Exploring the Dynamics of Trade Openness, External Debt, and Economic Growth in Somalia: Evidence from a Vector Error Correction Model (VECM)

Mohamud, Ibrahim Hussein (2026): Exploring the Dynamics of Trade Openness, External Debt, and Economic Growth in Somalia: Evidence from a Vector Error Correction Model (VECM).

Abstract

ABSTRACT This study empirically investigates the influence of trade openness and external debt on economic growth in Somalia from 1990–2022, utilising a vector error correction model (VECM). The findings confirm a consistent long-term link among the factors. Trade openness exerts a substantial negative long-term effect on growth, indicative of structural limitations such as reliance on imports and inadequate export capability, but external debt demonstrates a negative albeit negligible influence. Conversely, foreign direct investment fosters long-term growth, whereas inflation adversely affects growth in the short term. The results indicate that sustainable growth necessitates structural reforms, enhanced institutions, and superior macroeconomic management. IMPACT STATEMENT This report presents a comprehensive analysis of trade openness, external debt, and economic growth in Somalia, delivering critical insights for vulnerable economies. The findings indicate a "trade openness paradox," wherein heightened global integration does not inherently promote growth due to structural deficiencies. It demonstrates that external debt alone cannot stimulate growth without proficient management and robust institutions. This study critiques traditional development assumptions by underscoring the necessity for export diversification, enhancement of domestic capacities, and better governance. The findings provide pragmatic, evidence-supported recommendations for governments pursuing sustainable and resilient economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Trade openness; external debt; economic growth; foreign direct investment; macroeconomic dynamics; VECM; cointegration; time series analysis; Somalia
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa

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