Local Economic Councils: A Tool to Improve Business Productivity in Yemen

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Executive Summary

Even before the events of 2014 and 2015 that led Yemen into the ongoing civil war, its economy was fragile. The years of hardship that have haunted the country ever since have been devastating. Yemen is now rated as one of the hardest places in the world for businesses to operate and is last or near last in a host of global business competitiveness indexes. From January 25-27,2021 the seventh Development Champions Forum, held virtually, focused on this dire national situation. To help address local economic challenges, the Development Champions discussed the possibility of establishing Local Economic Councils. According to their analysis, between the existing community-level local development committees (which guide targeted, small scale infrastructure investment from development funds such as the Social Fund for Development and the World Bank) and the Supreme Economic Council (which guides sector-led state investment at a national level), a space exists for a governorate-level body to drive development by guiding investment to serve local needs and strengthen ties between the governorates and the private sector.

Introduction

Even before the events of 2014 and 2015 that led Yemen into the ongoing civil war, its economy was fragile.^[1] The years of hardship that have haunted the country ever since have been devastating. Yemen is now rated as one of the hardest places in the world for businesses to operate^[2] and is last or near last in a host of global business competitiveness indexes.^[3] On a national level, stressors have included the interruption of oil and gas exports, suspension of donor development support and drop in remittances.^[4] In addition, there has been a bifurcation of monetary policy and financial regulation between rival central banks, a general shortage of foreign currency in the market to finance imports, a major depreciation in domestic currency value that has eroded local purchasing power, and widespread loss of livelihoods and income.^[5] Damage to vital infrastructure has also been widespread and public finances are in disarray.^[6]

The devastating results of this economic collapse cannot be overstated. Poverty and hunger are rife.^[7] According to UNICEF,^[8] “Yemen is the largest humanitarian crisis in the world, with more than 24 million people – some 80 per cent of the population – in need of humanitarian assistance, including more than 12 million children.”

The Development Champions (DCs) are senior Yemeni experts and professionals from various backgrounds, with established expertise in development and economy. The seventh Development Champions Forum (DCF7), held virtually on January 25-27, 2021, discussed how within this clearly dire national situation, businesses still operating in Yemen today face considerable local-level challenges. The forum considered challenges both unique to, and shared by, the country’s various governorates,^[9] regarding areas such as vital infrastructure. Roads, power, fuel supplies, water, and access to communications across the country are often either below standard or not functioning at all.^[10] Issues raised also included: a lack of skilled workforces and training opportunities; governorates’ lack of decision-making powers required to react to their specific circumstances; inadequate oversight of funds available to invest in local economies; and scarcity of microfinance opportunities.^[11]

The Argument for Local Economic Councils

Yemen’s local authorities are, for the most part, weak clients of the central authority,^[12] and require more resources to cover local development needs.^[13] The implementation of the Local Authority Law in 2000 devolved responsibility for providing local services to the district-level local councils within each governorate, to be paid for by revenues generated through taxation. Economic collapse and lack of access to national wealth generated by oil and gas sales has left the councils in many cases unable to fund basic services required by their populations, let alone stimulate economic development.^[14] Measuresagreed upon in the National Dialogue Conference to strengthen the autonomy of governorates and their local councils are still waiting to be implemented.^[15]

As a possible solution , the Development Champions discussed the idea of a possible establishment of Local Economic Councils (LECs)that. According to their analysis, between the existing community-level local development committees (LDCs) (which guide targeted, small scale infrastructure investment from development funds such as the Social Fund for Development (SDF) and the World Bank)^[16] and the Supreme Economic Council (which guides sector-led state investment at a national level),^[17] a space exists for a governorate-level body to drive development by guiding investment to serve local needs and strengthen ties between the governorates and the private sector.

The LECs, as envisioned by the Development Champions, would comprise experts drawn from the private sector, academia, NGOs and local authorities, who would both assess the real needs of the governorate’s economy, and advise the local governor and relevant local offices on how best to address them.

Amongst others, the LECs could work on plans to improve local productivity in areas of priority in the governorate and will have to market their ideas to donors and the private sector to facilitate and mobilize funding to reach those in need. Unlike the LDCs, which are project-based temporary structures, LECs would focus on future development plans and implementation at the governorate level.

For example, if access to finance is found to be a major productivity barrier that needs to be addressed in a given governorate, the relevant LEC would advocate for extending microfinance services to the governorate. The LEC could target microfinance stakeholders such as the SFD, Yemen Microfinance Network, microfinance institutions and donors, with needs assessments, studies and presentations and a clear message that facilitating microfinance in the governorate is feasible and a priority.

LECs would also be well placed to better facilitate private-sector bids for large-scale operations currently under the purview of the central government, such as power production and waste management, which could open the door for more significant investments.

Creating these credible, transparent bodies that could present a clear economic vision for their areas would also provide a more appealing environment for international donors looking to sponsor development projects, train workforces and distribute aid.

The Development Champions stand ready to support in drafting clear legal mandates for the implementation of the LECS. Both the nature of the mandates and the structure of each LEC should be flexible, decided by the local authorities depending on their needs. Once formed, the day-to-day running of the LECS should be left to their members.

Case Studies

Hadramawt

Located in the east of the country, Hadramawt (population 1.7 million officially, and 3 million anecdotally^[18]) is geographically the largest governorate in the Republic of Yemen. Its 28 districts cover some 193,000 square kilometers, around 36 percent of Yemen’s landmass. The governorate’s capital, Mukalla, is considered Yemen’s third largest seaport.^[19]

Economic activity in Hadramawt is hampered by general insecurity, especially in the valley and desert areas, in addition to specific conflicts between the components of the central authority, local authority and the Southern Transitional Council (STC). However, with the exception of some limited confrontations with Al-Qaeda in the Arabian Peninsula – most notably, the military operations to drive the extremist group out of Mukalla in 2016 – the governorate has not seen major military operations and has thus largely kept its economic infrastructure intact during the war. This leaves the governorate in an excellent position for economic development, if the appropriate policy steps are taken. Its coastline allows access to well-stocked fishing grounds; the governorate is rich in agricultural land with fertile soil and is known for animal husbandry and beekeeping. Hadramawt is rich in minerals, including gold, and the area currently produces some 65 percent of Yemen’s oil.^[20]

Hadramawt is a national outlier, enjoying relative stability and comparatively greater economic resources than other governorates in the country. Local government here functions at a much higher level than elsewhere and already has some working relationships with the private sector.^[21] As a result of the weakened power of the central government, Hadramawt has since 2015 exercised a reasonable degree of autonomy. The governorate takes a share from oil export revenues as well as from local financial resources. Compared to other governorates, Hadramawt’s infrastructure was not damaged by the fighting and enjoys a reasonable degree of security and stability.^[22]

A Hadramawt LEC comprising members of the private sector, academia, NGOs and local government would be well placed to create locally focused initiatives and economic partnerships that would stimulate growth. For example, the governorate has a well-established fishing industry but without investment it is unable to be exploited to its full potential. Similar to national trends, many fishers still use small artisanal vessels, which are inefficient, and only moderate landing and storage infrastructure exists.^[23]

Fisheries interventions in Yemen prior to 2015, of which Hadramawt was a part, came in the form of policy support to improve efficiency of the domestic and export marketing of fish and in the form of infrastructure support, such as the construction of fish-handling facilities, fish-receiving stations, engine maintenance, and net-repair facilities. In addition, efforts were made regarding capacity building for the fishermen in the areas of marine engineering navigation and fish-processing technology and for government fisheries personnel.^[24] However, these projects were limited and there have been no studies regarding their sustainability. The LEC could coordinate and advise development partners on existing as well as future interventions, based on consultations with the Yemeni Seafood Exporters Association (YSEA)^[25] and the local fisheries’ associations in Hadramawt.

Meanwhile, the LEC could advocate for bringing further microfinance into the governorate, which would help fishers invest in more modern boats, improve landing stations and establish a broad ecosystem of related businesses, such as fish farms, canning factories, boat builders and deep-sea fishing companies.^[26]

In addition, DCF7 found that poor catch quality, poor hygiene standards and a lack of quality management systems within fishing companies were affecting productivity.^[27] Assistance is needed in improving the quality of fishing and exporting practices based on international requirements, as well as awareness and monitoring campaigns to insure against overfishing. A close partnership with INGOs, facilitated by an LEC, could also help to introduce new fish-based food products, which would create local business, as well as help to mitigate malnutrition at the national level.

Similarly, an LEC could help facilitate targeted investment in Hadramawt’s agricultural sector to help with the significant problems currently caused by a lack of energy and fuel. For example, DCF7 members suggested that an investment fund of around 10-30 million United States dollar (US$) would help farmers move from diesel to solar power and increase productivity.^[28]

In the event of smaller-scale successful outcomes, the LEC could further guide the governorate to work with the private sector to develop more investments that entail major infrastructure improvements. For example, DCF7 members suggested LECs could investigate the merits of establishing an oil refinery or expanding export facilities to allow for exploitation of the governorate’s mineral resources.^[29] In the longer term, the council could guide the governorate to invest strategically in education, ensuring an educated workforce capable of staffing the governorate’s nascent industries and elevating them to higher levels.

Taiz

Taiz, located 256 kilometers south of the national capital, Sana’a, is Yemen’s most populous governorate. With an estimated 3.5 million^[30] to 5 million^[31] people, the area holds about half of the population currently living under the control of the internationally recognized Yemeni government.^[32]

Any economic activity in Taiz must overcome extreme challenges. The governorate is one of the worst affected by the ongoing war, having been an active frontline in the conflict throughout the war. Six of its 23 districts are currently held by the armed Houthi movement (Ansar Allah).^[33] Its eponymous principal city has seen the second highest proportion of damage of all Yemeni cities, according to the World Bank’s 2020 assessment, and suffers from a suffocating siege that has been in place for more than five years. The city ranks second worst for functioning services in the country, has suffered the worst damage to housing stock of any city in Yemen, has seen significant damage to its medical infrastructure and has no public access to electricity and very little public access to water.^[34] More than 80 percent of the governorate is food insecure.^[35]

The Taiz districts with large manufacturing plants and industry are controlled by the de facto Houthi authorities. Additionally, the coastal districts, although liberated, are still under the influence of the United Arab Emirates. Military interference in the coastal districts is limiting the effectiveness of the fishing sector.^[36] Consequently, investment momentum is nearly suspended. Internal sources of investment are insignificant and, since 2015, all sources of external funding have dried up.^[37]

The DCF7 believes that economic rejuvenation in Taiz will be limited without a peaceful solution to the fighting and the unification of its authorities under the state. However, the DCF7 has called the economic environment in Taiz “encouraging despite the current blockade and war,” given the adaptability and resilience shown by the businesses still in operation, and called for “urgent intervention in the field of commerce” to assist them.

With the right investment and opportunity, the DCF7 suggests that Taiz would be able to exploit diverse resources and bolster economic activity, with a focus on agriculture, livestock, fishing, and the manufacturing of, for instance, paint and foodstuffs.

The World Bank estimates that between US$44.5 million and US$54.5 million is required for the full rehabilitation of Taiz city.^[38] An LEC would be well-placed to ascertain the most suitable sectors to target and the most efficient methods with which to do so.

Exploring channels for adequate financial resources to build suitable infrastructure would be a key directive for an LEC in Taiz, as would facilitating economic partnerships with the private sector in order to achieve an economic boost, especially in sectors with untapped capacities – such as industry, fisheries and mineral wealth.^[39]

For instance, improvements in transportation infrastructure would help reduce the current high prices of goods and rehabilitation of power infrastructure would be crucial to drive down the crippling cost of electricity. An LEC would be well placed to guide investment into small-scale initiatives that would reap tangible benefits for local producers. For example, microfinance arrangements to allow the governorate’s farmers and other businesses access to solar power would be of great benefit, as would schemes to help reopen small factories and support artisanal producers.^[40]

A transparent, integrated LEC could also help restore trust in the local authorities, which, according to the World Bank,^[41] have been eroded over recent years, particularly regarding long-standing issues over garbage collection and sewers. Such issues might be alleviated with private-public partnerships.

Looking Ahead: Recommendations

In the continuing absence of steps to empower governorates and their local councils, as recommended by the 2013-2014 National Dialogue Conference,^[42] the DCs propose that emergency measures be taken to create a mandate for LECs. The central authority should create a legal framework – informed by the proposals of an independent legal consultant – to allow for the creation of LECs in each governorate; it should then validate their mandate. If, or when, the NDC recommendations eventually become law, the LECs could be absorbed into the structure of the local councils, perhaps as economic advisory committees. In order to establish the credibility of the LECs as a viable concept, the DCs recommend a three-year trial phase in which councils are implemented in two governorates.

The work of the LECs will be greatly aided if their governorates have funds to invest in development. The existing system does not encourage governorates to effectively collect funds, and any money available is redistributed without sufficient awareness of each governorate’s needs.^[43] At the DCF7, the governor of Taiz suggested that centrally collected funds should be redistributed in a more practical manner, whereby the poorer governorates receive a more generous contribution. Delegates also called for budget caps on autonomous spending – currently set at YR50 million – to be lifted, to allow governorates more flexibility to develop their own infrastructures as they see fit.

The political divisions of the center are reflected on the governorate level, with appointments often politicized. The LECs must remain apolitical if they are to succeed in gaining the trust, and thus investment, of a wary private sector. Many private investors are ready to support projects, but they fear that projects will be shut down centrally.

The DCs recommend the following points for the implementation of LECs:

• LECs of around 5-10 members should be implemented in each governorate (after a trial phase in two governorates), composed of members of academia, the business community, NGOs and local authorities. It is imperative that all four sectors be represented, but the exact formula may be flexible. Rather, the focus should be on the members’ suitability to sit on the council. For example, private sector members should be drawn from well-known businesses in the country or the governorate, with previous experience in development projects. Members should be appointed for their expertise and not for political reasons.
• The scope of the LECs should be clearly stipulated, affording them the mandate to approve substantial projects.
• Support, advice and training by appropriate INGOS in establishing LECs should be welcomed.
• The LECs’ key focus must be to increase economic production for the purpose of improving livelihoods and providing services.
• The LECs must have a legal framework delineating their creation and operations. A mandate should be drafted by a legal consultant.
• The LECs’ mandate must be flexible to best accommodate the requirements of each particular governorate; the councils may hold executive or advisory powers in economic and development matters, depending on context.
• Governors are likely to require some persuasion to share power and decision-making with LECs. Effective lobbying is essential to ensure that the LECs become an intrinsic mechanism of local governance.
• The LECs must start with a mapping exercise, detailing the production activities and capacities of each governorate. This will guide their strategies. The maps would display properties unique to each governorate, based on which the councils can identify solutions and priorities, and necessary steps to build upon each governorate’s potential.
• LECs should consult with local populations to ascertain their needs and their capabilities; strategies should reflect these local findings. Existing efforts, such as those of the Social Development Fund, to work with communities on small-scale investments could be built upon and improved.^[44]
• Approaches should combine study of past Yemeni experiences as well as international best practices.
• Broad, general and unactionable ideas must be avoided. After mapping and strategy development, the LECs must create concrete, actionable plans.
• The LECs should also be a focal point for INGOs to better direct aid, capacity building and development projects.

Recommendations for the Central Government

• Local authorities at the governorate level must be allowed to make their own decisions on whom to appoint to key positions, without political interference, and to create structures such as the LECs to support governorate development.
• The central government needs to activate and strengthen its oversight and accountability institutions to ensure checks and balances with local authorities.
• Legal chokeholds on development, such as those facing the fishing industry and investment in internet infrastructure, must be removed.
• Qualified personnel and trained workers should be redistributed across governorates to add capacity in areas where it is lacking.

Recommendations for Local Authorities

• Authorities must provide the finances and facilities required to set up LECs containing members of the private sector, academia, NGOs and local government.
• The councils must be free to advise, rather than be directed by, the governorate. The board members must be nominated at a local level, free from political bias and based on merit.
• The councils should be audited and monitored by the governorates, to ensure accountability and transparency.
• Engagement with the private sector is necessary to invigorate development, as local authorities do not have the requisite funding capacity. Initiatives such as a shared build-operate-transfer system between the private and public sectors may help support costly infrastructure investments.
• Funds should be made available to provide support for production through investments in infrastructure, targeted microfinance and availability of fuel and power.
• Governorates must be obliged to publish their relevant financial data.
• Qualified personnel and trained workers should be redistributed across governorates to boost capacity in areas where it is lacking.
• Local authorities should ensure oversight, transparency and accountability at the governorate level.

Recommendations for INGOs and International Stakeholders

• INGOs can help as a third party to guide the establishment of the LECs and provide the required training and advice to council members.
• Where necessary, INGOs may advocate for the implementation of the LECS at a central-government or governoratal level.
• INGOs can explore channels and programs that could deliver direct support to governorates and local authorities, rather than going through UN or other intermediaries.
• INGOs can support vocational training and ensure its customization to the needs of each governorate’s workforce.

Endnotes

1. “The Republic of Yemen Unlocking the Potential for Economic Growth, A Country Economic Memorandum”, World Bank, October 2015, http://documents1.worldbank.org/curated/en/673781467997642839/pdf/102151-REVISED-box394829B-PUBLIC-Yemen-CEM-edited.pdf
2. Ranked 187th out of 190 in “Ease of Doing Business Index”, World Bank Doing Business Project 2020, https://data.worldbank.org/indicator/IC.BUS.EASE.XQ?contextual=max&end=2019&locations=YE&most_recent_value_desc=false&start=2019&view=chart
3. “Priorities for Private Sector Recovery in Yemen: Reforming the Business and Investment Climate”, Sana’a Center for Strategic Studies/DeepRoot Consulting/CARPO, Rethinking Yemen’s Economy Policy Brief 15, September 9, 2019, https://devchampions.org/publications/policy-brief/Reforming_the_Business_and_Investment_Climate/
4. “Yemen Socio-Economic Update, Issue 13, Apr. 2016”, Ministry of Planning and International Cooperation, Economic Studies and Forecasting Sector, December 18, 2016, https://fscluster.org/yemen/document/yemen-socio-economic-update-issue-20
5. “Yemen’s Accelerating Economic Woes During the COVID-19 Pandemic”, Sana’a Center for Strategic Studies/DeepRoot Consulting/CARPO, Rethinking Yemen’s Economy White Paper 07, October 12, 2020, https://devchampions.org/publications/white_papers/yemens_accelerating_economic_woes_during_COVID19_pandemic
6. “Yemen’s Economic Update – October 2019”, World Bank, October 9, 2019, https://www.worldbank.org/en/country/yemen/publication/economic-update-october-2019
7. “Acute malnutrition threatens half of children under five in Yemen in 2021: UN”, UNICEF, February 11, 2021, https://www.unicef.org/press-releases/acute-malnutrition-threatens-half-children-under-five-yemen-2021-un
8. “Yemen Crisis: What You Need to Know,” UNICEF, https://www.unicef.org/emergencies/yemen-crisis
9. Conference notes, DCF7, held online, January 25-27, 2021, https://devchampions.org/events/The_Seventh_Development_Champions_Forum
10. Conference notes, DCF7.
11. Conference notes, DCF7.
12. Omar Saleh Yaslm BaHamid, “Wartime Challenges Facing Local Authorities in Shabwa”, Sana’a Center for Strategic Studies, October 10, 2020, https://sanaacenter.org/publications/analysis/11641
13. Maged al-Madhaji, “Beyond the Business as Usual Approach: Local Governance In Yemen Amid Conflict Instability”, Sana’a Center for Strategic Studies/DeepRoot Consulting/CARPO, Rethinking Yemen’s Economy White Paper 02, July 2018, https://devchampions.org/files/Rethinking_Yemens_Economy_No2_En.pdf
14. Awlaqi and Madhaji “Beyond the Business as Usual Approach: Local Governance In Yemen Amid Conflict Instability”.
15. Joshua Rogers, “Local Governance in Yemen: Theory, Practice, and Future Options”, Berghof Foundation, 2019, https://reliefweb.int/sites/reliefweb.int/files/resources/BF_Local_Governance_in_Yemen__2019.pdf
16. Scott Wallace, “Local Communities Taking Charge of Development in Yemen”, World Bank, May 22, 2012, https://www.worldbank.org/en/news/feature/2012/05/22/local-communities-taking-charge-in-yemen
17. “Republican decision to establish the Supreme Economic Council headed by the Prime Minister”, Presidency of the Republic of Yemen National Information Centre, April 27, 2008, https://yemen-nic.info/news/detail.php?ID=17314#
18. Conference notes, DCF7.
19. “Al-Mukalla Overview”, Yemen General Investment Authority, accessed March 29, 2021, http://www.investinyemen.org/content.php?c=2&langid=2&pageid=6
20. Conference notes, DCF7.
21. Maged al-Madhaji, “Beyond the Business as Usual Approach: Local Governance In Yemen Amid Conflict Instability”, Sana’a Center for Strategic Studies/DeepRoot Consulting/CARPO, Rethinking Yemen’s Economy White Paper 02, July 2018, https://devchampions.org/files/Rethinking_Yemens_Economy_No2_En.pdf
22. Ali Saeed Azaki, “Hadramawt”, DCF7, Jan 2021.
23. “Rethinking Yemen’s Economy: Developing Yemen’s Fishing Industry”, Sana’a Center for Strategic Studies/DeepRoot Consulting/CARPO, Rethinking Yemen’s Economy Policy Brief 19, 1 April, 2020, https://devchampions.org/publications/policy-brief/Developing_Yemens_Fishing/
24. “The Fisheries Sector in Yemen: Status and Opportunities”, USAID, November 2019, https://pdf.usaid.gov/pdf_docs/PA00WFZJ.pdf
25. YSEA provides various services to its company members, as well as acting as a responsible forum for development initiatives in cooperation and consultation with the artisanal sector as well as the Ministry of Fish Wealth. It also acts as a driver for better practices at sea and during early stages of the supply chain, which will result in better-quality and safer products becoming available on the domestic market. The YSEA made it possible for individuals in the industry to better understand the seafood markets that are receptive to Yemeni seafood products and to develop a strategy that addresses the standard requirements and barriers to these markets.
26. “Developing Yemen’s Fishing Industry”, Sana’a Center for Strategic Studies/DeepRoot Consulting/CARPO.
27. “Developing Yemen’s Fishing Industry”, Sana’a Center for Strategic Studies/DeepRoot Consulting/CARPO.
28. Dr. Saad aldeen bin Talib, interview by the author, February 4, 2021.
29. Conference notes, DCF7.
30. “Annual Statistical Report Book”, The Central Statistical Organization, 2018.
31. Conference notes, DCF7.
32. Conference notes, DCF7
33. Conference notes, DCF7; “Administrative division of Taiz Governorate”, National Information Center census results, 2004, https://yemen-nic.info/gover/taiz/classoff/
34. “Yemen Dynamic Needs Assessment: Phase 3”, The World Bank, 2020, https://openknowledge.worldbank.org/bitstream/handle/10986/34991/Yemen-Dynamic-Needs-Assessment-Phase-3-2020-Update.pdf?sequence=1&isAllowed=y
35. onference notes, DCF7.
36. Conference notes, DCF7.
37. Conference notes, DCF7.
38. “Yemen DNA: Phase 3”, The World Bank, 2020.
39. Conference notes, DCF7.
40. Conference notes, DCF7.
41. “Yemen DNA: Phase 3”, The World Bank, 2020.
42. Rogers, “Local Governance in Yemen”, Berghof Foundation, 2019.
43. Conference notes, DCF7.
44. Moneef al-Shaibani, “Microfinance in Yemen: an Overview of Challenges and Opportunities”, Sana’a Center for Strategic Studies/DeepRoot Consulting/CARPO, Rethinking Yemen’s Economy White Paper 06, April 2020, https://devchampions.org/publications/white_papers/microfinance_in_yemen/