Monday, 15 July 2013

SOMALIA: INSTITUTIONS, FREE MARKETS & DEVELOPMENT


“You are a sneaking Puppy, and so are all those who will submit to be governed by Laws which rich Men have made for their own Security...”




Attributed to the pirate Captain Bellamy, 1717


This is going to be my first foray into development economics in this blog.

What with the crisis and stuff, I never got around to write much about this branch of economics and yet I think it stands to be interesting precisely because development economics is forced to deal with the reality of countries trying (and often failing) to grow or catch up and thus it is forced to include the dreaded political and even cultural (gasps) factors into its analysis.

I would like to consider more specifically the case of Somalia because, well, if there is a basket case of a nation, this is it.

Now, everyone knows how the situation got to be the way it is.

In the 90s, the country experienced a civil war, when various armed opposition groups rebelled against the military government that had been in control since the late 60s. The UN peace efforts were rather unsuccessful and any attempt at federalism in the 2000s failed.

Meanwhile, profiting from the ensuing vacuum, foreign companies took to dumping waste into Somali waters, as well as to depleting its fishing stocks. (NB: I'd rather not think about what it means to eat fish that has been swimming within radiated waters).

In these conditions, it is no surprise that Somali fishermen took to a life of crime.

If piracy might look like an odd choice (why not be a center for drug trading, weapon smuggling or human trafficking, just like every other failed state or tinpot dictatorship?), the reason seems to be that the pirates evolved from gangs that were protecting their fellow Somali fishermen against foreign trawlers who would not hesitate to water-hose or even fire upon said local fishermen when they dared sail out - which is how you end up with pirate outfits named the "National Volunteer Coastguard of Somalia" and the "Somali Marines".

Still, as the Somali took to fighting back, Captain Bellamy-style, the world started noticing them again and the world was not happy. The various world Navies have taken to patrol those seas and are trying their best to put the kabosh on the whole pirate enterprise. But this is turning out surprisingly difficult and, in the meantime, the Somalian economy is actually showing signs of life due to the money flowing from the piracy!

And, of course, some economists have been literally giddy at the idea of seeing how a country without government manages itself. We have Peter T. Leeson and "Better off Stateless" - the title says it all - as well as Yusuf Ahmed Nur's more tempered "Entrepreneurship and Statelessness: A natural experiment in the making in Somalia" among others.

In reality and, as far as I can tell from afar, the situation is more or less what you'd expect it to be: In the absence of an effective central government but with a strong clan-based culture and a legalistic religion like Islam, local chiefs and strongmen act as feudal lords and/or territory-based gangs: They collect 'taxes' (or protection money), dispense justice (or let local religious courts operate) and provide 'some' public goods etc. Basically, they act as proto-governments.

Again, the main originality compared to other failed states is that the absence of a functioning central government seem particularly complete and that some fishermen have turned to piracy rather than sticking to smuggling.

What should we expect going forward?

The piracy issue, though it's no longer so vividly in the news, seems to agitate the international community more than most other criminal problems. Mexico's drug war is still on-going, cocaine is now moving to Europe via West Africa, Turkey and the Balkans remain big on heroin smuggling. And that is leaving asides the issue of legitimate goods acquired in dodgy circumstances, like coltan or tungsten in the DCR. But, while I am sure numerous agencies in many countries as well as international bodies are busy fighting against those criminal enterprises, I don't think they've had quite the same high profile or the same mustering of military resources as the anti-piracy operations we've seen in the Somalian case.

This might prove determinant for Somalia's future. A failed state can go on forever but, as the Taliban have found out, there are limits beyond which it is dangerous to push the international community.

But let's say that the Somalis piratical practices remain low-key enough that the Western governments do not get into their heads to "bomb them back to the Stone Age". What then?

As I mention above, territorial gangs or war-bands are really proto-governments. After all, the issue is one of power and one of legitimacy. A war-band clearly can have enough power to rule a given area and, if they amass enough legitimacy, one way or the other (notably by providing public goods), then they are, de-facto, the local state authority.

So, assuming that the foreign powers do not intervene and that the Somali clans manage to agree on the split of Somalia/respect each others' territorial claims, there would be nothing stopping Somalia (or parts thereof) from becoming another one of those middle income countries, like Cameroon, Zambia or Senegal.


Of course, we could consider such a development a success. But development economics has long noted that some countries get stuck in what is called the "middle income trap". As Wikipedia explains it "the middle income trap occurs when a country's growth plateaus and eventually stagnates after reaching middle income levels. The problem usually arises when developing economies find themselves stuck in the middle, with rising wages and declining cost competitiveness, unable to compete with advanced economies in high-skill innovations, or with low income, low wage economies in the cheap production of manufactured goods".

I would add or even substitute an institutional angle to the economic rationale above - The middle income trap can also get sprung when the local authorities are not corrupt or inefficient to the point it pushes people to revolt but nonetheless too corrupt and inefficient to provide the kind of environment where global businesses can invest or local big business flourish.

Ronald Wintrobe, of the University of Toronto, had an interesting paper, distinguishing what he calls 'tinpot dictators' from 'totalitarian ones'. Quickly, tinpot dictators are interested in extracting as much personal wealth as possible while totalitarian ones are interested in imposing an ideology.

The interesting insight from Wintrobe is that, in the case of an adverse economic shock, he predicts that tinpot dictators may well increase repression in order to maintain their chosen level of wealth extraction while a totalitarian dictator, already suppressing civil liberties, may well ease up on economic repression in order to buy himself some breathing room/not erode too much of its support/legitimacy.

If Somalian warlords are successful in splitting the country among themselves and do not trigger international anger, my prediction is that they will turn 'tinpot dictators' i.e. averagely corrupt and incompetent leaders, allowing the economic activity to take place and develop (while taking their cut, of course) but preventing true development beyond 'a certain point'. There is no lack of countries with similar characteristics among the various Emerging Markets - Angola, Belarus, Burkina Fasso, Cameroon, Kazakhstan, Tajikistan or Uzbekistan, for example. Morocco or Saudi Arabia could also qualify, up to a point.

I am not sure how much attention the phenomenon of "oligarchs" got in the realm of economic research. Google scholars list a few papers and I liked the one by Daron Acemoglu as it links democracy, entrepreneurship and oligarchy. Despite some contrary opinion, my experience of emerging markets lead me to believe that oligarchs play a mainly negative role in their economy. Some have tried to argue that they would trigger the emergence of property rights (a good thing). I am not convinced in the slightest. Yes, of course, they defend their property rights, tooth and nail. It doesn't mean they do not loot other, weaker, smaller entrepreneurs or state property with impunity. Similarly, they will often merge with the local political power, to be able to use public office to protect or extend their business interests. And, of course, they do not like competition anymore than any other businessmen but, as opposed to businessmen in more developed countries, they are in the position to prevent such competition from arising (i.e. they create strong formal and informal barriers to entry).

Of course, oligarchy and tinpot dictatorship (see above) go hand in hand. They prosper best in extraction industries (oil, mining etc) or by controlling major infrastructures (energy creation and its distribution etc) as those are simple and massive.

Here, the lack of natural resources (except, maybe, for their fishing rights?) may actually be a point in favour of Somalia: Not only can they avoid the resource curse but they could potentially avoid the creation of an oligarchy and thus letting smaller-scaled, more diverse, entrepreneurial class.

Regardless, stopping a civil war and installing a semblance of law and order is always good news, as far as I am concerned. But how to replace a parasitic administration or government that is sucking all the vital energy of a country (why bother creating wealth if it is going to be stolen by corrupt bureaucrats, protected by the powers-that-be) is, in my humble opinion, the far more critical question facing developing countries and those who wished them well.