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Maria Rodriguez

Dr. William Andrews

FSEM: Global Flashpoints

15 October 2014

The Economics of a Failed State: Somalia

When prompted to describe the economy of Somali, most Americans would describe it as nonexistent. They would cite terrorism, anarchy and piracy. After categorizing the Somali state into the easy compartment of “just another third world country”, they’d arrive at the following conclusion: the economics of a failed state must be, by definition, a failed economy. In reality, that is not always the case. For example, although Somalia has been crippled by a two decade war and subsequent civil unrest, beneath the turmoil lays a surprisingly healthy informal economy. It brings to question the validity of our notions as to what the necessary components for a healthy economy are, and it will make us re-evaluate how we see the dichotomy between the political realm and the economics at work.

Somalis use the word burbur (‘catastrophe’) to describe the period from December 1991 to March 1992, in which the country was torn apart by clan-based warfare that consisted of all these different factions fighting for possible control after the collapse of the country’s government. It is understandable that if only looking through the lens of political disorder, one would think that Somalia is nothing more than another victim of post-colonialist chaos. It is undeniable that the problems within this country are a hindrance when it comes to its economic potential, but my research has concluded that despite this, the Somali economy has shown great resilience.

The predictable problems arise when a government is unable to provide a stable theater for an economy. There are problems with currency, certification (or authenticity) of businesses, and difficulties in trade. Somalia’s problems with currency are the fact that there have been many “outbreaks” of fake currencies, such as fake bank notes, flooding the market. Currency reform is vital if Somalia’s economy will continue to move forward. Somalia’s central banking system was re-established in 2011, but it remains close to powerless when setting monetary policy in a country that doesn’t have any hard currency reserves or a discernible monetary policy. When it comes to certification, or the authenticity of business, the question lies in making businesses global competitors. When a government provides documentation for a business it helps it move into the global market. This is something that Somalia struggles in; its government doesn’t have enough popular backing among its citizens to actually dictate many things in the economy. Because of the political instability there have been many difficulties in trade on a global scale.

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Despite the odds, Somalia’s agricultural exports are thriving. Their biggest livestock importer is Saudi Arabia. Over seventy percent of all Somalia’s exports go to Saudi Arabia. Their annual export value is close to $200 million dollars. This sounds great, but because of a lack of a strong Somali government, Somali is left at the mercy of its trading partners. In 2000, the Gulf States (led by Saudi Arabia) imposed a ban on the imports of livestock from Somalia. This was a difficult blow to the Somali economy. Most of the population labors in agriculture and livestock; their livelihood depends on this industry. This may explain the resilience of trade. In 2009, after the ban was lifted, Somali was once again able to profit from the agriculture trade. The moral of this example is that the global standing of Somalia is determined by their political aptitude. Somalia is currently is not a member of any regional economic blocs, it has few formal trade deals with other nations, isn’t a member of the World Trade Organization and has no trade agreement with either the US or the EU. These are things that need to improve if Somalia is ever to move into a more formal economy via international trade.

Although, along with lack of government comes the global deregulation of trade. Many Somalis took advantage of this deficit and established successful businesses in money transfers and telecommunications. The industry of telecommunications is a surprisingly strong area in Somalia; in fact, it is one of the strongest regions for this industry in Africa. Because of this commerce, it is also possible to buy brand new high tech gadgets at the markets in Somalia. This is counter-intuitive to the idea of what the society of Somalia is. Although many of these commodities have been stolen as a result of the piracy, they help fuel the trade.

Prior to the civil war, most services and the industrial sector were government-run. This was not that great of a situation either. Corruption and negligence left many industries struggling. For example, in Somalia there were roughly 53 state-owned manufacturing firms. They were struggling and by the end of the conflict, the manufacturing industry was destroyed. Now private spending and ownership have revived the manufacturing processes. Many of these small-scale plants have re-opened and even new ones have been created. After the Civil War these industries have a greater and more viable chance of survival. This conflict has also resulted in some negative impacts on small-scale industries. The threat of ‘asset stripping’ is on the rise. This practice is best described as the taking over of a company in financial difficulties and selling each of its assets separately at a profit without regard for the company's future.

The conflict is exacerbated by the fact that there have been horrible droughts, which, in turn, cause famines. Due to the disruption of food supplies there have been an estimated 250,000 dead. Regardless, in 2012, Somalia exported goods worth $693 million, according to data from the European Commission’s Directorate-General for Trade. Although this may seem like a lot of progress, in reality, the country still runs a large trade deficit because it imports way more than it exports. For instance, that same year (2012), its imports were valued at $1,818 billion. The bulk of Somalian foreign exchange is from remittances sent by Somalis working abroad, mainly in the Middle East (Somalia Diaspora). A remittance is a sum of money sent, especially by mail, in payment for goods or services or as a gift back home. To witness the resilience of Somalia, one

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only has to look at the fact that an informal banking sector has sprung up to handle these transactions. Funds transfer services have become a big sector due to this. One company in particular, called Dahabshiil, handles around two-thirds of all remittances to Somali-speaking regions. It charges lower commission fees than its western counterparts and it accounts for almost a quarter of household incomes in Somalia (through the cashing of funds remitted by the Somalia Diaspora). The funds they have helped transfer sustain communities in some of the most remote locations in this region. These funds are substantial in promoting private sector activity. The argument can be made that the arrival of such foreign-based capital has helped keep the Somali shilling afloat and offset other economic pressures.

Somalia aims to build a transparent, formalized, globally competitive economy that collects tax revenues. For this to occur they will need to play on their strength and enter the global economy. To do so, they need a more stable governmental situation. In summation, while Somalia's prospects may be limited due to internal fighting and lack of government, there are still many economic powers at play that allow this economy to be remarkably resilient. It will be interesting to see whether the path of Somalia will lead to future sustainable economic success.

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Works Cited

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<http://www.britannica.com/EBchecked/topic/553877/Somalia/37724/Economy>.

2. Orens, Shayna. "'Guban' Burns Away Misconceptions of Somali Culture in Ph.D

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<http://www.irinnews.org/report/99647/five-challenges-for-somalia-s-economic-

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4. "ThirdWorldPlanet.com." The Somalia Economy. Thirdworldplanet.com, 2007. Web.

13 Oct. 2014. <http://www.thirdworldplanet.com/somalia-economy.php>.

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business-with-2-45480>.

7. Wikipedia. Wikimedia Foundation, n.d. Web. 21 Oct. 2014.

<http://en.wikipedia.org/wiki/Dahabshiil#Somali_money_transfer_industry>.