Why has GDP growth been so slow in Somalia? Essay
Why has GDP growth been so slow in Somalia?
Somalia, formerly known as the Somali Democratic Republic, is situated in the Horn of Africa1. It lies along the Gulf of Aden and the Indian Ocean, bounded by Djibouti in the northwest, Ethiopia in the west and Kenya in the southwest. Although generally arid and barren, Somalia has two main rivers; the Shebelle and the Juba.
It has had a turbulent history; governance has changed frequently and an independent Somalia has had to deal with assassination, internal conflict and famine. In 1970 Somalia was declared a socialist state, with most of the economy nationalised.
The country has battled both itself, in ongoing civil war, and neighbouring Ethiopia, among others. Civil war developed as a result of clan based military factions competing for control after the collapse of regime; War with Ethiopia was deep-rooted, and though it stemmed greatly from the desire of Somalia’s leaders to claim back the land they felt was rightfully theirs, it also carried religious undertones. The countries’ official religion is Islam, with 99.8% of the population being Sunni Muslims2.
Somalia’s difficult past has lead to an ever more challenging present. In 2001 it ranked 161 out of 163 countries in the UNDP’s Human Development Index3, and it has failed to provide data for the rankings several times since. The absence of a government (from Jan. 1991 to Aug. 20004), state conflict, continuing insecurity in many parts of the country and inadequate access to the most basic of services have contributed to a state where extreme poverty (less than $1 PPP) is estimated at 43%5. General poverty (less than $2 PPP) covers nearly three quarters of households, and is increased to 80% in rural and nomadic populations. The extreme conditions these people are living in are among the worst in the world.
GDP in Somalia:
A result of Somalia’s complex history is poor economical growth. Economic growth is defined as a long-term expansion of the productive potential of the economy6. Whilst sustained economic growth should, in theory, lead to higher living standards and rising employment, short term growth is measured by the annual change in real Gross Domestic Product (GDP). GDP is the value of all the goods and services produced by all sectors of the economy (agriculture, manufacturing, energy, construction, the service sector and the government) in the last three months7. The measure is used as the principal means of determining the health of an economy – sluggish GDP growth is considered harmful.
Somalia’s GDP growth has been particularly poor over the last century. The average annual growth in real GDP per capita between 1965 and 1990 was -0.98, showing a decline in the amount produced by the country8.
Although more recently Somalia has seen a slight improvement in growth, with estimations of a 2.6% growth in GDP for 2008 and the following two years, this is still poor in comparison to the rest of the word (ranking 133rd)9. There appears to be a direct correlation between the hardship the country has faced and the GDP figures it has been producing; GDP per capita is estimated to have declined from $280 in 1989 to $226 in 2002 as a result of the consequences of the civil conflict10.
The countries surrounding Somalia have seen considerably better GDP growth and HDI rankings in recent years, scoring higher in almost every indication of development. This raises the question as to why Somalia, in particular, seems to be suffering so greatly. This essay aims to ascertain and analyse the most significant factors which have caused such poor GDP growth in Somalia, such as the civil war, and come to a conclusion as to which factor has most hindered the country.
The dependency theory developed in the 1950s, under the guide of Raul Prebisch, as a critical reaction to the conventional approaches to economic development that emerged in the aftermath of World War II11. Prebisch’s initial explanation for the phenomenon was straightforward: poor countries exported primary commodities to the rich countries, which then manufactured products out of those commodities and sold them back to the poorer countries. The value added by manufacturing a usable product cost more than the primary products used to create those products. Therefore, poorer countries would never be earning enough from their export earnings to pay for their imports12. Effectively, the rich countries in the West exploit the poorer Third World in order to stay rich.
Unlike countries like the UK or Germany, the states of the Third World did not start from a position where competition was minimal and no restraints existed on entering the world market; this ties their economy to a global system of production and distribution controlled by the industrialized countries of the West13. Unfortunately it appears the West is unwilling to relinquish their power.
During the 1980s the position of many African countries declined further, with growing foreign debt, falling aid, very little -if any – price support for primary products and a great deal of protectionism from the West; the West was united in the belief that the world economy did not need restructuring. International debt in the Third World rose fifteen times, from approximately $100billion to just over $1450billion from 1970 to 1990; a debt trap ensnaring many African states, where the peripheral country’s economic policy is dictated by the hegemonic West. Giles Bolton sums this up when he says “Africa gets what we decide to give it, well intentioned or otherwise, especially when it comes to the aid we provide and the trade rules we want set”14.
Should the dependency theory be true, Somalia could attribute part of its poor GDP growth to this.
When African’s first gained independence they had little education at all; when Burundi gained independence there were only 2 people in the whole country who had a degree15. Most African’s hadn’t received any school-based education at all. Somalia has the lowest primary school enrolment in the world, at 22%16 and the years of schooling a Somali child could expect if they were born today is only 1.817.
Education and its effect through labour quality are generally found to be the most important contributors to economic growth18. Studies have shown it to contribute 15-25% of growth in GDP per capita, and up to 90% in improving the quality of the labour force. The theory of human capital considers education as an investment that makes individuals more productive and focuses on pecuniary gains. If education (and training) enables individuals to produced more efficiently it can lower the costs to produce an additional output (marginal costs), which would shift the supply curve.
However Somalia has not invested in education, and how only has this caused potential loss of GDP growth, but an uneducated workforce means that a high percentage of the labour force must find employment in the primary sector as they are not qualified enough to produce in the secondary or tertiary markets.
Primary product dependency:
Primary product dependency is measured by the percentage of a country’s merchandise exports that are primary products. Agriculture is Somalia’s most important sector, with livestock accounting for approximately 60% of GDP and more than 50% of export earnings19. The country produces bananas, corn, coconuts, rice and sheep to name a few.
There are vast economic disadvantages to being primary product dependent. Commodities are subject to price volatility. The cobweb theory, introduced by Nicholas Kaldor, is an economic theory which explains why prices might be subject to periodic fluctuations in certain markets. It is based on a time lag between price and output decisions; this year’s price determines next year’s output. Assuming that the market was in equilibrium, if there was a bad harvest output would fall. According to the laws of supply and demand this would result in the commodity fetching a higher price (as it is scarcer).
On the basis of this higher price, famers would plant more in year two, but again, due to the laws of supply and demand this leads the price to fall; and so it goes on, with the farmers basing what they plant on the previous year’s harvest. The cobweb is unstable because the market price is moving away from the market equilibrium. Overspecialisation in agriculture can therefore be detrimental to growth, as investment in such products is risky due to their changes in price, especially since the sector is subject to exogenous shocks20. The low price elasticity of demand for these products mean that any increase in supply leads to a greater percentage fall in price than output – therefore the revenue of producing a primary product tends to fall as output increases.
Another drawback of being primary product dependent is that is stops diversification against risk. Locking a country into primary activity may deny it the possibility of long term growth, particularly since the West produce their own primary products (which can strain relationships between Third World countries and the richer West). If you’re European you’re paying to subsidise every cow in the European Union at ï¿½2.50 a day, whilst 300million Africans live on less that ï¿½1 a day21. The exemplifies the way famers must be price takers in this industry – marginal productivity analysis determines how much the take-it-or-leave-it offers from Western firms are worth22, and if the Somali farmers choose to leave it and hold out for a better price? Well the West will use their buffer stocks to supply themselves with food, and the farmer and his family will be left to starve.
The Prebisch-Singer hypothesis23 argues that there will be a decline in the terms of trade of primary products due to factors like low income elasticity. This would result in a net flow of income from commodity producers to manufactured goods exporters. As world incomes rise the demand for goods with a high income elasticity of demand, such as high quality manufactures, will rise faster than the demand for goods with a low income elasticity of demand, such as agricultural products. This suggests that the price of agricultural goods will fall relative to the price of manufactured goods. A country specialising in exports of agricultural goods will then experience a fall in its terms of export prices falling relative to import prices.
This then implies that for every ton of cocoa (or any other primary product) exported the developing country will be able to import a smaller quantity of other goods. This problem is compounded because primary products tend to be traded under conditions approximating perfect competition; primary products are homogenous, with many buyers and sellers and no barriers to entry or exit24. Manufactured goods, meanwhile, tend to be produced under more monopolistic conditions. Any technological innovation is likely to result in lower prices for the competitive primary producers and higher prices for the monopolist producers of secondary products. This dynamic then further reduces the terms of trade of developing countries.
As previously stated, Somalia has had a difficult infancy. It was first inhabited in the 7th century by Arab tribes25, but has experienced several changes in leadership since. In 1887 Britain proclaimed protectorate over the diminished area of Somaliland (since France had required the area later to come Djibouti). The following year an Anglo-French agreement was made defining the boundary between Somali possessions of the two countries; this has remained in place despite the disorder that has occurred since. Britain’s first occupancy of the country was relatively short-lived, being invaded by the Italians in 1940, only to take back ownership in 1941. After partly returning to Italian control the country is granted internal autonomy in 1956.
Following this, in 1960 the British and Italian parts of Somalia became independent, merged and formed the United Republic of Somalia (with Aden Abdullah Osman Daar elected as president). But this was only the beginning. After becoming a Republic, Abdi Rashid Ali Shermarke beat Aden Abdullah Osman Daar to become president, only to be assassinated two years later. Muhammad Siad Barre assumed power in coup thereafter, before declaring Somalia a socialist state and nationalising the majority of the economy. In 1981 Barre’s regime began to face opposition and by 1991 it was so strong that he was ousted, leaving the country without government for 9 years. The constant turmoil that Somalia went through was detrimental to their growth. Without a strong government voted in by democracy a nation is likely to face corruption and myopic governance.
Although it may seem that Somalia, and other African countries like it, were slow to emerge as a democracy many forget that Europe had suffered numerous upheavals, revolutions, coups and conflicts – including the small matter of two world wars, the east-west partition of the entire continent over numerous decades and persistently periodic fighting in the Balkans in the twentieth century alone; it would have been unrealistic expect Africa to develop so quickly26.
However, in-between foreign governance and democracy a disturbing habit developed among the Somali officials: corruption. In 2009 Somalia was perceived to be the most corrupt country on the planet27. It had marred every aspect of Somali society. When Africa had been ruled by Western nations (after the ‘scramble for Africa’) regal qualities of life had been created to tempt minor officials from Bristol, Burges or Bordeaux to work in the colonies28. Large houses, lush gardens, servants, swimming pools and allowances were all just perks of the job that were to be expected. Inheriting these privileges overnight (when the foreign powers left), it was hardly likely that Africa’s new rulers were going to renounce them. Thus, Somalia’s new leaders began to enjoy their lifestyle.
They enjoyed it so much, that they started to delve into more obvious methods of corruption. Many prospered on bribery from the profiteers in the so-called gray economy29. Other government workers could obtain “letters of credit” (the right to draw funds from government-held foreign exchange accounts) allowing them to import goods for sale and for family use. Corruption is notoriously difficult to prove, especially so when Somali law states there are no legal consequences or sanctions for officials who exploit their position for private gain30, hence officials do not care if they were caught. Resources, extracted from the rural areas through various legislative devices and controls, were never used for development for the common people. The elites used them to develop only the urban areas and built statues of and monuments to themselves31. Corruption affects those worst off in society, increasing the poverty trap significantly.
According to preliminary report by a United Nations monitoring group in Somalia, up to half of all food aid meant for hungry people is siphoned by the warlords who control territory where most of the country’s displaced people live32. Further evidence is not hard to find – The Somali government announced its cabinet in 2010; a cabinet that is bigger than India’s, the largest democracy in the world33. India has a population of 1.2billion and a GDP of approximately $1.16trillion, yet lawless Somalia has only 9million inhabitants and a GDP of less than $9million but feels it needs more ministers? Furthermore, the Somali president Sheikh Sharif Ahmed has been in office more than 18 months but has yet to fulfil his election promise of restoring basic services – The government has not built one single institution in education, healthy, security, roads or any other industry. The solitary credible service they have provided is renovating the old parliament building.
The negative effects corruption can have on a countries growth rate come in abundance. An example would be that governments tend to shift spending away from social areas and towards the construction of unneeded projects or lower quality investments34. In corrupt countries, corrupted politicians will tend to choose corrupt investment projects (chosen not on the bases of their intrinsic economic worth, but on the opportunity for bribes these projects present). When these politicians influence the approval of an investment project the rate of return, as calculated by cost-benefit analysis, ceases to be the criteria for project selection. The result of this is that many projects are left uncompleted or built so poorly that they require continuous repair. In these circumstances it is not surprising that capital spending fails to generate economic growth.
High corruptions tend to reduce Government revenue, which in its place reduces the resources available to finance spending, including public investment. It can lead to tax evasions, as business men may pay bribes to low level officials to secure tax breaks. According to the Core Service Data Unit, nearly 69% of people believe tax collectors are corrupted. The taxes which they are collecting may also be corrupt; custom officials often create favourable tax policies for their relatives, friends and their own businesses. This promotes the creation of monopolies and oligopolies, hindering competition and undermining the image of the government as a facilitator of private sector growth.
Not only does corruption make it hard for small companies by facilitating tax evasion, it also introduces higher costs of doing business. Evidence from private sector assessments suggests that smaller firms bear a disproportionately large share of these costs. Firms may choose to avoid the administrative costs of opening new premises by paying bribes; however it will be much easier for businesses already owning premises to do this due to the economies of scale they receive and their existing connections to officials.
Finally, corruption can be obstreperous towards foreign investment. They are more likely to shun a country if they feel they will be at a disadvantage compared to businesses from within, or feel the costs become too high or unpredictable, thus corruption risks the country being marginalized in the international economy.
The emergence of religio-ethnic rivalry is a manufactured phenomenon, which is linked to post-colonial modernization35. Almost all countries in the African continent suffer from high religious and ethnic fragmentation. The population of Somalia is divided into two main ethnic groups: Hamitic stock and associated clans, who constitute 85% of the population, and the Bantu who account for 14% (other minorities include Europeans, Indians and Pakistanis)36. Like most other African nations Somalia is also home to a number of clans, namely the Darood, Hawiye, Digil-Rahanweyn, and Dir clans (although other clans, subclans and sub-subclans exist)37. Since the war, strong clans have occupied valuable urban and agricultural real estate by force.
The patterns of clan settlements have changed particularly in urban and arable areas such as Lower Shabelle and Mogadishu. These specific areas have undergone substantial changes due to heavy infusions of non-resident clans supported by their mercenaries. In South Central Somalia valuable agricultural land and urban real estate have been taken over byarmed clans for economic gains. These stronger clans have grabbed rich plantations and real estate owned by agricultural clans and indigenous groups, often leading to their displacement or enslavement. The displaced are then forced to move out of traditional lands into new areas, thus changing demographic constitutions. The ‘stronger’ clans are likely to grow or maintain strength if they have a significant proportion of government in their clan – this way laws may be swung in their favour and land is easier to win.
The larger clans are significantly wealthier than the smaller, inferior clans. This is likely to explain the distribution of income within the country; the poorest 10% of the population receive only 1.5% of total GDP38. With a Gini Coefficient of 40 Somalia is lagging considerably behind more developed countries such as Sweden and New Zealand39. This could be a problem for Somalia as a poor distribution of income (or wealth, for that matter) can lead to tension between tribes. In turn, this may lead to higher crime rates (as clans begin to fight or steal from each other) and a lack of cooperation within communities.
A poor distribution of income can also lead to a country failing to maximise the utility of society. Someone on a high income may not gain as much utility from an additional $200 as someone on a low income would – high incomes can demonstrate diminishing marginal returns – and so it would be conductive to society to spread income more evenly.
These factors all have a detrimental impact on a country’s ability to grow economically. High inequality threatens a country’s political stability because a higher percentage of the population are dissatisfied with their economic status, which makes it harder to reach political consensus among groups with higher and lower incomes40. This in turn makes the country a higher risk to potential investors, and so is likely to lose out on foreign venture.
It can also limit the use of important market instruments, such as changes in prices and fines. Higher rates for electricity may promote energy efficiency, however in the face of serious inequality governments introducing even slight increases in prices risk causing extreme deprivation among the poorest citizens. GDP growth will consequently suffer, as the government must subsidise basic amenities as well as losing out on tax revenue.
As previously mentioned, Somalia has been plagued by civil war. A civil war is classified as an internal conflict with at least one thousand battle-related deaths41. Although there have been numerous civil wars in Somalia, I will focus upon the one which commenced (officially) in 1991 and is ongoing.
There are multiple causes of civil war. When looking at the statistics Somalia is the perfect environment for internal conflict to breed in. Countries which have a substantial share of their income (GDP) coming from the export of primary commodities are radically more at risk of conflict. When 26% of GDP is primary commodity dependent an otherwise ordinary country has a risk of conflict of 23%. By contrast, if it had no primary commodity exports (but was otherwise the same) its risk would fall to only 0.5%. At stated earlier, 60.2% of Somalia’s GDP is gained from primary products, showing large risk of civil war42.
The geography of a country matters too. If the population is highly geographically dispersed, then the country is harder for the government to control than if everyone lives in the same small area. Population density is low in Somalia, with 63% of the population living in rural areas. With geographic dispersion like this our otherwise ordinary country has a risk of conflict of around 50% whereas with Singapore-like concentration its risk falls to around 3%43.
A country which has recently been occupied with civil war has a much higher risk of engaging in another in the near future. Immediately after the end of hostilities there is a 40% chance of further conflict. This risk then falls at around one percentage point for each year of peace. Somalia has been plagued with civil war and war with its neighbours since its birth.
Finally, the ethnic and religious composition of the country matters. If there is one dominant ethnic group which constitutes between 45% and 90% of the population – enough to give it control, but not enough to make discrimination against a minority pointless – then the risk of conflict doubles. Again, as previously stated, Somalia is made up of two main ethnic groups, Hamitic (85%) and the Bantu (14%), and various different types of clans. Inter-clan discord is one of the biggest causes of the ongoing civil war44.
Since Somalia attained statehood, private pursuit and fierce competition over the resources of the country has been a marked feature among Somali elite behaviour45. Each member of the governing elite thought that he was in the government, not as a national figure, but as a clan representative. The income which the state obtained, mainly through foreign aid, was seen as similar to water and pasture which Somalis competed for in the pre-state era. The practical idea behind this is that each and every pastoral Somali, thus, representing his clan, has a right to appropriate a slice of this gift from Allah. This sort of behaviour is incompatible with running a modern state.
The other reason behind Somalia’s fighting is their General, Siad Barre. He came to power in 1969 and it wasn’t long before his dictatorship showed the tyrant he was. Soon after taking control, General Barre started playing on the people’s emotions by invoking Somali Nationalism and the returning of the missing Somali territories46. He pursued this irredentist development while neglecting domestic issues. In 1977 Somali army units crossed the border of Ethiopia, waging war with the country. War was unsuccessful for the Somali, with Ethiopia regaining all its territory by 1978.
Soon after, the General faced a huge failure in his dominant policy. As both his national construction and development policy, which was based on greater Somalia, slowly came to an end his prospects for holding on to power were seriously in doubt. Subsequently, Somali politics seemed to have completely focused on internal conflict and repression. A body of disgruntled army officers, equally angry at Barre’s poor leadership during the war and subsequent defeat attempted to stage a coup d’etat against the regime late in 1978. The coup, however, failed and together with their leader Colonel Mohamed sheikh Osman and 17 ringleaders were summarily executed. This finally led to the emergence of the armed oppositions. Somali Salvation Democratic Front (SSDF) was at first formed, followed by the Somali National movement (SNM).
The nature of the leadership in Somalia was ruthless. In 1988, at the President’s order, an aircraft from the Somali National Air Force bombed the city of Hargeisa in northwestern Somalia, killing nearly 10,000 civilians and insurgents. Economic crisis, brought on by the cost of anti-insurgency activities, caused further hardship as Siad Barre and his colleagues looted the national treasury.
By the end of the 1980s, armed opposition to Barre’s government, fully operational in the northern regions, had spread to the central and southern regions. Hundreds of thousands of Somalis fled their homes, claiming refugee status in neighbouring Ethiopia, Djibouti, and Kenya. At the end of 1990 the Somali state was in the final stages of complete collapse. Following the collapse of the Barre regime in 1991, various groupings of Somali factions sought to control the national territory (or portions thereof) and fought small wars with one another. Approximately 14 national reconciliation conferences were convened over the succeeding decade. Efforts at mediation of the Somali internal dispute were also undertaken by many regional states.
The Somali economy was hit hard by war. By the end of the typical war the economy is about 15% poorer than it would otherwise have been47, and mortality is much higher, mainly due to disease triggered by movements of refugees and the collapse of public health systems, rather than combat deaths.
One of the most striking effects of the war was over fishing48. Somali people ignored international fishing protocols, thereby seriously harming ecology in the region. Fishing soon became an unsustainable practise. Fishermen perceive over fishing as a property right and can therefore hardly be stopped. This lead to a decrease in supply of fish, and eventually the fishermen had exhausted the stock of many species, leaving them without a job.
Another detrimental consequence was the livestock ban49. One of the largest income-generating exports in Somalia is livestock, which before 1991 accounted for around 80% of the country’s income earnings. In 2000, eight Gulf States that had been the main importers of Somali livestock imposed a ban on Somali livestock, citing poor quality control due to corruption and war. The livestock ban significantly damaged the economy and worsened pastoral livelihoods, pushing many pastoralists into destitution. Demand was skewed towards the basic necessities such as food and clothes. The people had no purchasing power and thus GDP growth slowed.
The capital stock of an economy represents its accumulated stock of residential structures, machinery, factories, and equipment that exist at a point in time and add to the productive power of the economy50. Increases in the capital stock are a crucial source of economic growth. Civil war changes the capital stock in two ways. First, internal con?ict reduces the existing stock of capital. Residential structures, roads, bridges, ports, and factories are targeted and destroyed by competing militaries in wartime.
During the first wave of war between clan militias fighting for control over the capital in the wake of President Siad Barre’s fall, most of the businesses were destroyed and much of the capital was moved to banks outside the country51. The level of the capital stock is also affected over time by changes in investment and the rate of depreciation52. In order for the capital stock to grow, the level of investment in the maintenance and expansion of the capital stock must outpace the rate of depreciation on the existing stock. Since civil war increases the rate of depreciation and reduces investment, growth in the capital stock is stunted. Civil war, therefore, is detrimental to growth of a country.
Political models present a second outlet through which civil war might affect economic growth. It is possible that civil war is a cause of poor macroeconomic policy: high in?ation, distorted foreign exchange markets, and large budget de?cits. The greater the probability of not being re-elected and the greater the degree of polarization of two political parties, the larger the budget deficit is likely to be (in a model where the optimal policy is budget equilibrium). The polarization and likelihood of defeat create incentives for politicians to behave myopically and incur large ?scal de?cits whilst in power. The power in office faces military competition from a domestic threat. The stronger this threat is, the more likely the office will not remain in power.
Moreover, civil wars are often fought along ideological lines suggesting that the opposition is likely to have di?erent preferences from the government. Such a situation creates strong incentives for de?cit spending. As the state is weakened by an internal threat, it often turns on the civilian population, using tools of intimidation to maintain its power. In addition, as the con?ict expands, the state ?nds itself resource constrained and increases its tax rates. Often, this cannot keep pace with the rising costs of con?ict. Thus, civil wars negatively affect the government’s ?scal balance. Since ?scal balance, as part of a stable macroeconomic framework is a key source of growth, poor ?scal policy may be a channel through which civil war imposes costs on the economy. Just how much of a cost it is to the economy is shown by Paul Collier (Professor of Economics, Oxford), when he claims that “during civil war the annual growth rate is reduced by 2.2%. A 15-year civil war [such as Somalia’s] would thus reduce per capita GDP by around 30%”.
Barriers to trade:
Openness to international trade affects growth in two ways: it affects the level of steady state income and it affects the speed of convergence to the steady state53. Openness encourages greater efficiency in the allocation of the economy’s scarce resources; it also promotes market competition and thus helps reduce monopolies.
Trade is often a vehicle for the importation of technical innovations and improvements, which serve to raise total factor productivity in the entire economy. Between 1970 and 1980 countries that increased their exposure to international trade also increased their growth rates, from 2.9% to 5%. Correspondingly, those who did not saw their growth rate decline, from 3.3% to 1.4% over the same period54. Unfortunately for Somalia, its current political instability excludes it from exporting products to many countries because their trade barriers prevent them from doing business with such a corrupt country.
Somalia is also ineligible for trade benefits under the African Growth and Opportunity Act (AGOA)55. The Act authorizes countries as eligible to receive the benefits of AGOA if they are determined to have established, or are making continual progress toward establishing, the following: market-based economies; the rule of law and political pluralism; elimination of barriers to U.S. trade and investment; protection of intellectual property; efforts to combat corruption; policies to reduce poverty, increasing availability of health care and educational opportunities; protection of human rights and worker rights; and elimination of certain child labour practices56.
Somalia has a population of approximately 9,925,640 and covers roughly 637,657 sq k57. This gives the country a population density of 15.5 per sq k. A comparison to the UK’s population density of 39558 shows Somalia is sparsely populated, with 63% of people choosing to live in the country.
It is beneficial to a government if a large proportion of their population live in cities or densely populated areas. High density development results in significant savings to the government by reducing both the capital and operating costs of police, fire and waste collection and disposal services. Infrastructure may also be cheaper. For every rural community there must be a school and medical centre (or hospital, depending on the size of the community) to accommodate it. If two rural communities merge, or migrate to a more urban area, fewer schools and hospitals would need to be built. It could be argued that fixed costs spread over a larger number of people would lower the per capita costs of public services.
The same stands for public goods. If the Somali government was trying to implement street lights to reduce crime, it would be less expensive if the population was urbanized, as fewer lights would be needed. Dense populations can also provide economies of scale.
Unfortunately for Somalia this situation is only likely to get worse due to the large number of refugees. In 2007 the number of Somali refugees hit one million, with nearly 200,000 feeling the capital every week59; the situation has hardly improved since.
The black market is the illegal business of buying or selling goods or currency in violation of restrictions such as price controls or rationing. In Somalia this is estimated to be worth $414million, 7% of GDP60. The examples of this untoward market come in abundance. In 2008, the United Nations claimed that up to 80% of all arms, ammunition and supplies that were supplied to the transnational government of Somalia were diverted to the black market. The firearms ended up in the hands of private individuals, opposition groups and arms traffickers. When famine stuck Somalia earlier this year there was widespread report of aid being stolen by the black market and sold openly, causing the ‘many unnecessary deaths’ of the 3.2million in dire need of the aid61. However, the biggest contributor to the Somali black market is piracy.
Piracy off the coast of Somalia is growing at an alarming rate62. It has disrupted international trade and provides funds that feed the vicious, ongoing war. With no government, isolated beaches and a population that is both desperate and used to war, Somalia is the perfect environment for piracy to flourish in. Prior to 1990 it was not a major issue, however a more structured form developed in the 1990s when some armed groups, claiming they were authorised coast guards charged with protecting Somalia’s fishing resources, attacked vessels they declared were fishing illegally in their waters and help them for ransom63. This expanded after 2000 to any vessel that sailed within or close to Somali territorial waters. By 2006 some of these attacked were extending as far as 350m off the coast, and by 2008 the northern coast of Somalia was the most dangerous region in the world for pirate attacks, with 111 incidents reported64.
But why is piracy such a popular choice? Piracy is flourishing in Somalia as it is a quick way for all involved to earn a large amount of money way beyond any other means of income generation. While the action of piracy involves some risk the benefits far outweigh that risk, a fact indicated by the few arrests made. Poverty, lack of employment, environmental hardship, pitifully low incomes, drought and political situation all contribute to the rise and continuance of piracy in Somalia. The pirates also firmly believe that they have every right and entitlement to attack illegal fishing vessels operating in their territorial waters as their fishing resources are being pillaged daily by international shipping vessels from Asia and Europe.
Somalia’s economy is based heavily on the sea, and international shipping and trade. Piracy imposes additional (‘frictional’) costs on business, such as the increase in the costs of ship insurance, or higher shipping freight costs necessary to persuade international ships owners to deploy ships to Somalia’s ports. Extra security measures, such as deploying armed security teams to protect ships, are also necessary and a cost to the Somali’s.
The black market created by piracy discourages overseas business investors, reduces port revenues and consequently the income of those communities dependent on them. Even more detrimental to the economy is the level of inflation which occurs as a result of the large inflows of $s earned by pirates through ransom.
Reverting back the wider concept of a black market as a whole, there are numerous negative economic consequences. The first is that the recorded national income is likely to be underestimated65. This makes it difficult for the government (or in Somalia’s case, the transitional federal government) to correctly identify the true economic status of the country. Accordingly, this will make it hard for the government to implement appropriate economic policies to stabilise the country’s economy and raise standards of living.
Another problem is that the tax authority may fail to detect the income earned through the black market. The official tax rates may have to increase as a result, to compensate for the losses. This adversely affects those who are paying their taxes, and this may lead to them finding ways to evade taxes in subsequent fiscal years.
The external costs to society that the black market inflicts are clear. Somalia’s GDP growth may have been constrained by the negative impacts it brings, however it could also be much higher than currently estimated because of this market. GDP is, after all, the value of all the goods and services – if a country is producing more than is being calculated, growth can only be increasing.
Sub-Saharan Africa is a region prone to harsh weather. Somalia’s climate is one of principally desert conditions66. In July 2011 the country was declared to be in a state of famine after a serious drought had consumed the area67. The U.S. Centre for Disease Control and Prevention estimated that more than 29,000 children under the age of 5 died in 90 days in southern Somalia68, and that 3.2 million Somalis were, and still are, in need of immediate lifesaving assistance.
One obvious economic effect of famine is that food must be imported. This is costly, and will decrease the changes of balancing the trade budget that year. Crops and livestock must also be replaced, since they will have been unable to survive the ruthless conditions. This is particularly significant in Third World countries, since the majority if their income is based upon the trading of primary products. Demand for food will soar, raising the equilibrium price and causing inflation to rocket. This, in turn, will cause an increase in corruption as those in a position to take aid and disperse it between their clan will do so.
Famine is not only costly for the government and agonizing for the populace, but it drastically slows the growth of a country. Children are too ill to go to school, disease is spread quicker and the government must spend money (which could have been invested elsewhere) attainting food for its population.
In absolute terms, Sub-Saharan Africa’s debt is small69. This explains the lack of interest in the West in dealing with its economic repercussions; in global terms its debt is so modest it is a threat to no-one except the Africans themselves. Citizens of the West may go to bed with a clear conscience, thinking that the $15 billion they gave as a response to the debt crisis was enough, however relative to the scale of the debt (nearly $1500 billion) this was quite insignificant, little more than 1%. Only $4 in every $10 of global aid goes to low-income countries – only three of the top ten recipients of the European Commission aid are even African70.
Aid has been deemed as unsuccessful on the whole. One reason for this may be the lukewarm reaction the West has had to calls for aid, as shown above. In 1992 the OECD agreed that they should give 0.7% of their gross national income each annum as aid, yet only the Nordic countries, the Netherlands and Luxemburg ever met this target71. More evidence came in 2008, when the nongovernmental organisation DATA reported that only 14% of additional funds pledged by the G-8 nations had actually been provided72. Being promised aid and then not receiving it is hard for the African authorities, as it complicated planning; they are not sure when the aid is coming and where it is going.
Another reason could be that different aid organisations are failing to work together effectively. By 2003, there were thought to be 39,729 branches of international charities across Africa, an excessive amount. What’s more, charities have their headquarters thousands of miles away, pursuing overlapping objectives and making few attempts to coordinate with each other. Duplicated projects will have little benefit to the receiving countries.
Even plans which have been put into place, such as the Brady Plan, have been relatively unsuccessful73; resources were disproportionally taken from the poor and near poor. The bank’s response has been half-hearted, with the IMF and World Bank revealing split personalities – they champion Millennium development goals in speeches, and approve programmes which not achieve them, whilst privately acknowledging that they cannot be met74.
Aid specific to Somalia has also been ineffective. Analysts may look at the correlation between provision of aid to the country and its rates of economic growth, and finding no discernible connection75. When Somalia was in Italian control more than $40 million was spent to build a brand new hospital equipped with sophisticated machinery and operating rooms, in the south of Mogadishu76. Since the Somalis were unable to run it, the hospital was left derelict, falling to pieces.
The Italian government paid $95 million for a fertilizer plant in Mogadishu that never became operational. They even established a University of Somalia–despite the fact that 98 percent of the population was illiterate. More modern examples of aid failure include the food aid during famine. Between 50% and 85% of emergency aid went straight into the hands of wealthy politicians, and when it did reach their public it was for a premium77. Although the UN humanitarian intervention in Somalia sought to curb these practices, it was with limited success78.
Aid is no longer available for much of the Somali population since the country is deemed too dangerous for many charities to work there. Whilst it hasn’t slowed down the growth of Somalia, it also hasn’t helped boost it (despite having the potential to), and therefore can be considered a factor hindering Somali GDP.
Somalia’s growth is being mired by a combination of factors. The country has now reached the stage where the majority of its population is in a poverty trap. For example, let’s take Mara (a stereotypical Somali citizen). She is young and optimistic, but lives permanently close to the edge of crisis. She has no assets and rents a small shack by the month, with her small baby boy. This week she decided she can buy a jerry can of clean water, as work has been good; this is much healthier for her and her son, but it means sacrificing some food. Earlier in the year she had tried to put money aside to save future school fees for her baby, but she caught Malaria and was forced to buy medicine, depleting the savings. In theory, a bed net preventing malaria would been more useful, as it would save on future medical costs and help ensure she’s fit to work, but this is too expensive. And her problems go on…
Mara’s life is a combination of many regrettable factors. She received little education as a child because going to school was too expensive. This means that she can only get a job doing basic tasks such as cutting crops for a local farmer. This leads to primary product dependency within Somalia, which will remain detrimental to the country as long as the dependency theory exists. All of these problems are then exacerbated by the ongoing war and black market in Somalia.
Lack of education is likely to be what is holding the country’s GDP growth back the most, as statistics prove it contributes up to 25% of GDP growth, and is the instigator of other factors holding back the measure. Although it seems unlikely that Somalia has the capacity to change this anytime soon, it is a problem which has solutions. Investment in schools, and getting both girls and boys to attend will have huge long term benefits. In essence, Somalia must stop sacrificing the future to salvage the present.
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University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 13 August 2017
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