Assessing the role of institutional quality in shaping the trade openness–growth nexus in fragile states: A case study of Somalia

Motivation This study is motivated by Somalia's difficulty in translating trade openness into sustained economic performance under fragile‐state conditions. Rather than treating trade openness as an automatic driver of growth, the study examines how institutional quality, foreign direct investment (FDI), labour‐force dynamics, and inflation condition the trade‐growth relationship in Somalia. The contribution lies in focusing on a fragile‐state setting where weak governance, limited regulatory enforcement, informal trade networks, and data constraints can reduce the expected gains from liberalization. Approaches and Methods The study applies an autoregressive distributed lag (ARDL) approach to annual time‐series data for Somalia from 1990 to 2022. The model includes trade openness, institutional quality, FDI, labour force, inflation, and the logarithm of GDP as the indicator of long‐run economic performance. The ARDL method is complemented with unit‐root testing, bounds testing for cointegration, an error‐correction representation, diagnostic tests, stability checks, and FMOLS, DOLS, and CCR estimators for robustness. Findings The results indicate a statistically significant long‐run association between the examined variables and Somalia's economic performance. Trade openness, institutional quality, foreign direct investment, and labour‐force expansion are positively associated with economic growth, while inflation shows a negative relationship with economic performance. These findings underscore the importance of trade integration and institutional strength in supporting growth, although the interpretation of the results remains subject to the limitations of Somalia's data environment. Policy implication The policy implications are that trade liberalization alone is insufficient in a fragile state unless it is supported by stronger institutions, better customs administration, improved infrastructure, credible legal enforcement, and macroeconomic stability. Somalia should prioritize governance reforms, inflation management, trade facilitation measures, investor protection, and human capital development so that openness and FDI can translate into more inclusive and resilient growth.