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Geopolitical Situation and History

Geopolitical Situation and History






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    Geopolitical Situation and History Geopolitical Situation and History Document Transcript

    • Contemporary Economic Systems John Kyle Prof. Moss Ajax Regional Operations Report Area of Former Somalia For this assignment, we were to look at opportunities for the operations of Ajax Corporation within a region of the world. This report examines the possibilities and relevant factors now existing in the area formerly known as the nation of Somalia. Geopolitical Situation and History The region of former Somalia is located in North East Africa in a section often referred to as the Horn of Africa. It borders Djibouti and the Gulf of Aden to the North, Ethiopia and Kenya to the South, and the Indian Ocean to the West. The area consists of 246,200 square miles, and 7-8 million people. The population distribution is 27% urban and 73% rural. Population growth stands at 3.4%, the life expectancy is 48 years and the literacy rate is 24%. The area existed as blah blah until the arrival of the European colonial forces in XXXX. Then some history of colonial forces. In blank, 1960 British Somaliland gained its independence, with Italian Somaliland gaining its independence shortly thereafter in blank, 1960. Shortly after these colonies’ independence, they decided to join to form the Republic of Somalila. Things remained relatively stable until a military coup de etat
    • occurred in 1969, putting Mohammed Siad Barre into power as socialist dictator. Siad ran an extremely corrupt regime, often considered to be the most corrupt in the whole of Africa. Under his rule, government had a hand in, and nearly control of, all operations of the economy including industry, manufacturing, agriculture, and business. While such widespread government involvement and control was done under the auspices of the “general good”, it was in fact largely an extortion and protection racket. Conducting any sort of business meant getting government approval through a bureaucratic maze of permits from a multitude of governmental organizations. What this really translated into was that numerous large bribes, payoffs, and kickbacks were necessary to get moving, and competing against “friends” of the government was nearly impossible. Additionally, the government could turn against you at any time and sieze property and other assets for the state, or rather, specific state employees. Story of fisherman. Such a governmental structure of course led Somalia to become one of the poorest nations on the continent. Siad’s dictatorship lasted until 1991, when the rebellion of numerous factions resulted in his overthrow. Several warlords vied for control following the dissolution of the republic, although none were able to gain control. The ongoing warfare exacerbated the plight of Somalis, and in 1992 U.S. President George H. Bush sent American troops into the area as part of a UN peacekeeping and relief mission known as blah blah blah. Somalis were united in their objection to foreign imposed rule via the UN and tried to expel the UN forces. This led to the infamous downing of US Blackhawk helicopters, and the deaths of many US military personnel. It is from these events of the early 90’s that most Americans acquired their perceptions on the Somalia and the situation there, even though events were related by a media with a strong pro-US sentiment. U.S. perceptions
    • of Somalia are also colored by general portrayals of Africa as a completely undeveloped and impoverished wasteland by advertisements such as “Save the Children”. This is not to disparage the organization, only to point out that most Americans are misinformed on the true nature of things in Africa. Getting back to the UN effort, it was largely a failure, and the massive amounts of monetary and material aid prolonged the conflict by giving the warlords resources to fight over and the means to sustain their operations. Between 1994-1995, all UN and US forces withdrew from Somalia. Since 1991, Southern Somalia has had no form of government. Northern Somalia has seen recently the emergence of three main self declared states, Puntland, Somaliland, and Awdal. Southern Somalia exists as an anarcho-capitalist area. Anarcho-capitalisim is basically the operation of a capitalist economy in the complete absence of government, where all aspects of the society are done through private means. Given that anarcho- capitalism has been a system long theorized upon by economists and political philosophers, it is worthwhile to examine this region since it is the only area in the world currently operating as such. Business Opportunity for Ajax Corporation For the purpose of this exercise, I have envisioned Ajax as a company involved in the shipment of international cargo. Given this fact, a good business opportunity exists for Ajax revolving around the port of Mogadishu. The port ceased operating in 1991 soon after the government fell and has been in a state of disrepair. Ajax could go in and make the necessary repairs and reopen the port. As a side project, Ajax could refurbish the
    • roadways and rail lines running to Mogadishu and the surrounding area so as to enable the efficient movement of goods once cargo is offloaded from the ships. Currently, the means of importing and exporting goods in and out of the former Somalia is quite crude. At the moment, ships anchor off the coast and load their cargo onto small boats. These boats than proceed to beach themselves on the shore, and the cargo is hand carried and loaded onto trucks for transport. The only “major” Somali port is in the town of Berbera, some 600 miles to the north. The movement of goods from this area adds much unnecessary costs do to this distance and the marginal transportation infrastructure between North and South. According to press sources, the port of Berbera is nevertheless experiencing record traffic and generating large profits for its operators. The situation is the same for the cottage industry operations near Mogadishu. Re-opening the port could undercut competition and provide the capacity needed for the booming economy. The potential for the Mogadishu port extends beyond just the Somali area. The only truly modern port on East coast is the port of Djibouti, and it handles a large portion of all goods coming and leaving Eastern Africa. However, the Djibouti port is notoriously corrupt and one of the most expensive ports in the world to deal with. If you do not make appropriate payments, often 50% of your cargo will disappear at the dock. If the port of Mogadishu can be connected with the rest of Eastern Africa, there is a potential to capture most of this market. Strengths Now that the business opportunity has been divulged, we can look at some of the strengths the region of former Somalia offers to this proposed business undertaking. One
    • of the major benefits is that Ajax’s operations will not be faced with taxation of any kind due to the absence of the state. Furthermore, the completely free market will alleviate Ajax from having to adhere to governmental rules or regulations concerning their operations. There is no need to apply for permits, lobby the government, pay out bribes, or worry about political forces. Ajax may run the port as they see fit, and in line with maximizing profitability. Potential workers would also be working for low wages. Often good Somali workers can be employed for as little as a few dollars a day. Speaking of dollars, the US Dollar is used extensively throughout the economy and in the transactions of local business. Such an arrangement would mean that Ajax would not have to fear risks associated with dealing in foreign currencies. Often, currency volatility or depreciation can have dramatic affects on the profitability of a corporation’s operations abroad. Gold is also often used, and I always find it beneficial to work with a solid means of exchange than by fiat currency. Mogadishu and the Southern region are undergoing a rapidly expanding economy. Numerous new buildings are being constructed, new factories and businesses are opening, and the oil refiners are on their way to come back on line. GDP per capita has increased from $177 under Siad in 1989 to $600 in 1999. The economic activity the area is witnessing is to be expected when free markets are in operation. One interesting free market curio is that when making a telephone call from Africa to another continent, Somalila has lower rates than any other African country. A growing economy is highly correlated with growing imports and exports. Increased traffic will result in higher revenue and profits to the port. Another strength is
    • Mogadishu’s location in close proximity to the markets of the Middle East. Taking a look at the region’s import and export partners, things look good for seafaring traffic. 57% of exports go to Saudi Arabia, at least 80% of exports go to the general Middle East Area, and 90% of exports are off the continent. Since most exports go via ship, and not land, a clear need exists. As far as imports, at least 40% come in via the sea. The region has a GDP of $4.3 Billion US, and $187 Million US in annual exports. Taking a cue from the import and export figures and how much cargo is taken by ship, the potential market for the port is $243 Million US in goods. The population seems to have learned valuable lessons from their past dictatorship. The people seem to recognize the failures inherent in most governments, and no longer look to government as a solution. They have seen the increasing welfare provided by laisez faire economics, and they remain committed to those principles. With a public attitude like this, Ajax need not worry about the sudden uprising of a corrupt government that would interfere with operations and threaten the security of the project. Finally, one of the major strengths is that inter clan hostilities have been largely reconciled. As mentioned previously, when UN cut off aid, there was nothing left for the factions to fight over. Also, increasing commerce has broken down barriers between groups in the name of profit. The violent factions are also vastly diminished in size as warlords have lost their people as Somali businesses hire them away for private security. Weaknesses One thing holding Somalis back and one thing that could possibly cause some difficulty for Ajax is the lack of education amongst the people. Without a government, there are no state schools. The only educational institutions are the small school run my
    • Muslim clerics, and these focus mostly on religion. These factors have contributed to the regions poor literacy rate of 24%. While many of the port facility jobs would not need educated individuals, the inability to read will complicate any job. Wide spread use of the drug Khat (often spelled Qat) also may have some negative affects on the social structure and the viability of the workforce. Khat is a plant chewed by many like tobacco which delivers a drug like amphetamine. Khat has become a major industry in the region, and flights of Khat often provide the only routinely scheduled air service in and out of the country. While the US Dollar is in widespread use, especially in larger business transactions, there is a local currency called the Somali Shilling. Recently this currency has seen rapid inflation as Somali businessmen print shillings in Canada and ship in crates of new bills. Ajax can do business with the US Dollar, but there may be insistence by some people to use this currency. If it becomes necessary to do some portion of business in Somali Shillings, that could open up a new area of risk. The absence of a government provided for many of the benefits discussed in the strengths section. However, the same absence of government can be a weakness. There is no government police, military, or justice system, and the services they used to provide must be replaced with private sector solutions. Often, this means companies must employ large groups of armed guards for security. At one major cell phone company in Mogadishu, two men with tripod mounted machine guns guard either side of the door in fortified positions. Factories also have groups of roving security forces, carrying lighter automatic weapons such as the SKS and AK47. When moving shipments of product or other valuables, such things are transported in caravans under the guard of “technicals”.
    • Technicals are pick up trucks with a bed-mounted large-caliber machine gun, or a surface to air missile. Opportunities The majority of African governments are thinly veiled racketeering operations, prone to extreme corruption, taxation, and random nationalization. They ruin the economic machinery, act as leeches, and provide little in the way of services compared to the taxes they collect. If you look at Somalia’s neighbors, they both fit this description. Ethiopia has a Corruption Perception Index (CPI) of 2.6 and Kenya has a CPI of 2.1. However, without these problems, the Somali region is an exception to the African rule, an exception to how businesses in Africa have been traditionally forced to operate. By being the sole exception on the continent, this region has a large potential to be Africa’s haven. One of the largest, if less probable, opportunities is that the region will follow the precedent of Hong Kong. About 50 years ago, Hong Kong was a small, underdeveloped, and impoverished British Protectorate. However, when Hong Kong embraced free- market policies and a hands-off government approach to business, development exploded. The situation is different in Somalia because Hong Kong had an element of stability because they still had some form of government along with financial stability helped along by the United Kingdom. However, in Somalia this might be offset by the extreme nature of their free markets and their complete lack of government controls. Somalia could potentially become an international manufacturing and shipping center as Hong Kong is today. If so, the potential to get in now with the Port of Mogadishu at the
    • ground floor before a rapid development could reap enormous benefits. Eventually, the area could even proceed to be a very stable environment despite its lack of government. Threats At the moment, there is an important conference going on in the neighboring country of Djibouti. Many prominent Somalis are there to discuss the possibility of reinstating a central government known as the Transitional National Government (TNG). The re-establishment of a government could be a threat because it could eliminate everything that has begun to make Somalia a success story. While the attendees of the conference affirm that the new government would only provide basics such as a military, police force, justice system, and international representation, it is possible that once a new government comes into power they will begin to abuse their position in the grand tradition of typical African governance. Another threat is that inter-clan fighting could lead to more civil wars. Such a war would end up benefiting very few, while derailing the economic engine. The result of renewed conflict could also possibly bring a very poor government into power. Recommendation The unique political structure of Somalia, or lack thereof, is what makes this business proposition attractive. However this same political structure is also what raises several areas of concern. At the root of it all is perhaps the question philosophers have been asking all along, is anarcho-capitalism stable? Can a society without government be peaceful, efficient, and stable? That question can’t be answered yet; only time will tell. Personally I find minarchy, a very small government to handle defense, police, and
    • justice, is a superior solution. Some sort of government must exist to keep the peace, protect citizens in their natural rights, and defend them against initiation of force. Time may prove me wrong, but I believe anarchy is just too risky. My recommendation to Ajax is to take a wait-and-see attitude with foreign direct investment in the former Somalia. I would certainly not disregard them all together given all of the possible benefits. Ajax should wait and see if the current situation is sustainble. If a government is formed, Ajax should make sure it supports the free-market principles before proceeding further. Overall, I believe Ajax should not make any foreign direct investment at this time. Notes on economic data Economic data on the former Somali area is hard to come by. Without a governmental authority, there is a severely reduced ability to compile economic statistics. Many organizations choose to not list any data for Somalia, such as the World Development Report. Only the CIA factbook and some spotty figures at the UN and IMF exist. These figures are also estimates, so while the numbers used in this report may be good at hitting a general target, I question the accuracy of some of the figures. It seems that since the UN withdrew after a botched attempt with the New World Order in the early nineties, they have washed their hands of Somalia, and generally ignore the whole area. The IMF, with no Somali government to deal with, also seems to not bother compiling economic data. Therefore, where and how the estimates that are available are computed is unknown, and readers should keep this in mind.
    • Because of the absence of government, there are no government taxes, rules, or regulations. In Somalia you have a completely free and dynamic market, wide open to entreprenuership. If you want to produce, manufacture, buy or sell, you just “do”, without the intervention of a governmental force. Such