to explore how regime change altered direction of some Macroeconomic variables such as Government Spending, Investment Freedom, Financial Freedom and Monetary Freedom. In order to make a case, I am using data from World Heritage Foundation which provides an index for each of these variables and also provides change in trends from preceding years.  In order to better understand the economic trends, I will individually look at these indexes, define what is captured in these indexes and provide my analysis for why particular economic variables choose to move in certain direction.

During the Arab Spring Government Spending decreased significantly. Heritage Foundation quantifies as Government Spending. According to Heritage Foundation Government Spending considers the level of government expenditures as a percentage of GDP. Government expenditures, including consumption and transfers, account for the entire score. One of the reasons for declining Government Spending as quoted by The Economist is attacks by angry tribes on oil pipelines that made it more expensive to produce and transport food and water. The government had to import fuel, doubling its monthly import bill to around $500m. The tax take, never large, has vanished. Central bankers are under pressure to raid reserves, said to be around $4.5 billion. Factories were shut because they lack fuel. Countless casual jobs have been lost.”

Since most of Yemen National Income was coming from oil revenue, the Arab Spring made it impossible to use these resources amidst civil disobedience. After the crisis, we did not only saw an increase in Government Spending but also that most of it was moderately fair. As data suggests, Couple of years before the Arab Spring, Government Spending remained between 50-60 points. After 2011, there was a sharp increase in government spending which currently stands at 62.4 points and is considered “moderately fair”.

Investment Freedom in Yemen has decreased during and after the Arab Spring. There was a decline from 50 to 45 points. In early 2000’s the Investment Freedom in Yemen was at a low of 30 points falling under repressed category. Individuals and firms were not allowed to move their resources freely and quickly into specific industries both internally and across borders. The key factors that provide constrain to investment freedom are political security, infrastructure, capital transaction, and labor regulations. With the advent of Arab Spring most of these variables were driven down in negative direction specifically political security and infrastructure which decreased investment freedom in Yemen. Some of the implication of this will be that there will be less Investment making the economy less stimulus and rather static.

Financial freedom during and after the Arab Spring remained at the same level. The Index scores an economy’s financial freedom by looking into the following five broad areas:

  • The extent of government regulation of financial services,
  • The degree of state intervention in banks and other financial firms through direct and indirect ownership,
  • The extent of financial and capital market development,
  • Government influence on the allocation of credit, and
  • Openness to foreign competition.

Since the index score remains the same, it can be argued that during the Arab Spring, there have been no structural changes in the government or financial institutions. With the changes in the government, we might see the graph rise in the long run.

The monetary freedom during the Arab Spring increased significantly. There was a jump from 65.1 to 82.2. The score for the monetary freedom component is based on two factors:

  • The weighted average inflation rate for the most recent three years and
  • Price controls.

Considering the crisis, the weighed inflation is expected to increase due to bad business conditions in Yemen. There also seems to be less price control on goods and services as inflation drives up prices. It is also interesting to notice that as soon as crisis are over, there is a sharp drop in Monetary Freedom showing stabling conditions of the economy.

Over all, there are two important indications of economic trends in Yemen. Economic variables that depend on individual and free market operations have seen an upward trend. Variables that are dependent on government or structural reforms have either remained the same or moved in negative direction. In order to address these challenges, revolutionary energy needs to be converted into structural rebuilding of the economic model.


Usman Shabbir.