Kagnew Wolde

8/11/2019 Kagnew Wolde

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EXPORT PERFORMANCEAND ECONOMIC GROWTH

IN ETHIOPIA

By Kagnew Wolde

March 2007


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Like other SSA economies, the Ethiopian economy is essentially agricultural

based and highly dependant on earnings of fragmented household agricultural

activities.

The performance of the economy is guided by the performance of the

agricultural sector.

Agricultural commodities dominate the countrysexport baskets.

Coffee is the principal export product.

The share of non-coffee exports has been rising remarkably in recent years

attributed to the dropping in the coffee export earnings.

The share of non-agricultural exports is very narrow.

Introduction


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Introduction cond

The major manufacturing export commodities are leather and

leather products, frozen meat, sugar and textiles.

Ethiopia did not succeed in increasing manufactured exports.

The Ethiopian economy had recorded a promising growthperformance during the imperial regime, which was halted after themid 1970s.

In the Derge regime the overall economic performance was gloomyand real aggregate variables decelerated.

Since 1992, Ethiopia has embarked on reform package with the aimof reversing the deteriorating economic conditions and put theeconomy in a sustainable growth momentum. However, theeconomy remains weak and sensitive to shocks.


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Regime Years Real GDP Real Export Real Percapita

GDP

Imperial 1960/61-1973/74 3.87 8.20 1.90

Derge 1974/75-1990/91 1.80 4.70 -0.84

EPRDF 1991/92-2003/04 5.92 23.58 0.84

1960/61-2003/04 4.21 13.04 0.41

Table 1: Grow th rate of Real GDP and Real Expo rt of Ethio pia


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Introduction Contd

The over all performance of the export sector has been gloomy in the lastfour decades due to structural problems and policy constraints.

The average growth in real value of goods and services exported:

- 1960/61-2003/04 = 13.04%.

- 1960/61-1973/74 = 8.2%.

- 1974/75-1990/91 = 4.7%

- Has showed improvement in the period 1991/92-2003/04.

The contribution of exports in financing imports has been continuouslycontracting to reach about 45.1% in 2001/02.

The decline in export revenue relative to the steady rise in import bill has:

- widened the balance of trade deficit,

- restrained the import of essential intermediate and capital goods,

- exacerbated the rise of external financing in the form of aid and credit.

Not only does the export pattern dominated by primary commodities butthere is also market concentration of the countrys exports.


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Introduction Contd

The country needs to find out ways that makes it possible to diversify andradically augment its exports on sustainable basis.

This study examined a data set for a period of four decades and couldassess the impact of the government strategies on export performance andoutput growth.

Statement of the Problem

The Ethiopian economy is agrarian and agricultural commodities dominatethe export basket, basically Coffee.

Although the focus of the economic reform program has been to makeexport as an engine of growth, it does not seem that the governmentsattempt has brought the required results and thus whether exportsdetermine GDP growth needs to be empirically probed.

This study is, therefore, undertaken to fill the gap; may be an up to datetest of the export growth linkage in Ethiopia.


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Objective of the Study

To examine the relationship between export performance andeconomic growth in Ethiopia using co-integration and vector errorcorrection techniques.

To highlight possible intervention areas for export growth anddiversification.

Significance of the Study

Policy makers can utilize the information generated to design appropriatepolicies.

Can serve as a reference to subsequent research works in the area of

export-led growth in the context of Ethiopia.


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A Review of the Export policy in Ethiopia

The pre 1974/75 Periods

The private sector, mainly foreign capital, had occupied the sheer weight ofboth exports and imports activities.

The development plan had three phases (Imperial Government of Ethiopia,

1955, 1962, 1968).

The first five-year development plan (1957/58-1961/62):

Import substitution industrial promotion and infrastructure facilities like

road development were the focus.

Diversification of the export structure by exploiting the large livestock

population, and the products of agro-processing industries to secure

average annual export growth of 9% and 11% share of exports in national

income.


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The second five-year development plan (1962/63-1966/67): Structural change and export diversification received priority.

New export products of industrial origins and mining products weresupposed to play key role.

The average annual export growth rate was expected to reach 11%.

- the share of agricultural exports to trim down to 72.3% in 1966/67

from 93.6% in 1962/63

- manufactured products to wind up to 24.2% from 5.2%.

The policies: the formation of government foreign trade

corporations, revisions of existing customs tariff to protect domestic

products and stimulate exports, directing credit and subsidy policies

towards the production and promotion of exports, conclusion of a

series of bi-lateral and multilateral agreements and better

participation at international trade fairs.


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The third five-year development plan (1968/69-1973/74):

Geographic diversification of traditional export produces (coffee, livestockproducts and oilseeds) and the development of non-agricultural exports

were the focus.

Envisioned to reduce the share of traditional exports from that of 86% in

1967/68 to 75% in 1973/74.

The share of coffee was planned to plummet from 55% to 40% in the same

period partly due to the addition of new products in the export basket.

The measures adopted include overvaluation of the exchange rate, high

tariff rates, wide-ranging foreign exchange control and non-tariff barriers

like restrictions on some items and heavy tax on export.


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The Derge Regime (1974/75- 1990/91)

The overall policies favored the expansion of collective and publicenterprises while private enterprises were kept at cove for long.

An inward looking strategy behind a highly protective tariffs andquantitative restrictions was the development strategy.

The government undertook a ten-year perspective plan (1985/86-1994/95):

- aimed at orienting export structures of the country towards high valueadded products and increasing the amount and composition ofmanufactured exports, expanding the foreign exchange earnings, andincreasing the socialization of the export sector.

- However, particular attention was given to state owned export companies

heedless of their inefficiency.

- geographic diversification of exports towards the markets of socialistcountries and neighboring African countries.


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- average annual export growth rate was targeted to stand at 15.4%. Stateowned export companies were expected to take up 90% of the exportbusiness.

- to reduce the share of all traditional exports (coffee, hides and skins, pulsesand oilseeds) to 53.2% from 73.5%.

- the share of other export products (live animals, meat products, fruits andvegetables, spices, sugar and molasses, natural gum, chat and others) wastargeted to rise from 26.5% in1985/86 to 46.8% in 1994/95.

The tools employed: provision of favorable tax, tariffs and foreign exchangerate measures, improving exports in terms of quality, quantity and varietyand providing current information on world market prices and other factorsin international market to exporters and producers.

The other efforts: the introduction of the export subsidy scheme in 1983/84and the directive issued to ban the export of raw hides and skins in1989/90.


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The Post 1990/91 Period

Since 1992, Ethiopia under the support and guidance of the IMF and theWorld Bank has undergone liberalization and enhanced Structural

Adjustment Programs (SAPs) to restrain internal and external imbalances ofthe economy.

One of the basic tasks of the new policy regime is to increasingly open theeconomy to foreign competition with a view of benefiting the economy fromexpanded markets.

The tools implemented include:

- devaluation of the Birr and step-by-step liberalization of the foreignexchange market,

- streamlining import and export licensing system,- tariff reduction, and provision of incentives to exporters,

- abolishing taxes on exports and subsidies to parastatal exporting enterprises,

- encouraging export-oriented investment,


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The Post 1990/91 Periods Contd

- introduction of duty draw back and foreign exchange retention scheme,

- minimizing administrative and bureaucratic procedures.

Promulgating an export development strategy,

Established export support institutions,

Instituted export specific incentive schemes,

Foreign exchange retention scheme,

Export duty incentive schemes such as duty draw back scheme,

voucher scheme and bonded manufacturing warehouse scheme,

Export credit guarantee scheme,

External loan and suppliers or Foreign partners credit


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Literature Review Much has been said in the literature regarding the role of the export sector

to the overall economic performance.

Export-led growth theory suggests that export-oriented polices enhanceeconomic growth. Proponents of this theory argues that export has strongcorrelation with economic growth and can play key roles to enhance overalleconomic performance of a country.

Export expansion brings about technological progress resulting from foreigncompetition that is crucial for improvement of factor productivity and better

use of resources (Kavoussi, 1984, Moschos, 1987). Export may benefit economic growth through generating positiveexternalities on non-exports (Feder, 1982), increased scale economies,improved allocative efficiency and better ability to generate dynamiccomparative advantage (Sharma and Panagiotidis, 2004).

Exports ease foreign exchange constraints and can thereby provide greater

access to international market. The foreign exchange earnings from exportsallow the import of high quality intermediate inputs, mainly capital goods,for domestic production and exports, thus expanding the economysproduction possibilities (McKinnon, 1964).


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Literature Review Contd

According to Esfahani (1991), export enables developing countries torelieve the import shortage they may face up to. Speaking differently,revenue from exports can fill the foreign exchange gap which is perceivedas barrier to growth.

Michaely (1977) used cross-section data set for sample of 41 lessdeveloped countries to the export-economic growth relationship by applyingspearman rank correlation coefficient. The estimated coefficient suggested

a positive and significant relationship between exports and economicgrowth among the more developed economies but not among the leastdeveloped ones. He concluded that export performance affects outputgrowth once countries attain some minimum level of development.

Tyler (1981) took a sample of 55 middle-income developing economies toinvestigate the impact of exports on growth and found a positive andsignificant relation between export growth and income growth.


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Literature Review Contd

Kavoussi (1984) considered 73 middle and low-income developing countriesand found a strong relation of higher rate of economic growth with higherrates of export growth. He showed that the positive correlation betweenexports and growth holds for both middle- and low-income countries butthe effects tend to diminish according to the level of development.

Esfahani (1985) used sample of 31 semi-industrialized countries andemployed a simultaneous equation model to deal with simultaneity problem

between GDP and export growth. He found that the economic growth ofmost of the sample countries is due to the import supply effects of exports.

Lussier (1993) employed cross-section and panel data analysis to establishthe direction of causality between the growth of export and real output, by

taking sample of 24 and 19 African countries. The result supports thehypothesis for panel data but fails to find any positive linkage when usingexport growth as a share of GDP.


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Thornton (1996) used Engle-Granger co-integration and Granger causalitytests within a two variable framework and found a positive and significantcausal relationship running from exports to economic growth in Mexico.

Amoating and Amako (1996) run causality test for 35 African countries byintroducing foreign debt service as a third variable within a tri-variatecausality analysis of exports and economic growth. The results showed ajoint feedback effect between export revenue, external debt service andeconomic growth.

The study of Doraisami (1996) strongly supports for bi-directional causalitybetween exports and growth in Malaysia, and that a positive long-run

relationship existed between these results.

Al-Yousif (1997) employed time series analysis for four Arab Gulf countriesand the results support the hypothesis in the short-run but fail to find long-run relationship, i. e. does not find co-integration.

Shan and Sun (1998) established a Vector Autoregressive model in theproduction function context in case of China. They found a bi-directionalrelationship and hence their results rejected the export-led growthhypothesis of uni-directional linkage. Nonetheless, both exports andindustrial output contribute positively to each other in the course of theChinese economic development.


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Chang etal (2000) used multivariate causality analysis incorporatingimports as a factor in the relationship between exports and output inthe case of Taiwan and found no support for the export-led growthhypothesis during the period of rapid growth in Taiwan (1971-1995).

Keong, Yusop and Liew (2003) run vector autoregressive model andmultivariate co-integration for Malaysia and found a long-runassociation between the variables considered. The results of the errorcorrection model revealed that all variables except exchange rateGranger cause economic growth in the short run. This led them to

confirm the validity of the export-led growth hypothesis in the case ofMalaysia both in the short - and long - term. The result furthersuggests that the growth rate of capital formation and imports havepositive impacts on economic growth, while labour has a negativeimpact in the short run.

Sharma and Panagiotidis (2004) test the export-led growth hypothesisfor the case of India using different approach and the resultsstrengthen the arguments against the export-led growth hypothesis forthe case of India.

Methodology and Sources of Data


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Methodology and Sources of Data

Sources and Type of Data

The main sources of data for this study were the National Bank ofEthiopia (Annual and Quarterly bulletins), the Ministry of Finance

and Economic Development, Export Promotion Agency, and theEthiopian Economic Association statistical data base.

Annual data was due to inadequacy of reliable quarterly data formost of the variables.

Long years of data are not available for most of the variablesconsidered in the case of Ethiopia; the ideal national account dataavailable to undertake time series based studies is from 1960onwards.

Even the available data lack accuracy.

Total population is taken as a proxy for labor force though the useof population in an empirical study could result in overestimatingthe contribution of labor as a factor of production to the rate ofeconomic growth.

Gross fixed capital formation is used as a proxy for capital.


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Framework of Analysis As indicated in recent empirical literatures, excluding relevant variables may

understate or overstate the causality between variables (See Al-Yousif (1999),

E. J. Medina-Smith (2001), Keong, Yuop and Liew (2003).

The econometric technique employed in this study is a multivariate co-

integration and error correction procedure with the hypothesis that GDP is a

function of aggregate exports, imports, capital, labor force and exchange rate,

which can be stated as follows:

The signs above the variables suggest the anticipated relationshipbetween each explanatory variable with the dependent variable (realGDP).

2........................................................,,,,

tttttt ERLGCFMXfGDP


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Introducing logarithm to the variables in equation (2) yields:

Where LRGDPt, LLt, LRGCFt, LRERt, LRMt, LRXt are the logs of output,labour, gross capital formation, exchange rate and export variablesrespectively. The coefficients 1.5 are parameters and Ut is the random

disturbance term. Equation (3) will form the basis of estimations in thisstudy.

3..................................543210 ttttttt URLXRLMLRERLRGCFLLLRGDP


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Tests for Order of Integration The primary step in testing whether variables share a common trend in

such a way that they can be considered a long run equilibrium relationship

is to find out whether each series contains a stochastic trend.

Estimating regressions using non-stationary variables based on ordinary

least square lead to spurious and inconsistent results (Gujerati, 1995,

Enders, 1995).

It is also difficult to conduct hypothesis testing in non-stationary variables

as the classical assumptions on the property of the disturbance term is

violated (Rao, 1994).

One could achieve stationarity by applying appropriate differencing called

order of integration.


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Augmented Dickey-Fuller (ADF) Test

The standard Dickey-Fuller test is conducted by estimating the following

regression equation:

Where is the differencing operator, Yt represents the variables to be

estimated (i.e. LRGDPt, LLt, LRGCFt, LRERt, LRMt, LRXt), is constant,

is a the trend coefficient, U is the white noise residual of zero mean andconstant variance and t is the time or trend variable. The null andalternative hypotheses may be written as follows:

aUYY tttt 4...............................................................................................1

bHa

H

4.....................................................................................................0:

0:0


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Accepting the null implies there is a unit root (the series is non-stationary)where as rejecting the null implies Yt is a stationary time series.

According to Rao (1994) the problem associated with the simple Dicky-Fuller unit root could be avoided by running the ADF test, which is derived

from the regression equation:

Where Yt-1 is equal to (Yt-1- Yt-2), Yt-2 is equal to (Yt-2- Yt-3), etc. and m is themaximum lag length on the dependent variable to ensure that Ut is the stationaryrandom error.

The null hypothesis of a unit root is rejected if the t-statistic associated withthe estimated coefficients exceeds the critical values of the test.

The ADF specification accounts for possible autocorrelation in the errorprocess Ut through the lagged dependent variable on the right hand side.

The practical rule for establishing the value of m (i.e. the number of lags) isthat it should be relatively small in order to save degrees of freedom, butsufficient to remove serial correlation in the residuals. The weakness in thistest is that the power of the test may be adversely affected by mis-specifying the lag length (Rao, 1994).

.4.............................

1

1 cUYYtY

tit

m

i

itt


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Tests for Cointegration The next step is to find out whether the variables share a common

stochastic trend, i.e. to test whether two or more variables are

cointegrated.

Cointegration can be regarded as the empirical counterpart of thetheoretical notion of a long-run relationship among the variables.

In other words, a cointegration of two or more variables suggeststhat there is a long run, or equilibrium relationship between thevariables (Rao, 1994).

Cointegration technique provides a means of identifying and hence

avoiding spurious regressions generated by non-stationary series.

When variables are cointegrated, the OLS estimates from thecointegrating regression will be super-consistent.


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The Johansen Approach

To determine the long run relationship between export growth and economicgrowth in this study, the Johansen (1991) multivariate co-integration test willbe employed, which involves three steps.

For an intuitive insight into the Johansen method, consider a two-variablecase. Suppose that two I(1) variables, x and y, are determined by thefollowing Auto-Regressive Distributed Lag (ADL) equations with a maximum oftwo periods:

6.................................

5.. ...............................

2224223122121

1214213112111

tttttt

tttttt

XbYbXbYbX

XbYbXbYbY

Equations (5) and (6) can be re-written as follows:

8....................211

7...................111

2232122422121122

2141221311112111

tYbbXbbYbXbX

tXbbYbbXbYbY

ttttt

ttttt


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Equations (7) and (8) can be expressed in matrix form as follows:

Where

Zt = 9a

1= 9b

2 = .9c

t = ..9d

9......................................2211 tttt ZZZ

t

t

x

y

t

t

2

1


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In a multivariate case of m variables that are all I(1), there will be m

equations similar to (5) and (6). These equations will have a matrix

formulation similar to (9) except that 1 and 2 are now both m m

matrices and t now contains m disturbances.

If the m variables in (9) are cointegrated, it means that the m equations

are free from spurious regression problems. However, standard estimation

methods are not applicable. The Johansen procedure not only determines

the number of cointegrating vectors but also provides estimates of these

vectors.

For the purpose of testing the number of cointegrating vectors, Johansen

and Juselius (1988, 1990) propose the use of two likelihood ratio teststatistics namely, the trace test and the maximum eigenvalues test.


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Trace test

The trace statistic for the null hypothesis of r cointegrating relations iscomputed as follows:

aTrm

i

ttrace 10.................................................................1log)(1

Maximum Eigenvalue Test

The maximum eigenvalue static tests the null hypothesis of r cointegrating

relations against r +1 cointegrating relations and is computed as follows.

bTrr r 10............................................................................1log)1,( 1max


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Vector Error Correction Model (VECM) If variables are cointegrated, an error correction model exists. Error

Correction Model combines both the short run dynamics and long run

properties and at the same time eludes the spurious regression problem. The VECM can be expressed as follows.

11.............................................................11

6

1

5

1

4

1

3

1

2

1

10

tytit

g

i

e

i

it

d

i

itit

c

i

t

b

i

it

a

i

t

ZDLRER

DLRMDLRGCFDLLDLRXDLRGDPDLRGDP

12.......................................................1

1

6

1

5

1

4

1

3

1

2

1

10

txtit

r

i

q

i

it

p

i

itit

o

i

t

n

i

it

m

i

t

ZDLRER

DLRMDLRGCFDLLDLRGDPDLRXDLRX

Where, ZYt-1 and Zxt-1 represent the error terms lagged by one period for thereal output and real export equations, respectively. The coefficient measuresthe long run equilibrium relationship while 1, , 6 and , measure theshort run causal relation. 0 6

E i i l R lt


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Empirical Results

Tests for Stationarity

The ADF test was employed to the data in levels and in first differences(with series lagged once and twice and with the option of intercept and

trend) to examine the stationarity of the variables in the model.

All variables under investigation are found to be non-stationary at levels

suggesting that the estimated values of all variables in levels are not

statistically different from zero (table 2A).

However, after first differencing the null hypothesis of the variables are

stationary at the 1%, 5% and 10% levels of significance and hence

characterized by one order of integration I(1) processes.


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A. Test on Levels

With Constant With Trend and Constant

Variables/Lags 0 1 2 4 0 1 2 4

Log (RGDP) 0.537 0.633 0.998 1.323 -1.324 -1.216 -1.482 -1.320

Log (RX) -1.126 -1.853 -1.492 -1.131 -1.483 -1.982 -1.622 -1.368

Log (RM) 0.721 0.502 0.463 0.344 -1.959 -2.286 -2.188 -2.061

Log (RGCF) -0.514 -0.647 -0.582 -0.266 -1.812 -2.103 -1.887 -1.738

Log (RER) -0.164 0.328 0.216 1.019 -2.154 -1.502 -1.881 -0.817

Log (L) 0.167 0.509 0.669 0.626 -1.631 -1.254 -1.125 -1.193

Critical Values 1% -3.592 -3.597 -3.601 -3.610 -4.186 -4.192 -4.199 -4.212

5% -2.931 -2.933 -2.935 -2.939 -3.518 -3.521 -3.524 -3.530

10% -2.604 -2.605 -2.606 -2.608 -3.190 -3.191 -3.193 -3.196


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B. Test on First Difference

With Constant With Trend and Constant

Variables/Lags 0 1 2 4 0 1 2 4

D(Log (RGDP)) -5.817** -5.963** -2.832*** -2.712*** -5.805** -6.005** -2.782 -2.650

D(Log (RX)) -5.815** -4.937** -3.782** -2.759*** -5.717** -4.869** -3.733* -3.486***

D(Log (RM)) -6.696** -4.462** -3.358* -2.833*** -6.685** -4.494**-

3.407*** -3.020

D(Log (RGCF)) -5.534** -4.564** -3.417* -3.417* -5.460** -4.485**-

3.341*** -3.486^

D(Log (RER)) -7.680** -4.251** -4.025** -3.644** -7.743** -4.342** -4.176* -3.982*

D(Log (L)) -5.571** -4.375** -3.538* -3.003* -5.562** -4.371** -3.527* -2.975

Critical Values 1% -3.597 -3.601 -3.606 -3.616 -4.192 -4.199 -4.205 -4.219

5% -2.933 -2.935 -2.937 -2.941 -3.521 -3.524 -3.527 -3.533

10% -2.605 -2.606 -2.607 -2.609 -3.191 -3.193 -3.195 -3.198


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Co-integration and Error Correction Model

The fact that all the variables appear to be integrated in an order of one

(i.e. I(1)), and their first differences appear to be stationary, they are all

candidates to be included in a long run relationship.

The next procedure is to test for co-integration. The Johansen procedure

was used for detecting the number of cointegrating vectors.

The results show that the variables are co-integrated with a maximum oftwo cointegrating equations.

The null hypothesis of no co-integration among the variables is rejected at

the1% and 5% levels of significance.

The results thus demonstrate that the considered variables are cointegrated

in that there is a long run equilibrium relationship among them and the

existence of causality for instance, between export and GDP in at least one

direction.


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Table 3: The Trace and Eigenvalues Tests

r

NullHypothesis

Alternative

Hypothesis

Statistical

Value

5%

Criticalvalue

1%

Criticalvalue

Eigenvalue

Trace Tests

r = 0 r >= 0 129.15 94.15 103.18 0.692

r = 1 80.86 68.52 76.07 0.622

Eigenvalues Tests

r = 0 r = 1 48.29 39.37 45.10 0.692

r < =1 r = 2 39.88 33.46 38.77 0.622

Long run Relationship


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Long run Relationship

The residual generated from estimation of the long-run output growthmodel is stationary suggesting that the variables are co-integrated.

The results of the long-run model reveals that all the variables have the

anticipated signs and are of reasonable magnitude: export, exchange rate,labor, and capital positively affect output growth while import is negativelyrelated with output.

The estimated parameter of real import is highly significant but of anegative sign:

- indicates that the much dependence on import has negatively affected thegrowth of the economy,

- tells us that the rise in imports slows down economic growth throughaffecting the countrys international reserves.

- the country had used to expend a great deal of foreign exchange on thepurchase of military armaments during the regime of the Military junta.

- may also suggest that the imports of consumer durables and non-durables

outweigh the imports of capital goods.

Real exchange rate is positively and significantly related to growth suggeststhe need to shift in the structure of both production and trade towardsproducts with demand elastic and high value added produces.


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Table 4: The Est imates of the Lo ng run Parameters

(Joh ansen Method)

Variable Coefficient Std. Err. t tatistic

Constant 2.196 0.2219 9.900

LRX 0.2686 0.0961 2.794

LRM -0.9271 0.2045 -4.533

LL 0.7139 0.3339 2.138

LRGCF 0.3439 0.1723 1.997

LRER 0.0889 0.0490 2.379

Short Run Dynamics


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Short Run Dynamics

After estimating the coefficients of the long-run model, the next step is

estimating the coefficients of the short-run dynamics.

A VECM was estimated that incorporates the short-run interactions and thespeed of adjustment towards long run equilibrium.

In estimating the model dummy for drought, war and government changewas introduced to capture their effect from the regression analysis.

The estimated results inclusive of the dummy are reported below (t ratios inparenthesis).

D(LGDP) = 0.424 *D(LLt) + 0.443 *D(LRXt) + 0.127 *D( LRERt)

(2.957) (2.15) (0.594)

- 0.073 * D(LRMt) + 0.027*D(LRGCFt) 0.017 *Dummy - 0.525*ECMt

(-0.184) (0.325) (-1.943) (-3.356)


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Coefficients of the short run dynamics reveals that both export and laborare statistically significant showing their contribution to the growth of theeconomy in the short run. The regression result confirms the hypothesisthat exports positively affect the growth of the Ethiopian economy.

Though statistically insignificant other variables have the expected signs.

The literature relates dynamic technological spill over with manufacturedexportable produces, i.e. scholars argued that income elastic goods(manufactures) have a larger effect on economic growth than traditionalagricultural goods.

However, the results obtained in this study evidenced that the relationshipbetween export and economic growth holds despite the Ethiopian exportbasket is dominated by traditional primary produces and in the face of aninward oriented trade strategy.

The results thus led to skepticism on the argument that a positive andsignificant linkage in export and output growth is achieved only when thecountrys export basket is dominated by higher value added manufacturedexports.


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The magnitude of the error correction coefficient is - 0.525 implying that

with in one year it adjusts about 52.5% of the disequilibria. In other words

deviation from the long run equilibrium is adjusted fairly quickly 52.5% of

the disequilibrium is removed each period.

Where as the negative coefficient of the dummy variable suggests that the

prolonged civil war and the border conflict, the cyclical drought and famine

that hits the country and the change of government with a new ideology

has negatively affected the growth of the economy.

The results of the Granger causality test at different lag lengths reveal that

the causation is weak implying that export growth affects output growth

through another channel, which could be ascertained in further research

works.

Estimating the model with other specification may bring about a better

result.

6 0 Conclusion and Policy Recommendations


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6.0. Conclusion and Policy Recommendations

The paper empirically examined the export growth and income (output)

nexus in the Ethiopian context using multivariate time series approach.

Consistent with expectation, export growth and output growth were found

to be positively related supporting the export-led growth hypothesis. Thus

export expansion brings economic growth in various ways.

Despite the focus on export diversification in the development plans of thecountry, the export pattern is still dominated by traditional produces and

more so on coffee whose world price is fluctuating;

- Symptomatic of the lack of economic transformation and absence of

structural change in the mode of production.

- Still primitive mode of production predominates in the major sector.

The country has failed to fully utilize the opportunities offered by the

African Growth Opportunities Act (AGOA) of the United States of America.


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Despite the country has implemented an ADLI strategy, there remains a

more long distance to go to use this sector as the basis for industrialization

and sustainable progress.

It is impossible to see a vibrant Ethiopian economy without structural

transformation.

I.e. Ethiopia should in the long time horizon diversify its economy towards

higher value added and income elastic products. In this regard:

- the ardent need for a concerted effort to improve internal conditions and

bring about diversification of the productive structure and curtailment of

supply side constraints.

- Rehabilitating the domestic manufacturing industries and encouraging both

private domestic and foreign investments.

The study suggests that the country needs to strengthen export capacity


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The study suggests that the country needs to strengthen export capacityand to promote diversification in the sector to fully exploit the benefits ofthe sector and achieve sustainable growth.

- Maintaining export friendly effective exchange rate, lowering tax burden on

exports and imports of inputs, providing exporters with easy access toforeign exchange for the purchase of intermediate items and preferentialand/or lower interest rates on bank loans.

- Designing export promotion strategies, policies and support servicesconducive towards stimulating competitiveness remains crucial. Targeted

and concrete export support services, product specific export marketresearch, active participation in international trade fairs and institutingofficially sponsored trade missions.

- Addressing sector specific bottlenecks.

- Exerting intensified efforts to identify key commodities to which Ethiopia hasa comparative advantage and could diversify (e.g. expanding theproduction of horticultural and flower products, fruits and vegetables,livestock products, and exploiting apicultural possibilities).

Id tifi ti f k l t i t th t h di th f f


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- Identification of key supply constraints that handicap the performance ofthe export sector and take appropriate measures to improve domesticconditions for business development.

- Improving problems in infrastructure such as roads, air transport, railwaysand energy and other facilities, which would greatly contribute forfacilitating export diversification and effectively competing in theinternational market.

Success in export diversification and promotion is an amicable means toextricate the country from excessive dependence on foreign loans and aidand eradicate abysmal poverty.

- The government needs to work together with the business communityinculcating an atmosphere of mutual trust and confidence building topersuade them engage in the export diversification policy making.

Due attention should also be given to exploit abundant mineral resources,the export of which would be a good source of foreign exchange. There istherefore, a need to develop new policies and strategies to encourageinvestments in these untapped resources.

The success to bring about economic transformation to increase


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The success to bring about economic transformation, to increase

production, and to diversify exports and ultimately, to break the vicious and

visible circles of underdevelopment relies on addressing the problems of

governance, avoiding bureaucratic chains, creating an enabling supervisory,

regulatory and legal environments and increasing private investmentparticularly in the productive sectors.

The results obtained from the regression indicate that labor growth

positively and significantly affects economic growth both in the short - and

long - term horizon. In this regard, Ethiopia needs to educate its active

labor force with the required skills.

Ethiopia has decided to become a member of the WTO. The country should

thus improve its position in the international economy so as to benefit from

its accession to the WTO.

Kagnew Wolde

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Transcript of Kagnew Wolde