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Unregulated capitalism and globalization: The hidden threats to Somalia’s economic stability


Monday May 27, 2024
By Mohamed Rage Hassan

 

Somalia faces not only the challenges associated with state-building but also a complex interplay of issues. One of the most profound crises is the economic model used in the country, which undermines the well-being of the people and poses a threat to the state itself.

It is not widely acknowledged or closely observed that unregulated capitalism, coupled with exposure to global international trade, has had a detrimental impact on both the state and society. Before delving into the problems that the current capitalist system in Somalia has brought to the state and society, it is important to understand the economic system in which Somalia operates. Therefore, it is crucial to assess the features and structural arrangements that enable the functioning of the market.

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Can the economic system in Somalia be accurately described as capitalist, or is it a unique form specific to the country? When examining Somalia's economy, it is evident that no standardized economic model 
is operating strictly under market forces. Partially, it can be considered a capitalist system since the government does not allocate resources or manipulate the market and it is apparent in the sense that the market is open to investment. However, in the areas of the labour market, financial institutions, innovation and entrepreneurship, and consumer choice, Somalia demonstrates an unsystematic application of this economic model.

Somalia's economic model can be described as a blend of traditional and capitalist systems. In a country where poverty and various economic distortions prevail, why is there not more debate about the economic system, which can be said to be responsible for these distortions? In the socialist model of central planning, when issues such as market failures, unemployment, and poverty go beyond control, the fundamental principles and application of the system are questioned. This has led many countries that once adopted and appreciated this system to reform their economic structures. However, the current capitalist model appears to have failures similar to, or perhaps worse than, those previously experienced by socialist states in the late 1980s.

Despite this, the capitalist system is often supported by international financial institutions, which prevent its collapse. Typically, the collapse of a state is preceded by an economic downturn, and the issues arising from economic challenges often serve as sources of conflict, political instability, and social unrest. Therefore, international financial institutions invest considerable effort in preventing the economies of countries that have adopted the capitalist system from collapsing. They provide loans, grants, advice, and capacity-building programs. However, the question remains: to how long and to what extent can these efforts prevent countries from suffering the dire consequences of capitalism and ultimately collapsing?

The Western world tends to uphold its economic ideology, which, despite its strengths, harbours significant weaknesses. These weaknesses contribute primarily to absolute poverty, widening wealth gaps, income inequality, and unfair distribution of resources. Conversely, the fundamental tenets of capitalist principles often evade thorough reassessment regarding their suitability for impoverished nations. Instead, entities like the World Bank and other international organizations bear the responsibility for implementing changes, often without considering locally-driven initiatives. Their efforts to refine and readjust the economies of fragile states, such as Somalia, often prioritize best practices over a best-fit approach.

This article delves into the present condition of Somalia's economic system and examines how the capitalist framework contributes to the country's economic challenges. It reevaluates how globalization exacerbates these issues and why international financial institutions often compel African and other states to adhere to capitalist principles. The piece closely examines how state fragility further compounds the underperformance of Somalia's economy.

Impact of Capitalism in Somalia

Capitalism is an economic system that incentivizes the production of goods and services without moral constraints, allowing them to be sold in the market at any price determined by competition with other firms supplying similar goods. The underdeveloped world has been plagued by various economic issues as a result of misapplication of capitalism. This model, founded on the principle of winner-takes-all, disproportionately affects countries, particularly those in the third world, leaving them impoverished. Therefore, the challenges arising from its application are not unique to Somalia. All non-industrialized nations bear a significant cost in satisfying their commodity requirements. However, industrialized countries often benefit the most from this system, as they can supply their products to international markets with the aim of maintaining full employment in their economies. Internally, capitalism has affected Somalia in various ways. For example, it has led to the privatization of key public sectors. International financial institutions have imposed structural adjustment policies as part of their aid conditions, compelling the Somali government to accept any economic directives, including drastic reforms and privatization, to receive budget support. When essential services like water, electricity, education, and health are privatized, and the Somali government established in Arta is discouraged from entering any sector as a key service provider, ordinary citizens suffer under profit-oriented enterprises. Recently, there was an organized social outcry in Mogadishu, where residents from a specific district protested against the private water company that supplies their area, complaining about the lack of water. People told the media that the water providers had colluded to maximize their profits and expand their market base together. In economic terminology, this is known as horizontal integration, where firms unite to maximize their profit at the expense of consumers. Electricity companies in Hargeisa have also integrated in this manner to maximize their profits. This is an outcome of what is known as a free market and pure capitalism, where the government has no involvement in market affairs. However, the tragedy lies in the fact that the government is unable to exercise its guaranteed discretionary power and macroeconomic tools to regulate the market. Aside from that, all essential public services are now in the hands of the private sector, which filled the vacuum left by the statelessness in Somalia. The government has not worked towards regaining control of some of these vital services, which the private sector has commercialized badly and immorally, making them unaffordable for most citizens. Instead, the government has focused on further retracting from all sectors theoretically, even though, in practice, it did not control any sector to begin with. Following the directives of the World Bank and IMF, the Somali government has supported multisectoral reforms, strengthening privatization, and in some areas, promoting public-private partnerships. Only in Somalia is the State grappling with domestic revenue generation to cover its expenses. It claims to engage in public-private partnerships, such as handing over service provision in certain areas to private companies. However, these companies, acting on behalf of the government, collect service fees from citizens, taking more than 50 percent of the revenue for themselves. The country is grappling with a pervasive pattern of rent-seeking practices in the name of public-private partnerships. The most recent unsuccessful public-private partnership project involved the collection of passenger information for security purposes, for which the people of Mogadishu and even airline companies refused to pay. Numerous public-private partnerships (PPPs) are presently active across Somalia. The scope of PPP implementation extends beyond mere simple service provision, encompassing even critical infrastructural assets such as ports and airports. The profound impact of a free market economy, which advocates for reducing state intervention and empowering the private sector to dominate all spheres of service provision, has deeply affected Somalia's fragile economy and plunged its citizens into poverty if quantitatively assessed. This economic system has ruthlessly exploited labour in an inhumane manner, viewing workers merely as production machines devoid of human value. In Somalia, labourers toil from early morning until late at night in various private sector jobs, often under harsh conditions and excessively long hours. They receive no benefits such as annual leave, holidays, promotions, or overtime pay, mirroring the stark contrast with the comprehensive benefits packages enjoyed by workers in developed nations. Moreover, upon the termination of employment, Somali labourers lack any rights or recourse, as no trade unions are advocating for their interests, and the government fails to enforce labour laws that exist only on paper.

The economic system present in Somalia is a blend of traditional and capitalist models that primarily serve to further empower and enrich those entities already entrenched in the market. The multifaceted problems stemming from Somalia's free market economy are evident across various dimensions, including privatization, public-private partnerships, and the exploitation of labour, as discussed. Furthermore, in terms of investment, private companies prioritize their own interests over the collective good, avoiding labour-intensive projects that could provide employment opportunities for the country's youth. Consequently, the government, operating within the framework of this purportedly free market economy, neglects crucial investments essential for improving social well-being. Somalia also grapples with constant and substantial negative balances of payment, leading to monetary outflows that fuel hyperinflation and necessitate the use of the dollar as a de facto local currency. This complex chain of causation underscores the urgent need for a comprehensive reevaluation of the country's systems and policies.

How globalization has exacerbated economic challenges in Somalia.

The developed world typically has industrialized economies that produce a wide range of goods, often for the purpose of selling to less developed countries. This is why these nations strongly support globalization, which facilitates the easy movement of goods, services, labour, technology, and knowledge across borders. Consequently, they prefer an open economy with no barriers to entry over a closed economy. In international trade theories, concepts like absolute advantage and comparative advantage are significant. These theories suggest that a country should consider its relative position to other countries globally before deciding to produce a specific commodity, even if the raw materials are available domestically. Globalization has integrated Somalia into the world markets, driven in part by initiatives from international financial institutions. These institutions not only provide development aid to Somalia but also play a significant role in restructuring its institutions to align with the principles of globalization. This shift has adversely affected domestic production. For instance, in the markets of Mogadishu, you can find fruit products from Egypt produced at a lower opportunity cost, competing with local products from Lower-Shabelle farmers. In addition, globalization has exacerbated income inequality both within and between countries. One of the most significant negative consequences is the extreme volatility of Somalia’s market. Due to its high dependency on the global economy and lack of substantial local production, any minor global economic shock can severely impact the country. what makes the life of the Somali ordinary citizens very difficult is the adoption of globalization and climate change both have made the poorer Somali people more vulnerable.        

State Fragility and the Absence of Institutionalism

The lack of state involvement in controlling and regulating the economy makes the system that Peter D. Little describes in his book "Economy without State" more informal. According to Peter Little, the economy operates through informal mechanisms, while somewhat conforming to the formal standards of capitalism which he termed as half-status.

It's evident that Somalia's economy functions without state supervision, and the key market stakeholders manipulate the economy to serve their own interests. There are no government directives on what businesses can or cannot do, and obligatory taxes are not paid fairly. Notably, corporate taxes based on financial strength and balance sheets are not imposed on multimillion-dollar companies, including banks, telecom industries, and large private import companies.

When a company's revenue is confirmed and allowable deductions are made—including operating expenses and depreciation—the government then taxes the company's taxable income. However, the government of Somalia is not able to effectively implement this system. Additionally, some companies have significant influence over government policies.

Even if we assume that the current governmental institutions are robust enough to regulate the economy, international financial institutions are not permitted to make adjustments aligned with the interests of Somalia's population. These institutions impose aid conditionality that affects various spheres of political, economic, and governmental institutions, preventing Somalia from controlling its own affairs.

As a fragile state, Somalia is subject to international financial institutions' attempts to structure its economy to fit its best interests, similar to pressures seen in other developing countries. For instance, these institutions have recommended and pressured the Indian government to cut subsidies in crucial sectors like food, fertilizers, and fuel. However, the Indian government has chosen to maintain these subsidies to ensure the social welfare of its citizens. India has repeatedly refused to follow the World Bank's suggestions and recommendations for economic reforms aligned with globalization and a free-market economy. Similarly, in Latin America, there have been instances where states have refused to reform their economies and government expenditures as recommended by these institutions.

Somalia, lacking the institutions to regulate the economy through subsidies and taxes effectively, as well as critical scholars and politicians to thoroughly assess and potentially reject the World Bank's recommendations, faces an even more challenging situation. Consequently, Somalia's economy will likely continue to suffer under an unregulated capitalist system, leading to ongoing hardship for its population.

Conclusion

Somalia's current economic system, influenced by an unregulated blend of traditional, capitalism and globalization, exacerbates the country's state fragility and socio-economic challenges. The imposition of international financial institutions' directives has led to privatization and the neglect of essential public services, leaving citizens vulnerable to exploitation and economic instability. To address these issues, it is crucial to reevaluate Somalia's economic model and align it with the local context. A comprehensive approach that incorporates effective state involvement in regulating the economy, equitable taxation policies, and the protection of essential public services is needed. By prioritizing the well-being of its population and fostering sustainable development, Somalia can mitigate the adverse impacts of a mixed economic approach and create a more resilient and inclusive economy.




Mohamed Rage Hassan

[email protected]



 





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