article · Cogent Economics & Finance
Somalia faces substantial macroeconomic challenges, including political instability, elevated unemployment, external debt, and inflation. An empirical assessment of data spanning 1991 to 2021 explores interactions between gross domestic product, unemployment, external debt, inflation, and gross capital formation. The findings demonstrate an inverse relationship between unemployment and economic growth, confirming the relevance of Okun's law in the Somali context and indicating that joblessness largely stems from insufficient growth. Economic growth is likewise negatively linked with inflation and external debt. Furthermore, unidirectional causal pathways run from unemployment to gross domestic product, gross capital formation to gross domestic product, and consumer prices to gross domestic product, among other interactions. To foster durable economic expansion and employment, policy priorities must centre on effective fiscal measures, flexible labour market regulations, and environments that support small businesses and the broader private sector.
Understanding the macroeconomic forces that drive unemployment and inflation is essential for post-conflict economic rebuilding. By demonstrating that job creation relies directly on broader economic expansion, lower inflation, and manageable debt, the findings provide clear guidance for policymakers working to structure effective fiscal frameworks, stabilise national markets, and foster a more supportive environment for small businesses.
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Maintaining optimal levels of unemployment and external debt remains a significant challenge for ensuring consistent economic growth in many developing countries. Despite persistent economic difficulties marked by political instability, high unemployment, external debt, inflation, and limited capital formation, Somalia is increasingly recognizing the importance of fostering stability, instituting economic reforms, seeking debt relief through international collaborations, and promoting inclusive growth. Therefore, this paper empirically examines the relationship between gross domestic product (GDP), unemployment, external debt, inflation, and gross capital formation in Somalia using annual data from 1991 to 2021. To attain the aim of the study, we implemented the Augmented Dickey-Fuller (ADF), vector error correction model (VECM), variance decomposition, impulse response function, and Granger causality test. The outcomes of the study present a negative relationship between unemployment and economic growth, implying the applicability of Okun’s law in Somalia. This suggests that the unemployment crisis in Somalia can be attributed to a lack of economic growth. Furthermore, the study identified that economic growth is negatively associated with inflation and external debt. Moreover, the study reveals unidirectional links between unemployment and GDP, gross capital formation and GDP, GDP and external debt, CPI and GDP, unemployment and gross capital formation, and external debt and unemployment. No causal effects were found in the other combinations of interactions. To sustain economic growth and job creation, the government must implement effective fiscal policies, create an inviting atmosphere, and have a flexible labour market policy to encourage the private sector and small businesses.
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DOI: 10.1080/23322039.2024.2385644
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