Yemen's political transition, which has been held up as a potential model for conflict-affected states, is due to come to an end with a round of elections scheduled for 2014. Backers of the country's peace plan believe that it will usher in a new, more equitable and peaceful era for Yemen.

But new research from Chatham House's Yemen Forum shows that the structure of the political economy built up under former president Ali Abdullah Saleh has not been significantly affected by the transition, and that the same elite actors who set the country on a path to economic ruin are likely to prevail after the elections.

A new report, Yemen: Corruption, Capital Flight and Global Drivers of Conflict, argues that international factors, including capital flight to tax havens, play a role in encouraging corruption and developmental dysfunction in Yemen, the Arab world’s poorest country. Similar drivers are likely to play a role in blocking reform in the future.

Yemen was the world’s fifth largest source of illicit capital flows among Least Developed Countries between 1990 and 2008, with $12bn leaving the country.  For every dollar spent on aid during that period, $2.7 left Yemen illegally, with politicians routinely using private banking channels to transfer their money into safer, more profitable jurisdictions outside Yemen, often in donor states.  

The chronic problem of capital flight links Yemen to a wider global governance agenda over tax havens (secrecy jurisdictions), an issue that has been steadily rising in importance on the G8 and OECD policy agendas. While Yemen’s elites are able to systematically extract rents from oil, smuggling and aid, and siphon them out of the country, they have little or no incentive to improve the domestic situation, and tax revenues that are needed to fund Yemen’s development are undermined.  

Meanwhile, security interests have shaped the strategy of Western and Gulf states in Yemen in the past decade, in which military aid to the Saleh regime has grown much more rapidly than development aid. However, short-term counter-terrorism priorities are not always consistent with domestic perceptions of political legitimacy, and the US drone strategy – supported by President Hadi – risks undermining Yemen’s stability in the long term.

All too often the focus on 'fragile states' revolves around domestic dynamics and ignores the international factors that incentivize personal enrichment at the cost of good governance. The report recommends that Western donors widen the scope of their political economy analysis to address the interaction between domestic and international factors that cause corruption in Yemen, and that the role of secrecy jurisdictions should be included in the revised Millennium Development Goals, beyond 2015.

The systemic corruption that often impedes the development of impoverished countries is not isolated from the international context.  Recent events in Egypt have clearly shown the extent to which the ‘deep state’ has remained largely intact in Arab countries, and the threat this poses to successful political transitions.

Notes to Editors

Read Yemen: Corruption, Capital Flight and Global Drivers of Conflict

Launch event: Fragile States, Capital Flight and Tax Havens, 25 September 2013.

More from the Chatham House Yemen Forum.

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