Despite weak governance, the Somali economy has not fully collapsed and has proven remarkably resilient during even the harshest episodes in the last three decades.

Somali migrants have been noted for their ability to adapt their ‘nomadic’ heritage to life in displacement, maintaining a high degree of mobility and strong social networks. They are best approached as a transnational community spanning multiple countries, rather than a static diaspora settling into a new country while maintaining ties to Somalia.

The emergence of a transnational community went hand in hand with the emergence of transnational entrepreneurship: a form of entrepreneurship that includes border-crossing businesses that rely on the existence of dual cultural, institutional and economic features and involve at least the countries of origin and destination, if not more.

The transnational Somali community was instrumental in reversing the flow of capital and the economic resurgence.

Transnational entrepreneurs have entrenched their economic role and clientelist networks, which has had a significant impact on socioeconomic development and governance.

The idiosyncrasies of the Somali economy are not just something that transnational companies cope with – weak institutions and a difficult business environment are at the very core of these companies’ business models.

No Somali state institution has been able to take a major role in the development of Somalia nor Somaliland. Instead, it has been the private sector that has taken the lead in the economic development of the area, largely unchecked by government authority.

The main constraint companies face in Somalia is growth potential. In a market where nearly all goods and assets are imported, the importance of having access to substantial capital (especially in hard currency) is the key factor to transforming a small-scale start-up into a fully-fledged business.

Several major transnational conglomerates have leveraged their liquidity as a competitive asset, and scrambled to gain a dominant position in a wide variety of markets, often unrelated to their core business as their growth strategy.

Companies’ secure their competitive position by establishing favourable relations to formal and informal governance through their highly professional corporate social responsibility (CSR) departments.

The corporate social responsibility track is frequently supported by a range of clientelistic incentives aimed at formal and informal authorities, while few if any taxes are paid.

The aggressive way in which private business reacted to statelessness in Somalia, resulted in ‘monopolies, coordination failures, externalities, and public goods provision’, that precluded efficient market outcomes. This has at times fuelled mistrust between the business and political elites as well as factional infighting.

Transnational business practices have influenced governance in Somalia and Somaliland, as market concerns are often interlinked with clan power dynamics and concerns about (clientelistic) distribution and justice. The resulting oligopolistic governance practices reinforce clan power hegemonies, status quo politics based around established patronage networks, and the unequal distributions of resources.

In the absence of more open, competitive markets, both small and medium enterprises (SMEs) and forms of diaspora investment have largely failed to significantly stimulate economic development and contributed to market inefficiencies.

In Somalia, competition over state power and resources (furthered by the system of aid rents) has not translated into genuine competition in the market. Instead, SMEs and small competitors are beholden to political elites, tied to more factionalised spoil politics and segmented into discrete networks. Their ties to systems of political patronage have at times risked destabilising critical security arrangements and political pacts, as allocating patronage to new economic actors has threatened to destabilise distribution across the wider political settlement.

In Somaliland, the formation of a discrete economic elite class has seen the reproduction of elite and clan power that has allowed for more organised competition from the bottom up. The number of actors involved in economic and political activity are fewer in Somaliland and constitute only three primary groups of actors (government, clan and business). These key stakeholders are closely interlinked where access to economic wealth by key clans has been a deciding factor for political power and vice versa.

Efforts to improve the economy and good governance through private sector development are challenging tasks in contexts where the private sector remains stronger than the state. Diaspora investment and aid offers some potential for addressing liquidity concerns but risk reinforcing rent-seeking practices and power differentials.

In Somaliland, more support to SMEs is needed to counter the authority and political influence of monopolies and provide a unique opportunity for economic development, whereas in Somalia, such support may risk reinforcing rivalrous competition, inefficient market outcomes and conflict.

Based on the analysis, the following recommendations are made:

Effective programming in Somalia or Somaliland must take into account and address the interests the major transnational conglomerates.

The development of a formal banking system increasing access to capital would be a key step to ensuring more equitable economic development.

Scaling up selected SMEs could function as a catalyst to create space for further economic development.