The roles of foreign aid, foreign direct investment (FDI), and agricultural labor on agricultural production in Somalia

Abstract

Agriculture serves as the cornerstone of Somalia’s economy, providing livelihoods for the majority of the population and contributing significantly to national economic development. Despite its critical role, the key factors influencing agricultural production in Somalia have not been thoroughly analyzed. Thus, this study explores the roles of foreign direct investment (FDI), foreign aid, and agricultural labor in influencing agricultural production in Somalia from 1990 to 2023, employing the Autoregressive Distributed Lag (ARDL) model, along with stationarity tests, bounds testing, and Granger causality analysis, to ensure the robustness of the results. The findings confirm a stable long-term relationship among variables. In the long term, FDI and agricultural labor positively affect agricultural production, while development food aid has an adverse effect. This implies sustained capital and labor boost productivity, but food aid may distort markets and create dependency. In the short term, food aid and labor positively influence production, with FDI’s effect being positive but insignificant. The Granger test results of this study indicate unidirectional causality from agricultural output to FDI, suggesting that agrarian growth attracts investment. A bidirectional relationship exists between labor and production. Agricultural labor also Granger-causes food aid, implying that increased employment may reduce future reliance on food aid. Based on the findings, the study suggests easing legal and administrative barriers to attract FDI, enhancing public-private partnerships, maintaining targeted emergency assistance while gradually shifting toward locally supportive and production-enhancing modalities to reduce long-term dependency and support sustainable agriculture, and improving labor productivity through training, mechanization, and institutional reforms.