The role of institutional quality in shaping economic growth: Evidence from Somalia

Motivation Institutional quality and its impacts on economic growth are crucial in fragile states like Somalia, where weak governance, corruption, and political instability hinder effective policy implementation and economic development. This study is motivated by the need to understand how improving institutional frameworks can foster sustainable economic growth in Somalia despite these challenges. Purpose This study examines the impact of institutional quality on economic growth in Somalia from 1989 to 2023. The research focuses on how institutional quality, trade openness, foreign direct investment (FDI), inflation, and government expenditure influence Somalia's economic growth. In particular, the study investigates the relationship between these variables in both the short and the long run. Approach and methods To address the research question, the study employs an autoregressive distributed lag (ARDL) model, using time‐series data from 1989 to 2023. The model explores both short‐term and long‐term relationships between institutional quality and economic growth. The study also considers variables such as trade openness, FDI, government expenditure, and inflation, employing various diagnostic tests to ensure the robustness of the results. Findings The study finds a significant positive long‐term relationship between institutional quality, trade openness, FDI, and government expenditure with economic growth. In contrast, inflation negatively affects growth. Both institutional quality and government expenditure have a negative effect on growth in the short run, emphasizing the transition costs associated with reforms. The error correction term indicates a swift adjustment to long‐run equilibrium. Policy implications The findings suggest that improving institutional frameworks, prioritizing trade liberalization, and controlling inflation are essential for fostering sustainable growth in Somalia. Additionally, Somalia should focus on increasing its FDI by means of regulatory reforms and improved infrastructure to further boost its economic growth prospects.