Background

Since the collapse of the Siad Barre regime in Somalia in 1991, the territory has gone through nearly three decades without effective central governance.[1] Throughout this period, the territory faced protracted civil war, several international and regional military interventions, periods of rule by warlords, regional fragmentation and secession, the rise and fall of the Islamic Courts Union and precarious governance by several internationally sponsored institutions attempting to restore a semblance of statehood. The hardships inherent in this tumultuous period were further compounded by recurrent episodes of severe drought, flooding and other major natural disasters.[2] While the situation has certainly improved over the last few years, giving rise to more optimistic views on Somalia’s future, events such as the 2017 Mogadishu truck bombing continue to highlight the tenuous authority of the Somali federal government.[3] While areas of relative security and stability, such as seceded Somaliland, do exist, large parts of the country, the capital, and the public sphere remain firmly in the control of non-state actors such as Al Shabaab or territorialised clan-governance.[4] The complex patchwork of local, regional and international actors active throughout Somalia continues to give rise to a wide range of disputes over territory, resources, allegiances and authority at local level and within the federal system.[5] The continued fragmentation and instability have ensured that Somalia has maintained a position at or near the top of most indices of state fragility for years, and earned it the reputation as the prime example of a failed state.[6]

To stave off the worst of the humanitarian impact of these crises and to support the development of the territories and of its governance in particular, Somalia has been the recipient of substantial aid and other assistance from international donors for years (e.g. Somalia has received over a billion US dollars in official development assistance (ODA) annually since 2013).[7] Donor engagement has revolved around three key strands of programming: 1) good governance and institution building, aiming to increase the government’s institutional capacity, service delivery and authority; 2) public-private partnerships and business environment reform; and 3) humanitarian action (mainly resilience related).[8] While some of this assistance has certainly served an important role bridging many people through the periods of extended drought, many humanitarian and development efforts have run into significant difficulties. Extensive patronage networks, widespread corruption, unstable political coalitions and a lack of access due to security risks have jeopardised tangible development progress, ensuring that Somalia has become known as the ‘graveyard of foreign aid’ and ‘the world's foremost graveyard of externally sponsored state building initiatives’.[9]

Despite the bleak picture regarding governance that is evident from Somalia’s image of a failed state, the Somali economy did not fully collapse and has proven remarkably resilient during even the harshest episodes in the last three decades. Especially as the security situation improved somewhat in recent years, the Somali economy has shown remarkable growth (given the still unstable business environment). Somalia achieved a modest but persistent (formal) economic growth of 1.7% (Compound Annual Growth Rate – CAGR) between 2013 and 2017, compared to a decline in many other fragile states such as South Sudan, Iraq or Afghanistan over the same period.[10] This level of economic growth is especially notable considering that the majority of productive assets and investment capital that existed under the rule of Siad Barre had been lost throughout the civil war: moveable assets were shifted out of Somalia; immovable assets were either destroyed or looted to fund the conflict; and capital was parked or reinvested in safer havens (such as Dubai).[11] Additionally, although donor funding for private sector development has been rising, total funding remained at a mere 5.6% of the total National Development Plan ODA funding (2015-2017).[12] Hence, these levels of economic growth cannot be adequately explained by donor support.

The dearth of domestic capital and limited availability of donor funds begs the question how, by whom, and from where this growth has been fuelled. While some observers hailed the emerging economic model as a functioning example of an ‘economy without a state’ where remittances fuel a flourishing cross-border trade, others noted the opportunities for smuggling licit and illicit goods, as well as the opportunities for private individuals in mediating aid-flows in a protracted state-building process.[13] While such models are appropriate to describe the resurgence of the Somali economy in the initial post-civil war years, economic developments in the last decade have far outstripped what can be expected from such a war-economy. Somalia today has developed into a lucrative market in its own right, rather than merely an ungoverned territory facilitating transit of goods into other markets.[14] This market has seen an influx of transnational entrepreneurs, running operations fully reliant on the Somali market, but formally headquartered outside the Somali territory in order to benefit from access to banking, developed legal frameworks, logistical hubs, educated (diaspora) human resources, and security. Attention to the economic resurgence has remained largely limited to technical considerations, and the role of peculiar emerging business models thriving in the Somali market has not been fully understood and appreciated by international audiences.[15] As a consequence, an influential set of stakeholders and significant interests have not been adequately considered by donors, thus risking the impact of programming, or even further fragmentation and conflict, as projects conflict with these actors’ interests.

This analysis seeks to inform the policies of donors invested in development efforts in Somalia, by examining the interests and influences of business actors in public institutions and the wider public sphere. The transnational entrepreneurs that have emerged in Somalia are influential political actors. In stark contrast to rapid developments in the private sector, government capacity in Somalia and Somaliland has lagged behind. The capacity of government bodies to regulate businesses operating in their territories has been extremely limited, which prompts the question to what extend government is regulating businesses and to what extend economic incentives instead are ruling political processes and governance throughout the Somali territories. As some observers have noted, nearly all political developments in Somalia are underpinned by a clear economic rationale.[16] Actors in the Somali private sector have remained far from neutral observers, and have actively facilitated, influenced, bankrolled and/or participated in key political developments such as the 2016 elections to the federal government of Somalia, the numerous Somaliland peacebuilding conferences from 1991 onwards, the 2000 Arta conference, and the establishment of the Islamic Courts Union.[17] While tax discipline remains markedly low, the flow of private funds into the public sphere has been substantial. Businesses fund charities that are providing public services, they financially support specific government institutions and are major financiers for many politicians’ election campaigns.[18] While most Somalis sharply divide the business community and the political community, and have markedly different opinions of both groups, individuals frequently move back and forth between corporate and cabinet positions. Business and politics are strongly intertwined, and both communities have mutual but often differing interests regarding number of salient topics (such as security, service delivery, justice, protectionism).

Research objective

This report explores economic developments in Somalia, the transnational entrepreneurs it gave rise to, the business models that thrive in the Somali market, and the impact these developments have on governance. Given the significant capital flight throughout the civil war, it highlights the role of the transnational Somali community reversing the flow of capital and its role in the economic resurgence. It thus focuses on the role of transnational businesses driving investment in Somalia. Specifically, this report seeks to answer the question how the Somali private sector influences governance, what role transnational capital and entrepreneurs have played in socioeconomic developments, and how this influences the development pathway in Somalia and Somaliland. In doing so, it seeks to inform policymakers in the international community active in Somalia, in order for them to understand and manage the business interests entrenched in the political and statebuilding processes. By improving our understanding of transnational business interests and their intersection with development programming, this report seeks to improve the effectiveness of and reduce the risks to programming efforts, most notably in the fields of good governance, rule of law, inclusiveness and (diaspora driven) private sector development (PSD). Insights derived from economic developments in Somalia may also prove informative for developments in a number of other areas going through processes of economic recovery in a fragile environment. Politically influential, ‘hard-to-tax’, sectors and corporations exist in numerous other areas, and are especially difficult to govern in those contexts where state capacity and authority is limited.[20]

In order to explore the economic development and its impact within Somalia, this report seeks to answer the question ‘What is the impact of the transnational businesses operating in Somalia on socio-economic development and governance in Somalia?’ This question is answered by step-wise exploring: 1) what the transnational Somali community looks like, and how it relates to Somalia; 2) how transnational businesses position themselves in the market and how they operate; and 3) what the impact is of transnational business interests on socioeconomic development and governance. The study is conducted through a political economy analytical framework, and builds upon data gathered through desk research, market analysis, telephone interviews and multiple episodes of fieldwork informed by multi-sited ethnographic methodological practices. The research was conducted between September 2018 and March 2019, covering the sites of Somalia, as well as transnational Somali communities in Dubai (UAE) and the UK.[21] Unfortunately, it was not feasible to include the China-based community, and Kenya was excluded, as aid-based businesses were not in scope, and the business activities in Eastleigh have been extensively explored elsewhere.[22]

The nonetheless broad scope of the research and its fieldwork generates numerous insights regarding the Somali market and the businesses within them, but it should be kept in mind that Somali market dynamics are not homogenous across the Somali territories, nor across the transnational community, and are evolving and changing rapidly as the economy develops. Dynamics between Somalia, Somaliland and other states vary substantially as a consequence of their distinct clan and historical circumstances. As such, insights gained from the economic development patterns in the Somali territories may be informative, but cannot be expected to hold uniformly across all Somali territories. Extrapolations to other territories that do not take into account local context may thus obscure important differences (for an in-depth discussion of the methodology and its limitations, please refer to annex 1).

Structure of the report

This report explores the impact of the transnational businesses active in Somalia on socioeconomic development and governance within the Somali territories. It commences in the first chapter by exploring the development of the transnational Somali community, highlighting how its character changed from the initial dispersal throughout the civil war (and before), through its establishment in its host countries, and subsequently its re-engagement in Somali affairs. It highlights the development and transnationalisation of the Somali community, illustrating the establishment of the transnational entrepreneurship that emerged from it and which has come to play such a big role in Somali economic and social developments. The next chapter further explores the way transnational entrepreneurs operate. It examines the role of transnational entrepreneurship within the Somali context by tracing the business models employed by some of the largest conglomerates active in the Somali territories. It specifically seeks to explore how these companies manage to drive economic growth while also shaping the political environment in order to maintain a favourable business environment, allowing for further growth. Chapter 4 turns attention to these transnational actors’ interests in and impact on development in Somalia. It explores the political and societal implications of businesses’ activist role, and how it impinges on the interests of other stakeholders within Somalia (especially on political actors, community leaders and the international community). It also explicates how this impact differs in the different contexts of Somalia and Somaliland. Chapter 5 then considers how the influence of corporate actors on socioeconomic development and governance impinges on donors’ (diaspora based) private sector development efforts in the territories. The final chapter synthesises the main findings from across the previous chapters, and sets out concrete recommendations for policy makers active within Somalia to understand and manage the business interests entrenched in the political and statebuilding processes, allowing them to improve the effectiveness of and reduce the risks to programming efforts.