As the humanitarian crisis in southern Somalia threatens millions of lives, Somalia's little-known northern neighbour, Somaliland, is doing so well that its government recently offered to send aid across the border. That a small and relatively poor country that is also suffering from the ongoing drought would be in a position to help Somalia is itself remarkable; that Somaliland achieved this position without being officially recognised by the international community as a sovereign nation – and thus without being eligible for international assistance – is truly impressive.

But have Somaliland's accomplishments come in spite of its ineligibility for foreign assistance, or because of it? Somaliland's success – providing peace, stability and democracy in a region where all are scarce – is in large part due to the fact that the government has never received foreign aid. Because Somaliland's government cannot access funding from the World Bank, IMF, or other major donors, officials were forced to negotiate with citizens and business leaders for financial support. This negotiation created the responsive political institutions that, in turn, have allowed the nation to fare relatively well in recent years and in the current crisis.

Somaliland was part of Somalia until 1991, when it seceded during the country's civil war. When Somaliland first declared independence, its government was built around a single clan and lacked accountable political institutions. Business leaders eventually agreed to provide funds, but not until the government agreed to develop representative and accountable political institutions (a concession that politicians made only out of necessity, as it weakened their own grasp on power).

In one notable incident, the government was forced to implement democratic reforms in exchange for tax revenues from Somaliland's main port. These revenues total less than $30m a year – a fraction of the more than $100m the government would have received from aid organisations if Somaliland had been eligible for international assistance. It is difficult to imagine that the owners of the port would have been able to exact the same concessions if the government had other funding options.

As a result of these negotiations over tax revenue, Somaliland has become an exceptional democracy. It has held multiple presidential, parliamentary and district-level elections. It has seen multiple peaceful handovers of power, including to a minority clan. It even survived a presidential election that was decided by an 80-vote margin without resorting to violence.

While the government's limited finances prevent it from providing an ideal level of public goods, the stability it has ensured has led to an economic revival, massive gains in primary schooling, and significant reductions in infant mortality. It has also been able to facilitate a strong response to the current food shortages, which is evident in this World Food Programme map of the current incidence of famine. To be sure, there is still much work to be done but, in context, Somaliland's accomplishments are, in the words of Human Rights Watch, "both improbable and deeply impressive".

Of course, one might wonder whether Somaliland's experiences can be generalised. In fact, the idea that government dependency on local tax revenues makes it more accountable has a strong historical pedigree. Political scientists and historians have long argued that the modern, representative state emerged in medieval Europe in large part as the result of negotiations between autocratic governments that needed tax revenues to survive inter-state conflicts and citizens who demanded accountability in return. Only recently, though, have development professionals have begun to recognise the implications of this line of research for modern development policy.

Certainly, not all foreign assistance is bad. Aid has clear benefits against which the potential harms discussed here must be weighed on a case-by-case basis. In a country like Nigeria, where the government has ample access to oil revenues, foreign assistance is unlikely to affect the relationship between citizens and the government. In many countries, though, aid is the largest single source of government revenue; there are 16 sub-Saharan countries in which the ratio of foreign assistance to government expenditure is greater than 50%, and in 10 of those, this ratio is greater than 75%. If these aid levels damage the quality of governance in recipient countries – as Somaliland's experience suggests they may – then it might be the case that, in the long run, less money may actually do more good.

Nick Eubank is a PhD student in Political Economics at Stanford University's Graduate School of Business. His paper "Taxation, Political Accountability, and Foreign Aid: Lessons from Somaliland" is forthcoming in the Journal of Development Studies.