Thursday, January 22, 2015

How Will Political Instability Impact Yemen's Economy?

Yemen’s investment opportunities were not necessarily strong before the recent ousting of the pro-American president by the Shia faction Houthi. That investment climate is even more uncertain now. As one of the world’s least developed nations the loss of investment could push the country further into poverty which contributes to greater in-fighting and instability making tribal regions open to foreign influence at the expense of a centralized government.

The long-lasting impact of investment opportunities will make themselves more apparent in the future as the nations tribes and factions determine what routes they are going to take in settling disputes. Any long-lasting heated conflict will likely ensure that investors do not put their money into a politically unstable nation heightening local fighting over resources. Land grabs and resource confiscation could lead to civil war.

Yemen has always been seen as a risky place for international businesses investment so recent instability shouldn’t come as a surprise.  According to the State Department there are opportunities for investing in sectors like energy, infrastructure, fishery, and real estate (1). The problem is that the government has been fairly unstable for a long time and officials can be influenced through bribery, clansman, and religious loyalties that raise legal risks.

As additional political instability takes precedence in the country investment opportunities for locals will dry up as businesses keep their distance and take a "wait and see" attitude. A study that reviewed 37 countries from 1979 to 2000 found that economic and social-political instability seriously hampered private investment (Escaleras & Kottaridi, 2014). Such decline in investments naturally threw a wet blanket on growth and prospects of the country.

Investors are unlikely to engage in further short-term investments within the country. Private investment will slow leaving a vacuum politically and economically that will likely be played out over Yemen’s natural resources like oil. Foreign investors may not be willing to wait for a country that will be in a protracted conflict. The end result is that Yemen will miss some opportunities and be added to the list of Middle East economic casualties.

Escaleras, M. & Kottaridi, C. (2014). The joint effect of macroeconomic uncertainty, sociopolitical instability, and public provision on private investment. Journal of Developing Areas, 48 (1).

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