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Abstract
This study is part of a collaborative project between the International Food Policy Research
Institute and the Arab Planning Institute in Kuwait on public policy and poverty reduction in the Arab
region. The purpose of this paper is to assess the impact of an increase in public spending in priority
areas on economic growth and poverty reduction in Yemen. To accomplish this objective, the study
builds a dynamic Computable General Equilibrium model to provide a baseline scenario of changes
in the economy and poverty levels in Yemen during the period 1998-2016. Alternative scenarios are
then compared to isolate the specific impact of several policies on poverty. The scenarios assume an
increase in public spending devoted to three priority areas (agriculture, education, and health), which
affect the economy through an increase in sectoral or economy-wide technical factor productivity.
Results of public spending experiments show that targeting increased amounts of public
spending towards education and health services will generate more economic growth and poverty
reduction than increasing public spending solely on the agricultural sector. However, when an oil
sector is a prominent part of the economy, as in Yemen, additional public spending on health and
education does not improve productivity in the oil sector. Therefore, spending on agriculture
becomes the most important channel for poverty reduction and economic growth.
While increasing public spending in priority areas appears to be the best solution available for
the government to reduce poverty during the next decade, the road is still long for Yemen to be able
to achieve its Millennium Development Goals for poverty reduction. Re-allocating public
expenditures from defense to key sectors appears to be an additional option for reducing poverty,
given the financial constraints facing Yemen. However, in the current context of terrorism concerns,
it will be difficult to convince policy-makers to reduce spending on defense and security. Seeking
additional resources from international donors seems to be the only option available to increase
benefits from increased public spending in the priority areas identified and assessed in this study.