The political economy of taxation in Somalia (Najibullah Nor Isak)

Somalia has the weakest tax capacity in the world. In many ways, this is unsurprising given the collapse of the state in 1991 and the instability that has followed. In this paper, however, we argue that an analysis of taxation in Somalia cannot begin with the collapse of the state, drawing attention to understudied legacies of colonialism and conflict that shape the political economic dynamics that limit the contemporary state’s capacity and will to tax. Relying on historical and qualitative interview data and applying a political settlements analysis, we argue that top-down or technocratic institutional reform will not succeed if it does not transform underlying political and social relations and informal institutions.

We show how the historical legacies of colonialism, a post-conflict authoritarian regime, and civil war gave rise to informal institutions, norms, and networks that continue to undermine the state’s capacity and will to expand taxation, particularly as it relates to the business community. In this context, informal institutions of tax negotiation, the unwillingness to introduce new taxes or expand the tax base, and the forbearance of tax enforcement has a political logic that can be explained through three central mechanisms. First, the discretion and autonomy afforded by the weakness of the current system enables rent-seeking by front-line tax officials and collectors, while the broader institutionalization of informality benefits would-be corporate taxpayers. Second, the intertwining of networks among political and economic elite underpins the disincentives of senior administrative officials and politicians to extend taxation on the business community. Third, the critical role that the business community has played in enabling stability and supporting state institutions over time further limits incentives to expand business taxation.

In light of significant international investment in tax policy and administrative reform and some successes in recent years, we consider ways in which resistance to reform has been overcome in this context. We fundamentally argue that tax reform will fail unless it addresses the overarching elite bargains and political settlements that represent the greatest obstacle to reform. Concretely, reform has been possible where it has evaded the attention of would-be resisters, strengthened popular support for reform, or otherwise distributed the benefits of institutional reform. Most critically, reform has been possible where international development partners have put pressure on the government to undertake reforms, even when misaligned with the political settlement in the short-term. Though such strategies represent risks for instability and sustainability, in the longer-term they can transform underlying social relations and support the development of a more inclusive political settlement and society. In effect, international support can be used to strategically “unsettle” or reshape political settlements, increasing and broadening the number of actors with an interest in formal institutions. This analysis illustrates the value and necessity of analysing political settlements in order to deepen our understanding of what is possible in terms of institutional reform and fiscal capacity building.