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Quick Facts
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The 2012 Index resumes covering Somalia for the first time since 2001. Somalia’s economic freedom is not graded because of the lack of reliable data. The last time Somalia was fully graded was in the 2000 Index when the country received a score of only 27.8.
Somalia is a failed state. Extreme violence, political instability, and famine have ravaged the already fragile living situation over the past decade. The economy has been mired in a tragic situation, aggravated by civil war and the absence of a functioning national government, in which even basic needs cannot be provided. Decades of lawlessness have destroyed any foundation of economic freedom on which a developing economy might be built. Complete economic collapse has resulted in massive human migrations, and a humanitarian catastrophe has been unfolding in the devastated economy due to the most severe drought in recent years. It has been estimated that about 4 million Somalis are in crisis nationwide. Over 700,000 people in the southern parts of Somalia are reportedly at risk of death.
Background
Since the collapse of the socialist Siad Barre regime in 1991, Somalia has descended into chaos. An autonomous Republic of Somaliland, not recognized by any government, maintains a relatively stable existence. The Bari, Nugaal, and northern Mudug regions comprise the semi-autonomous state of Puntland. Conditions worsened when a U.N. humanitarian mission’s mandate ended in 1995. After several transitional governments, Somalia still lacks effective national governance. The current Transitional Federal Government (TFG) has failed to establish stability and uses the African Union’s peacekeeping mission to Somalia (AMISOM) to protect civilians. Somalia’s informal economy is largely based on agriculture and livestock herding. Traditional exports include hides, fish, charcoal, and bananas. With the economy in shambles, the population is heavily dependent on overseas remittances and foreign aid.
The rule of law does not exist in the absence of a functioning central government. Numerous armed groups and militias control different parts of the country, exercising their own informal rule of law. In April 2009, Somalia’s transitional federal parliament ordered that Islamic Sharia law be applied throughout the country. However, in practice, local authorities or elders enforce laws based on traditional customs.
There is no fully effective national government that can provide basic services. Other than the collection of very limited duties and taxes, little formal fiscal policy is in place. In southern Somalia, taxes are often levied by local warlords or clan leaders and used to pay militiamen. In Somaliland, duties levied at the port are estimated to provide around 80 percent of government revenue.
Political instability, an outmoded regulatory environment, and inadequate infrastructure significantly deter the formation and operation of businesses. The labor market is dominated by the agricultural sector and informal hiring practices. Agriculture is the most important sector, with livestock normally accounting for about 40 percent of total domestic output and more than half of Somalia’s limited export earnings.
Much of the population remains outside of the formal trade and banking sectors, and private investment remains extremely limited. Swiss Financial Bank announced in 2011 that it intends to open a bank in Somaliland. The bank is one of three international commercial banks that have applied for licenses to operate in Somaliland in anticipation of parliament passing a new banking act.