Yemen: Corruption, Capital Flight and Global Drivers of Conflict

Chatham House, the respected London-based think tank, has published an important new report on Yemen, which illustrates the close linkages between the issues we care about - capital flight, tax havens, illicit looting and corruption and so on - and issues of conflict and global security.

There's a lot in here worth looking at; this blog is really just a pointer to a fascinating case study. As it notes:

"By the time of the 2011 uprising, ownership of the ‘commanding heights’ of Yemen’s economy were concentrated in the hands of a tiny elite. In early 2011, an estimated 10 families controlled more than 80 per cent of imports, manufacturing, processing, banking, the telecommunications and transport sectors (a situation that remained unchanged at the time of writing)."

And the broader global geo-political context for these country-level issues are, of course, crucial:

"All too often the focus on poor and conflict-affected states revolves around domestic dynamics that drive corruption and weaken institutions, ignoring the international factors that incentivize personal enrichment at the cost of good governance.

While Yemen’s dependence on external assistance should provide at least some prospect that external donors can act as a lever for change, overall levels of foreign aid have been overshadowed by high volumes of capital flight. The problems of corruption, cronyism and chronic capital flight are by no means unique to Yemen; and they are exacerbated by the global phenomenon of secrecy jurisdictions or tax havens.

In the United Kingdom in particular, there is growing tension between the financial sector’s support for secretive tax havens, and a desire to see aid spending utilized for the national interest of recipient countries, rather than being siphoned off abroad by elites."

It also notes that Yemen, according to 2011 UNDP data, had the fifth largest volume of illicit capital outflows ($12 billion) of all the Least Developed Countries between 1990 and 2008, easily outstripping aid inflows.

It covers many of the important angles, including this all-important one:

"Capital flight undermines domestic tax revenues that are needed to fund infrastructure development, deliver public services and ‘establish bargaining relationships between governments and their citizens and build long-term institutional capacity’. Tax collection agencies in countries that suffer high levels of capital flight are generally weak and fail to enforce collection, especially from elite actors with powerful domestic and international connections, limiting growth in government revenues.

Governments in such scenarios tend to depend on taxes paid by smaller- scale players in the private sector who ‘lack the political clout to get tax exemptions’.147 Although they are not the sole contributing factor to weak tax collection, investment or growth, illicit flows have been found to ‘[discourage] domestic investment in poor countries, and therefore [reduce] rates of economic growth’."

And, again quite rightly, it highlights Britain's role in the global system of offshore tax havens.

Now read on.

Update: for background and resources on Inequality & Democracy, see here.