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EXPORT PERFORMANCE EXPORT PERFORMANCE AND ECONOMIC AND ECONOMIC

GROWTH IN ETHIOPIAGROWTH IN ETHIOPIA

By Kagnew WoldeBy Kagnew Wolde

March 2007March 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 country’s export 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. The share of non-agricultural exports is very narrow.

Introduction

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Introduction con’dIntroduction con’d

The major manufacturing export commodities are leather and The major manufacturing export commodities are leather and

leather products, frozen meat, sugar and textiles. leather products, frozen meat, sugar and textiles.

Ethiopia did not succeed in increasing manufactured exports.Ethiopia did not succeed in increasing manufactured exports.

The Ethiopian economy had recorded a promising growth The Ethiopian economy had recorded a promising growth performance during the imperial regime, which was halted performance during the imperial regime, which was halted after the mid 1970s. after the mid 1970s.

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

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

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RegimeRegime YearsYears Real Real GDPGDP

Real Real ExportExport

Real Percapita Real Percapita GDPGDP

ImperialImperial 1960/61-1960/61-1973/741973/74

3.873.87 8.208.20 1.901.90

Derge Derge 1974/75-1974/75-1990/911990/91

1.801.80 4.704.70 -0.84-0.84

EPRDFEPRDF 1991/92-1991/92-2003/042003/04

5.925.92 23.5823.58 0.840.84

1960/61-1960/61-2003/042003/04

4.214.21 13.0413.04 0.410.41

Table 1: Growth rate of Real GDP and Real Export of Ethiopia

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Introduction Cont’dIntroduction Cont’d

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

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

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

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

- 1974/75-1990/91 = 4.7% - 1974/75-1990/91 = 4.7%

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

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

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

- widened the balance of trade deficit, - widened the balance of trade deficit, - restrained the import of essential intermediate and capital goods,- restrained the import of essential intermediate and capital goods, - exacerbated the rise of external financing in the form of aid and - exacerbated the rise of external financing in the form of aid and

credit.credit.

Not only does the export pattern dominated by primary commodities Not only does the export pattern dominated by primary commodities but there is also market concentration of the country’s exports. but there is also market concentration of the country’s exports.

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Introduction Cont’dIntroduction Cont’d

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

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

Statement of the ProblemStatement of the Problem

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

Although the focus of the economic reform program has been to Although the focus of the economic reform program has been to make export as an engine of growth, it does not seem that the make export as an engine of growth, it does not seem that the government’s attempt has brought the required results and thus government’s attempt has brought the required results and thus whether exports determine GDP growth needs to be empirically whether exports determine GDP growth needs to be empirically probed. probed.

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

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Objective of the StudyObjective of the Study

To examine the relationship between export performance To examine the relationship between export performance and economic growth in Ethiopia using co-integration and and economic growth in Ethiopia using co-integration and vector error correction techniques. vector error correction techniques.

To highlight possible intervention areas for export growth To highlight possible intervention areas for export growth and diversification.and diversification.

Significance of the StudySignificance of the Study

Policy makers can utilize the information generated to design Policy makers can utilize the information generated to design appropriate policies. appropriate policies.

Can serve as a reference to subsequent research works in the Can serve as a reference to subsequent research works in the area of export-led growth in the context of Ethiopia.area of export-led growth in the context of Ethiopia.

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A Review of the Export policy in EthiopiaA Review of the Export policy in Ethiopia

The pre 1974/75 PeriodsThe pre 1974/75 Periods The private sector, mainly foreign capital, had occupied the sheer The private sector, mainly foreign capital, had occupied the sheer

weight of both exports and imports activities. weight of both exports and imports activities.

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

Ethiopia, 1955, 1962, 1968).Ethiopia, 1955, 1962, 1968).

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

Import substitution industrial promotion and infrastructure Import substitution industrial promotion and infrastructure facilities like road development were the focus. facilities like road development were the focus.

Diversification of the export structure by exploiting the large Diversification of the export structure by exploiting the large livestock population, and the products of agro-processing livestock population, and the products of agro-processing industries to secure average annual export growth of 9% and 11% industries to secure average annual export growth of 9% and 11% share of exports in national income.share of exports in national income.

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The second five-year development plan (1962/63-The second five-year development plan (1962/63-

1966/67):1966/67): Structural change and export diversification received priority. Structural change and export diversification received priority.

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

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

- the share of agricultural exports to trim down to 72.3% in - the share of agricultural exports to trim down to 72.3% in 1966/67 from 93.6% in 1962/63 1966/67 from 93.6% in 1962/63

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

The policies: the formation of government foreign trade The policies: the formation of government foreign trade corporations, revisions of existing customs tariff to protect corporations, revisions of existing customs tariff to protect domestic products and stimulate exports, directing credit and domestic products and stimulate exports, directing credit and subsidy policies towards the production and promotion of subsidy policies towards the production and promotion of exports, conclusion of a series of bi-lateral and multilateral exports, conclusion of a series of bi-lateral and multilateral agreements and better participation at international trade fairs.agreements and better participation at international trade fairs.

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

Geographic diversification of traditional export produces (coffee, Geographic diversification of traditional export produces (coffee,

livestock products and oilseeds) and the development of non-livestock products and oilseeds) and the development of non-

agricultural exports were the focus. agricultural exports were the focus.

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

in 1967/68 to 75% in 1973/74. in 1967/68 to 75% in 1973/74.

The share of coffee was planned to plummet from 55% to 40% in the 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 same period partly due to the addition of new products in the export

basket.basket.

The measures adopted include overvaluation of the exchange rate, The measures adopted include overvaluation of the exchange rate,

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

barriers like restrictions on some items and heavy tax on export. barriers like restrictions on some items and heavy tax on export.

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

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

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

The government undertook a ten-year perspective plan (1985/86- The government undertook a ten-year perspective plan (1985/86-

1994/95): 1994/95):

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

- However, particular attention was given to state owned export - However, particular attention was given to state owned export companies heedless of their inefficiency. companies heedless of their inefficiency.

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

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

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

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

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

The other efforts: the introduction of the export subsidy scheme in The other efforts: the introduction of the export subsidy scheme in

1983/84 and the directive issued to ban the export of raw hides 1983/84 and the directive issued to ban the export of raw hides and skins in 1989/90. and skins in 1989/90.

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The Post 1990/91 PeriodThe Post 1990/91 Period

Since 1992, Ethiopia under the support and guidance of the IMF Since 1992, Ethiopia under the support and guidance of the IMF and the World Bank has undergone liberalization and enhanced and the World Bank has undergone liberalization and enhanced Structural Adjustment Programs (SAPs) to restrain internal and Structural Adjustment Programs (SAPs) to restrain internal and external imbalances of the economy. external imbalances of the economy.

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

The tools implemented include:The tools implemented include:

- devaluation of the Birr and step-by-step liberalization of the - devaluation of the Birr and step-by-step liberalization of the foreign exchange market, foreign exchange market,

- streamlining import and export licensing system, - streamlining import and export licensing system,

- tariff reduction, and provision of incentives to exporters, - tariff reduction, and provision of incentives to exporters,

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

- encouraging export-oriented investment,- encouraging export-oriented investment,

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The Post 1990/91 Periods Cont’dThe Post 1990/91 Periods Cont’d

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

scheme, scheme,

- minimizing administrative and bureaucratic procedures. - minimizing administrative and bureaucratic procedures.

Promulgating an export development strategy, Promulgating an export development strategy,

Established export support institutions, Established export support institutions,

Instituted export specific incentive schemes,Instituted export specific incentive schemes,

Foreign exchange retention scheme,Foreign exchange retention scheme,

Export duty incentive schemes such as duty draw back scheme, Export duty incentive schemes such as duty draw back scheme,

voucher scheme and bonded manufacturing warehouse scheme, voucher scheme and bonded manufacturing warehouse scheme,

Export credit guarantee scheme,Export credit guarantee scheme,

External loan and suppliers’ or Foreign partners’ creditExternal loan and suppliers’ or Foreign partners’ credit

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

sector to the overall economic performance. sector to the overall economic performance. Export-led growth theory suggests that export-oriented polices Export-led growth theory suggests that export-oriented polices

enhance economic growth. Proponents of this theory argues that enhance economic growth. Proponents of this theory argues that export has strong correlation with economic growth and can play key export has strong correlation with economic growth and can play key roles to enhance overall economic performance of a country. roles to enhance overall economic performance of a country.

Export expansion brings about technological progress resulting from Export expansion brings about technological progress resulting from foreign competition that is crucial for improvement of factor foreign competition that is crucial for improvement of factor productivity and better use of resources (Kavoussi, 1984, Moschos, productivity and better use of resources (Kavoussi, 1984, Moschos,

1987).1987). Export may benefit economic growth through generating positive Export may benefit economic growth through generating positive

externalities on non-exports (Feder, 1982), increased scale externalities on non-exports (Feder, 1982), increased scale economies, improved allocative efficiency and better ability to economies, improved allocative efficiency and better ability to generate dynamic comparative advantage (Sharma and Panagiotidis, generate dynamic comparative advantage (Sharma and Panagiotidis, 2004). 2004).

Exports ease foreign exchange constraints and can thereby provide Exports ease foreign exchange constraints and can thereby provide greater access to international market. The foreign exchange greater access to international market. The foreign exchange earnings from exports allow the import of high quality intermediate earnings from exports allow the import of high quality intermediate inputs, mainly capital goods, for domestic production and exports, inputs, mainly capital goods, for domestic production and exports, thus expanding the economy’s production possibilities (McKinnon, thus expanding the economy’s production possibilities (McKinnon, 1964). 1964).

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Literature Review Cont’dLiterature Review Cont’d

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

Michaely (1977) used cross-section data set for sample of 41 less Michaely (1977) used cross-section data set for sample of 41 less developed countries to the export-economic growth relationship developed countries to the export-economic growth relationship by applying spearman rank correlation coefficient. The estimated by applying spearman rank correlation coefficient. The estimated coefficient suggested a positive and significant relationship coefficient suggested a positive and significant relationship between exports and economic growth among the more between exports and economic growth among the more developed economies but not among the least developed ones. developed economies but not among the least developed ones. He concluded that export performance affects output growth once He concluded that export performance affects output growth once countries attain some minimum level of development. countries attain some minimum level of development.

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

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Literature Review Cont’dLiterature Review Cont’d

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

Esfahani (1985) used sample of 31 semi-industrialized countries Esfahani (1985) used sample of 31 semi-industrialized countries and employed a simultaneous equation model to deal with and employed a simultaneous equation model to deal with simultaneity problem between GDP and export growth. He found simultaneity problem between GDP and export growth. He found that the economic growth of most of the sample countries is due that the economic growth of most of the sample countries is due to the import supply effects of exports. to the import supply effects of exports.

Lussier (1993) employed cross-section and panel data analysis to Lussier (1993) employed cross-section and panel data analysis to establish the direction of causality between the growth of export establish the direction of causality between the growth of export and real output, by taking sample of 24 and 19 African countries. and real output, by taking sample of 24 and 19 African countries. The result supports the hypothesis for panel data but fails to find The result supports the hypothesis for panel data but fails to find any positive linkage when using export growth as a share of GDP.any positive linkage when using export growth as a share of GDP.

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

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

The study of Doraisami (1996) strongly supports for bi-directional The study of Doraisami (1996) strongly supports for bi-directional causality between exports and growth in Malaysia, and that a causality between exports and growth in Malaysia, and that a positive long-run relationship existed between these results.positive long-run relationship existed between these results.

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

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

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

Keong, Yusop and Liew (2003) run vector autoregressive Keong, Yusop and Liew (2003) run vector autoregressive model and multivariate co-integration for Malaysia and found a model and multivariate co-integration for Malaysia and found a long-run association between the variables considered. The long-run association between the variables considered. The results of the error correction model revealed that all variables results of the error correction model revealed that all variables except exchange rate Granger cause economic growth in the except exchange rate Granger cause economic growth in the short run. This led them to confirm the validity of the export-short run. This led them to confirm the validity of the export-led growth hypothesis in the case of Malaysia both in the short led growth hypothesis in the case of Malaysia both in the short - and long - term. The result further suggests that the growth - and long - term. The result further suggests that the growth rate of capital formation and imports have positive impacts on rate of capital formation and imports have positive impacts on economic growth, while labour has a negative impact in the economic growth, while labour has a negative impact in the short run. short run.

Sharma and Panagiotidis (2004) test the export-led growth Sharma and Panagiotidis (2004) test the export-led growth hypothesis for the case of India using different approach and hypothesis for the case of India using different approach and the results strengthen the arguments against the export-led the results strengthen the arguments against the export-led growth hypothesis for the case of India. growth hypothesis for the case of India.

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Methodology and Sources of DataMethodology and Sources of Data

Sources and Type of DataSources and Type of Data

The main sources of data for this study were the National The main sources of data for this study were the National Bank of Ethiopia (Annual and Quarterly bulletins), the Bank of Ethiopia (Annual and Quarterly bulletins), the Ministry of Finance and Economic Development, Export Ministry of Finance and Economic Development, Export Promotion Agency, and the Ethiopian Economic Association Promotion Agency, and the Ethiopian Economic Association statistical data base. statistical data base.

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

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

Even the available data lack accuracy. Even the available data lack accuracy.

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

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

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

variables may understate or overstate the causality between variables may understate or overstate the causality between variables (See Al-Yousif (1999), E. J. Medina-Smith (2001), Keong, variables (See Al-Yousif (1999), E. J. Medina-Smith (2001), Keong, Yuop and Liew (2003). Yuop and Liew (2003).

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

co-integration and error correction procedure with the hypothesis co-integration and error correction procedure with the hypothesis that GDP is a function of aggregate exports, imports, capital, labor that GDP is a function of aggregate exports, imports, capital, labor force and exchange rate, which can be stated as follows:force and exchange rate, which can be stated as follows:

The signs above the variables suggest the anticipated The signs above the variables suggest the anticipated relationship between each explanatory variable with the relationship between each explanatory variable with the dependent variable (real GDP).dependent variable (real GDP).

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

tttttt ERLGCFMXfGDP

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

Where LRGDPt, LLt, LRGCFt, LRERt, LRMt, LRXt are the logs of Where LRGDPt, LLt, LRGCFt, LRERt, LRMt, LRXt are the logs of output, labour, gross capital formation, exchange rate and export output, labour, gross capital formation, exchange rate and export variables respectively. The coefficients β1….β5 are parameters variables respectively. The coefficients β1….β5 are parameters and Ut is the random disturbance term. Equation (3) will form the and Ut is the random disturbance term. Equation (3) will form the basis of estimations in this studybasis of estimations in this study. .

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

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

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

relationship is to find out whether each series contains a stochastic relationship is to find out whether each series contains a stochastic

trend. trend.

Estimating regressions using non-stationary variables based on Estimating regressions using non-stationary variables based on

ordinary least square lead to spurious and inconsistent results ordinary least square lead to spurious and inconsistent results

(Gujerati, 1995, Enders, 1995). (Gujerati, 1995, Enders, 1995).

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

variables as the classical assumptions on the property of the variables as the classical assumptions on the property of the

disturbance term is violated (Rao, 1994). disturbance term is violated (Rao, 1994).

One could achieve stationarity by applying appropriate differencing One could achieve stationarity by applying appropriate differencing

called order of integration. called order of integration.

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Augmented Dickey-Fuller (ADF) TestAugmented Dickey-Fuller (ADF) Test

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

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

to be estimated (i.e. LRGDPt, LLt, LRGCFt, LRERt, LRMt, LRXt), to be estimated (i.e. LRGDPt, LLt, LRGCFt, LRERt, LRMt, LRXt), is is constant, constant, is a the trend coefficient, U is the white noise residual is a the trend coefficient, U is the white noise residual of zero mean and constant variance and t is the time or trend of zero mean and constant variance and t is the time or trend variablevariable. . The null and alternative hypotheses may be written as The null and alternative hypotheses may be written as follows: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-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 stationary) where as rejecting the null implies Yt is a stationary time series.series.

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

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

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

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

The practical rule for establishing the value of m (i.e. the number of The practical rule for establishing the value of m (i.e. the number of

lags) is that it should be relatively small in order to save degrees of lags) is that it should be relatively small in order to save degrees of freedom, but sufficient to remove serial correlation in the residuals. freedom, but sufficient to remove serial correlation in the residuals. The weakness in this test is that the power of the test may be The weakness in this test is that the power of the test may be adversely affected by mis-specifying the lag length (Rao, 1994). adversely affected by mis-specifying the lag length (Rao, 1994).

.4.............................1

1 cUYYtY tit

m

iitt

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

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

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

In other words, a cointegration of two or more variables In other words, a cointegration of two or more variables

suggests that there is a long run, or equilibrium relationship suggests that there is a long run, or equilibrium relationship between the variables (Rao, 1994). between the variables (Rao, 1994).

Cointegration technique provides a means of identifying and Cointegration technique provides a means of identifying and hence avoiding spurious regressions generated by non-hence avoiding spurious regressions generated by non-stationary series.stationary series.

When variables are cointegrated, the OLS estimates from the When variables are cointegrated, the OLS estimates from the

cointegrating regression will be super-consistent. cointegrating regression will be super-consistent.

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The Johansen ApproachThe Johansen Approach

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

For an intuitive insight into the Johansen method, consider a two-For an intuitive insight into the Johansen method, consider a two-variable case. Suppose that two I(1) variables, x and y, are variable case. Suppose that two I(1) variables, x and y, are determined by the following Auto-Regressive Distributed Lag (ADL) determined by the following Auto-Regressive Distributed Lag (ADL) equations with a maximum of two periods:equations with a maximum of two 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:Equations (7) and (8) can be expressed in matrix form as follows:

Where Where

Zt = ……………………………9a Zt = ……………………………9a

β1= ………………………9bβ1= ………………………9b

β2 = …….………9cβ2 = …….………9c

t = …………………..……9dt = …………………..……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 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 m equations similar to (5) and (6). These equations will have a

matrix formulation similar to (9) except that β1 and β2 are now matrix formulation similar to (9) except that β1 and β2 are now

both m both m m matrices and m matrices and t now contains m disturbances.t now contains m disturbances.

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

equations are free from spurious regression problems. However, equations are free from spurious regression problems. However,

standard estimation methods are not applicable. The Johansen standard estimation methods are not applicable. The Johansen

procedure not only determines the number of cointegrating procedure not only determines the number of cointegrating

vectors but also provides estimates of these vectors. vectors but also provides estimates of these vectors.

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

Johansen and Juselius (1988, 1990) propose the use of two Johansen and Juselius (1988, 1990) propose the use of two

likelihood ratio test statistics namely, the trace test and the likelihood ratio test statistics namely, the trace test and the

maximum eigenvalues test. maximum eigenvalues test.

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Trace testTrace test

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

aTrm

ittrace 10.................................................................1log)(

1

Maximum Eigenvalue Maximum Eigenvalue TestTest

The maximum eigenvalue static tests the null hypothesis of r The maximum eigenvalue static tests the null hypothesis of r

cointegrating relations against r +1 cointegrating relations and is cointegrating relations against r +1 cointegrating relations and is

computed as follows.computed as follows. bTrr r 10............................................................................1log)1,( 1max

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

Correction Model combines both the short run dynamics and long Correction Model combines both the short run dynamics and long run properties and at the same time eludes the ‘spurious run properties and at the same time eludes the ‘spurious regression’ problem. regression’ problem.

The VECM can be expressed as follows. The VECM can be expressed as follows.

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

6

15

14

13

12

110

tytit

g

i

e

iit

d

iitit

c

it

b

iit

a

it

ZDLRER

DLRMDLRGCFDLLDLRXDLRGDPDLRGDP

12.......................................................11

6

15

14

13

12

110

txtit

r

i

q

iit

p

iitit

o

it

n

iit

m

it

ZDLRER

DLRMDLRGCFDLLDLRGDPDLRXDLRX

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

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Empirical ResultsEmpirical Results

Tests for StationarityTests for Stationarity

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

intercept and trend) to examine the stationarity of the variables in the intercept and trend) to examine the stationarity of the variables in the

model. model.

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

levels suggesting that the estimated values of all variables in levels levels suggesting that the estimated values of all variables in levels

are not statistically different from zero (table 2A). are not statistically different from zero (table 2A).

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

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

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

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A.A. Test on LevelsTest on Levels

    

With ConstantWith Constant With Trend and ConstantWith Trend and Constant

Variables/LagsVariables/Lags 00 11 22 44 00 11 22 44

Log (RGDP)Log (RGDP) 0.5370.537 0.6330.633 0.9980.998 1.3231.323 -1.324-1.324 -1.216-1.216 -1.482-1.482 -1.320-1.320

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

Log (RM)Log (RM) 0.7210.721 0.5020.502 0.4630.463 0.3440.344 -1.959-1.959 -2.286-2.286 -2.188-2.188 -2.061-2.061

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

Log (RER)Log (RER) -0.164-0.164 0.3280.328 0.2160.216 1.0191.019 -2.154-2.154 -1.502-1.502 -1.881-1.881 -0.817-0.817

Log (L)Log (L) 0.1670.167 0.5090.509 0.6690.669 0.6260.626 -1.631-1.631 -1.254-1.254 -1.125-1.125 -1.193-1.193

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

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

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

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B. Test on First DifferenceB. Test on First Difference    

      With ConstantWith Constant With Trend and ConstantWith Trend and Constant

Variables/LagsVariables/Lags 00 11 22 44 00 11 22 44

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

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

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

--3.407**3.407**

** -3.020-3.020

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

--3.341**3.341**

** -3.486^-3.486^

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

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

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

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

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

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Co-integration and Error Correction ModelCo-integration and Error Correction Model

The fact that all the variables appear to be integrated in an order of 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, 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. they are all candidates to be included in a long run relationship.

The next procedure is to test for co-integration. The Johansen The next procedure is to test for co-integration. The Johansen procedure was used for detecting the number of cointegrating procedure was used for detecting the number of cointegrating vectors. vectors.

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

The null hypothesis of no co-integration among the variables is The null hypothesis of no co-integration among the variables is rejected at the1% and 5% levels of significance. rejected at the1% and 5% levels of significance.

The results thus demonstrate that the considered variables are The results thus demonstrate that the considered variables are

cointegrated in that there is a long run equilibrium relationship cointegrated in that there is a long run equilibrium relationship among them and the existence of causality for instance, between among them and the existence of causality for instance, between export and GDP in at least one direction. export and GDP in at least one direction.

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Table 3: The Trace and Eigenvalues Tests

r

Null Null HypothesisHypothesis

Alternative Alternative HypothesisHypothesis

StatisticalStatisticalValueValue

5% 5% Critical Critical valuevalue

1% 1% Critical Critical valuevalue

EigenvalueEigenvalue

Trace TestsTrace Tests

r = 0r = 0 r >= 0r >= 0 129.15129.15 94.1594.15 103.18103.18 0.6920.692

r <=r <= 1 1 r > = 1r > = 1 80.8680.86 68.5268.52 76.0776.07 0.6220.622

Eigenvalues TestsEigenvalues Tests

r = 0r = 0 r = 1r = 1 48.2948.29 39.3739.37 45.1045.10 0.6920.692

r < =1r < =1 r = 2r = 2 39.8839.88 33.4633.46 38.7738.77 0.6220.622

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Long run RelationshipLong run Relationship The residual generated from estimation of the long-run output growth The residual generated from estimation of the long-run output growth

model is stationary suggesting that the variables are co-integrated.model is stationary suggesting that the variables are co-integrated.

The results of the long-run model reveals that all the variables have The results of the long-run model reveals that all the variables have the anticipated signs and are of reasonable magnitude: export, the anticipated signs and are of reasonable magnitude: export, exchange rate, labor, and capital positively affect output growth while exchange rate, labor, and capital positively affect output growth while import is negatively related with output.import is negatively related with output.

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

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

- tells us that the rise in imports slows down economic growth through - tells us that the rise in imports slows down economic growth through affecting the country’s international reserves. affecting the country’s international reserves.

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

- may also suggest that the imports of consumer durables and non-- may also suggest that the imports of consumer durables and non-durables outweigh the imports of capital goods.durables outweigh the imports of capital goods.

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

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Table 4: The Estimates of the Long run Parameters (Johansen Method)

VariableVariable CoefficientCoefficient Std. Err.Std. Err. t tatistict tatistic

ConstantConstant 2.1962.196 0.22190.2219 9.9009.900

LRXLRX 0.26860.2686 0.09610.0961 2.7942.794

LRMLRM -0.9271-0.9271 0.20450.2045 -4.533-4.533

LLLL 0.71390.7139 0.33390.3339 2.1382.138

LRGCFLRGCF 0.34390.3439 0.17230.1723 1.9971.997

LRERLRER 0.08890.0889 0.04900.0490 2.3792.379

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Short Run DynamicsShort Run Dynamics

After estimating the coefficients of the long-run model, the next After estimating the coefficients of the long-run model, the next step is estimating the coefficients of the short-run dynamicsstep is estimating the coefficients of the short-run dynamics. .

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

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

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

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

(2.957) (2.15) (0.594)(2.957) (2.15) (0.594)

- 0.073 * D(LRMt) + 0.027*D(LRGCFt) – 0.017 *Dummy - - 0.073 * D(LRMt) + 0.027*D(LRGCFt) – 0.017 *Dummy - 0.525*ECMt0.525*ECMt

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

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

Though statistically insignificant other variables have the expected Though statistically insignificant other variables have the expected signs. signs.

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

However, the results obtained in this study evidenced that the However, the results obtained in this study evidenced that the relationship between export and economic growth holds despite the relationship between export and economic growth holds despite the Ethiopian export basket is dominated by traditional primary Ethiopian export basket is dominated by traditional primary produces and in the face of an inward oriented trade strategy. produces and in the face of an inward oriented trade strategy.

The results thus led to skepticism on the argument that a positive The results thus led to skepticism on the argument that a positive

and significant linkage in export and output growth is achieved only and significant linkage in export and output growth is achieved only when the country’s export basket is dominated by higher value when the country’s export basket is dominated by higher value added manufactured exports. added manufactured exports.

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The magnitude of the error correction coefficient is - 0.525 The magnitude of the error correction coefficient is - 0.525 implying that with in one year it adjusts about 52.5% of the implying that with in one year it adjusts about 52.5% of the disequilibria. In other words deviation from the long run disequilibria. In other words deviation from the long run equilibrium is adjusted fairly quickly 52.5% of the disequilibrium is equilibrium is adjusted fairly quickly 52.5% of the disequilibrium is removed each period. removed each period.

Where as the negative coefficient of the dummy variable suggests Where as the negative coefficient of the dummy variable suggests that the prolonged civil war and the border conflict, the cyclical that the prolonged civil war and the border conflict, the cyclical drought and famine that hits the country and the change of drought and famine that hits the country and the change of government with a new ideology has negatively affected the government with a new ideology has negatively affected the growth of the economy. growth of the economy.

The results of the Granger causality test at different lag lengths The results of the Granger causality test at different lag lengths reveal that the causation is weak implying that export growth reveal that the causation is weak implying that export growth affects output growth through another channel, which could be affects output growth through another channel, which could be ascertained in further research works. ascertained in further research works.

Estimating the model with other specification may bring about a Estimating the model with other specification may bring about a better result. better result.

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6.0. Conclusion and Policy Recommendations6.0. Conclusion and Policy Recommendations

The paper empirically examined the export growth and income (output) The paper empirically examined the export growth and income (output) nexus in the Ethiopian context using multivariate time series approach. nexus in the Ethiopian context using multivariate time series approach.

Consistent with expectation, export growth and output growth were found Consistent with expectation, export growth and output growth were found

to be positively related supporting the export-led growth hypothesis. to be positively related supporting the export-led growth hypothesis. Thus export expansion brings economic growth in various ways.Thus export expansion brings economic growth in various ways.

Despite the focus on export diversification in the development plans of Despite the focus on export diversification in the development plans of the country, the export pattern is still dominated by traditional produces the country, the export pattern is still dominated by traditional produces and more so on coffee whose world price is fluctuating; and more so on coffee whose world price is fluctuating;

- Symptomatic of the lack of economic transformation and absence of - Symptomatic of the lack of economic transformation and absence of structural change in the mode of production. structural change in the mode of production.

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

The country has failed to fully utilize the opportunities offered by the The country has failed to fully utilize the opportunities offered by the African Growth Opportunities Act (AGOA) of the United States of America. African Growth Opportunities Act (AGOA) of the United States of America.

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Despite the country has implemented an ADLI strategy, there Despite the country has implemented an ADLI strategy, there remains a more long distance to go to use this sector as the basis remains a more long distance to go to use this sector as the basis for industrialization and sustainable progress. for industrialization and sustainable progress.

It is impossible to see a vibrant Ethiopian economy without It is impossible to see a vibrant Ethiopian economy without structural transformation. structural transformation.

I.e. Ethiopia should in the long time horizon diversify its economy I.e. Ethiopia should in the long time horizon diversify its economy towards higher value added and income elastic products. In this towards higher value added and income elastic products. In this regard:regard:

- the ardent need for a concerted effort to improve internal - the ardent need for a concerted effort to improve internal conditions and bring about diversification of the productive conditions and bring about diversification of the productive structure and curtailment of supply side constraints. structure and curtailment of supply side constraints.

- Rehabilitating the domestic manufacturing industries and - Rehabilitating the domestic manufacturing industries and encouraging both private domestic and foreign investments.encouraging both private domestic and foreign investments.

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

- Maintaining export friendly effective exchange rate, lowering tax - Maintaining export friendly effective exchange rate, lowering tax burden on exports and imports of inputs, providing exporters with burden on exports and imports of inputs, providing exporters with easy access to foreign exchange for the purchase of intermediate easy access to foreign exchange for the purchase of intermediate items and preferential and/or lower interest rates on bank loans.items and preferential and/or lower interest rates on bank loans.

- Designing export promotion strategies, policies and support services - Designing export promotion strategies, policies and support services conducive towards stimulating competitiveness remains crucial. conducive towards stimulating competitiveness remains crucial. Targeted and concrete export support services, product specific Targeted and concrete export support services, product specific export market research, active participation in international trade export market research, active participation in international trade fairs and instituting officially sponsored trade missions. fairs and instituting officially sponsored trade missions.

- Addressing sector specific bottlenecks.- Addressing sector specific bottlenecks.

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

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

- Improving problems in infrastructure such as roads, air transport, Improving problems in infrastructure such as roads, air transport, railways and energy and other facilities, which would greatly railways and energy and other facilities, which would greatly contribute for facilitating export diversification and effectively contribute for facilitating export diversification and effectively competing in the international market.competing in the international market.

Success in export diversification and promotion is an amicable Success in export diversification and promotion is an amicable means to extricate the country from excessive dependence on means to extricate the country from excessive dependence on foreign loans and aid and eradicate abysmal povertyforeign loans and aid and eradicate abysmal poverty. .

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

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

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The success to bring about economic transformation, to increase The success to bring about economic transformation, to increase

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

vicious and visible circles of underdevelopment relies on vicious and visible circles of underdevelopment relies on

addressing the problems of governance, avoiding bureaucratic addressing the problems of governance, avoiding bureaucratic

chains, creating an enabling supervisory, regulatory and legal chains, creating an enabling supervisory, regulatory and legal

environments and increasing private investment particularly in the environments and increasing private investment particularly in the

productive sectors.productive sectors.

The results obtained from the regression indicate that labor The results obtained from the regression indicate that labor

growth positively and significantly affects economic growth both in growth positively and significantly affects economic growth both in

the short - and long - term horizon. In this regard, Ethiopia needs the short - and long - term horizon. In this regard, Ethiopia needs

to educate its active labor force with the required skills. to educate its active labor force with the required skills.

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

country should thus improve its position in the international country should thus improve its position in the international

economy so as to benefit from its accession to the WTO.economy so as to benefit from its accession to the WTO.