Determinants of trade openness in Somalia: the role of the agricultural sector and macroeconomic indicators

This study investigates the determinants of trade openness in Somalia by examining how the agricultural sector and key macroeconomic factors—including foreign direct investment (FDI), exchange rates, and trade integration—jointly influence trade performance. Drawing on classical and modern trade theories, such as comparative advantage, export performance, and endogenous growth, the study employs annual data spanning 1990–2020 and applies an Autoregressive Distributed Lag (ARDL) model with an Error Correction Mechanism (ECM) to capture both short- and long-run dynamics. The stationarity of the series is assessed using the Augmented Dickey–Fuller (ADF), Phillips-Perron (PP), and KPSS tests. The long-run results indicate that agricultural exports significantly enhance trade openness, highlighting the central role of the agricultural sector in promoting Somalia’s integration into international markets. In contrast, FDI inflows exhibit a negative long-term effect, suggesting that investments are often directed to non-trade-oriented sectors, limiting their contribution to trade performance. Short-run dynamics reveal that export growth and exchange-rate stability are crucial for trade performance, whereas exchange-rate volatility can impede trade flows. Comprehensive diagnostic tests confirm the model’s robustness and stability. These findings underscore the importance of strengthening agricultural export capacity, maintaining macroeconomic stability, and strategically allocating FDI to trade-enhancing sectors to improve Somalia’s participation in global markets.