Development Economics in Somalia Grade 12 SL Economics Case Study (By: Vidhya Ravi Sankar)

Overview

Details

  • Since the school system collapsed in the mid-1980s there has not been a proper source of education for over two generations of Somalians.
  • Somalia has also been without a government “since the collapse of its 22-year military dictatorship in 1991”. Due to this dictatorship, when it comes to reuniting the country it has been a difficult process causing the separation of large parts of the populations.
  • Many children and youth have been forced to join the militia and many others have been starved to death, killed and displaced.
  • There was also a famine in 2011 which has brought up the need to promote long-term growth.
  • From: Somalia Human Development Report 2012
Caught between the dual traps of conflict and poverty, Somalia, not surprisingly, remains at the bottom of the list of the world’s failed states, showing no improvement since 2005. (Somalia Human Development Report 2012)
  • Two regions of northern Somalia have avoided most of the conflicts during the 1990s. In comparison to the rest of Somalia, both Somaliland and Puntland, have gained the opportunity to gain a better "social and political coherence" through the establishment of a separate administration.
  • Though yet to gain international acknowledgement, in 1991 Somaliland claimed independence from the country of Somalia.
  • Furthermore, "in 1998, the northeast region of Somalia proclaimed itself the semi-autonomous State of Puntland.”
  • From: Somalia Human Development Report 2012

Economic Growth

Definition: Economic growth refers to increases in output and incomes over time, often measured on a per capita basis. (Tragakes)

  • Population: 10.79 million (as of 2015)
  • GDP: $5.925 billion (as of 2015)
  • GDP growth: -1.5% (as of 1990)

Economic Development

Definition: Economic development refers to a process that leads to improved standards of living for a population as a whole. (Tragakes)

  • Life Expectancy: 55.4 years (as of 2014)
  • HDI: 0.349 (as of 2016)
  • Infant Mortality rate: 96.6 per 1000 live births
Development Framework for Somalia

Comparing Levels of Development

Somalia vs Singapore

Life expectancy vs Mean years in school for women aged 15-44

This was the only graph which could be found due to the lack of data related to education in Somalia. The graph compares the relationship between the health indicator of life expectancy and the education indicator of mean years of school for women aged 15-44. As seen in the graph there seems to be a correlation between the two, because when life expectancy increases, the mean year of school also increase. Furthermore as seen Somalia has a rather low life expectancy/mean year of schooling in comparison to a developed country like Singapore. There is one main variable in this data which is the time. The latest data was in 2009 and so far 7+ years have passed so this may have an impact (though most probably not by much) on the data.

Economic Development (Indicators)

  1. Education: has yet to contribute to economic development in Somalia. In fact it has been an issue due to the lack of education in the country.
  2. Property Rights: It is a part of the Index of Economic freedom, and it measures the degree to which a country’s laws protect private property rights, and the degree o which its government enforces these laws. (In Somalia it has been noted that it is often difficult for women to gain access to their inheritance which was left behind by their families or husbands as Elders often “forget” Islamic law and follow customs instead. Women are often forced out of the house.)
  3. The use of appropriate technology: Somalia is still in the process of developing, so the process of gaining technology in general has been difficult. However, more appropriate technology would lead to the development and increase in the economy.
  4. Access to credit (including micro credit): Somalia’s microcredit schemes are just beginning to develop and are still not really a huge part of the economy yet. In particular, microcredit schemes are generally one of the most important components which are key for poorer countries to undergo development. A microcredit scheme is a small amount of money given by non-governmental institutions to the people who do not have access to credit.
  5. Women’s empowerment: As discussed with regards to property right, women are often taken advantage of, especially when it comes to things like money. However, things like microcredit schemes may be better for women to borrow money because it is believed that they are more likely to repay loans.

Domestic Factors

  1. Political Stability: Somalia is not very politically stable. Due to constant changes in the government and a lack of coherence in the system there is no proper government, which means that development is very minimal due to lack of support from the government.
  2. Degree of Corruption: Somalia is ranked very low in comparison to other countries and it also has a very high rank in regards to it’s corruptness. In other words it is a highly corrupt country, which is likely to heavily impact its economic development.
Degree of corruption in Somalia

International Trade and Economic Development

There are a number of international factors that act as a barrier to both growth and development. Give examples of how the following may have impacted your country:

Over-specialisation

An overspecialisation would mean that the country is overly dependent on commodity exports. Furthermore, primary commodities which are the main source of exports for Somalia, has no value added to it and is generally exported at a cheaper price. Thus it also means that they are missing out on the benefits brought along with diversification (mainly that even if one market fails the entire economy of the country is not dependent on it. Furthermore, in the long run it is likely to bring about economic growth).

Price volatility of primary products

Primary products have increased price volatility which means that the prices vary at an increased degree, as seen in the diagram.

Price volatility of primary products in Somalia

Inability to access international markets

This is generally because developing countries impose increased tariffs on imports from developing countries than on imports from each other and moreover, developed countries use tariff barriers to discourage the development of manufacturing and diversification into higher value added products.

Somalia's economy
Exports
Countries exported to
Imports
Countries imported from
Trade balance

Growth and Development Strategies aimed at Increasing Trade

  1. Import substitution: Refers to the growth and trade strategy where a country begins to manufacture simple consumer goods.
  2. Export promotion: Refers to the growth and trade strategy where a country attempts to reduce imports and going to achieve economic growth by expanding its exports. - Somalia is attempting to promote export promotion and adapting it into the country’s trade. Export promotion is very beneficial to a country’s economic development, while compared to import substitution due to the fact that a growth in a country’s exports is most likely to improve it’s aggregate demand, thus improving a country’s economic growth and development.
  3. Trade liberalisation: Countries eliminate trade barriers to achieve a free trade and a free market approach in the domestic country. (Capital liberalisation: free movement of financial capital in and out of a country by elimination of exchange controls, which are government restrictions on the quantity of foreign exchange that can be brought by a domestic resident of a country.)
  4. The role of the WTO: "An international organisation that provides the institutional and legal framework for the trading system that exists between member nations worldwide, responsible for liberalising trade, operating a system of trade rules and providing a forum for trade negotiations between governments, and for settling trade disputes."
  5. Bilateral and regional preferential trade agreements: Bilateral: "Any trade agreement (or agreement to lower international trade barriers) involving two trading partners, usually two countries. It may also involve a trade agreement between one country and another group of countries when this groups acts as a single unit (such as the European Union). May be contrasted with regional trade agreement and multilateral trade agreement." Regional: " A trade agreement (or agreement to lower international trade barriers) between several countries that are located within a geographical region (such as NAFTA, or North American Free Trade Agreement). May be contrasted with bilateral trade agreement and multilateral trade agreement."
  6. Diversification: “Generally refers to change involving greater variety, and is used to refer to increasing the variety of goods and services produced and/or exported by a country; it is the opposite of specialisation."

Aid, Trade & FDI

  • Aid: Somalia has been a recipient of aid (however there are no details available).
  • Trade: Mainly in the primary sector.
  • Foreign Direct Investment (FDI): 0.1-0.4 billion dollars
FDI in Somalia

From the information available it seems like FDI has been the most beneficial to economic growth in Somalia, however due to the lack of coherent data collected, it is hard to say if this is the case for certain.

Impact of Debt on Economic Development

Explain why the servicing of international debt causes balance of payments problems and has an opportunity cost in terms of foregone spending on development objectives.

The reason why an international debt causes balance of payment problems is because it has to be repaid in foreign currency, so the government has to find a way to obtain foreign currency in order to pay back the interest and the loan itself. There is also an opportunity cost for both the borrowing country and the lending country. With regards to the borrowing country, the money which the country has earned due to development, instead of being used for further development is now used in order to pay back their debt which is the opportunity cos incurred. Similarly, for the lending country, the money which was lent could have been used for the development of said country thus incurring an opportunity cost. There can also be other problems caused due to the servicing of international debts such as the debt trap which is the inability to repay interest and loan so the government requires to borrow even more money to repay them. Another problem which could be caused is low investment, due to political instability and uncertainty and low confidence, and finally low economic growth.

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