Investigating trade openness’s impact on Somalia’s economic growth: a VECM study

Abstract

Trade openness plays a pivotal role in shaping economic growth, particularly in fragile and developing economies where external integration influences productivity and capital flows. This study investigates the long- and short-run effects of trade openness on Somalia’s economic growth from 1990 to 2023 using the Vector Error Correction Model (VECM). The analysis incorporates foreign direct investment (FDI), official development assistance (ODA), and population growth as explanatory variables. Stationarity was tested using Augmented Dickey–Fuller and Phillips Perron tests, while Johansen cointegration confirmed long-term equilibrium relationships among the variables. The long-run results reveal that trade openness and population growth significantly and positively affect economic growth, highlighting market integration and demographic expansion as growth engines. Conversely, FDI exerts a negative and significant effect, reflecting weak absorptive capacity and limited sectoral linkages, while ODA shows an insignificant relationship with growth. Short-run results indicate limited immediate effects, with population growth negatively influencing economic performance. The findings highlight that long-term growth in Somalia is primarily driven by trade integration and demographic dynamics, while the benefits of foreign inflows remain constrained by institutional fragility. The study recommends policies that enhance trade infrastructure, improve investment efficiency, and strengthen governance to convert openness into sustainable economic development.