Results from 1B and 2B show that using all savings for direct transfers strongly smoothens the negative impacts on households, yet growth impulses for sustainable development are likely to be limited. In addition, the impact of transfers obviously strongly depends on the targeting and the efficiency of service delivery. In our example of this paper we assume a distribution of transfers according to initial poverty status and population size, ergo the biggest beneficiaries will be the rural households. While direct transfers to the poorest cushion some of the negative short-term growth effects due to higher fuel prices, growth acceleration remains limited. Income multiplier effects are low, import intensity of major consumer goods including food is high, and the positive effect on private consumption cannot compensate for the loss in other GDP components, namely exports.

Direct transfers will not be sufficient to alleviate the negative effects of reform in fuel subsidies. While they can mitigate the short-term negative effect on the poorest of the poor, they may not be fiscally sustainable, and their impact on growth is limited. Therefore, additional measures are needed. Productivity-enhancing investments make an important contribution to development and provide the foundation for poverty reduction and growth. Scenarios 1C and 2C reflect the case in which the remaining savings of the fuel subsidy are used to improve infrastructure such as transport and communication. The remainder of the savings, 127 billion YER in scenario 1C and 153 billion YER in 2C, is invested in the electricity, water, transport, trade, and construction sectors. Improved infrastructure lowers transaction costs; offers the opportunity to integrate economic spaces in Yemen; and creates the platform for a restructuring of productive, industrial, and service value chains, which could be exploited by enabling domestic and foreign private investment. Based on the experience of many other countries, it is assumed that after an initial time lag of two to three years this public investment triggers additional growth in all sectors by creating higher economy-wide efficiencies.

Results show that this type of growth has strong poverty-reducing effects and, in addition to its longterm development effect, can more than mitigate the negative short-term effects of subsidy reform. Growth acceleration and the related increase in returns to factors, especially labor, are the main drivers of poverty reduction. During the initial years, investment-related income, for example, from construction jobs, creates additional income for the poor. Then, when investment-induced direct effects phase out and other sectors start benefiting from new infrastructures, growth accelerates economywide and boosts the incomes of all households, including the poorest. Overall poverty reduction is higher under the accelerated reform scenario and poverty declines sharply by the end of the six-year period considered here, by 6 (accelerated) and 4 (gradual) percentage points. This can be explained by the fact that under accelerated reform, more resources become earlier available for investment, which then translates earlier into economy-wide growth effects. However, in both cases, investment-induced growth benefits rural and urban households if investments are also spread to rural areas.

The combination of direct transfers _and_ investment is therefore a promising strategy for combining subsidy reform with the promotion of sustainable development. Transfers, investments, and resulting long-term productivity effects complement each other and lead to a significant reduction in poverty.

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