The case for Diversification [Archives:2006/985/Business & Economy]

By: Raidan Abdulaziz Al-Saqqaf
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Poverty eradication does not simply mean ensuring our economic growth, it means ensuring economic growth for people's income in real terms. In Yemen, the real economic growth is at 2.4 percent while the population growth rate is at 3.4 percent, therefore the growth in people's income in real terms is – 1 percentage because economic growth cannot keep up with the growth of the population to sustain the same level of income per person, that is even wore is we put into account the level of inflation which reaches 12 percent.

A study on the Yemeni economy illustrates the reason why poverty in Yemen is increasing; the study says that the income per person declines is because of the undiversified nature of the economy. The national economy can be segmented into three main parts, agriculture which accounts for 54 percent of the economy; services which account for 34 percent of the economy; and finally industry which accounts for 12 percent of the economy and it is inclusive of the oil and gas industry. These numbers mean the economic base of the country lies in agriculture and is the biggest employer especially in rural areas; therefore any growth in the agricultural economy would have a vast positive impact on masses of the Yemeni people.

However, Yemen's growth has been mainly driven by growth of the oil sector, as oil revenues constitute up to 70 percent of the government's revenues, but has very little impact on the society and the income per person. Therefore the government focus and reliance on oil to finance its operations has affected its ability to tackle the real sources of growth in terms activities which increase income per person, such as manufacturing and industry.

Diversifying the Yemeni economy means new sectors and industries should emerge and provide employment and initiate non-oil based growth and reduce the government dependence on oil as new industries will result in taxable activities and also reduce the population's dependence on agriculture which is a low-value addition and has a relatively low economic return, all in search of a new source of growth through diversification.

The third national plan includes a vision to establish industrial zone for manufacturing in several locations in the country to host labor-intensive industries, in order to raise the average of real wages in the country and in turn the real income per person. Although in theory this plan would improve the real income per person, but in practice we are yet to see the fruits of this vision, although it is a step in the right direction towards diversifications of the economy and in turn growth in the diversified economy would result in growth in the real income per person, and in turn reduction of poverty.
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