Stimulating Business and Employment in Yemen

Yemen is at a crossroads. Two years after the popular unrest led to the ousting of the former President, there is now a coalition government, and the beginnings of a national political transition. March 2013 saw the launch of the National Dialogue Conference (NDC) that brought together political and civil society actors from across the spectrum to formulate a constitution and bring closure not only to the unrest that began in 2011, but to decades of unresolved grievances and conflicts. Expectations are high and much is riding on the outcome of the NDC, not least of which is the future direction of the Yemeni economy. As in most developing countries, the Yemeni private sector consists predominantly of micro, small, and medium enterprises (MSMEs) – over 97% of firms (about 290,000 in number) have less than 25 employees with total estimated employment of over 600,000 workers, including approximately 30,000 women. The inclusion of these MSMEs in Yemen’s economic recovery is critical for social stability as they represent a significant portion of the jobs outside the public sector and a significant source of income for segments of the Yemeni population. Even more crucially, they also represent an important source of potential future job growth. The importance of MSMEs in the recovery is underscored by the unlikelihood of foreign or large scale investment in the current political and security climate. Beyond possible private partnerships in public investment infrastructure or similar large-scale projects, which may take some time to materialize, conventional foreign direct investment (FDI) is not likely to fuel early recovery. On the other hand, domestic firms, including MSMEs, are invested in and closely tied to the national economy, hungry for growth, and have little, or no, option to move their businesses elsewhere. Accordingly, private sector job creation, and particularly in MSMEs, is high on the agenda in Yemen. This is no small task especially given the limitations and restrictions under which MSMEs in Yemen operate. The 2012 rapid assessment of the effects of the crisis on businesses in Yemen found that the large majority of enterprises (over 75% of firms surveyed), including small and medium enterprises, identified electricity, macroeconomic uncertainty, political instability, and corruption, as major or severe obstacles to their business. All of these obstacles increased in reported severity since the last Investment Climate Assessment in 2010. The 2012 assessment of the effects of the crisis on the private sector also found that over 40% of small enterprises reported shedding more than 40% of their labor force and losing over half of their sales by value since the beginning of the crisis in December 2011. These effects were found to be more pronounced for small businesses over the medium and large businesses, likely reflecting the more limited coping mechanisms and shallow financial resources available to small businesses. While this may have improved since the survey last year, it is likely that the vast majority of smaller businesses are still struggling to recover. The government and international donor agencies have begun to respond to the challenge of creating jobs in a private sector dominated by MSMEs with limits on their capabilities and within a challenging business environment buffeted by political and economic uncertainty. The World Bank, supported by the MENA Transition Fund, has launched the Enterprise Revitalization and Employment Pilot (EREP) project piloting a dual approach that tackles the issue from two angles: (i) improving the business capabilities of firms and (ii) facilitating entry of recent graduates into the job market through internships and training. The EREP project aims to inform private sector development policies and programs in Yemen, with a particular emphasis on SME development and employment. This focus on SMEs and employment stems from the conflict-affected nature of the country context and evidence of the importance of SMEs in private sector development. Private Sector Development can be a vital tool in conflict-affected environments. In the World Bank’s 2011 World Development Report (WDR) on Conflict, Fragility and Development and elsewhere, it is now recognized that low GDP per capita and unemployment are major drivers of conflict. This is supported by survey data cited in the WDR. Asked for the reasons why young people join rebel groups or gangs, the biggest share of respondents indicated unemployment as the main reason. The report concludes that the path to longer-term development and peace "is dependent on a healthy private sector". Private sector development and growth is therefore crucial, "especially if creating jobs and incomes is to out-last donor-funded, short-term emergency works." Since in Yemen, as in many other developing countries, the private sector consists predominantly of micro and small, and medium enterprises, this places their competitiveness and growth at the top of the development agenda in fragile and conflict situations. The EREP project will pilot small scale matching grants to finance business development plans for up to 400 firms seeking to improve products and processes or enter new markets. By virtue of design, the project would aim to support mainly small scale firms, but micro or larger firms would not be excluded. The results of these grants are expected to improve business capabilities in terms of improved products and services; upgraded management, manufacturing, or service delivery; and

development of new markets. In the process, these grant activities are expected to improve the familiarity of firms with BDS and their capacity and willingness to procure these types of services in the future, which will be key to their future growth.

EREP’s Outreach activities will be undertaken to reach SMEs, with specific steps to reach women owned and managed businesses. The project will engage with businesses in different sectors or clusters on good management practices, standards and regulations, quality systems and certification, export market requirements, advanced buyer requirements, and technology. Such initiatives may involve workshops and training, technology transfer activities, hosting of exporters and market experts, coordination and organization of BDS providers, and linkages between academic/vocational education and specific sectors on job skill needs. Both this and the internship component would be implemented in two locations, Sana’a and Aden.

Engaging SMEs on upgrading their business skills also creates an opportunity to leverage their interest in improving their capabilities by linking their business development activities with job opportunities for youth. The EREP project will pilot an internship matchmaking program that aims to place up to 400 interns in Yemeni private businesses to help the interns gain practical experience. This should improve their employability and ultimately lead to permanent employment either in their host businesses or elsewhere. The program rests on a matchmaking process that will match vocational college and university graduates applying for internships with firms that have applied to receive subsidized interns. The firms are expected to pay half of the intern’s stipend, and will have the opportunity to interview and select the interns to be placed in their firms. This is intended to increase the likelihood that the host business will utilize the intern for jobs requiring higher level skills and hire the intern at the end of the internship period.

The project also includes a rigorous component for impact evaluation. This is deemed essential to this project due to the relative dearth of impact evaluations on both matching grant and internship programs. In addition, the World Bank and other development agencies have expressed potential interest in scaling up this type of program and developing similar programs in Yemen, so having a body of evidence on the efficacy of these approaches will be invaluable moving forward.