Somaliland’s Private Sector at a Crossroads: Political Economy and Policy Choices for Prosperity and Job Creation (2016) is the World Bank’s first comprehensive analysis of the private sector in Somaliland. The 90 page report takes stock of the evolution of the private sector over the past two decades, it identifies priority policy options as well as the necessary reforms that would enable the private sector to take advantage of opportunities. The report draws on a political economy lens to study how dynamics of power, interests and relationships between key (economic, social and state) actors and sociocultural contexts interplay and influence public policy and private sector activites. The report focuses on three sectors: enterprise, finance and government with a bundle of policy recommendations proposed for each. Overall the report emphasizes the need to formalize the private sector and build the capacity of civil servants to lead this formalization process. Doing so would, according to the World Bank, enable Somaliland’s economy to take advantage of opportunities, promote a climate that favours investments as well as job creation. In my attempt to review this report, I take the position of someone who has lived and worked in Somaliland for the past five years. I summarize the report’s main findings and explain how they resonate with my previous research experience on economic actors and dynamics in Somaliland.
Investors understand the language of regulation
The report demonstrates that Somaliland’s private sector, to this day, remains largely informal and unregulated. This form of informal governance poses an incremental challenge to economic growth and job creation as it limits access to finance, which makes it difficult for new enterprises to enter the market. My 2016 data collection on the business sector in Somaliland produced similar findings; foreign investors cannot insert themselves into the informal economy as they do not share the same socio-cultural traits, which are often instrumental in guiding business operations in the absence of formal regulations. Foreign investors base their decision to invest or not to invest on the existence and enforcement of regulations, which protect their investments and interests.
‘Necessity’ is no longer necessary
The report acknowledges that Somaliland’s ‘economic growth’ has been achieved through ‘pragmatic tools’ (p. 8) including a reliance on a pluralistic legal system and informal deals between authorities and private sector actors. These tools, which are also present in Somaliland politics and state decision-making, have emerged out of necessity during the state rebuilding process of the 1990s. But they are increasingly unnecessary. As ‘Somaliland of today bears very little resemblance to the Somaliland emerging from the war and dislocations of the early 1990s’ (p. 83), it is not only physical structures that have transformed, but citizens’ expectations have evolved as well. Hence the demand for formal and transparent structures and procedures in Somaliland is growing. This necessitates, as the World Bank recommends, a pragmatic and holistic review of legal, political and institutions’ structures in order to match citizens’ expectations of good governance.
More ministries, less resources and recurrent reshuffling
The World Bank draws our attention to several challenges in the governance sector, in particular ad hoc government changes, informal decision making and increasing ministerial positions. Somaliland has grappled with this governance challenge since it reclaimed its independence in 1991. The incumbent administration promised small government and appointed 20 ministers in 2010. Since then, however, the government structure has changed. President Silanyo’s administration currently counts 27 ministries with some of them having been spun off from ‘parent’ ministries while others are new. The number of deputy and state ministries has also increased. The report documents that newly created ministries such as the Ministry of Industry (established in 2012) was not fully functional as it lacked resources to operate. Other technical departments in the Ministry of Energy and Minerals, the Ministry of Water and Health or the Quality Control Commission lack necessary equipments including laboratories to discharge their duties. This happened in tandem with close to a dozen reshuffles of ministers. The report argues that ‘ad hoc changes in the government structure (…) were leading to uncertainty in government operations and budgeting’ and ‘confusion between government ministries in relation to their scope of responsibilities’ (p. 63).
Asymmetrical power relations between state and private sector
The World Bank report acknowledges that in most societies policies are formulated in contexts where multiple actors compete to influence the policy process in line with their own particular interests. These interests may or may not be aligned with the national interest. Though this is an indicator of a ‘vibrant polity’ it can produce ‘suboptimal outcomes’ (p. xii) as powerful actors can block necessary reforms of national policies that contradict their own interests. As a result, the report notes, the ‘Somaliland government is vulnerable to capture by private sector interests, which constraints its ability to take policy actions for the public good’ (p. xix). The state lacks the ability to generate its own resources and is entirely dependent on tax revenues collected from the private sector. There are also others issues that weaken the state in the face of the private sector. Socio-cultural and political factors, which explain why some civil servants have a greater allegiance to business actors from their own clan than to the state they serve. Furthermore, because of the absence of international recognition, Somaliland cannot obtain loans from international financial institutions such as the IMF and the World Bank. Consequently, the finance starved Somaliland state has to get loans from the private sector, which further deepens its dependence and vulnerability of capture by private interests.
How can Social Capital be institutionalized?
The report acknowledges that despite weak institutions, regulations and policies ‘Somaliland has been the site of impressive levels of economic recovery’ (p. 8) due to high social capital. In the view of the World Bank social capital is the main contributor to Somaliland’s political stability, which is characterized by a ‘sufficient degree of inclusivity and negotiation in matters of politics, disputes, and allocation of resources and employment across clan lines’ and also economic success as social capital ‘facilitates greater social trust, the flow of finances in the form of informal loans or gifts, and mutual indebtedness’ as well as ‘low levels of crime’ (p. 8). Other factors that contribute positively to economic well-being in Somaliland build on this social capital, whether it is the ability to maintain peace or the high inflow of remittances. The World Bank has for a long time propagated the importance of social capital for ‘sustainable development’ as well as the need to increase stocks of social capital. In one of its papers it defined social capital as ‘the internal social and cultural coherence of society, the norms and values that govern interactions among people and the institutions in which they are embedded. Social capital is the glue that holds societies together and without which there can be no economic growth or human wellbeing’. Although it is difficult to quantify social capital, the World Bank’s report on the private sector in Somaliland does not provide any suggestion on how the very social capital that accounts for the success of the private sector can be increased, formalized or institutionalized. In other words, while there is a clear need for reforms in the economic governance of Somaliland, these reforms need to institutionalize rather than erode social capital that forms the backbone of both economic and political processes.
In conclusion, Somaliland’s Private Sector at a Crossroads is a comprehensive report, which – like its title suggests – highlights the strengths and current challenges of the private sector in Somaliland. The Somaliland government is well advised to pay close attention to the report’s main findings and recommendations. The report’s proposed reforms towards greater formalization of the private sector will not only increase economic opportunities in Somaliland, but also meet citizens’ expectations of better governance without neglecting the strength and role of local social capital
Ahmed M. Musa is a PhD student with the University of Nairobi’s Dryland Resource Management programme.