Assessing the impact of government expenditure and economic growth empirical evidence from Somalia

This study investigates the dynamic relationship between government expenditure, gross fixed capital formation, foreign direct investment, population growth, and economic development in Somalia over the period 1990–2022. Grounded in Keynesian, Endogenous Growth, and Neoclassical economic theories, the research employs the Autoregressive Distributed Lag (ARDL) bounds testing approach to estimate both short-run and long-run effects of these macroeconomic variables on real GDP growth. The long-run results indicate that a 1% increase in government expenditure and population growth leads to a 1.27% and 1.45% rise in economic development, respectively. In contrast, gross capital formation and foreign direct investment exhibit statistically insignificant effects in the long run. In the short run, gross fixed capital formation (0.28) and population growth (4.09) significantly boost growth, whereas government expenditure shows a negative effect (-0.21), suggesting short-term inefficiencies. Granger causality tests reveal bidirectional causality between economic growth and both capital formation and population growth, while a unidirectional link runs from economic growth to FDI. These findings underscore the need for targeted fiscal reforms, including reallocation of government spending toward productive sectors, investment in human capital to leverage demographic trends, and improved regulatory frameworks to enhance FDI effectiveness. The study enriches the limited empirical literature on Somalia by quantifying macroeconomic growth drivers and offering context-specific recommendations for sustainable development in fragile states.