Ala’a Jarban, Concordia University

This memo was drafted for POMEPS Studies 29,Politics, Governance, and Reconstruction in Yemen.” 

Introduction

National dialogue conferences (NDC) are one of many important tools to facilitate political transitions after regime change. External actors are often involved in a variety of roles to support such processes of transition. Before its failure, Yemen’s transition and National Dialogue Conference (NDC) was seen as one of the most successful examples for other Arab Spring countries to follow (Kronenfeld and Guzansky 2014). The presence of the international community in Yemen’s transitional period was strong and represented primarily by the Gulf Cooperation Council (GCC), the United Nations (UN), the United States (US), the European Union (EU), and development agencies and international financial institutions such as the Islamic Development Bank (IDB), the World Bank (WB), and the International Monetary Fund (IMF); these parties were present under an encompassing group which was co-chaired by the United Kingdom (UK), Saudi Arabia, and Yemen (NDC 2016; Government of UK 2017).

Yemen’s NDC was at the core of the transitional process that all these actors aimed to support. However, the National Dialogue Conference and transitional period were officially declared unsuccessful after the Houthis, a religious-political group from the north of Yemen, in alliance with former president Ali Abdullah Saleh, conducted a coup d’état in Sana’a following popular protests against the government’s decision to comply with the conditions to lift fuel subsidies in order to receive a critical IMF loan. This coup led to an internal armed conflict among political factions and the Saudi-led military intervention, resulting in some 10,000 deaths over 50,000 injuries, and widespread famine and cholera outbreaks in what has been categorized as the world’s worst humanitarian crisis (Almosawa et al. 2017).

While there are many reasons for the failure of the fragile NDC and transitional process, development agencies bear some responsibility because of their unsuccessful attempt to support the transition. Some of the reasons for the failure of Yemen’s NDC were attributed to the empty representation, public disconnect, and the unrealistically short time and limited scope of the conference (Gaston 2014; SupportYemen 2017; Elayah et al. 2016). It is important to note that this is not to say that international development agencies are the reason behind the failure of Yemen’s national dialogue; such a statement will be an oversimplification of a much more complicated situation. However, by being negligent of the complex political reality, the IMF’s loan conditions, which were supported by the Friends of Yemen group, were a contributing factor in opening up political opportunities that led to the collapse of the process (IMF 2017).

It is almost certain that these development agencies and international financial institutions will resurface as central actors in any future dialogues in Yemen, and in peacebuilding efforts in the postwar context. Therefore, it is crucial for any future postwar dialogue and development efforts in Yemen to contend with the failures of the past. The questions remain: How and why did development agencies contribute to the failure of the transition process? What can these organizations learn from their failure in Yemen? And how might they, conversely, use these lessons to positively support future transitions?

This paper argues that the IMF’s loan, through its conditionality, acted as the deathblow to the transitional process in Yemen. This failing intervention on the part of the IMF was the result of two factors: 1. a weak understanding of the rising tensions in Yemeni politics during the transition, and 2 an inadequate understanding of the dangers of the conditionality of fuel subsidy reforms during political transitions. Pointedly, for the first argument, the IMF neglected the rising tensions between the Saleh and the Houthi alliance on one side and the NDC and the coalition government on the other side. Saleh and the Houthis perceived the transition as a threat to their power. The second argument has to do with the IMF’s vision on fuel subsidy reforms through previously conducted research. The IMF relied on research findings that conclude that fuel subsidy reforms are necessary during economic restructuring, despite any political and social undesirability or short-term consequences, such as the increase in food and fuel prices (Arze del Granado et al 2012; Coady et al. 2015). The IMF’s understanding of fuel subsidy reforms does not consider the imminent dangers that such conditionality can have during critical political transitions in conflict-prone contexts. The way that such economic interventions destabilize a county’s political situation and create political opportunity to end the transition, leading to more violence, needs to be considered seriously by the IMF and other development agencies.

Political tensions were on the rise during the transitional period precisely because of the shift of powers and harmful interventions by development entities. The discussions around the proposal for a transitional justice law was seen as a threat by Saleh and his party as calls to remove immunity were brought to the table. Military restructuring and the removal of Saleh’s family members from leadership positions were also seen as major threat to Saleh’s interests and future. On the other side, the Islah Party (Yemen’s version of the Muslim Brotherhood) was getting more powerful and closer to president Hadi through several appointments of Islah members in ministerial positions, to which the Houthis objected (Worldview Stratfor 2017). The military branch of the Islah party had already clashed with the military branch of the Houthis in several areas in the North as the Houthis were attempting expansion, which also led the Houthis to perceive this power shift as a political threat. This shared feeling of common danger and loss of power due to the transitional process led the Houthis and Saleh to create a coalition that was looking for justifications to rebel against the transitional process and the NDC. This justification was provided when the IMF offered a critical loan of $553 million to the Yemeni government with the condition – among others – of lifting fuel subsidies (IMF 2017). Fearing possible unrest that would affect the political efforts to successfully conclude the NDC, the Yemeni government was hesitant at first to accept the conditions; however, facing an increasing international pressure and the government’s failure to find alternatives, the government decided to end its fuel subsidy program in July 2014 (Al-Batati 2014a; Al-Batati 2014b).

The decision had an immediate impact on Yemenis, as food prices rose drastically (Ghobari 2014). The Houthis, who were already showing discontent with the transitional process and Western influence, profited instantaneously from the decision by calling on the public to join a Houthi-led demonstration against this decision and against foreign intervention (Al-Haj 2014; Al-Batati 2014b). Popular discontent was on the rise because of immediate effects of the IMF’s loan conditions and was thus available to be recruited by the Houthis for their political aims (Al-Batati 2014b; Ghobari 2014). Tens of thousands joined the protests in the capital, and one protester was killed as the government cracked down on the public displays of discontent (Al-Batati 2014b). The Houthis saw the government reaction as the final loss of legitimacy for a government that, as they claimed, was incapable of providing basic services and was controlled by foreign interests (Al-Batati 2014b; Ghobari 2014). Soon enough, in September 2014, the Houthi militias, aligned with military forces loyal to former president Saleh, took over the capital in a coup d’état and declared the end of the transitional process (BBC 2017).

IMF’s position on fuel subsidy reforms

It is worth asking on what grounds the IMF conceptualized and justified its intervention in Yemen’s transition, presented in the form of a $550 million loan conditional on the immediate lifting of fuel subsidies by the Yemeni state (IMF 2017). This section analyzes the IMF’s position on fuel subsidies based on two IMF working papers that match the IMF’s justification in Yemen, which conclude three main points. First, the IMF finds fuel subsidies harmful and should be avoided at all costs; second, the IMF supposes that lifting fuel subsidies is undesirable by governments due to the immediate impact on fuel and food prices; third, the IMF believes that short-term public unrest and protests are passable and acceptable in comparison to the long-term benefits resulting from fuel subsidy reforms (Arze del Granado et al 2012; Coady et al. 2015). Examining how this position was implemented during the IMF’s intervention in Yemen, it becomes clear that the IMF’s vision does not take into account contextual factors and misses how short-term problematic political effects can be fatal in conflict-prone countries. The following is an analysis of two IMF working reports in 2012 and 2015, on which the IMF relies heavily to justify fuel subsidy reforms.

1. Fuel subsidies are harmful:

In a 2012 study, Arze del Granado, Coady and Gillingham (2012) conducted a cross-country analysis for the IMF of 20 countries from Africa, Asia, the Middle East, and Latin America. It is noteworthy that a similar study was conducted by the IMF in 2006 on a smaller number of countries with similar conclusions. The study finds that fuel subsidies are “inefficient, inequitable, and fiscally costly” (2241). It was clear that fuel subsidies were hurting the Yemeni economy as they were weighing heavily on the government’s budget (Al-Haj 2014; Ghobari 2014). The IMF recommended lifting fuel subsidies to strengthen the worsening Yemeni economy by balancing the government’s budget and cutting down on its spending (IMF 2017). This way of measuring the benefits of subsidy reforms might make sense from an economic understanding and might be beneficial in a context that is more stable than Yemen; however, subsidy reform comes with political effects, a fact that the IMF’s research seems to realize but seriously underestimate.

2. Reforms are undesirable by governments:

Despite the inefficiency of fuel subsidies, the IMF’s working papers find that “developing country governments often find subsidy reform politically difficult” (2241). The authors continue to attribute the public backlash to two factors. The first being that people often have a lack of confidence in the government’s intention to use the budget savings wisely and distribute it in a way that benefits the greater population (2240). The second factor is that, in the short-term, fuel subsidy reforms can increase poverty and cause greater harm to the welfare of low-income populations (2240). As a recommendation for future policies, this study suggests that, “Reform strategies that address these two constraints are therefore more likely to succeed” (2240). However, the warning of how politically difficult these reforms can be does not go beyond this superficial analysis and does not evaluate different political effects in conflict-prone contexts.

This research shows that the IMF has an understanding that governments prefer to avoid lifting fuel subsidies and causing sharp increases in fuel costs out of fear of public backlash. Indeed, the IMF is aware of the dire political impact that such interventions can have in developing countries. However, these limited concerns only superficially touch the political implication of subsidy reforms and fails to consider the serious immediate effects they can have in conflict-prone countries.

3. Short-term unrest is acceptable:

In a follow-up study in 2015, Coady et al. (2015) include a more substantial number of countries by to reach the same conclusion about reforming fuel subsidies: it is more efficient to avoid fuel subsidies (Arze del Granado et al. 2012). What the two reports have in common is suggesting a form of a payoff matrix, in which the best result comes from enduring the short-term political effects of fuel subsidy reforms in order to benefit from the long-term equalities these reforms can generate (Coady et al. 2015; Arze del Granado et al. 2012). The IMF’s awareness of short-term political effects is dangerous because it underestimates their power. The reports view short-term effects as passable or survivable protests (Arze del Granado et al. 2012, 2244). What the research seems to overlook is that short-term consequences are not the same in every context and are not always passable. In conflict-prone countries undergoing political transitions, such as Yemen, short-term consequences can be lethal to political processes. In the Yemeni case, short-term political effects lead to political actors conducting a coup d’état, countrywide chaos, and what the UN classifies as the world’s worst humanitarian crisis (Almosawa et al. 2017).

The 2015 study was conducted after the IMF’s failed attempt to aid the transition in Yemen in 2014, which shows a limited learning process from lessons of the past. The IMF underestimated how its intervention could lead to opening political opportunities for rivals in Yemen to rebel against the transitional process. There were many warnings by the Yemeni government and Yemeni economic and strategic experts of the dire consequences that fuel subsidy reforms could have on the political process. The IMF’s intervention ignored these warnings, because it justified its conditional loan based on research that does not consider short-term political effect seriously. This is not to argue that fuel subsidy reforms are bad or that they are not capable of creating economic equalities in developing countries. However, these studies fail to consider the differences between the implementation of such reforms in relatively stable developing countries vis-à-vis conflict-prone countries that are undergoing fragile “make it or break it” transitional processes.

Conclusion and final thoughts

This paper examined interventions by the IMF (supported by other international political and development actors through the umbrella of the Friends of Yemen group) that were taken with the intention of supporting Yemen’s transitional process (World Bank 2017). Despite having relied on studies that show such strategies can have a negative immediate political impact, the IMF made lifting fuel subsidies an immediate and inflexible condition for the Yemeni government to obtain a critical loan. The IMF neglected the political reality obvious to many Yemenis, wherein political actors were looking for opportunities to drive the transitional process to fail. Undeniably, this intervention by the IMF created more harm than good when the Houthi-Saleh alliance used the short-term effects of subsidy reforms as a justification to throw off the transitional process and take power. This shift in power led to the ongoing military and humanitarian crisis in the country. As this paper demonstrates, the IMF loan and its conditionality were a critical contributing factor in ending the transitional process.

There is no doubt that the IMF and other development and international financial actors will continue to resurface in Yemen through humanitarian efforts and post-war dialogue efforts. The ideal degree of integration of development actors in a post-war context is a difficult question to answer, but any future support efforts will have to contend with the failure of the last. Future interventions must be more sensitive to the political realities, gain the public’s trust, and consider both short-term and long-term impacts and needs more seriously. In a post-war context, the IMF and other development actors should expect a considerable pushback from Yemenis who feel the international community has failed them. Any future attempt to support local processes should consider local voices, warnings, and expertise more seriously and offer more flexibility to avoid any immediate short-term negative political effects.


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Supporting and failing Yemen’s transition: Critical perspectives on development agencies