The impact of trade openness on private consumption in a heavily import-dependent country

Abstract

Trade openness plays a pivotal role in shaping economic structures, particularly in fragile and import-dependent economies. Despite its importance, limited research has examined the direct effects of trade liberalization on private consumption in such contexts. This study addresses this gap by empirically investigating the relationship between trade openness and private consumption in Somalia, a country heavily reliant on imports and characterized by structural vulnerabilities. Using annual time-series data from 1980 to 2022, the study incorporates key macroeconomic variables trade openness, economic growth, inflation, population growth, foreign direct investment (FDI) and domestic investment and applies the Autoregressive Distributed Lag model, supported by Canonical Cointegrating Regression and Dynamic Ordinary Least Squares for robustness. Granger causality tests are employed to examine the directional relationships among variables. The results indicate that trade openness significantly enhances private consumption in both the short run and long run, driven by greater access to imported goods and services. Economic growth is the strongest determinant, while FDI contributes positively to private consumption. In contrast, domestic investment negatively affects consumption, reflecting a potential trade-off between current consumption and capital accumulation. Inflation has a negative short-run effect, while population growth appears statistically insignificant in the long run. Granger causality results highlight dynamic feedback mechanisms between trade openness, consumption and economic growth. These findings have vital policy implications: Somalia should enhance trade integration, stabilize inflation and attract responsible FDI to stimulate household demand and welfare. Data limitations beyond 2022 and unavailable variables like remittances or social services present future research opportunities.

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