Arabia Without Oil: A Tale of Two Yemens

By John Haldane

One the earliest centers of civilization in the Middle East and an important stop on the ancient world's spice trading route, the mountainous lands of Yemen and the Hadramaut inherit a rich, 3000 year recorded history. The Biblical Queen of Sheba ruled this fabled land of frankincense and myrrh, exotic aromatic gums favored by the Romans for state and religious ceremonies.

Today these lands in the southwest corner of the Arabian Peninsula are anything but affluent. The area's two nations the Yemen Arab Republic (YAR) in the highlands bordering the Red Sea and the People's Democratic Republic of Yemen (PDRY) in the mountain ridges and coastal plain to the South have the lowest per capita income in the Middle East and, barring the discovery of oil in marketable quantities, are likely to remain the poor relations among their Arab kin. Producing few products for export, most of their income derives from foreign remittances, loans and grants from their rich Arab neighbors, the Soviet Union, Western nations and international lending organizations.

The YAR "Remittance Economy"

The Yemen Arab Republic, though the smaller in area (75,000 sq. km. to the PDRY's 290,000), has the larger population (7.5 million to 2.1 million). Bereft of an adequate agricultural base or major industry, the country's two major sources of income are remittances from Yemenis working abroad (mostly in Saudi Arabia and the Gulf States) and foreign aid. The $1 billion or so annually that the YAR receives in foreign aid is the primary engine of the Government's drive to build a modern industrial and agricultural infrastructure. The OPEC Fund for International Development is providing $4 million to finance a highway project and the Abu Dhabi Fund for Arab Economic Development is giving $10 million to help finance a port expansion project at Hodeida. The World Bank's International Development Association ODA) is loaning $10 million for a project to increase agricultural productivity. The United States, interested in fostering good relations with a country touching the strategic sea lane into the Red Sea, provides the YAR about $48 million annually, while the Soviets, for their part, have provided at least $1 billion worth of aircraft, tanks and other military equipment over the years. The Saudis and Kuwaitis are other regular contributors of aid.

Although the economic boons of this foreign aid will come mainly in the long term, when the development schemes they are financing come to fruition, the short term news for the YAR's economy is encouraging. Recently, the World Bank's 1985 Annual Report disclosed that the YAR's Gross Domestic Product (GDP) had grown at a slightly faster rate in 1984 than in the previous year. Bank economists, citing a substantial reduction in the budget deficit and a drop in the balance of payments gap, saw this as a sign that the YAR Government's new cautious fiscal policy was working. Some of the gain, however, must certainly be attributed to the YAR's other main source of income: remittances from Yemenis working abroad.

These payments currently running at about $1 billion annually and accounting for close to 40 percent of GDP posifively affect the YAR's balance of payments and boost the country's reserves, even though much of the total bypasses the Government treasury. They have enabled individual Yemenis to start up small businesses, buy land and equipment for agricultural production and purchase foreign goods which help to raise the general standard of living. As a source of national wealth, however, the "remittance economy" has been at sixes and sevens with the government's development schemes. Currently, over 40 percent of the country's native born adult work force resides abroad. Not only does little of the money they send home find its way into projects aimed at developing a modern industrial and agricultural infrastructure, but the workers' departure has drained the nation's skilled labor pool nearly dry. The need to import skilled labor from the West, and unskilled labor from Pakistan and East Africa, has restrained the government's few development programs and discouraged many private entrepreneurs from constructing small factories for the production of import substitution goods. The nation's manufacturing sector, consequently, remains underdeveloped, providing only 14 percent of GDP and employing less than 10 percent of the workforce, according to the most recent statistics.

The brightest spot in the YAR economic picture, however, is the financial potential of the Dallas-based Yemen Hunt OR Company's 1984 discovery of oil. Although appraisal drillings are still under way in an effort to determine the extent of the find, Hunt officials estimate the discovery well is capable of producing more than 7000 barrels per day (b/d). Meanwhile, Hunt is building a 10,000 b/d refinery near the site and has plans for a 250 mile export pipeline to the Red Sea. When completed, this refinery should satisfy up to half of the country's need for fuel oil, gasoline and diesel, saving the YAR something in the range of $120 million annually in petroleum imports.

The PDRY's Precarious Future

With a population density of only seven inhabitants per sq. km. and an annual per capita income of barely $300, the People's Democratic Republic of Yemen (PDRY) is a poor brother even to the Yemen Arab Republic. Some of its economic woes can no doubt be laid on the doorstep of the political turmoil which has gripped the nation in the last two decades. When the country gained independence from Great Britain in 1967, it was a mere hodgepodge of 22 sheikdoms and Aden, an important deep water port on the Gulf of the same name. Two years later, a Marxist Liberation Front seized power and established a republic. Between 1969 and 1978, there were three successive coups by various hardline Marxists. Stability was strengthened when Nasir Mohammad assumed the Presidency in 1980, but the events of last month culminated in his bloody overthrow and the appointment of Haidar Abu Bakr al Attas, a 49 year old engineer, as provisional President.

Until his ousting, Nasir Mohammad had pursued a dual strategy of close cooperation with the Soviet Union and movement toward improved relations with his Arab neighbors. He restored diplomatic relations with Oman and Saudi Arabia and stopped government support of guerrillas fighting the regimes in the YAR and Oman. Such conciliatory efforts won him sizeable loans from the Arab Monetary Fund and OPEC, as well as separate grants from several Gulf states. It is too early to tell whether President Attas will continue this policy. Some Western experts expect that he may cool relations with his fellow Arabs in deference to the wishes of his Moscow mentors. Such a step would not bode well for the PDRY's economy, which is still hurting from events and trends of the past few years. Severe floods in 1982, followed by droughts in 1983 and 1984, have slowed down economic activity. Workers' remittances from Yemenis in other Arab states once a major source of income are on the decline and the current level of foreign aid is less than it was two years ago. And, despite a decade of development efforts, the nation still draws much of its income from the Aden oil refinery, port bunkering and ship repair facilities.

Long the Soviet Union's only ally on the Arabian Peninsula, the PDRY under Attas is in a good position to turn to Moscow for economic succor. Since 1979, when it signed a 20 year friendship treaty with Moscow, the PDRY has sponsored the only Soviet military presence in the Middle East: a naval base and submarine pens in Aden and a major communications facility manned by East Germans. When work finishes on the extension of the Aden airport runway, the Russians will also have the capability of overflying the American base at Diego Garcia, 2200 miles away in the Indian Ocean, with their longrange surveillance aircraft.

The Soviets have come through with $400 million in credits for agricultural, power, port and oil and mineral exploration projects. By far the PDRY's biggest creditor, the Soviet Union maintains an estimated 1000 military personnel and another 1000 technical advisors in the country. Technoexport, in the hope of duplicating the recent Hunt discovery in the YAR, is busy drilling oil exploration wells.

Whether the Soviets secretly engineered the overthrow of Nasir Mohammed or inadvertently let local political and tribal rivalries get out of hand, they will eventually have to pay dearly for the events of the last month. Given the worsening economic situation and the possibility that the Atlas regime will lose the financial backing of its rich Arab neighbors, the Soviet Union is caught between the rock of pumping billions of rubles into a stagnating economy and the hard place of defending their military privileges against an outbreak of local unrest. After their experience in Afghanistan, the Soviets know that's not a happy choice.

John Haldane is a specialist in Middle East affairs who has served as a foreign service officer in Baghdad, Beirut and Cairo, and as an international economist in the Departments of Commerce and Treasury.