Is Yemen Ready for a Social Market Economy?

A billboard advertises Yemen's national dialogue process. (Photo: FP)
A billboard advertises Yemen’s national dialogue process. (Photo: FP)

Two years have passed since disgruntled Yemeni protesters stormed the streets in an attempt to oust then-President Ali Abdullah Saleh. But the dust has not settled yet. The National Dialogue Conference, a six-month-long discussion involving 565 delegates from Yemen’s various factions, is hammering out a set of principles that will guide the country’s new constitution. As a new Yemen is being forged, foreign investors are wondering what lies ahead for its debilitated economy.

At an economic forum months before the Arab Awakening, one of Yemen’s former economic ministers noted “that the reliance on the social market economy system has proven its success in a number of countries with similar conditions to Yemen.” He envisioned a system that would require the state to take on a greater role in the market, providing healthcare, unemployment benefits, and other social welfare programs. However, is the social market economy a viable system for Yemen?

In the Arab world, the state has played a dominant role in economic affairs since the 1950s. In monarchies and republics alike, the state generated oil revenues, relied on foreign aid, and expanded social welfare programs. As the people grew dependent on government handouts, the Arab public sector became bloated and exhibited symptoms of corruption and bureaucratic inefficiency. The old Arab social contract – political exclusion in exchange for social welfare – came at the expense of private sector growth, democracy, and most importantly, people’s dignity. At last, the people rose up in defiance. Now, they are holding their governments accountable.

Over the last two decades, Yemen, too, has relied on oil exports and foreign aid – what political economists call “rents” – to expand the public sector and fund social welfare programs. Unfortunately, Yemeni oil is running out. According to the World Bank, Yemen’s oil reserves are expected to be depleted by 2017. For the social market economy to work in the new Yemen, what the government needs is a sustainable source of revenue.

The Nordic countries are also committed to keeping their citizens wealthy, happy, and healthy, but more importantly, they have the means to do so. For the past three years, Norway has enjoyed the title as the world’s most prosperous country, according to the 2012 Legatum Prosperity Index. The rankings are based on the level of economic opportunities in the 142 countries analyzed, and the index is divided into eight distinct sub-categories that include the economy, entrepreneurship and opportunity, governance, education, health, safety and security, personal freedom, and social capital. According to these measurements, Denmark was ranked second and Sweden third. (Yemen was ranked 134th.)

This is because the social welfare programs in Norway, Denmark, and Sweden are generous and extensive, but these programs did not form out of thin air. Beginning in the late 19th century, the Scandinavian social policies were forged under inclusive and democratic political processes. At first, the policymakers experimented with modest policies focusing only on education and infrastructure.

As economic opportunities grew and the private sector expanded, social policies became more comprehensive as they were bolstered by a larger tax base. Moreover, the Scandinavian policymakers were pragmatic, accountable, and sensitive to the demands of their taxpayers. They have been responsive to economic woes and tackled structural challenges with aggressive economic reforms when necessary.

Although the Nordic welfare system as it exists today cannot be replicated in Yemen, there are still lessons to be drawn from these countries’ experiences. First, the Scandinavian system was built on a sound foundation of inclusive politics and strong local governance. The policymakers listened to the demands of the people, and they debated the proposed policies before coming to a consensus and implementing the programs.

Second, the basic needs of society – education, healthcare, and sanitation – should be addressed first, prior to establishing a wide-ranging social welfare system. With limited time and resources, the government must give its citizens the opportunity to live up to their full potential.

Third, to stimulate sustainable economic growth, the private sector must come first. In Yemen, as elsewhere, this would require a set of legal and regulatory institutions that can foster private-sector led growth and encourage new businesses.

I do believe that governments have the responsibility to take care of their people and offer safety nets for those who need the assistance. Certainly, the society’s wellbeing is a top priority. However, my viewpoints and those of the Yemeni economic minister diverge when it comes down to the role of the state in the market. Whereas he envisions a comprehensive social welfare program implemented by the state, I argue that this is not the right time to burden the government with more responsibilities. To create millions of much-needed jobs and to make the government more transparent and accountable, the public sector should aim to be leaner. To unleash the energy and creativity of the Yemeni people, the government must make way for the private sector to grow.

As the National Dialogue Conference continues, Yemen seems to be on the right track toward political inclusion. What Yemen needs next are investments in an educational system that fosters innovative thinking. In Good Capitalism, Bad Capitalism, Kauffman Foundation’s Dr. Robert Litan stresses the need for “entrepreneurial capitalism,” a type of free market economy that encourages innovation and new businesses. Entrepreneurs are the engines of economic growth. Once the private sector develops and matures, a tax base will naturally emerge to support social welfare programs.

The Nordic welfare system has attracted much admiration, and rightfully so. However, Yemeni policymakers must also understand that a social welfare system is built steadily over time. The new Yemeni state should not bear the full responsibility of lifting the economy from the brink of collapse. Once a successful free market economy is established, the public sector will have the means and tools to follow in Scandinavia’s footsteps. Not unlike the political dialogue currently taking place, the Yemeni economic minister’s vision of a social market system in Yemen will take time.

Abdulwahab Alkebsi is Regional Director for MENA & Africa at CIPE.