Oil Curse in Yemen: The Role of Institutions and Policy

This paper studies the natural resource curse (NRC) hypothesis as it applies to Yemen. There is evidence that Yemen has in fact not been immune from the NRC symptoms as identified in the literature. The country’s economic, social and political structures have changed ever since oil was discovered. Evidence shows that the positive contribution of oil in the country’s development was far from satisfactory. There is also evidence that procyclical government policies have exacerbated the unfavorable effects of oil on the country’s development. In addition, bad (or non-existent) institutions led to mismanagement of oil wealth. Finally, the political economy of oil (rent-seeking) has prevented the development of quality institutions and resulted in political instability and conflict. Although there is no one-recipe for solving Yemen’s problems, the government may be able to reduce the NRC symptoms by implementing carefully-designed countercyclical, rule-based economic policies and increasing transparency and the role of institutions in managing the oil wealth.