In Somalia, while the international community has focused its efforts on humanitarian response and political reconciliation, entrepreneurs have arisen to meet the demands of the population. The success of the Somali business community is a positive story within the context of of war, famine, and instability.  A closer examination of this progress makes for an insightful case study in the role of the private sector in state formation.
The push toward growth in the Somali private sector came with the collapse of the Siyad Barre regime and the influx of aid that followed.  Barre, a military dictator with a Socialist economic ideology, ruled Somalia during the 22 years prior to the 1991 coup.  His policies cultivated inefficiency, nepotism, and fraud in state-run industries, with high military expenditures leaving little money for human capital investment.  The resulting economy was in dismal shape, with commercial activity limited to a few well-connected elite at the time of the state’s collapse. 

International actors, such as the United States (US) and the United Nations (UN), attempted to minimize the violence and famine due to the ensuing civil war and the 1992 drought.  Large amounts of aid flowed into the country.  Without a state to facilitate relief distribution, the UN relied on local entrepreneurs to support operations as well as to supply goods and services.  Such activity launched a class of Somali entrepreneurs who substituted for the public sector in the years to come.

After the failure of the US-led UN peacekeeping mission in the mid-1990s, support and aid from the international community evaporated.  Entrepreneurs became the sole providers of a wide array of goods and services, flourishing under the fierce competition that takes root in places with little to no government intervention.  For most Somalis, entrepreneurship became the only source of livelihood.  Relying on the reputation and trust embedded in Somalia’s clan networks, these entrepreneurs facilitated access to basic services, provided alternatives to hard and soft infrastructure, and expanded the traditional private economy.

The private sector found creative ways to provide public services.  With water infrastructure limited to cities, entrepreneurs owning donkeys and trucks developed systems to deliver water to rural areas at a reasonable price.  In Somaliland, the city of Hargeisa managed to form a public, but independent and financially sustainable, water agency.  Somali entrepreneurs responded to electricity demand by selling contracts to households wherein diesel generators provided power by the hour for designated purposes.  As a result, electricity rates are comparable to other African countries, and access levels expanded since the Barre era. , 

Entrepreneurs even developed alternatives to hard and soft infrastructure.  To make up for dilapidated roads, the Somali airline industry has blossomed to increase the number of routes offered in the post-state era.  The industry accommodates safety and security concerns through wet-leasing and basing operations out of foreign countries.  In addition to offshore registration, the demand for legal and judicial processes is met through other mechanisms, such as xeer, Somali customary law, and privately-funded courts.  These solutions—covering dispute resolution, contract enforcement, resource use, marriage, and other issues—are supported through the trust, reputation, and religion central to clan networks.  In some areas arbitration is fairer than under the Barre regime.   

In addition to filling in for the state, the Somali business community has also shown remarkable progress in the traditional private sector.  Livestock exports have risen exponentially, aided by the abban protection system comprised of brokers at the Kenyan border who certify that transactions do not involve stolen animals.   Intense competition and partnerships with international corporations like Sprint, ITT, and Telenor enabled seven mobile phone companies to offer Somalis the lowest rates in Africa. The money transfer system, known as hawala, extended its market penetration as a result of the diaspora’s growth and its correspondent remittances.  The ability to transmit remittances as high as $2 billion, as well as the widening array of banking services offered, including travelers checks, deposit services, and even consumer lending, are evidence of the strength and efficiency of the system. 

Private sector initiatives have been so successful that welfare may have improved since the fall of the government, with poverty at lower levels than in richer, more stable African countries.  In this way, progress in the private sector could actually impede state formation, as Somalis may rationally believe that they have little to gain under a new government.  A new government would undoubtedly raise the cost of doing business through tax collection and regulation expenses.  The business community will need to be persuaded that its achievements will not be wiped away under an institutionalized state. 

An episode from the 2011 drought-induced famine demonstrates the complexities of this issue. Some entrepreneurs benefited as rising food prices increased profits.  The UN and other humanitarian organizations, on the other hand, offered free or low-priced food, crowding out these entrepreneurs.  Seeing an opportunity to gain local support from the private sector, al-Shabaab, a militant Islamist group periodically controlling much of Southern Somalia, restricted access to relief services so that businesses could maintain revenue.  

At least two negative effects relevant to the discussion on government credibility can be distilled from this incident.  First, by harming the local private sector, international agencies undermined their reputations in the business community, which is vital to efforts aimed at establishing peace and forming a government.  Partnering with entrepreneurs for relief provision could address this issue in the future and also help reorient business models away from an emphasis on short-term profits.   Second, it reinforced any pre-existing perceptions among entrepreneurs that state alternatives like al-Shaabab are better poised to respond to their needs than a hypothetical future government.  Given entrepreneurs’ indispensable role in providing for the population throughout the Somali crisis, it is especially important that they be convinced of the advantages of having an official state organization. 

Somalia’s war has ebbed and flowed across the country, providing sufficient levels of stability to give rise to an unexpectedly dynamic private sector.  It is a testament to the fact that stateless does not inherently mean chaos and stagnation.  Insofar as the ability to work through the crises of the past twenty years demonstrates a magnitude of tenacity and awareness, entrepreneurs should be tapped to apply these skills towards the formation of an effective, well adapted, and credible government.  Yet there is reluctance within the international community to leverage the strengths of the private sector.  While part of the hesitancy to work with entrepreneurs may be explained by risks related to money laundering and inadvertent financing of terrorists, the long-term benefits to engagement are high enough to merit the time and effort required to find a way around those challenges.

Herein lies the lesson for the development community: Bringing the private sector into the discussion is imperative to create a sense of ownership in the political process.  The international community can incentivize the business community’s participation by building awareness of the benefits of a well-functioning government, and by aiding in the prioritization and implementation of reforms that will bring these benefits sooner.  For many people that have lived so long without a constructive government, it is rational to dismiss the value that proper governance can bring. Changing this perception is neither easy nor quickly done, but necessary for creating sustainable, inclusive political systems.

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Nenova and Hartford. “Anarchy and Invention.”; Cassanelli, Lee. “Private Sector Peacemaking: Business and Reconstruction in Somalia.” Accord Issue 21 (2010).

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