Can Somalia really cope without a government?

[Jen. Halgame]

How Does Somalia’s Private Sector Cope without Government?

Somalia has lacked a recognized government since 1991—an unusually
long time. In extremely difficult conditions the private sector has
demonstrated its much-vaunted capability to make do. To cope with
the absence of the rule of law, private enterprises have been using
foreign jurisdictions or institutions to help with some tasks,
operating within networks of trust to strengthen property rights, and
simplifying transactions until they require neither. Somalia’s private
sector experience suggests that it may be easier than is commonly
thought for basic systems of finance and some infrastructure services
to function where government is extremely weak or absent.

Somalia is the quintessential failed state. After
the autocratic regime of Siad Barre fell in 1991,
the country collapsed into civil war. Peace has
been established in some regions, but Somalia
has only a limited government in the Northwest
and no recognized government in the South. In
these circumstances the private sector has been
surprisingly innovative. Competition thrives in
markets where transactions are simple, such as
retail and construction. In more complex sectors,
such as telecommunications and electricity
supply, the private solutions are flawed but
impressive: coverage has expanded since the
1980s, and prices are attractive compared with
those in other African countries.
Only when it comes to public goods or to private
goods with strong spillover effects—roads,
monetary stability, a legal system, primary education

a cross-border financial system—does
the state seem to be sorely missed. But even here
the private sector has developed creative
approaches that partially substitute for effective
government. As a result, Somalia boasts lower
rates of extreme poverty and, in some cases, better
infrastructure than richer countries in Africa

Private firms make do

Somali entrepreneurs have used three methods
to compensate for the lack of effective government
regulation (table 2). First, “importing governance”
by relying on foreign institutions—for
example, for airline safety, currency stability,
and company law. Second, using clans and
other local networks of trust to help with contract
enforcement, payment, and transmission
of funds. Third, simplifying transactions until
they can be carried out with help from neither
the clan nor the international economy.

Telecommunications: networks link up

Many local companies have teamed up with
international giants such as Sprint (U.S.) and
Telenor (Norway), providing mobile phones
and building new landlines. Vigorous competition
has pushed prices well below typical levels
in Africa, and Somalia now has 112,000 fixed
lines and 50,000 mobile subscribers, up from
17,000 lines before 1991. Yet not all is well.
Calling every phone subscriber in Hargeisa, in
the Northwest, would require connections from
four telephone firms. But firms in Mogadishu
have now agreed on interconnection standards,
and those in Hargeisa appear to be following
suit. The negotiations were brokered by the
Somali Telecom Association, set up with the
help of the United Nations and International
Telecommunication Union (ITU) and headquartered
in Dubai.

Electricity: simple solutions yield results

Entrepreneurs have worked around Somalia’s
lack of a functioning electricity grid, payment
systems, and metering. They have divided cities
into manageable quarters and provide electricity
locally using secondhand generators bought
in Dubai. They offer households a menu of
choices (daytime, evening, or 24-hour service)
and charge per lightbulb.

Water: access but not cheap or safe

Public water provision is limited to urban areas, but
a private system extends to all parts of the country
as entrepreneurs build cement catchments, drill
private boreholes, or ship water from public systems
in the cities. Prices naturally rise in times of
drought. Traditionally, destitute families have not
had to pay for water, while the slightly better-off
borrow funds from relatives. Nevertheless, after several
years of drought the United Nations estimates
that many families in the Eastern Sanaag have debts
of US$50–100 for water. Moreover, access to safe
water is low even by African standards because neither
regulators nor the market have been able to
persuade merchants to purify their water.

Air travel: outsourcing safety

In 1989 the national carrier (partly owned by
Alitalia) operated just one airplane and one international
route.2 Today the sector boasts about 15
firms, more than 60 aircraft, 6 international destinations,
more domestic routes, and many more
flights. But safety is a concern. Airports lack
trained air traffic controllers, fire services, runway
lights, and a sealed perimeter against stray animals,
and checks on aircraft and crew are inadequate.
The makeshift solution: international
outsourcing. Somali carriers lease planes, often
with crews from Eastern Europe (the largest,
Daallo Airlines, leases a Boeing from the United
Kingdom, to boost customer confidence). And
they operate out of Djibouti, Dubai, and Nairobi,
using the facilities there to check aircraft safety.

Private courts: quick but limited

A recent effort to endow Mogadishu with a functioning
court collapsed when the court tried to
levy taxes and take over the privately run port of
El Ma’an. In any case Somalia lacks contract law,
company law, the concept of limited liability,
and other key pillars of commercial law. In some
cases Somalis have used offshore registration of
businesses to import legal concepts and services.
More commonly, disputes are settled at the clan
level, by traditional systems run by elders and
with the clan collecting damages.
Such measures are free—and fast by international
standards. In a case involving the oppression
of minority shareholders in a large livestock
company, out-of-court talks were preferred, the
company continued to operate successfully, and
the dispute was settled amicably. But clan-based
systems deal poorly with disputes outside the
clan. In a dispute involving the telecommunications
company Aerolite, the interclan committee
of elders awarded the plaintiff from a weaker
clan an unfairly small settlement, and since it
was not enforced, he received nothing.

Currency: perfect competition for dollars

Sharp inflation in 1994–96 and 2000–01
destroyed confidence in three local currencies.
U.S. dollars are harder to forge, do not need to
be carried around in large fragile bundles, and,
most important, retain their value. The feeble
capabilities of the central bank have allowed free
entry into the currency exchange business,
which is as close to perfectly competitive as is
ever likely to be possible.


International fund transfers: hawala system

The hawala system, a trust-based money transfer
system used in many Muslim countries, moves
US$0.5–1 billion into Somalia every year. A person
in New York wishing to send money to his
family in Tog-waajale gives the hawala agent in
New York the sum in cash, paying a 5 percent
commission. The agent deposits the cash in a
local bank account to be transferred to the company
bank account in Djibouti or Dubai, then
alerts the clearinghouse in Hargeisa, which
passes details on to Tog-waajale. When the recipient
shows up, the local agent quizzes him about
his clan lineage using questions provided by the
relative overseas as security against fraud. The
transaction is usually completed within 24 hours.
Hawala networks are unregulated and do not
always keep records of transactions, but they are
coming under pressure from efforts to combat
money laundering.

Savings accounts and traveler’s checks

Somalia has adopted the widespread African
institution of rotating credit associations, which
rely on clan links for enforcement and provide
a safe haven for savings. More innovative is the
system of traveler’s checks for the pilgrimage to
Mecca, or hajj. Nobody would accept Somali
checks, so Somali firms set up accounts in Saudi
banks and write checks to pilgrims that can be
cashed in any branch.

Gaps in private sector provision

In some areas the private sector has made little
progress. The Somali road system, for example,
is limited and in poor condition. For a private
supplier to build a road and collect fees to cover
the costs is apparently too hard, partly because
of prohibitive transaction costs and partly
because fee-paying users are not the only ones
who benefit from roads.
Primary education is another disappointing
story. Some 71 percent of primary schools are
privately owned (typically by parents or communities),
but enrollment is just 17 percent. By
contrast, it is 82 percent in West Africa, where
countries are richer and more stable and the
government is much more heavily involved in
the economy.
Ideally, benevolent government would sort
out both problems. But government that is
merely stronger might not help. Where municipal
governments along the Berbera–Hargeisa
road have the power to collect tolls, they do not
spend them on maintenance. The failings of the
education system are partly because half of
Somalis are nomads. It is not clear that government
would do much better, especially since the
private schools are locally acknowledged to be
superior to those run by local government.
Rather than try to create a government system
from scratch, a better policy would be to
improve the network of higher-quality private
schools.

Conclusion

The achievements of the Somali private sector
form a surprisingly long list. Where the private
sector has failed—the list is long here too—
there is a clear role for government interventions.
But most such interventions appear to be
failing. Government schools are of lower quality
than private schools. Subsidized power is being
supplied not to the rural areas that need it but
to urban areas, hurting a well-functioning private
industry. Road tolls are not spent on roads.
Judges seem more interested in grabbing power
than in developing laws and courts.
A more productive role for government
would be to build on the strengths of the private
sector. Given Somali reliance on clan and reputation,
any measures allowing these mechanisms
to function more broadly would be welcome;
credit and land registries would be a good start.
And since Somali businesses rely heavily on institutions
outside the economy, international and
domestic policies supporting such connections
would help.
For governments and aid agencies, the capability
of some business sectors to cope under the
most difficult conditions should give hope and
guidance in other reconstruction efforts. It may
take less encouragement than is commonly
thought for stripped-down systems of finance,
electricity, and telecommunications to grow.

Notes
1. “Somalia Telecoms Boom without Government,”
Somaliland Times, July 22, 2004.
2. United States Institute for Peace, Removing
Barricades in Somalia: Prospects for Peace (Washington, D.C.,
1998).
3. Abdusalam Omer, “Supporting System and
Procedures for the Effective Regulation and Monitoring of
Somali Remittance Companies (Hawala)” (United
Nations Development Programme, Nairobi, 2003

[Basra-]

Can Somalinet forum really "Cope" with you and your long drivel of idiocy?

[Addoow]

Can Somalinet forum really "Cope" with you and your long drivel of idiocy?

no and it also cant cope with your narcissism.

[Basra-]

Adooow How dare u attack a fair maiden demsel?