The Somali territories[1] have faced several decades of civil conflict and extremist insurgency, while experiencing weak or non-existent formal central governance, compounded by a range of natural disasters such as floods, droughts and locust infestations.[2] 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.[3] The legacy of fragility continues to impose significant hardship on the nation’s population through ongoing local conflict, poor governance, corruption and an overall weak infrastructure providing little in terms of utilities or public services.[4] Although significant segments of the Somali population hence face internal displacement, unemployment, poverty, recurring hunger and insecurity, it should be noted that over the past few years livelihoods in the Somali territories have seen substantial improvements following economic transformation and growth. While some decades ago the nation’s economy might have been best described as an ungoverned war economy relying on remittances, the diversion of aid resources and the smuggling of goods, the security situation and business environment have significantly improved and lucrative domestic markets have emerged in the Somali territories.[5]

Over the years, Somalia has been a major beneficiary of aid and other assistance from international donors, receiving over a billion US dollars in official development assistance (ODA) annually since 2013.[6] In addition to humanitarian aid, donor support has focused on: 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).[7] Although such donor support has played a role in relieving human suffering across several crises, it has so far failed to establish functional, effective and legitimate governance structures. Extensive patronage networks, widespread corruption, unstable political coalitions and a volatile security situation persist, and they have hindered improvements in Somalia’s business climate, as exemplified by the country’s poor performance in the World Bank’s Doing Business reports.[8] Instead of public or international actors, it has been Somalia’s adaptive business community that has been the main driving force of the Somali territories’ economic resurgence and the improving urban livelihood situation. Placing the fragile and unpredictable Somali business environment at the core of their business models, a number of companies have been able to establish resilient and fast-growing operations. This has allowed them to supply a wide range of goods and services, present the financial basis for the reopening of several ports and other trade facilities, and even start domestic production.[9]

As well as driving economic growth, the aggressive way in which private businesses reacted to statelessness in Somalia has also resulted in inefficient monopolies, coordination failures, externalities, and the privatisation of public goods. The increasingly oligopolistic markets, dominated by a range of large Somali-owned transnational conglomerates branching out into virtually every market segment, have reinforced clan power hegemonies, status quo politics based around established patronage networks, and the unequal distributions of resources.[10] Business incentives frequently coincide with processes aimed at establishing legitimate and representative governance (for instance through businesses funding electoral campaigns and unfair government tendering practices).[11] Although significant sections of the population have benefited from improved livelihoods and corporate social responsibility (CSR) efforts during humanitarian crises, growing inequality and instances of exploitation signal the clear social limits attached to this growth model.[12]

In the absence of open, competitive and regulated markets, both small and medium enterprises (SMEs) and forms of diaspora investment have struggled to survive, let alone flourish. It is, however, exactly these SMEs that are essential to market competitiveness, equitable growth, and broader social and political inclusion.[13] A growing field of SMEs is generally seen as having a role in building social cohesion, fostering state legitimacy and restoring community security.[14] Additionally, a vibrant segment of SMEs is an important form of resilience against increasing oligopolistic practices.[15] The challenge in the Somali territories is, therefore, how to stimulate the growth and stabilisation of the entrepreneurial middle class in spite of the fragile and conflict-affected environment and business climate.

1.1 Research objective

This study aims to contribute to the private sector development debate on SME growth in fragile and conflict affect states during crises, including its relationship to wider social political developments. Deepening the understanding of the dynamics faced by SMEs in the Somali territories may support improving the effectiveness of and reducing the risks to programming efforts in the territories, most notably in the fields of good governance, rule of law, inclusiveness and private sector development (PSD). Insights derived from economic developments in the Somali territories may also be informative for other fragile states going through processes of economic recovery and market concentration, potentially undermining governance efforts. The exploratory question the study seeks to answer is how crisis situations affect SME growth in relation to developments in the wider business environment. This study takes the constraints imposed by the global COVID-19 pandemic as a natural experiment of a crisis. Although the strain posed by COVID-19 on public health is significant, it should be kept in mind that its impact on Somali businesses is compounded by an international economic crisis, supply constraints and weak governmental capacity offering virtually no support measures, and coincides with a resurgence of Al Shabaab activity in Puntland and the southern parts of Somalia. The report thus explores the questions of how the COVID-19 constraints have affected the Somali markets and SMEs operating in those markets, and also how identified market changes influence the wider political system, including governance and its relation to the larger conglomerates. It therefore also aims to support the adaptation of donor programming in light of the changed circumstances in the post-COVID-19 period.

This study is based on research conducted following a political economy analysis framework. It builds on insights derived from telephone interviews with Somali entrepreneurs, Somali academics and aid workers focusing on Somalia and Somaliland. The interview methodology followed a multi-cited ethnographic practice, covering mostly urban locations across Somalia, Somaliland, the United Arab Emirates and the United Kingdom. Research was conducted during the COVID-induced lockdowns across various research locations (from August to December 2020), hence necessitating phone interviews. Unfortunately, it was not feasible to include the China-based community, the aid-based business activities in Eastleigh (Nairobi, Kenya) nor peripheral agricultural sectors. Given such limitations, the insights derived are thus indicative of developments in urban Somali markets but cannot claim to be comprehensive. Market and political dynamics vary widely over the Somali territories due to clan groupings, historical circumstances and the degree of institutionalisation of state structures. Hence dynamics described here 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 further details on the methodology and its limitations, please refer to the Appendix).

1.2 Structure of the report

This report explores the behaviour of SMEs in fragile and conflict-affected situations in relation to broader political-economic developments at times of crisis, such as that brought about by the COVID-19 pandemic. The report sets out with a discussion on the theoretical underpinnings of the significance of SMEs in fragile and conflict-affected situations (FCAS), as well as their significance in the face of broader political developments. It subsequently discusses the business environment in Somalia, illustrating the links between political and private sector actors. In this chapter, a brief overview of the spread of COVID and the formal response to the pandemic are also presented. The next chapter explores the economic impact of the (global) pandemic and responses to it on the Somali territories, tracing its impact through parts of their supply chains, remittance corridors and government revenue developments. The following chapter lays out the political-economic impact of the constraints previously identified and described. The paper traces the differential impact on larger and smaller private enterprises, their position in the market, and their relationship to governance. The final chapter concludes the discussion by presenting a summary of the key political-economic impacts, and presents three recommendations for future donor programming.