Yemen's domestic economy is largely dependent on oil, which accounts for about 85 percent of export earnings and 75 percent of government revenue. Yemen's oil reserves, however, are small in comparison to its larger oil-producing neighbors, such as Saudi Arabia. Oil reserves are concentrated in the north and south, with the southern field of Masila being the largest, followed by the Ma'rib field, also in the south. Agriculture, the second largest sector, accounts for 20 percent of real gross domestic product (GDP) and employs over half of the labor force . Higher oil prices fueled GDP growth of 2.8 percent in 1999 and 6.0 percent in 2000, and that upward trend is expected to continue in the coming years, barring a drop in oil prices.
Yemen entered the 20th century as part of the Ottoman Empire, administered by officials appointed by the Ottoman sultan based in Istanbul. For most of the 20th century Yemen was divided into 2 separate states: South Yemen and North Yemen. South Yemen was carved out by the British, who had established a protectorate area
In 1990, after years of hostilities and occasional conflict, north and south Yemen formally united to form the Republic of Yemen. Since unification, the country has struggled to overcome the legacy of the civil war that broke out between the north and the south in 1994, and to reform the economy. In 1995, Yemen launched an economic reform program in coordination with the International Monetary Fund (IMF). By the end of the 20th century, however, Yemen still had not created a vibrant economy or diversified its sources of income. As a result, Yemen remains dependent on oil revenue and on international lending agencies for financial assistance.
Yemen's economy is an underdeveloped free market economy with limited state control. Despite political violence, it has a fairly stable multiparty system and enjoys the support of the United States and the European Union. The economy's main exports are cotton, coffee, and dried and salted fish, but oil remains by far the largest single contributor to the national economy. Agricultural products account for one-fifth of GDP. Industry and mining, which are concentrated in Masila in the north and Ma'rib in the south, account for approximately one-fifth of GDP. Limited manufacturing, retail trade, and services are centered in the urban centers of Sanaa and Aden. Because of its limited productive capacity and industrial base, the country is heavily dependent on imported goods and on foreign debt relief and assistance to sustain its struggling economy.
Neither the agricultural sector nor the oil sector is capable of providing enough jobs to counteract long-standing problems with unemployment, which is exacerbated by rapid population growth. Unemployment reached 35 percent in Yemen during 1998, while the unemployment rate in the United States was just 4.2 percent in 1999. Despite the government's efforts to address the problem, unemployment will continue to present a serious challenge to the government for a long time to come.
Yemen's economic difficulties—sluggish GDP growth and high unemployment—have traditionally been offset by remittances from Yemeni workers abroad, and foreign aid from neighboring countries, especially Saudi Arabia. The Saudi government, however, both expelled Yemeni workers and cut off aid in 1990, due to Yemen's support for the Iraqi invasion of Kuwait that started the Gulf War. The country has also sustained a heavy foreign debt as a result of the 1990 unification, which, at its peak in 1990, was valued at almost twice the gross national product . Unable to make its debt payments, Yemen was forced to reschedule its debt to the Paris Club (a grouping of country creditors that extends loans to poor developing countries) in 1996. However, foreign assistance in the form of grants and loans, mainly from the United States and Europe, has alleviated the country's debt burden.
Corruption is a major problem in Yemen, and is especially so in the overstaffed and underpaid government bureaucracy. Chief illicit practices include soliciting bribes, evading taxes, and nepotism (favoring relatives, especially in hiring). The government has taken a tough stand against corruption, but with little success.