A 'failed state' that functions: Somalia has no government to speak of or functioning official institutions and it is battle scarred and chaotic but, and here is the surprise, it works remarkably well. Tom Nevin explains

African Business, July, 2007 by Tom Nevin

Superficially and by reputation, Somalia is the quintessential failed state. Closer inspection of this African horn country's born-again economy however, reveals a unique determination to survive and the universal resilience of the entrepreneur.

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More recently it has had to face the added challenge of an armed insurgency in the south, invasion by rampaging Ethiopian troops, air attacks by US fighter jets and street battles in the capital Mogadishu. But, as a nation, it still works better than many of its peers in Africa and the world is wondering why. Businesspeople there say the lack of bureaucracy helps to get things going faster and more efficiently

"After the autocratic regime of Siad Barre fell in 1991, the country collapsed into civil war. Peace has been established in some regions, but Somalia has only limited government in the northwest and no recognised government in the south. In these circumstances the private sector has been surprisingly innovative," say Tatiana Nenova and Tim Harford, both economists at the World Bank, in a report.

Competition thrives in markets where transactions are simple, such as retail and construction. In more complex sectors, such as electricity supply and telecommunications, the private solutions are flawed but impressive.

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Prices are attractive compared with those in other countries. In extremely difficult circumstances the private sector has demonstrated its much-vaunted capacity to make do. To cope with the absence of the rule of law, private enterprises used foreign jurisdictions or institutions to help with some tasks, operating within networks of trust to strengthen property rights, and simplifying transactions until they need neither. This is where the Islamic courts, later to become the focus of attacks by the US, came into their own.

Somalia's private sector experience suggests that it might be easier than is commonly thought for basic systems of finance and some infrastructure services to function where government is extremely weak or absent.

Peter Davis of the US-based Ethical Corporation agrees. "Despite the chaos and the lack of any central government," he says, "Somalia has one of the most efficient telephone systems in the region. It takes just three days for a landline to be installed, compared with the waiting time of many years in neighbouring Kenya where a stable, democratic system has been in place for half a century."

Businesspeople in Somalia and intrigued observers from other parts of Africa and the world have come to the consensus that it is the lack of bureaucracy and other government interventions that lets things happen quickly and efficiently.

According to the World Bank, Somalia now has 112,000 fixed lines and 50,000 mobile subscribers, up from a total of 17,000 lines in 1991. Competition between rival suppliers has resulted in some of Africa's lowest call costs. In addition, problems such as allowing calls between different networks are resolved through the Somali Telecoms Association. This body, based in Dubai, represents all the telecoms companies, as well as the International Telecommunication Union.

Creative approaches

"Only when it comes to public goods or to private goods with strong spillover effects--roads, monetary stability, a legal system, primary education, a cross-border financial system--does the state seem to be sorely missed," say Nenova and Harford. "But even here the private sector has developed creative approaches that partially substitute for effective government. As a result, Somalia boasts lower rates of extreme poverty and, in some cases, better infrastructure than richer countries in Africa.

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Despite the chaos and the absence of a state structure, other sectors are also operating successfully. In supplying electricity, enterprising companies are bridging the governance gap.

"There is no functioning national grid so entrepreneurs have divided cities into manageable sectors and provide electricity on a local basis using generators bought overseas," reports Davis. "These providers offer households a menu of choices, including daytime, evening or 24-hour supply, and charge per light bulb."

He says local businesspeople find it easier to do business in a country where there is no government. "There is no need to obtain licences and, in contrast with many other parts of Africa, there is no state-run monopoly that prevents new competitors setting up. Keeping prices low is helped by the absence of any need to pay taxes."

Competition keeps prices low

Somali entrepreneurs have used three methods to compensate for the lack of effective government regulation. "First," say Nenova and Harford, "importing governance by relying on foreign institutions--for example, for airline safety, currency stability and company law. Second, using clans and other local networks of trust to help with contract enforcement, payment and transmission of funds; and third, simplifying transactions until they can be carried out without help from either the clan or the international economy."