The ‘Oil Curse’: Yemen’s Forgotten War, Economic Diversification, and OPEC strategies

As the war in Yemen drags on between the Saudi-led coalition and the Houthi armed group, leaving over 16,000 casualties in its wake, Executive Editor Nathan Appleman met with Dawud Ansari, researcher at DIW-Berlin and founder of EADP, who stresses the importance of the ‘resource curse’ as a determinant of the Yemeni state failure and civil war.

The Governance Post: First of all, what is the resource curse (or ”paradox of plenty”) and why should it be relevant not only for resource-rich countries but also for net-importers of fossil fuels (i.e., the West)?

Dawud Ansari: The resource curse is a phenomenon that became quite popular in economics more than 20 years ago. It was around that time that researchers observed a rather strange phenomenon happening in resource-rich economies: While you might expect these countries to benefit from their initial endowment, be it in oil, gas, metals, or anything else, we see that this is not the case and that many perform actually quite poorly on a number of economic and political indicators. This is of course very counterintuitive: Let’s say you found a treasure in your backyard – you would clearly assume that you will benefit from it, why should there be any harm?

Today, there is a fairly wide consensus that institutional quality is the main driver of the problem. There are some purely economic effects that threaten a resource-rich economy, such as a (real) exchange rate appreciation or harm from volatile prices, but sound long-term economic policy could mitigate these risks.

Nigeria, Venezuela, and a number of Middle Eastern oil producers are prominent examples of countries on which this curse has befallen. The resource curse can also yield somewhat more indirect effects and has, to varying extents, been linked with regional instability, war refugees, or toughened conditions for global climate governance.

TGP: Even though there is an observed pattern, most of these countries were also subject to pre-existing conditions that already made them worse-off before the discovery of resources such as oil and gas. Can we really affirm that resources cause political turmoil and/or economic instability?

DA: There was a time when researchers thought resources might be the real cause behind those countries lagging behind. Of course, they aren’t. Many of the economies that are subject to the resource curse had already been suffering from insufficient rule of law and governance, especially in the Global South. Typically, this is also linked to a colonial past, as former colonies hardly had any chance to develop sound institutions.

If a government is weak, or possibly even if there is no government at all, then resources keep different parties competing for their control and the potentially large windfalls, e.g., from their embezzlement. This, in effect, constitutes a vicious cycle, as resources can worsen institutions, which in turn makes the country all the more vulnerable to the curse.

TGP: We also observe that countries that have experienced civil unrest, war, and varying degrees of state failure are often found also to be endowed with natural riches. As an economist, how do you explain that relationship?

DA: Although economics cannot explain everything, there undoubtedly is a direct link between both. The most obvious relationship is that larger resource endowments increase incentives for competing groups to take control over a territory, sometimes through violent means. Also, governments can easily misuse resource revenues for buying off dissents or engaging in patronage. Of course, government transparency and effectiveness are not desirable in these cases, as patronage and misappropriation would become harder to realise.

Another point is that short-sighted decision-makers are not encouraged to diversify the economy, which becomes completely dependent on natural resources. What happens then is, as soon as there are any fluctuations in resource revenues, the already-fragile state system is exposed to high pressure. Because of dwindling budgets, the state can no longer ensure a reliable patronage system, which results in different factions competing against one another for whatever reserves are left. This can effectively lead to the emergence of violent confrontations and, further down the line, war and state failure. Again, this is not to suggest that war is the pure outcome of collapsing resource revenues, but it is to a large extent driven if not triggered by it.

TGP: In your research on the resource curse in Yemen, you do find similar results to those enunciated in the general literature. Still, Yemen is a relatively small oil-exporter. How do you explain that it was so vulnerable to the curse?

DA: Yemen is a particularly interesting case. The ongoing civil war, known as the ‘Forgotten War’ due to the lack of media attention it attracts, has left Yemen devastated. The country hosts world’s largest cholera outbreak with more than 500,000 cases, adding to the large-scale humanitarian crisis. And to some extent, these developments have their historical roots in corruption and mismanagement resulting from the Yemeni resource curse.

Although supply has always been tiny compared to Yemen’s neighbours, it accounted for more than 60% of both GDP and government revenues in certain years. Yemen’s hydrocarbon revenues were sufficient to create a large patronage network and a reason for conflict, but they were not enough to reach ordinary citizens – a quite toxic combination.

In these regards, the Yemeni experience is also a very special one, because we found that resource-curse-related symptoms could be observed even before the official discovery of oil. The reason for this was that a large share of the Yemeni population had lived and worked in other Gulf countries, particularly Saudi Arabia. The large remittances, which composed a major share of Yemen’s economy in the 1970s and 1980s, had a similar effect to that of resources: We observe the same patterns of adverse sectoral change, away from productive industries, and an increasingly-corrupt state apparatus.

Hence, the case of remittances in Yemen supports the argument that the whole phenomenon does not limit itself to resources, but it may rather result from any kind of external income that suddenly changes certain key aspects of the economy. So, coming back to introductory metaphor, it’s not about the treasure in the backyard per se, but about the discoverer not being able to handle its value properly.

TGP: So what exactly can be done to correct these institutional failures and revert back to a pre-resource curse environment in the case of Yemen?

DA: Unfortunately, Yemen is a case where it is simply too late to tackle the roots of the resource curse. The current foreign-led assault continues to ravage Yemen, its infrastructure, and also its human capital due to brain drain and a starved education system, not mentioning the disturbing humanitarian situation. A post-war Yemen can expect state-and-economy-building to happen the hard way, as oil production has already declined sharply since 2002, and incipient gas production it remains at a low scale. Hence, there are hardly any natural endowments left to cash-in, and there will be a long way to go towards growth. However, as a silver lining, post-war Yemen could at least have the chance to develop an entirely new set of institutions.

TGP: Given the Yemeni experience, can we reasonably argue that certain lessons have been learned in the wider MENA region? In recent years, we have seen a shift in strategy from several Gulf countries which have pushed for greater economic diversification, with countries such as the UAE or Oman trying to expand their local tourism or banking sector. Does that affect the general OPEC stance on the management of oil production?

DA: Yemen’s collapse is an extreme example, but the danger of a breakdown of resource revenues is a persistent threat to all exporters, even those that are, for now, perceived as economically and politically stable. The tipping point does not need to originate from resource exhaustion, but can also come from a price drop or a supply disruption.

New policies need to place greater importance on industry, manufacturing, and more generally on developing a sustainable approach towards economic policy-making. OPEC members have only very recently recognised the importance of such diversification. Saudi Arabia, for example, has released Vision 2030, which foresees the Saudi Arabian economy becoming more diversified. The IPO of Saudi Aramco, strengthening the private sector, and improving logistics performance are examples of such policies that aim to build an economy beyond oil. We’ve also witnessed the UAE implementing similar policies. As a result, the country has seen its dependence on oil decreased thanks to major investments in sectors such as education, banking, and infrastructure.

All in all, it would be naïve to assume OPEC members to generally move away from the oil industry. However, last years’ price drop has taught an important lesson to the big players in the sector: You cannot count on a high oil-price forever, but high prices will just attract alternative technologies and innovation. Economic diversification is a central tool to decrease the lock-in of fossil fuels and their revenues, but it constitutes a highly complex matter, as OPEC’s problems are, even from a normative point, anything but trivial. Beyond OPEC, the developments are also central for international climate change efforts, as only diversified economies will loosen their grip on hydrocarbons and embrace clean technologies.

TGP: Why is it that the oil price has dropped so significantly since 2014?

DA: Generally, the oil markets have observed many changes during the last years, which is why some experts now speak of the ‘new economics of oil’ to describe the shift in paradigms, driven by the emergence of non-conventional oil, such as shale. Due to important technological changes, the most known of them being hydraulic fracturing, these technologies have become available on a wider scale than previously, and costs have decreased significantly. This boosted the U.S. oil industry and, on a global level, changed the market rationale as oil production itself has become much more elastic and reactive to price fluctuations, besides a redirection of trade flows.

Although a variety of reasons have put negative pressure on the price, OPEC’s decision not to cut their production was the final trigger for the price drop. In this regards, I can confirm other studies with results from recent modelling that OPEC has deliberately pressured prices to compete against shale and to test for its performance.

TGP: In some cases, the resource curse can result in important production disruptions, as it was the case of Nigeria since the early 2010s, which did, in fact, affect the scarcity and price of oil on world markets. On aggregate, how do you foresee efforts by OPEC countries to diversify their economy and how might prices develop?

DA: First, the relationship is very complex and possibly reciprocal. Of course, it’s no historical accident that OPEC members are implementing diversification policies now. There is very little doubt as to the role of the volatility of oil prices and its associated danger for regime stability in these countries. Still, it is very hard to determine to which extent diversification strategies constitute an integral reform and not just a new buzzword. Oil producers also have little incentive not to make definitive steps towards diversification, as present production and investment decisions depend on how the future oil market is perceived. The IPO of Saudi Aramco is an example of this, as the company’s valuation will depend on whether investors believe in consistent returns from oil in the long-term, or not. As such, it’s also connected to asset stranding, which itself is a potential economic and political ticking time bomb: how will a government’s policy decisions change if it expects its assets to run stranding?

Besides that, it might be important to realise that no one in the market has a stake in either positive or negative price spikes. For exporters, low prices mean low revenues, but high prices will only attract new technologies, just the way it happened in the past cycle; and this is something exporters have realised. For importers, too high prices would paralyse the macroeconomy, but low prices render all alternative technologies such as renewable energies uncompetitive. Hence, there are at least no major incentives for drastic changes. But as the market is very politicised and dynamic, no one knows for sure what tomorrow will bring.

TGP: While we see the majority of Gulf countries gradually “moving away” from the traditional sector, we do also notice a countermovement led by another country, Iran, which seeks to massively invest in its oil and gas infrastructure and expects an important increase in its production as a result of the lifting of sanctions. Is there already a resource curse hitting Iran and, if so, will it intensify in your opinion?

DA: Multiple studies in the last ten years have confirmed the presence of resource curse symptoms in Iran. However, it’s a different case in many regards from other countries, be it in terms of economic structure, domestic policy, or culture. Iran’s geopolitical situation is quite unique, as its neighbours might experience substantial increases in hydrocarbon demand over the next years, which could leave Iran in a favourable position. As the international sanctions had significantly impacted the Iranian economy, we might observe many interesting developments in the coming years. It will be particularly relevant to see which role Iran sees for its future hydrocarbon sector if institutional quality will worsen along this path , and what this would mean for sustainable economic growth.


Dawud Ansari is a researcher at DIW Berlin, founder of the Energy Access and Development Program (EADP), and specialist on oil and the Middle East. His latest publications are available here.



Executive Editor

Nathan Appleman is Executive Editor of the Governance Post and soon-to-be graduate. His work mainly revolves around energy transition policies in both developed and developing  countries. He also likes to quote Marx Brothers movies.