EXCERPT

Losing Yemen

How this forgotten corner of the Arabian Peninsula became the most dangerous country in the world.

In the final presidential debate, more than 11 years after the Bush administration launched its global war on terror, President Barack Obama identified "terrorist networks" as the gravest national security threat facing America. But Yemen, which is home to the most dangerous al Qaeda affiliate, has attracted precious little attention from either of the candidates in this election. In the recent foreign-policy debate, for instance, Yemen was mentioned only once; compare that to Iran, which was name-dropped 47 times.

In many ways, Yemen has become this war's laboratory, a place where the United States can test new ways to fight al Qaeda. In December 2009, Obama opened the campaign with a strike on what U.S. military planners believed was an al Qaeda training camp in southern Yemen. The cruise missiles equipped with cluster bombs hit their target, killing 55 people in minutes of bombing. But instead of the al Qaeda camp the United States thought it was hitting, it had bombed a Bedouin village where some al Qaeda fighters were staying. Just over a week later, on Christmas Day 2009, a would-be suicide bomber dispatched by al Qaeda in the Arabian Peninsula (AQAP) attempted to bring down Northwest Airlines Flight 253 over Detroit.

In the three year since, AQAP has repeatedly tried to strike the United States -- with a pair of parcel bombs in 2010 and another underwear bomb that was uncovered in early 2012 -- while the United States has responded with ramped-up drone and air strikes along with increased economic aid to the central government in Sanaa. AQAP has also been active on the ground, briefly taking over and administering a number of towns in the southern part Yemen that had drifted beyond government control during the 2011 uprising that forced President Ali Abdullah Saleh to step down from power in exchange for immunity.

With covert military backing -- and the most generous aid package ever from Washington -- the Yemeni military has managed to regain much of the territory it had lost. But it did not defeat al Qaeda. The fighters were not arrested and they were not killed; they simply faded back toward the mountains where they have been living and plotting for years.

If U.S. assistance pulled Yemen back from the brink this time around, it's only because the United States' love-hate relationship with Sanaa has allowed al Qaeda to regroup time and again as Washington trained its sights elsewhere. Indeed, the story of al Qaeda's stubborn persistence in Yemen's tribal hinterlands is the story of Washington's tortured relationship with Saleh -- and its attempt to make up for past mistakes by bolstering former vice president Abd Rabbu Mansour Hadi, who has taken over in his stead, with aid.

In November 2005, Saleh -- who could have had no inkling of the unrest that would oust him 6 years later -- traveled to Washington for a state visit. He had been angling for an invitation for more than a year, but with al Qaeda in Yemen seemingly in check there was none of the urgency there had been in the hectic days after September 11, when the United States had heaped aid on the Yemeni president in an attempt to contain the terrorist threat. Now that it appeared to be winning on the terrorism front, the George W. Bush administration had shifted its focus to democracy promotion.

Thomas Krajeski, the U.S. ambassador in Sanaa, and analysts at the State Department's Bureau of Intelligence and Research spent months attempting to figure out how best to encourage Saleh to reform. As with the Egyptian jihadis of the 1990s, the Americans found that the Yemeni leader blew hot and cold. He was engaging and concilia­tory in private but all too often combative in public. Which was the real Saleh? Was there a real Saleh? Paid informants with inside access to the president continued to peddle stories of Saleh joking about his ability to pull the wool over the eyes of the Americans.

Something needed to change; that much, at least, was clear. Krajeski's private warnings hadn't done any good. The U.S. ambassador repeated them and Saleh nodded, but there never seemed to be any action. Corruption had spiraled out of control as military officers bought diesel at the subsidized rate before smuggling it out of the country to sell at a premium. Individuals in the National Security Bureau, the new intelligence agency the United States had pushed for in 2002, hoping that it would replace Yemen's jihadi-riddled Political Security Organization (PSO), were just as deeply involved in the diesel smuggling as their counterparts in the PSO. So too were Yahya Saleh, President Saleh's nephew, and his officers in the Central Security Forces, which also received U.S. funding and training.

Corruption had been a problem in Yemen for decades, as Saleh's family and inner circle seized land across the country for their vari­ous business interests. But the old generation of careful crooks, the men who had come up with Saleh, had given way to spoiled youngsters who believed they were entitled to whatever they could grab. What the United States had once been willing to overlook in exchange for Yemen's cooperation on counterterrorism now became a sticking point.

In early October 2005, a month before Saleh's trip to the United States, Krajeski went public with his criticisms and told an opposition newspa­per that democratic reform in Yemen had "stopped." If the rookie ambassador was looking for a response, he didn't have long to wait. The next day, Yemen's stable of official columnists and journal­ists tore into him in newspapers and on state television, warning Krajeski against interfering in Yemen's internal affairs. The con­centrated effort and near unanimous message suggested a direc­tive from the top. The United States, it seemed, finally had Saleh's attention.

But Saleh never quite got Krajeski's message. For all his signaling and attempts at subtlety, Krajeski apparently failed to communicate the shift in U.S. policy to the man who mattered most. When Saleh left for Washington in early November, he expected to be rewarded as a close and indispensable ally. After all, in the four years since his first visit with President Bush, he had done everything the United States wanted. He had killed or imprisoned all the al Qaeda leaders from a list the CIA had given him in 2001 and there hadn't been a terrorist attack since the MV Limburg bombing three years earlier. Every time a security threat popped up, he dealt with it. Earlier in 2005, when a blustery cell of militants emerged, threatening the U.S. Embassy in Sanaa and forcing it to shut down briefly, Saleh's troops had arrested the men responsible within days. "I respond to you immediately when you need something," Saleh told the embassy.

The calculating Yemeni president had several ideas as to how Bush could repay him for his vigilance and quick action. In Saleh's mind, the Washington trip was a shopping spree, and he landed in D.C. with a wish list. Another war against the Huthi separatists in the north -- the third in as many years -- was just getting underway, and the president needed to replenish his armory. He had helped the Americans with al Qaeda, and now he wanted help with his own terrorists.

On the first day of his three-day trip, Saleh got a taste of just how much things had changed. Secretary of State Condoleezza Rice informed him that Yemen was being suspended from the Millennium Challenge Corporation, a new funding organization that Bush had established to tie aid to reform. The cut would cost Yemen $20 million in aid. Ill-prepared for the meeting, the Yemeni presi­dent could only sputter in frustration as Rice rapped him over the knuckles on corruption and lack of reform. If nothing changed, Rice continued, the United States would not view Saleh as a legitimate can­didate in the 2006 presidential election. Krajeski had been say­ing the same thing for months, but Saleh had never quite believed the United States was serious. Seemingly overnight, the United States had changed its rationale for foreign aid. Al Qaeda, the United States explained, was yester­day's problem.

The next day, Saleh had a meeting at World Bank headquar­ters, just a couple of blocks from the White House on Pennsyl­vania Avenue. World Bank officials wasted little time. Yemen, they said, had regressed significantly on key indicators. As a result, the bank would be slashing aid to the country from $420 million to $280 million. Just like Rice, they cited widespread government corruption as the deciding factor.

Two days later, on the flight home, Saleh finally lost it, scream­ing at aides and firing his entire team of economic advisers within minutes of takeoff. The group of young, Western-educated Eng­lish speakers couldn't wait to get back to Sanaa and away from their fuming boss. "It was horrible," one later recalled. "The longest plane ride of my entire life."

Weeks later, when Saleh had calmed down, he rehired most of them. "Do you really think that if Freedom House and the rest changed our ratings, it would make any difference?" he asked one of the young men, who, in the messy world of family politics, was related to Saleh's newest wife.

"Of course," the nervous aide responded. "That was the reason they cut it in the first place."

Saleh smiled and shook his head. "The Americans give money to who they want when they want."

The trip was a turning point in U.S.-Yemeni relations. By the beginning of 2006 -- as U.S. security aid dipped to a new low of $4.6 million -- the United States decided that al Qaeda in Yemen was no longer a threat and it could put its money and resources elsewhere. Absent al Qaeda, Yemen was just one more poor country.

But it wouldn't stay that way.  On February 3, 2006 -- weeks after Saleh's disastrous Washington visit -- 23 al Qaeda suspects tunneled out of a maximum-security prison on the outskirts of Sanaa and into a neighboring mosque, where they said their morning prayers and then walked out the front door to freedom. Just like that, al Qaeda was back.  The escape was AQAP's genesis moment, the seminal event that birthed years of attacks.

The United States quickly concluded that the prisoners must have had inside help. The odds of them digging 50 yards from a prison cell to the women's bathroom of a neighboring mosque were simply too great. The prison, after all, was run by the PSO, the same organization that had produced Abd al-Salam al-Hilah, the Guantánamo Bay detainee who had once tipped Osama bin Laden and Ayman al-Zawahiri off to a traitor within their ranks. Analysts at the CIA and FBI could only guess at the extent of the con­spiracy. We don't know "how many people were involved," one official admitted. Some in Washington suggested that the prison break might be Saleh's response to the aid cuts four months earlier. Others speculated that sympathetic guards had simply ignored evi­dence of digging.

Regardless of who was behind the jailbreak, al Qaeda was once again a substantial threat and over the coming months the United States was forced to redirect its attention and aid dollars to Yemen.  The Bush administration made plans to reinstate Yemen to the MCC. But the rehabilitation was short lived. In October 2007, Saleh announced that he had struck a deal with Jamal al-Badawi, one of the escapees and a main suspect in the USS Cole attack seven years earlier, which had killed 17 U.S. sailors.

Shocked that Yemen would release someone who had killed American sailors and was on the FBI's most wanted list, Bush dispatched his top counterterrorism adviser, Frances Townsend, to Yemen. In a meeting at his winter residence in Aden, Saleh tried to reas­sure Townsend. Don't worry about Badawi, he told her. "He is under my microscope." Over lunch, Saleh explained that he had been communicating with Badawi for months-information he had not previously shared with his American allies. Two weeks ago, Saleh continued, he had personally met with the fugitive for a frank discussion. "Badawi promised to give up terrorism and I told him that his actions damaged Yemen and its image," Saleh said. "He began to understand."

Townsend listened tight-lipped as Saleh described the deal as a sort of house arrest. Yes, Badawi was living and working on his farm outside Aden, but the government was monitoring him closely. He won't commit any more crimes, Saleh pledged. 

Saleh's promises convinced no one, and back home on the campaign trail, Republican presidential hopeful and former New York City mayor Rudolph Giuliani seized on the incident and began calling for Yemen to stop siding with terrorists: "As a first step, I urge the U.S. government to cancel the more than $20 mil­lion in aid scheduled to be delivered to Yemen." Days later the United States did just that, suspending Yemen from the MCC a second time.

Once again, U.S. funding to Yemen dipped in punishment. But 2008 was also the year al Qaeda first issued Sada al-Malahim, its online magazine of propaganda and religious justification, and in September a seven-man cell launched a brazen early-morning attack on the U.S. Embassy in Sanaa. Only the quick thinking of a local Yemeni security contractor, who lowered a metal drop bar in front of the speeding car moments before he was shot and killed, saved the embassy from being breached. Instead of exploding into the embassy's front gate, which would have allowed five gun-wielding attackers into the compound, the car detonated on the street near a line of Yemenis seeking visas. On the campaign trail in the United States, then Democratic nominee Barack Obama told reporters that the United States had to do more in Yemen. Once more, U.S. money and aid began flowing to Saleh and his family in Yemen's security services.

After inheriting Yemen's aid rollercoaster, the Obama administration soon established a new high in 2009 and then again in 2010 -- until popular protests forced the United States to cut funding and abandon Saleh altogether in 2011.  Earlier this year, when Hadi, Saleh's long-time vice president, took over as part of a shortsighted political deal that gave Saleh immunity, the United States restarted its aid package to Yemen.

For the third year in a row, the U.S. set a new high in aid to Yemen -- this year it is $337 million -- and for the third year in a row AQAP set a new high with the number of fighters within its ranks. Current estimates range from 1,000 to a few thousand.

After more than a decade of on-again, off-again aid to Yemen, the al Qaeda branch in Yemen is stronger than it was on September 11, 2001. The money the United States has spent in Yemen has enriched dozens and the missiles it has fired into the country have killed hundreds -- and yet AQAP continues to grow.

-/AFP/Getty Images

Democracy Lab

Finding the Right Take-Off Speed

There's no one-size-fits-all approach to transition economies. But slow and steady often wins the race.

The following is excerpted from The Quest for Prosperity: How Developing Countries Can Take Off by Justin Yifu Lin. Lin, was until quite recently, the chief economist of the World Bank (2008-2012) -- and probably the first western-trained economist to serve a leadership role in the People’s Republic of China. Oh, did I neglect to mention his dramatic past?

Lin was born in Taiwan and while serving in the Republic of China’s army as a captain in 1979, defected to mainland China just as Deng Xiaoping was opening the country to capitalism. Received warmly, he rose quickly in academic ranks. He later studied in the United States (University of Chicago, Yale) where he was rejoined by his wife and children whom he’d left behind in Taiwan. Lin is the founding director of the China Centre for Economic Research and Beijing University.

The new book is especially interesting because it outlines a hybrid “structuralist” approach to the transition from planning to free markets. Perhaps not surprisingly, Lin contrasts the structuralism with both the “shock therapy” approach (that largely worked in Poland, but failed miserably in Yeltin’s Russia) and the neo-liberal Washington Consensus (stabilize prices, get market incentives right, privatize) that has a mixed record in developing countries.

You can read Lin’s book as a fine economist’s analysis of the growing pains of developing countries. Or you can read it as the product of China’s own pragmatic turn to capitalism. Actually, I’d suggest both.  -- Peter Passell 

Big Bang or Gradualism?

A crucial issue in economic transition has been the choice of strategies for sequencing reforms. Two broad options -- each with some nuances -- have been implemented by Eastern European and Asian countries in the move from plan to market: the Big Bang, or “shock therapy,” and the gradualist approach.

Proponents of the Big Bang wanted to eliminate government distortions in socialist and developing countries, setting up well-functioning market systems in their place as soon as possible. They expected that market competition and quick privatization of state-owned enterprises would increase efficiency.

Post-communist leaders in Poland were among the most vocal proponents of that approach. When Jeffrey Sachs (then an economics professor at Harvard) was invited to advise the reformist movement Solidarity in 1989, he was told: Give us the outline that you see fit, but make it a program of rapid and comprehensive change. And please, start the outline with the words: "With this program, Poland will jump to the market economy."

Perhaps because former Polish trade union leader Lech Walesa was an electrician before he entered politics, he had a lightning approach to policies that seems to have served him rather well. Only four years after creating Solidarity (the Soviet Bloc’s first independent trade union) in the suburbs of Gdansk in 1980, he challenged the military regime of General Wojciech Jaruzelski and was awarded the Nobel Peace Prize. His charisma and strong support from the Western world helped him topple the Polish government, and he became president in 1990. He brought with him a team of radical reformists, such as the brilliant economist Leszek Balcerowicz, who served as deputy premier and minister of finance in the first Solidarity-led government after the fall of communism.

Following the wisdom of 17th century Japanese martial arts master Miyamoto Musashi, who said, “You win battles by knowing the enemy’s timing and using a timing which the enemy does not expect,” Balcerowicz argued persuasively that the short period of euphoria and “extraordinary politics” after the demise of communist regimes presented a unique opportunity in which reformers had to move rapidly to put in place new democratic and market-oriented institutions and to dismantle the massive structural distortions and disincentives of the socialist economy. He therefore made a strong case for the Big Bang on both political and economic grounds.

Politically, he asserted that economic reforms were easier to adopt and implement through a comprehensive program than through a lengthy process of piecemeal and often painful measures, which would leave more time for old-liners and conservative forces with the opportunity to oppose it. Economically, Balcerowicz said, radical reform was more likely to control inflation, signal a new era, build confidence and generate new structures from which there could be no turning back. “Delay will only worsen the macroeconomic situation,” he said, while “a gradual or mild stabilization program will most likely fail to overcome inflationary inertia and expectations.”

That same Big Bang thesis was advanced by many others, including Swedish economist Anders Aslund, who differentiated between “the developed socialist countries of Eastern Europe and the former Soviet Union” and “developing socialist countries like China and Vietnam.” Aslund first observed that Western-style democratization appeared to have been a precondition for a successful transition to a market economy. He then went on to suggest, “There are compelling reasons not only for the rapid destruction of the old order, but also for the speedy construction of a new democratic state.”

The slower the destruction of the old system, he argued, the more trouble and pain the transition would bring: “Given time, communist-holdover officials will find ways to transform their remaining power into property (whether by outright thievery or more subtle methods,) thus exacerbating inequalities, undermining public confidence in the state, and preparing the ground for potentially undemocratic populism.”

Such a prescription did not take into account the underlying viability problem in the economic system. Decades of central planning and forced industrialization created a massive structure of non-viable firms in the prioritized heavy industries. For the rapid transition to work, the economy would need to effortlessly reallocate resources from those industries to a market-oriented structure. However, equipment and workers in the prioritized heavy-industry sector could not be relocated immediately (or at all) to light industries and the service sector. The result would have been a collapse of the priority sectors, mass unemployment, and social and political instability.

A more nuanced approach to reform, quite different in practice from the typical Washington Consensus prescription but inspired by it, was advocated by a group of leading macroeconomists who argued that the economic transition from communism should proceed in sequence: stabilization, price liberalization and privatization had to be implemented rapidly, whereas restructuring should take time (a decade or more).

Almost all Eastern European countries entered the post-communist era with substantial fiscal deficits and excessive money creation. Drawing heavily on the Latin American experience with stabilization programs, the macroeconomists suggested that budget deficits and money creation had to be brought under control at the outset of transition and that prices had to be liberalized, because price controls would only perpetuate the shortages recorded under socialism. They also suggested that inflationary shocks be contained, where necessary by monetary reform involving partial confiscation of nominal assets.

Unfortunately, neither the Big Bang nor the more nuanced version of the Washington Consensus worked smoothly for post-communist countries. The prevailing wisdom embodied in their prescriptions often failed, and some countries could not come up with viable strategies for managing their structural transformation and guiding their industrial and technological upgrading. In Russia, for instance, most prices were liberalized in January 1992, but macroeconomic stabilization was not implemented because there was not enough political support among key policymakers for the unemployment that would have resulted.

In April 1992, the People’s Congress instructed the Russian government that the country’s priority was to “stabilize production,” meaning propping up employment in state firms through credit (and thus money) creation. As a result, inflation never fell below nine percent a month in 1992.

But in June the Supreme Soviet approved a plan for fast privatization. State capital was quickly sold at bargain prices to a small group of people, subsequently known as oligarchs, who had financial assets or political connections and could reap extraordinary gains. That, in turn, created new political-economy problems, which Russia is still struggling to address nearly two decades later.

Olivier Blanchard (an economist at MIT), who had recommended the nuanced version of the Big Bang, acknowledged that ambitious and clever plans have been disfigured by political compromises, bogged down in political fights, tied down by bureaucratic bottlenecks and foot dragging, sabotaged by those who would lose most from their implementation. The basic lesson is clear: privatization is not about the distribution of assets belonging to “the state,” which can dispose of them as it wishes, but about the distribution of assets with many de facto claimants: workers, managers, local authorities, central ministries, and so on. Unless these claimants are appeased, bribed, or disenfranchised, privatization cannot proceed.

The new structural economics that I introduce in this book provides an alternative explanation for the failure of both the Big Bang and its nuanced version.

Socialist economies that had adopted strategies inconsistent with their comparative advantage had a large number of non-viable enterprises in the government’s priority sector. Without government protection and subsidies, most of these enterprises were unable to survive in a competitive market. In some small post-communist countries such as Estonia, Latvia, and Lithuania that had only a limited number of such enterprises, the output and employment of those enterprises were limited and Big Bang reforms could realistically eliminate all government interventions at once.

With the abolition of government protection, these non-viable enterprises became bankrupt, but given their small relative contribution to the economy, the “transition costs” were small. The originally suppressed labor-intensive sector thrived, especially with inflows of foreign direct investment, and newly created employment opportunities in these industries could absorb labor and compensate for the losses from the bankruptcy of non-viable firms. As a result, the economy could grow soon after implementing the shock therapy, with a smaller initial loss of output and employment.

In larger countries, where the number of non-viable firms was large, forceful application of the shock therapy resulted in large-scale bankruptcies and mass unemployment. To avoid such dire consequences and sustain the non-viable enterprises in the advanced industries for political or military purposes, the governments had no choice but to attempt the nuanced approach offered by the leading macroeconomists: immediate stabilization, price liberalization and privatization, but postponement of the restructuring.

But this approach was logically inconsistent and self-defeating. Stability could not be achieved if prices were liberalized and non-viable enterprises were privatized while the restructuring was postponed. First, most enterprises in the government’s priority sector had monopoly power and would have raised their prices once controls were lifted. Second, the private entrepreneurs had more incentive than the state-owned enterprise managers to use the viability issue as an excuse to lobby for more subsidies from the government because they could directly benefit.

However, government revenues declined in the aftermath of the transition. Rather than the stabilization its proponents intended, this approach could lead to hyperinflation in the transition. Indeed, that was exactly what happened in many Eastern European and former Soviet Union countries. The result was (in the words of NYU economist William Easterly) “shock without therapy.” Easterly has also documented the failure in Eastern European transition economies and provided evidence that it was part of a broader stagnation of developing countries that adhered to the Washington Consensus.

A different and much more effective strategy for economic transition recommended by the new structural economics is a gradual, pragmatic, dual-track approach that recognizes the endogeneity (self-perpetuating nature) of the distortions and the viability issue of enterprises in the priority sectors. It recommends that the government provide some transitory protections to non-viable firms in the priority sector to maintain their stability in the transition, but to liberalize private firms and FDI and facilitate their entrance into sectors in which the country has comparative advantages so as to improve resource allocation, tap the advantage of backwardness and achieve dynamic growth.

The capital accumulation resulting from rapid growth in the new sectors will make many firms in the old prioritized industries viable. Dynamic growth will also create the necessary conditions, including financial resources and job opportunities, for removing the distortions in a manner reminiscent of Kaldor’s (Nicholas Kaldor, the great Cambridge economist) characteristics of 20th century growth, which implies that the policy change will increase the total social welfare and that the losers will be compensated for their losses so no one in the economy loses from the policy change. In this way the policy resistance to the reform can be minimized.

The process is one of opening markets, while also providing government support to facilitate the growth of new industries. For example, special economic zones are fully compatible with this gradualist approach: reforms and supportive infrastructure are established initially in limited geographic areas and support specific sectors during the economic transition. Elements of this approach have been implemented successfully in transition economies around the world.

Reprinted with permission from Princeton University Press. All rights reserved.

Photo by Neha Paliwal