Tax dealings – state and private sector relations in Somalia

The views expressed in this blog post are those of the author and do not necessarily reflect the opinions of CMI. 

Tax collection remains a challenge in many African countries. Compared to other regions, sub-Saharan Africa has one of the lowest tax-to-GDP ratios, which means governments are unable to raise sufficient revenues to finance their development priorities. In 2021, the average tax-to-GDP ratio of 33 African countries was 15.6%. By comparison, Asia and the Pacific averaged 19.8%, Latin America and the Caribbean 21.7%, and OECD countries 34.1%.

Tax scholars have long argued that African states struggle to raise taxes due to weak social contracts. A social contract is the idea of an unwritten agreement between citizens and the state: people pay taxes, and in return the state provides basic services, security, accountability, and political representation.

Rethinking neo-patrimonial explanations

Explanations for why social contracts remain absent often focus on what are called neo-patrimonial arguments. This school of thought sees African politics as dominated by personal ties and informal exchanges rather than impartial rules and institutions. In this view, states and taxpayers are bound in patron–client relations, where politicians agree not to tax their supporters in exchange for loyalty or votes.

Such explanations are problematic because they assume that clientelism is a uniform feature of African states, fail to explain the different outcomes of patron–client relations, and overlook the many ways governments and taxpayers negotiate tax ‘bargains’ across the continent.

Tax bargains in fragile states

Somalia is one example where such revenue bargains—deals between governments and taxpayers about how much tax is collected, how, and under what conditions—are unfolding even without an overarching social contract. Despite the state’s fragility and its inability to provide even basic law and order, the Somali government has managed to raise some taxes from one of the most powerful sectors of the economy: the telecom industry.

These corporate taxes were not standardized. Instead, they were negotiated case-by-case and set far below regional industry norms. This raises important questions about how these bargains were struck and why telecom actors were able to secure such favourable terms.

What drives revenue bargains?

In new research, presented in my WIDER Working Paper ‘Tax dealings – state and private sector relations in Somalia’, I argue that four factors condition the nature of revenue bargains, including:

• The distribution of power within the state—whether power is concentrated or distributed across a large and diverse group of elites, 

• The relative power of taxpayers and their fiscal importance, 

• The nature of institutions—whether institutions supporting productive activity are governed by formal rules or informal arrangements,

• The nature of benefits—whether benefits to powerful groups are distributed through taxes or through rents (in political economy, rents are unearned income gained from controlling resources, political connections, or privileges, not from producing goods or services).

In Somalia, telecom elites were able to negotiate low corporate taxes not only because of clientelist ties with political elites, but also because their economic power and fiscal importance gave them leverage. Political elites, by contrast, were weaker because they represented a fragmented set of interests contested by multiple groups both within and outside the state. The dominance of informal institutions further enabled the sector to resist efforts to formalize tax rates, ensuring taxes remained negotiable rather than standardized.

The role of external financing

External financing and aid also shaped these dynamics. A key turning point was the Heavily Indebted Poor Countries (HIPC) Initiative, a programme launched in 1996 by the IMF and World Bank to help poor countries reduce  unmanageable debt levels if they met economic and governance reforms. Meeting these milestones allowed Somalia to access greater flows of international development financing. For telecom actors, making some tax payments helped sustain the image of a functioning state and secure access to this external funding. Rather than reducing the incentive to pay taxes, aid flows in Somalia actually increased them by raising the prospects of future rents.

Together, these findings underscore the importance of political economy dynamics in understanding taxation in fragile states. They show how the distribution of power, the nature of institutions, and the flow of benefits shape the bargaining positions of state and revenue providers, especially in contexts of weak state capacity.

This blog was originally published by UNU-WIDER.