A Historical Glimpse atThe facts of foreign investments and financing in the Republic of Yemen (Prat 1) [Archives:2005/850/Business & Economy]

June 13 2005

The foreign investment at its outset was connected with the emergence and development of international trade. The emergence of multi national companies, have contributed to the spread and enlargement of its rate. States have made use of the foreign capital -variably, to modernize and develop its productive facilities and other national components, where foreign investment shares in stimulating economic activity due to the financing, technology and production procedures it provides. Also, the practices in management, training and marketing tend to add to the abilities of the hosting economy . it also creates new jobs and widens the capacity of exports .

The most important restrictions of direct foreign investment are the factors that affect the foreign multi national companies in obtaining successful lucrative processes. Among these factors :

– The size and development of the hosting country (which mainly depends on the holistic performance of economy, specially the development of national income and the real per capita)

– Access to international and regional markets from the country hosting the investment.

– Availability of human recourses, especially the cheap highly skilful labor.

– Technological capabilities and creative abilities.

– Availability of natural recourses and the type of infra structure

Other important restrictions of direct foreign investment are:

– Political stability in the country

– The efficient polices that motivate tendency to industrlization (general and qualitative)

– Trade and the activity of the companies in general, whether local or international, as well as the structural establishments for application.

– Also the availability of strong bases for long term development, that is to say high rate of domestic savings added to human recourses compatible technological flexible skills, with research centers in all establishments and specializations.

These support the economical bases of the hosting countries. They are considered the important bases that should be taken care of specially in the Arab countries that suffer from the burden of foreign debts, besides the weak infra structures. The process of attracting, maintaining or increasing the influx of direct foreign investments into the hosting country can help in healing up the ailing economy of the hosting countries

However there should be precautions of the influxes of the foreign investments, because of their commendable effects on methods of administration and production, as it enables easy access to foreign financing (loans and aids). Though this is a good thing for enhancing economical activity, it should also be accompanied by an increase in domestic savings to deepen the role of the markets and the increase of the chances of directing the economical recourses internally and externally to productive investments. It is also necessary to take precautionary measures concerning the extreme defects of current accounts to avoid inflation and instability that could result from the large amount of influx of incoming and outgoing foreign capital.

The relation with the multi national companies increased in the Arab countries in the last two decades. Ofcourse this is due to the immense increase in oil production. This led to a big leap in the amount of investments namely in infra structures. These countries depended almost completely on this companies to carry out a great part of the investments owing to the technical abilities these companies posses. This has a connection with the boom of activity of the consultancy engineering offices and international banks, that have strong ties with these companies. The importance of the Arab area increased because of the large amount of profits these companies have achieved in the area. Added to that is the big capacity of consumption of the Arab markets for the commodities these companies produce. Other attractions for these companies are (natural resources, geographical positions, cheap labor ). The exact amount of these investments are not exactly known, but no doubt it is very immense

The experience of the last three decades with these companies was not free from exploitation, and unbalanced chances. There were flaws in the projects and works which they executed. This is because of the technical methods that they followed. These methods ignored the environmental, natural and local labor's skills. It was also noticed that, these companies were insistent to sell ready technologies to Arab countries whose construction, operation and setting in operation depends totally on these companies. This guarantees entire dependence on these companies. It is a regrettable matter that these countries made no efforts of supervision on these companies, unlike many of the other developing countries.

This could have improved the terms of treatment with these companies. This is going to be the subject of our discourse in this study.

The foreign investments used to have a position in Yemen before the unity in 1990. The refinery in Aden has lured British and international investments. It also attracted financial projects, sea transport and trade. The semi socialist regime's measures of nationalizations of 1969 for French, American, Indian, Pakistani and Jordanian transport and trade projects and insurance added to that, the closer of Sues canal. All these led to repulsion of investors from Aden. Since the beginning of the Democratic Socialist republic of south Yemen, the foreign capital contracted.

The organisers began to speak of foreign capital as a recourse for development, a few of the Arabic, Asian and European projects came. Contrary to that, the planners in the northern Arab Republic of Yemen welcomed foreign capital. The liberal Arabian policies attracted foreign capital in limited areas where most of the foreign projects invested their capital in these areas. Up to that time the foreign financing remained to be the recourse for investment capital (loans and aids ) in the structure of social, agricultural and social services, where both parts of Yemen were “a basket” in the eyes of donors due to low income. In spite of the different dates of the commencement of foreign financing, the over all model remains the same. (see the table )

The dependence at the beginning was on Britain and the Soviet Union. It is only very late that the Southern Yemen socialist republic began to vary its sources of financing. Before independence Britain used to cover two thirds of the budget, so its withdrawal would lead to the bankruptcy of the new state.

The west and the radical Arabic regimes boycotted the socialist Aden for a decade. The Soviet Union and its allies like china and the extreme Arab regimes became the major source of aids. The multi national and international agencies of the International development body cooperated with Aden and introduced capital for financing the semi socialist economy of the Southern People Democratic Yemen.

Since the sixties the major powers began their competitions in financing the projects, but the Arabian oil countries were the major donors in the seventies. The International Development Agency has played a major role in the economical policy. The economical aids reached their peak in 1981 but it dropped to half of that in 1985, and less than 100million dollars in 1988. Both of the states then depended on the same list of debtors and donors who became less enthusiastic to finance bigger projects. The aids were confined to limited technical aid programs, by the United Nation or the donors, or those smaller gifts of the rich Gulf countries.

As the basic frames of the projects were the base stone for developmental investment in Yemen, the general projects were the subject of the support of the Socialists and others through debts or bilateral projects. China and East Germany made cement, textile milling and bakeries in the Arab Republic of Yemen. The fishery establishment in the South received aid from the Soviet Union and the International Development Agency Denmark and Kuwait.

The International Financing Agency supported the battery factory in Northern Yemen . The dual financing agencies constructed joint projects like the Iraqi – Democratic Yemen fishery, the Soviet – Democratic companies. The Saudi Yemeni Airlines company, the Chinese Yemeni company for engineering and contracting between Arab Republic of Yemen and China. In 1985, the Yemen Arab republic and the South People Arab Democratic Republic of Yemen made a joint tourist company and agreed on joint corporation in the field of fruits, poultry and fishing. The nature of investment in agriculture was low, taking in consideration the low level in private and cooperative investments.

The overall development was the strategy of the western countries to supply the rural regions with roads facilities and social services in addition to model farms and directing projects. The most prominent development projects in Yemen were after the model of the World bank for regional development

Such procedures were introduced in the Northern areas which were the most suitable for cash crops, like the semi equatorial Tehama and the temperate southern high lands. In spite of the slow progress towards construction, the same method was applied to cover from 50% to 70% of the populated areas in Yemen.

The biggest rural integral project for example, is that of Wadi Hadramout of the multi foreign financing, since the seventies. It concentrated on road construction artisan well construction studies, in addition to financing a number of cooperative societies with fertilizers .and pesticides. The second project of the foreign multi financing, which is on going since the sixties, is the Tehama Developing Authority.