The Road to Economic Development; the case for Somaliland

By: Mustafa M. Awjama, 

This work tries to pave the way for the achievement of a sustainable economic growth by taking into account the current position of the Somaliland economy and then compiles a set of recommendations for those agents including policy makers who are interested in improving the economy.

Currently, Somaliland is in the stage of what Rostow called “the preconditions for take-off”. According to Rostow, the “preconditions for take-off”, the second stage of a five stage process, is characterised by the presence of entrepreneurs in the society and investors who are ready to invest ideas.

In his paper Is there a proper sequence in Democratic transitions? Francis Fukuyama highlights that “Development is a complex process that takes place across multiple dimensions of Human life”, and that economic growth, the State, Rule of law and mechanisms of democratic accountability are just few of those several dimensions. In this paper I will focus on the economic side of that development process.

Economic development is often understood as the transformation and improvement of a society’s standard of living and wellbeing. There is no universal strategy which succeeds the economic advancement for all nations and it is often up to that particular country to decide which way it takes to achieve its desired destination[1]. However, there is generally a correlation between state building and economic growth, between rule of law and growth, and between stable democracy and economic growth.

Economists often emphasize technological progress and capital accumulation as the two main sources of economic growth. The logic behind this is very simple. An individual with an advanced technology is likely to produce more than an individual with a primitive technology. Similarly, an individual with more capital can produce more than an individual with less capital; the higher the capital per worker the higher the productivity.  The good news is that it’s not hard these days to improve the state of technology for any given country due to technology diffusion which allows countries to adopt and replicate new technologies and know-how from other countries.

We need to acknowledge that the underlying purpose for economic development is to increase the wellbeing of the individual and that per capita income is just one of several indicators. In addition to promoting the wellbeing of the individual policies should also be structured to narrow the inequality gap as a wider inequality gap might have political repercussions. By aiming to achieve steadily growing productivity, Governments closely watch some key factors which stimulate the economy including; Investment, consumer expenditure, what the Government spends, and the country’s Net exports to the rest of the world.

Hence, in order for Somaliland to build its economy, a number of institutions and policies are needed to be in place. In here, I will present those policies and institutions which will assist Somaliland economy to develop and which will also take it to the next stage.

      I.            Property Rights and Contract Enforcement

The two aspects of the Rule of law, which restricts arbitrary decisions made by governments, that economists relate to economic growth are the Property rights and contract enforcement[2]. Reason being that no agent will make a long term investment unless their property rights are secured. It is conceivable that individuals are bound to face extra costs to defend their property where a property right does not exist. It is also arguable that economic efficiency requires the allocation of resources for those individuals who can utilize it.[3] With this respect investors in Somaliland might face several problems including tribalism which can hinder economic efficiency and can cause investors to seek protection from other agents. Though a resource has been allocated, it is highly unlikely that an individual from the east dares to make an investment in the west due to the disturbances caused by tribalism and vice versa.  This is one example of why sustained contract enforcement comes in to the calculus of economic productivity.

On one hand, the ability of the Somaliland state to enforce contracts needs to be established while on the other hand the ability of the state to make arbitrary decisions needs to be limited. When discussing property rights and contract enforcement the case of Zimbabwe can be a good example to refer where Ceil Rhodes’ company offered the land in order to attract settlers and where later Robert Mugabe redistributed the land just to hold on to power[4]. Whatever the reason has been for Zimbabwe, lack of property rights and contract enforcement can have disastrous effect on the economy. Somaliland will need to draft regulations of property rights in clear-cut terminologies and will also need to have a strong third party for arbitrations.

   II.            Financial Institutions

The fact that there are both entrepreneurs and people who want to invest in the country necessitates the establishments of financial institutions.  “A healthy and vibrant economy requires a financial system that moves funds from people who save to people who have productive investment opportunities” (Mishkin, 2007).

Before any step, Somaliland will need to establish a well functioning central bank. Apart from implementing the monetary and the exchange rate policies, the central bank is also required to supervise the banking sector and to act as the lender of last resort. In short, the central bank is the bank of the central government and the bank of all banks.[5]

All financial institutions including banks, insurance companies, saving institutions and investment companies needs to be regulated by the government. One might take the so called “gain profit while sitting” project in 2009 as a good example which can clearly show the negative effects of lack of financial regulations in Somaliland. During the years this project had been operating in Somaliland, thousands of people saved their money without official agreements. All those who deposited their money were at the end screaming in the streets of Hargiesa claiming that the saving institution had disappeared and that their money had been lost.

Therefore, since the failure of one bank can jeopardize the whole economy, financial institutions especially banks should be heavily regulated. According to Pilbeam (2005), the main objective of regulating financial markets is to promote stability, to keep the investors safe and to encourage fair competition in the market. All in all, as Brunnermeier (2009) said “one of the key purposes of bank regulation is to internalize the social costs of potential bank failures”.

1. III.            The Role of Diplomatic Missions in Promoting trade

Diplomatic recognition cannot be said to be a precondition for economic development and lack of recognition does not exclude countries to pursue their economic growth goals. According to Shaw (2008), Recognition is merely “a method of accepting certain factual situations and endowing them with legal significance”. However, Somaliland arguably exists as a legal personality in international law. It has been emphasized that:

“…Recognition may be viewed as constitutive or declaratory…, the former theory maintains that it is only through recognition that a state comes into being under international law, whereas the latter approach maintains that once the factual criteria of statehood have been satisfied, a new state exists as an international person, recognition becoming merely a political and not a legal act”.[6]

Somaliland will need to see the diplomatic recognition as a quid pro quo game; scratch my back and I will scratch yours. It is highly unlikely that a country will recognise Somaliland unless that country is sure what it is getting in return is at least proportionately equal to the benefits of the recognition it is giving. Therefore, parallel to its mission in getting recognition, Somaliland should come up with strategies to promote its international trade and seek investment through its diplomatic representatives. This is also one of the core functions of diplomatic missions as defined by article 3 of the Vienna convention on diplomatic relations in 1961.[7]

By concentrating economic diplomacy, Somaliland will not only promote trade and investment but will also increase its networking, promote country profile and at last will have a say in those global political organisations including the United Nations.