As the economic and fiscal position of Somalia improves, its medium to long term effectiveness and sustainability will be determined by its tax regime, youth employment, and the size and form of the public sector.
Contentious policy issues in advanced countries are centred around the role of the state and the size of the public sector. The nature of the tax regime remains the defining political issue that separates the left and right, with the left traditionally supporting redistribution while the right favours a small state. Unfortunately, there is a dearth of such important policy debates in African politics, which is, instead, dominated by tribal and clan politics. For Somalia, the role of state and of economic policy is not a matter of ideology that alternates between advocates of big and small government, as observed in advanced democracies, but rather is an existential issue and amounts to the difference between an effective state and continued fragility, or worse, return to failure.
In 2017, Somalia has made significant and fundamental progress its macro-fiscal and state-building indicators. The aim of this paper is to present conceptual framework to analyse the most exigent economic issues that must be addressed in order for the government to address and prioritise state-building and economic growth.
Learning from the past to shape the future
Notwithstanding the cause-and-effect relationships, to reduce Somalia’s problems to mere political, cultural and anthropological issues, as many political scientists are predisposed, would be a gross misreading of the facts. In fact, economics, particularly fiscal and public sector finance, was and continues to be the heart of the matter . To illustrate, a brief historical lesson in economics is necessary. The main precipitant of state collapse in 1991 was economic and fiscal mismanagement – far more so than other key contributors including political crisis, repression, corruption, nepotism, land disputes, and clan polarisation and conflict. Between 1985 and 1989, government revenue fell to a meagre 6% of GDP (at the time the average for sub-Saharan Africa was 18%) while government expenditure was 32% of GDP . The resulting deficit was almost entirely financed by foreign loans with the share of international aid accounting for 40% of GDP (the highest ratio for any developing country and matched only by Haiti at the time). Despite the decline in revenues, the civil service grew from 20,000 in 1974 to 45,000 in 1989. State owned enterprises and financial institutions, which made up a large proportion of the economy, become insolvent and ceased to operate because of government mismanagement. Following the collapse of the Berlin Wall in 1989, Somalia’s anti-Soviet strategic importance to the Western-Atlantic alliance declined. Hence, bilateral aid which was already declining because of the regime’s poor human rights records, decreased substantially . Moreover, U.S. security assistance to Somalia—previously the largest recipient of military aid in sub-Saharan Africa—suddenly disappeared, and the government struggled to pay the salaries of its soldiers, which were in real terms only 6% of what they were in 1974 [1,2,3]. The Somali state, stripped of its principal source of revenue by late 1990, shrank while its military services disbanded and eventually collapsed .