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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.