Geopolitical Situation and HistoryDocument Transcript
Contemporary Economic Systems John Kyle
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
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.
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
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.
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.
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
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.
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.
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