76812 April 2013 - Number 91 STIMULATING BUSINESS AND EMPLOYMENT IN YEMEN Nabila Assaf1 large scale investment in the current political and security climate. Beyond possible private Introduction: Yemen is at a crossroads. Two partnerships in public investment years after popular unrest led to the ousting of infrastructure or similar large-scale projects, the former President, there is now a coalition which may take some time to materialize, government, and the beginnings of a national conventional foreign direct investment (FDI) is political transition. March 2013 saw the launch not likely to fuel early recovery. On the other of the National Dialogue Conference (NDC) hand, domestic firms, including MSMEs, are that has brought together political and civil invested in and closely tied to the national society actors from across the spectrum to economy, hungry for growth, and have little, or formulate a constitution and bring closure not no, option to move their businesses elsewhere. only to the unrest that began in 2011, but to decades of unresolved grievances and conflicts Accordingly, private sector job creation, and within Yemen. particularly in MSMEs, is high on the agenda in Yemen. The Transitional Plan for Security and Expectations are high and much is riding on the Development (TPSD) prepared by the outcome of the NDC, not least of which is the transitional government put job creation at the future direction of the Yemeni economy. As in center of the economic transition, linking most developing countries, the Yemeni private MSME development not only to private sector sector consists predominantly of micro, small, development, but to the social equity and and medium enterprises (MSMEs) – over 97% protection agenda. The Joint Social and of firms (about 290,000 in number) have less Economic Assessment (JSEA) undertaken by than 25 employees with total estimated the World Bank, UN, EU and Government of employment of over 600,000 workers, including Yemen to set the socio-economic transition approximately 30,000 women2. The inclusion of agenda emphasizes accelerating private sector these MSMEs in Yemen’s economic recovery is development through policy reforms and critical for social stability as they represent a improved operating conditions and access to significant portion of the jobs outside the public finance for SMEs3. The Mutual Accountability sector and a significant source of income for Framework, a statement of priority reforms and segments of the Yemeni population. Even more investment action committed to by the crucially, they also represent an important Government of Yemen (GoY) and the source of potential future job growth. development agencies, includes commitments to support SME growth and job creation for The importance of MSMEs in the recovery is youth and women during the transition period underscored by the unlikelihood of foreign or (through February 2014). 1 Nabila Assaf works at the Finance and Private Sector Development Unit, the Middle East and North Africa Region (MNSF1), the World Bank. This Quick Note was 3 cleared by Simon Bell, Sector Manager (MNSF1). . For more on the JSEA see Joint Social and Economic 2 The data is from the Building and Establishment Census Assessment Republic of Yemen, MENA Knowledge and of 2004, Central Statistics Office. More recent data is not Learning Quick Note Series, Wilfried Engelke, the World available. Bank. August 2012, #70. The Challenging SME Environment in Revitalization and Employment Pilot (EREP) Yemen: This is no small task especially given project piloting a dual approach that tackles the the limitations and restrictions under which issue from two angles, (i) improving the MSMEs in Yemen operate. The 2012 rapid business capabilities of firms and (ii) facilitating assessment of the effects of the crisis on entry of recent graduates into the job market businesses in Yemen found that the large through internships and training. majority of enterprises (over 75% of firms surveyed), including small and medium The EREP project aims to inform private sector enterprises, identified electricity, development policies and programs in Yemen, macroeconomic uncertainty, political with a particular emphasis on SME instability, and corruption, as major or severe development and employment. This focus on obstacles to their business. All of these SMEs and employment stems from the conflict- obstacles increased in reported severity since affected nature of the country context and the last Investment Climate Assessment in 2010. evidence of the importance of SMEs in private The 2012 assessment of the effects of the crisis sector development. Private Sector on the private sector also found that over 40% Development can be a vital tool in conflict- of small enterprises reported shedding more affected environments. In the World Bank’s than 40% of their labor force and losing over 2011 World Development Report (WDR) on half of their sales by value since the beginning Conflict, Fragility and Development and of the crisis in December 2011. These effects elsewhere, it is now recognized that low GDP were found to be more pronounced for small per capita and unemployment are major drivers businesses over the medium and large of conflict. This is supported by survey data businesses, likely reflecting the more limited cited in the WDR. Asked for the reasons why coping mechanisms and shallow financial young people join rebel groups or gangs, the resources available to small businesses. While biggest share of respondents indicated this may have improved since the survey last unemployment as the main reason. The report year, it is likely that the vast majority of smaller concludes that the path to longer-term businesses are still struggling to recover4. development and peace "is dependent on a healthy private sector".6 Private sector The World Bank and Donors Respond - The development and growth is therefore crucial, Enterprise Revitalization and Employment "especially if creating jobs and incomes is to Pilot (EREP) Project: The GoY and out-last donor-funded, short-term emergency international donor agencies have begun to works."7 Since in Yemen, as in many other respond to the challenge of creating jobs in a developing countries, the private sector consists private sector dominated by MSMEs with limits predominantly of micro and small, and on their capabilities and within a challenging medium enterprises, this places their business environment buffeted by political and competitiveness and growth at the top of the economic uncertainty. The World Bank, development agenda in fragile and conflict supported by the multi-donor MENA situations. Transition Fund5, has launched the Enterprise Improving SME Business Capabilities in 4 Yemen: Literature on small and medium The Plight of Yemeni Private Enterprises since the 2011 Crisis: enterprises (SMEs) suggests that the majority of A Rapid Assessment, MENA Knowledge and Learning Quick Note Series, Andrew Stone, Lina Badawy and Nabila Assaf, new jobs in diverse economies are generated by the World Bank, September 2012, #72. a small percentage of fast-growing SMEs, or 5 In May 2011, the G8 launched the Deauville Partnership “gazelles�. While accounting for some gaps in as a response to the historical changes underway in several available data, being a high employment countries in the Middle East and North Africa region. The Deauville Partnership was launched as a long-term, global initiative that provides Arab countries in transition with a the Deauville Partnership set up the MENA Transition framework based on technical support to: (i) strengthen Fund. For more see: http://www.menatransitionfund.org/ governance for transparent, accountable governments; and (ii) provide an economic framework for sustainable and 6 World Bank, 2011. World Development Report 2011: Conflict, inclusive growth. To support the countries in transition to Security, and Development, Washington D.C.: World Bank. formulate policies and programs and implement reforms, 7 Ibid April 2013 · Number 91· 2 growth SME in MENA is positively correlated grant facilities for new market development. with specific initiatives and activities including These are based on the private sector’s capacity new/improved product development, offering to innovate and help entrepreneurs develop workers formal training, having international new product lines while sharing the risk of quality certification, and having a company investment, and value chain approaches that website.8 address breakdowns in business and market linkages.10 And yet these are precisely the types of practices that smaller firms are particularly EREP and Matching Grants for Business challenged to adopt. Business owners are often Development Plans: The EREP project will reluctant to take decisions to invest in learning pilot small scale matching grants to finance and innovation that are essential to meet business development plans for up to 400 firms market requirements. They under-invest in seeking to improve products and processes or business and technical skills, know-how, enter new markets. By virtue of design, the information and advice and tend to seriously project would aim to support mainly small undervalue the gains from using business scale firms, but micro or larger firms would not development services (BDS) to deal with be excluded. The results of these grants are competitiveness adjustments In many cases expected to be improved business capabilities they simply cannot afford them in the near in terms of improved products and services; term. They also tend to be unconvinced that upgraded management, manufacturing, or the substantially higher initial investments in service delivery; and development of new learning and pre-competitive investments markets. In the process, these grant activities required to grow are justified by expected are expected to improve the familiarity of firms benefits. This is particularly true in fragile and with BDS and their capacity and willingness to conflict contexts where small businesses may be procure these types of services in the future, more isolated and often less sophisticated than which will be key to their future growth. their counterparts in other countries with similar income levels.9 EREP’s Outreach activities will be undertaken to reach SMEs, with specific steps to reach In addition to these typical challenges, private women owned and managed businesses. The enterprises in Yemen face a particularly project will engage with businesses in different difficult business environment and the negative sectors or clusters on good management impact of the 2011 crisis. Overcoming these practices, standards and regulations, quality combined factors will require an intervention systems and certification, export market that can address both the short-term challenges requirements, advanced buyer requirements, of revitalizing businesses after the 2011 crisis and technology. Such initiatives may involve and assuring competitiveness and growth in workshops and training, technology transfer the longer term. The 2011 WDR emphasizes the activities, hosting of exporters and market importance of early results and confidence experts, coordination and organization of BDS building measures which promote jobs and providers, and linkages between business confidence, including initiatives for academic/vocational education and specific private sector recovery. The WDR takes note of sectors on job skill needs. Both this and the approaches that have been effective in fragile internship component would be implemented and conflict situations, including matching in two locations, Sana’a and Aden. Facilitating Youth Employment : Engaging 8 SME Innovators and Gazelles in MENA – Educate, Train, SMEs on upgrading their business skills also Certify, Compete!, MENA Knowledge and Learning Quick creates an opportunity to leverage their interest Note Series, Andrew Stone and Lina Tarek Badawy. the World Bank, September 2011, #43. in improving their capabilities by linking their 9 Private Sector Development in Conflict Regions: Viable Support business development activities with job Options in the West Bank and Gaza, MENA Knowledge and opportunities for youth. The EREP project will Learning Quick Note Series, John Nasir, Ranan Al- Muthaffar, and Rimal Kacem. World Bank, January 2012, No. 52. 10 Ibid April 2013 · Number 91· 3 pilot an internship matchmaking program that performance. The project will seek to aims to place up to 400 interns in Yemeni determine the impact of the internship program private businesses to help the interns gain not only on the employment status of the practical experience. This should improve their beneficiaries after the internship, but also the employability and ultimately lead to permanent impact on specific technical skills. Direct testing employment either in their host businesses or will be used for this and the project will also elsewhere. The program rests on a look at the specificities of the hiring firms. This matchmaking process that will match additional aspect of measuring the success of vocational college and university graduates the internship program is important in applying for internships with firms that have reflecting the benefits of internship programs in applied to receive subsidized interns. The firms creating a cadre of skilled graduates. The are expected to pay half of the intern’s stipend, limited availability of such a group is a and will have the opportunity to interview and constraint oft-cited by firms in investment select the interns to be placed in their firms. climate assessments in Yemen and MENA. The This is intended to increase the likelihood that internship program can also demonstrate to the the host business will utilize the intern for jobs GoY, academic institutions, and the private requiring higher level skills and hire the intern sector a model of private sector-led job training at the end of the internship period. and inform the introduction of other such programs in Yemen. A World Bank evaluation of wage subsidies to provide hiring incentives has found that this The EREP and Public Policies on MSME approach can have positive impact on Development and Employment: The Mutual individual employment but that the improved Accountability Framework (MAF) agreed job outcomes depend on interns acquiring between the Government of Yemen and higher-level skills during the internship and international partners commits both parties to that such programs can suffer from low firm develop policies and programs for the support uptake. 11 Linking the internships with support and development of MSMEs and employment, for business capability upgrading may particularly for youth and women. This project contribute positively towards both of these will contribute to this agenda. The outcomes outcomes. Testing the validity of this and lessons learned from this pilot project will hypothesis will be one of the aims of the inform the technical assistance aspect of the project’s impact evaluation. project and lead to policy notes and analysis to inform public policy in the short and medium Evaluating EREP’s Impact: The project term. Finally, and most importantly, if the includes a rigorous component for impact project is successful – it will be scaled up in evaluation. This is deemed essential to this Yemen to ensure faster PSD growth and more project due to the relative dearth of impact rapid job creation. evaluations on both matching grant and internship programs. In addition, the World Contact MNA K&L: Bank and other development agencies have Gerard Byam, Director, Strategy and Operations. expressed potential interest in scaling up this MENA Region, The World Bank type of program and developing similar Regional Quick Notes Team: programs in Yemen, so having a body of Omer Karasapan, and Roby Fields evidence on the efficacy of these approaches Tel #: (202) 473 8177 will be invaluable moving forward. The impact evaluation component will try and measure the The MNA Quick Notes are intended to summarize effect of the BDP grants program on firm lessons learned from MNA and other Bank Knowledge capabilities (new products, process, and and Learning activities. The Notes do not necessarily reflect the views of the World Bank, its board or its markets developed) and, if reliable data can be member countries. collected, on actual sales and export 11 Youth Employment Programs – An evaluation of World Bank and IFC support. IEG, World Bank. September 2012. 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