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Advice to the New Somali Government: Do no Harm to the Economy

by Abdulqafar Abdullahi
Saturday, February 16, 2013

Finally for the first time since 1990, Somalia has a permanent government with a mandate to reconstitute the nation and its system of government. This is a great opportunity at the same time a risky undertaking. It is a great opportunity because it represents a new beginning and a chance to design a new system of government that puts the country on path of sustainable economic growth and a lasting peace. However, there are also real dangers, if not avoided, that could result the new government to squander this opportunity resulting Somalia to remain a nation on the edge of collapse or once again descend into chaos. As an economist who lives in the policy making world, I am practically giddy at the prospect of contributing to the rebirth of a new nation albeit at the comfort of my home in Ottawa.


Despite the lack of a functioning government for over 22 years, Somalia’s economy has done wonders and in fact outperformed most sub-Saharan African countries in the indicators where there is data. A limited number of studies have found that Somalia’s poverty rate has declined and its living standard has improved at a rate faster than other sub-Saharan countries.  These studies support the argument that no government is sometimes better than a bad government. It also leads us to conclude that not only are Somalis better off than they were when they had a functioning government, but they are doing relatively better than most other sub-Saharan countries in terms of improved living standards.  For evidence check Benjamin Powell et. al. paper  “Somalia After State Collapse – Chaos or Improvement” and Peter Leeson’s paper “Better Off Stateless: Somalia Before and After Government Collapse”. These two studies compared Somalia after the collapse of the national government to other sub-Saharan countries.


Although one would be justified to doubt the conclusions reached by studies that may have used limited number of variables or less than reliable data, it is not that surprising or unbelievable to those who pay close attention to the economic conditions of Somalia.  However, no one should be under any illusion, Somalia still remains a very poor country with critical food security concerns, but a nation with a great potential. It should also be acknowledged that the overall improvements in the standard of living can be partially attributed to the relative stability and policies of the semi-autonomous regions of Somaliland and Puntland.


When one talks about the relative success of the Somalia’s economy they invariably mention the amazing progress in the telecommunications sector. Cell phone connections in Somalia are much clearer and cheaper than anywhere in Africa as reported by The Economist in 2005 but long distance charges have been creeping up recently. In fact the cell phone penetration has reached beyond urban and semi-urban centers to the pastoral lands and remote areas; where camel herders are now able to call anywhere in the world from the middle of nowhere. In almost all major cities the cell phone payment method is a commonly accepted means of monetary exchange.  Media is another industry that often receives accolades and international attention given that the independent media in Somalia has grown at a breath taking space. There are now more independent radio and TV stations in Somalia than most sub-Saharan countries. Access to utilities such as electricity has also attracted similar positive attention. These are only part of the story; there are now more universities and post-secondary institutions, and more hospitals and clinics in Somalia than any time in its history for example. Despite the attention to the successes of few industries, the general welfare improvements experienced by Somalis since the collapse of their state have largely been driven by small and medium enterprises (SMEs).


The best thing that the new Somalia government can do for its citizens is to get out of the way of the private sector and concentrate on providing services that the private sector cannot provide such as security, a functioning justice system, infrastructure, public education, health services etc. The goal of the government first and foremost ought to be to do no harm to the economy; otherwise the gains made by the private sector could easily be lost.


In the short term, the focus of the new government is, as it ought to be, on establishing law and order and improving security of areas under its influence. However, it should also pay attention to the long term issues and economic development and good governance. It is much easier to institute the right policies from the beginning than to make a course correct later.  Here is a non-exhaustive list of “Do’s and Don’t” for the new government in order to ensure that Somalis enjoy a sustainable economic development and the recent social welfare improvement are maintained.

Do fight corruption of public officials at all levels and in particular at lower levels


In the Transparency International’s 2012 corruption perception index, Somalia was ranked as the most corrupted nations in 174 ranked countries. Corruption is a huge problem that should be addressed and fought immediately and continuously as it undermines the authority of the nations, confidence of the public, and the donor community. More importantly it stifles the growth of the private sector, the engine of economic growth and the only bright light in Somalia since the collapse of the state.  However, corruption at lower to mid-level public officials and security officials is most detrimental to the private sector existence, particularly to small and medium enterprises. Among other things, the best way to reduce the temptation to extract bribes from the business community is to have simple and clear rules and as much as possible remove decisions that affect business enterprises from the hands of lower to mid-level officials.


Do not regulate unnecessarily but regulate if necessary


Complex regulations in an unstable environment sap business confidence, reduce investment, and increase cost of doing business. A myriad of regulations that change regularly and can only be fully understood by officials will encourage demand for bribes. Although less regulation is always better in general for the business community particularly in post conflict countries; however, there are areas that could benefit from more regulation. Public health safety and financial sector regulations are two such critical areas that need immediate attention.


Importation and sale of expired medications, doctored and ineffective medicine to the unsuspecting public is a major problem that would require immediate action and regulation. So called doctors practicing without proper credentials is very common and can cause serious harm to unsuspecting patients. They should not be allowed to practice medicine.


The money transfer companies that have been functioning much like banks by taking deposits, maintaining customer accounts as well as facilitating financial transactions need to graduate to become proper banks. Effective regulations of these financial institutions are necessary for their acceptance in the world community of bankers. Among other things, the ability to track financial transactions to prevent money laundering is the price of admission. If banks were to remain in the hands of the private sector, as they should be, then a proper supervision of the nascent banking sector is badly needed. 


 Do not create bloated bureaucracy


Tendencies of post conflict governments are to build government infrastructures and institutions to a level that is not sustainable. That will be a mistake. Bloated bureaucracy in an uncertain environment and with no culture of public service, ethical code of conduct, or proper checks and balances will do more harm than good. It will encourage corruption as the new government will certainly not be able to pay adequate salary to its growing staff. Bureaucrats with limited capacity will create more regulations and enforce them unevenly to create more revenue which will undermine the private sector particularly SMEs.


Do not create monopolies - public or private


During the last recognized Somalia government, Somalia’s economy was semi-socialist economy where the state dominated the economic life of the nation. All major industries were monopolies of state owned enterprises or in the hands of small selected and preferred individuals. Like any other state dominated economies with no profit maximization motive, there were inefficiencies due to inflated production and underestimated cost of production.


The new principle of the government should be that government will not get involved in production of goods and provision of services, if there are private enterprises that are willing to do it. Private enterprises will be more efficient and will be able to deliver products and services at much cheaper price and better quality than the government.


It should also not create private monopolies through preferential licensing or single source procurement contracts.  Both of these practices will create overpricing of services and products to the government and predatory monopoly pricing to the public. All government contracts should be awarded in a transparent manner and based on value for money principle.


 Do not tax small medium enterprises


I am sympathetic to the newly formed federal government’s search for new revenue sources; however, if it comes at the expense of the private sector or economic growth in general, it will be counterproductive. Somalia is not yet at a stage where it can levy business profit tax, and as a result the only avenue open to the government is to levy a head tax on individual businesses regardless of the profit level or income. This method of collecting revenue is highly regressive and unfair as it will disproportionately affect negatively new small and medium enterprises. In addition, it will potentially make them vulnerable to extortions by corrupted officials.


Furthermore, attempts by the federal government to raise revenue from the business sector would encourage similar actions from local governments, particularly given the absence of federal revenue sharing mechanisms with other levels of governments including Federal Member States and municipalities.


It is to be expected that the pressure on the new government to find new sources of revenue to fund its operations and to reduce its dependence on the donor community will only continue to build. However, that desire to raise revenue should not come at the expense of sustainable economic development which could only come from a thriving private sector. In the long run, dependence on foreign donations to run government operations will be reduced on permanent basis.


Do take care of women entrepreneurs


After the collapse of the state, many young men either joined various militias or left the country leaving women to raise their children and earn a living. Many of these women started small businesses and some have become successful. Throughout the country there are small food stores, restaurants, clothing stores and kiosks mostly owned by women entrepreneurs. They employ other women and family members and generate income to support themselves and their children. In many instances these women entrepreneurs are the sole breadwinner of the family.


Complicated business regulations and corruption at the lower to mid level officials will disproportionately affect them. It is critical that the new government do nothing to undermine this group of entrepreneurs. These small enterprises are critical for the future of the country and the government and other civil societies should do all they can to protect and promote them.


Do not look to your neighbouring countries and to the last recognized government of Somalia for guidance


Somalia’s neighbouring countries are not bastion of economic and political freedom. Their economic models are outdated and are not serving their citizens well. The last recognized government of Somalia was not better either; it had no coherent or good economic policies. Its policies had failed the Somali people and the standard of living stagnated for many years and regressed between 1985 and 1990. There is nothing positive that the new Somali government can or should learn from these countries and the previous governments when it comes to designing a winning economic strategy except may be avoid mistakes they have made.


Do promote exports and do not restrict imports


Economists, who hardly agree on anything, are in general agreement that free trade is more preferable to protectionism. Somalia could potentially become a trading hub for its neighbors. Somali traders have become skilled in sourcing products from all over the world through their network of Somali Diaspora community. To make Somalia as trading hub for neighbouring countries, import restrictions, tariffs, and duties should be kept to a minimum level and a duty free port will even be better.


Live stock export sector deserves special attention given that it is the single largest export from Somalia and that there is limited evidence that it has increased since the collapse of the Somali State. There is no doubt that livestock has been and will continue to remain the most important sector of the economy and could become a catalyst for the revival of the nation. In the old regime, there were myriad of rules and restrictions that made it very difficult for traders to maximize their business potential.


To promote exports, particularly export of livestock, the government should not pick winners and loser, but let the competition among traders take care of it. It should concentrate on the necessary infrastructure for international trade, the promotion of Somali exports particularly the livestock in the international markets, and ensure the health of the livestock destined for international markets meets international standards. One sick cow or sheep could ruin it for everybody.


Do promote and protect property rights


In the late 1980s and early 1990s, many of the middle class, educated, technocrats and people with money where the first to leave Somalia. They left their properties and businesses behind which has since been expropriated by those left behind. Returning these properties to their rightful owners is not only fair but an economic imperative. Many of these property owners and their children now live in almost every corner of the world. Given the opportunity, many will rebuild their debilitated properties and potentially retire to or return to Somalia to invest, start business, and to bring back their expertise to contribute to the rebirth of the new state. On a more humane level, many of the refugees who now call home various camps in Kenya and Ethiopia own properties in Somalia and may be willing to return to their properties if they could get them back without endangering their lives. Current methods of reclaiming lost properties are inefficient, costly and at times down-right dangerous as the new illegitimate occupiers resist vacating the properties.


The first step to promoting property rights is to establish fair and just dispute resolution mechanism where property owners can reclaim their lost properties. There are international models that have been successfully implemented such as post-conflict property restitution in Bosnia and Herzegovina, but would need to be adopted for Somalia based on her culture and customs.


None of the recommendations listed above will be easy to implement, but they are worth trying.  Efforts to adopt these set of common sense actions will be further complicated by the lack of constitutional clarity when it comes to economic and regulatory powers of the Federal Government and the Federal Member States. Nevertheless, policy makers at all levels should think long and hard about how policies and regulations will impact the private sector. If it is determined that any contemplated policy, regulation, or decision is going to impact the private sector negatively it should be thought about long and hard or dropped for the sake of the future of the economy and the nation.

The author is currently a program manager and a former senior economist in the Canadian public service and a part-time professor of Economics. You can contact the author directly at [email protected] or read his new blog posts www.economicscorner.com.


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