Ambo University

FACTORS AFFECTING ETHIOPIAN EXPORT PERFORMANCE

Student Name: Lechisa Bekele Jebessa

College of Business and Economics

Department of Economics

(Msc. Program in development Economics)

Advisor: Derese G. (Assistant professor)

Ambo

May 2022
Table of Contents

1. INTRODUCTION ............................................................................................................................................ 1
1.1 Background ............................................................................................................................................ 1
1.2. Statement of the problem: ................................................................................................................... 3
1.3. Research questions: .............................................................................................................................. 3
1.4. Objective of the study: ..........................................................................................................................4
1.4.1 General objective of this study is: ...................................................................................................4
1.4.2 Specific objectives of this study are: ...............................................................................................4
1.5. Significance of the study ........................................................................................................................4
1.6. Scope and limitation of the study ..........................................................................................................4
1.7. Organization of the thesis ......................................................................................................................4
8. Literature Review ..........................................................................................................................................5
8.1. Theoretical Literature ............................................................................................................................ 5
8.2. Empirical Literature ............................................................................................................................... 5
9. RESEARCH METHODOLOGY .......................................................................................................................... 6
9.1 Description of the Study Area .................................................................................................................6
9.2 Sources and Methods of Data Collection ............................................................................................... 6
9.3 Methods of Data Analysis ....................................................................................................................... 7
9.3.1. Econometrics model ...................................................................................................................... 7
9.3.2. Definition of variables and working hypothesis ............................................................................. 8
10. WORK PLAN ................................................................................................................................................ 9
11. LOGISTICS ....................................................................................................................................................9
12. REFERENCES ................................................................................................................................................ 9
13. APPENDIX ..................................................................................................................................................10
14. APPROVAL SHEET ......................................................................................................................................10
LIST OF TABLES
Table: 1 work
plan…………………………………………………………………………………………………………………………9
 1. INTRODUCTION

1.1 Background
Trade is a basic economic concept involving the buying and selling of goods and services,
with compensation paid by a buyer to a seller, or the exchange of goods or services between
parties. Trade can take place within an economy between producers and consumers. Or

Trade involves the transfer of goods and services from one person or entity to another, often
in exchange for money. Economists refer to a system or network that allows trade as a
market (Wikipedia).

According to the orthodox classical economist as well to the modern liberal view trade is
equivalent to an engine of economic growth. Exports promotion strategy is often in
accordance with the principle of comparative advantage.When a country specializes in a
product, which it can produce competitively. The goods become available to the community
of the world at cheaper prices. The markets are extended. The internal and external
economies are attained. Income and employment levels expand. Consequently process of
economic development is facilitated In a nutshell, putting more emphasis on the promotion
of exports would permit the optimal allocation of world resources and, therefore, returns
from trade sector depend upon accelerating growth of exports (Majeed and Ahmad, 2006).

Economic development is one of the main objectives of every society in the world and
economic growth is fundamental to economic development. There are many variables that
contribute to economic growth. Export is considered as one of the very important
accelerators of growth. The economics literature supports the contention that development
requires economic growth to alleviate poverty, and greater access to world markets is
perceived as a necessary condition for more rapid growth (Belayneh Kassa, 2012).

Developing countries have become major players in global trade. Their relative weight has
grown enormously, mainly due to China’s meteoric rise as an exporter. Though they partly
reflect surging oil prices, increasing exports from the Middle East and North Africa (MENA),
Eastern Europe, and Central Asia have further increased the weight of developing countries
in world trade.

Developing countries are already playing an increasing role in world trade. In 2006, they
accounted for 30 percent of world exports, up from 19.5 percent in 1996.

Middle East and North Africa’s (MENA)’s share of export increased from 1.4 percent
to 4.5 percent, while Sub-Saharan Africa (SSA)’s share rose from 0.7 percent
to 1.6 percent. (Carnegie Endowment for International Peace,2022)

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Ethiopia’s development model is partly inspired by the East Asian experience that realized
high economic growth through the development of new export sectors and government-led
development investments. No doubt, exports played a major role in East Asia, and developing
a larger export base in a market-based system provides a unique opportunity for Ethiopia.
However, the country’s exports measured in percent of GDP falls short of reaching the
heights seen in Korea, China, or Vietnam during their development periods (World Bank
2018).

Ethiopian exports grew at one of the highest rates in Sub-Saharan Africa. At an average
annual growth rate of about 20 percent, Ethiopia’s goods exports have doubled (in nominal
terms) every four years since 2001/02. This puts the country in the top side of developing
countries in terms of high growth in non-mineral exports not only in Africa but also globally.
Export growth benefited immensely from the surge in the price of Ethiopia’s main exports
like coffee and gold, as well as oilseeds, pulses, and spices. Most of Ethiopia’s top exports are
products for which world demand is increasing. Ethiopia’s product orientation with respect
to the average world growth rate of specific imports and individual markets. And indeed,
most of its top exports are those for which world demand is increasing, including coffee,
sesame seeds, soya beans, and footwear. But how a country’s industry is faring in
international competition can also be gauged by its share in strategic markets, such as those
that are expanding rapidly. (World Bank Groups, 2021)

The top exports of Ethiopia are coffee ($860m), other oil seeds ($384m), other vegetables
($261m), Gold ($194m), exporting mostly to United States ($409m) Somalia ($294m), Hong
Kong ($253m), United Arab Emirates ($247m) and Saudi Arabia ($203m). Exports in
Ethiopia averaged $673.58 million from 2006 until 2021, reaching an all times high of
$1176.90 million in the second quarter of 2021 and record low of $265.90 million in the
third quarter of 2007 (https//tradingeconomies.com, 2021).

As in the case of many developing countries, Ethiopia's export has been limited to few
primary products, which are mainly agricultural commodities. That is the sector has been
dominated by a few primary products that account for a country's export earnings.
Manufacturing exports have been positively affected by changes in the global trade regime
and the introduction of new trade preferences. Within manufactures, those products more
closely related to the primary sector (such as leather and wood) are the most significant. In
leather-related industries in particular (such as shoes and gloves), Ethiopia is beginning to
nurture capabilities for higher domestic value addition. Even if there is progress
performance Ethiopia’s export sector is currently too small to contribute to structural
transformation. In Ethiopia, both exports and the manufacturing sector remain relatively
small: it has the lowest ratio of merchandise exports to GDP among populous countries in the
world. The country has 1,800 exporting firms compared to 4,600 in Kenya (with half the

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population). Average exporter size is small (US$1.2 million versus US$4.1 million in Zambia).
The Ethiopian manufacturing sector accounts for only 4 percent of GDP.

Ethiopia’s small manufacturing sector implies that the domestic economy is not yet
sufficiently well diversified to wean exports away from agriculture. Ethiopia has one of the
highest shares of agriculture in GDP in the world (World Bank Groups, 2021).

1.2. Statement of the problem:

Though Ethiopia's total exports is an averagely $673.58 million from 2006 until 2021
Ethiopia's export sector is still small; evidenced by the lower export/GDP ratio and the
declining share of exports in import financing (NBE). Exports of goods and services as a
share of GDP increased from 37.5 percent in 2009/10 to 48.7 percent in 2019/20. Ethiopia’s
degree of international integration lags behind countries such as Kenya and Tanzania (74.9
and 79.8 percent of GDP, respectively) while it exceeds that of Rwanda (45.2 percent). In fact,
Ethiopia has the lowest goods export-to-GDP ratio (7 percent) among populous developing
countries. (World Bank Groups, 2021)

In addition to the government's effort to increase the country's foreign exchange earnings by
boosting the country's export performance and hence economic growth, pursuing concrete
policy measures and incentive schemes, it still calls for specific case studies concerned with
systematic identification of factors constraining export growth. Thus identifying and
examining those factors that significantly affect Ethiopia's export performance so as to take
corrective actions helps us to know what explains variation in Ethiopian export performance
that should facilitate the design of policies to improve the performance and ultimately
overall economic growth.

Hence, issues addressed in this study includes quantifying the performance of export and
understanding the determinants of export performance; which motivated the present study
by incorporating demand and supply side factors so as to identify possible policy
intervention areas for export growth.

1.3. Research questions:

 Does export sector of Ethiopia is dominated by few primary products and is the
performance of the sector is improved?
 Does Ethiopia's export performance is positively related with real income of trading
partner, real effective exchange rate, openness, real GDP of home country,
infrastructural and financial development in the long run?
 Does real effective exchange rate affects export performance of Ethiopia negatively in
the short run?

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 1.4. Objective of the study:

1.4.1 General objective of this study is:

 To empirically investigate factors that determines the country's export performance.

1.4.2 Specific objectives of this study are:

 To review the overall performance of Ethiopia's export sector.
 To examine the trends and contribution of different items to the overall performance
of export.
 To examine the long run determinants and short run dynamics of export performance
of the country.

1.5. Significance of the study

Export instability affects the performance of one country’s economy. Ethiopia which is
primary commodity exporting country is susceptible to such problems. Hence, identifying the
factors affecting export performance will help to provide information to policy makers to
enable them to come up with the appropriate policies regarding the growth of the sector and
the economy as a whole.

Output of this study expected to provide estimates of export response of the country with
respect to change different variables that potentially determine it. In addition to this the
results can be used, as an input towards designing appropriate extension programs and
development projects to maximize the benefits of the sector.

1.6. Scope and limitation of the study

The scope of the study is factors affecting export performance in Ethiopia in recent years.

The major limitation will be lack of continuous and sufficient data for export of services.

Lack of incorporate the role of domestic institutions that could partly explain export
performance in Ethiopia.

1.7. Organization of the thesis

The study will provides overview of the Ethiopian export performance and its trend.
Literature reviews, including theoretical and empirical evidence on factors affecting export
performance will presented in chapter three. Chapter four will provides Model specification,
data source and description, estimation techniques. Chapter five will presents analysis and
results of the study. Finally, chapter six will presents conclusion and policy implication based
on the estimated results.

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 8. Literature Review

8.1. Theoretical Literature

The classical economic view tries to explain why it is beneficial for a country to engage in
international trade based on the assumption that countries differ in their ability to produce
goods efficiently. Thus, the theoretical foundations for empirical studies of the determinants
of export performance lie in the conventional trade theories based on David Ricardo, the
Heckscher-Ohlin (H-O) framework, new trade theories and endogenous growth theories
(Krugman, 1983).

According to Ricardo's theory that other things being equal a country tends to specialize in
and export those commodities in the production of which it has maximum comparative cost
advantage or minimum comparative cost disadvantage.

Similarly Salvatore (2001) argues that if each nation specializes in the production of the
commodity of its comparative advantage, world output will be greater and, through trade,
each nation will share in the gain. With the present distribution of factor endowments and
technology between developed and developing countries, the theory of comparative
advantage thus prescribes that developing nations should continue to focus primarily in the
production of and export of raw materials and food to developed nations in exchange for
manufactured products.

On the other hand for H-O theory, factor endowments determine comparative advantages in
production and exports. A country should export those products that use intensively the
factor with which the country/industry is well endowed. According to H-O theory the
country with abundant capital will be able to produce relatively more of the capital intensive
goods while the country with abundant labor will be able to produce relatively more of the
labor intensive goods. Despite its simplifying assumptions, notably no economies of scale,
identical production functions and preferences across countries, the H-O theory seems to be
inconsistent in relation to LDCs, especially African countries (Chanthunya and Murindie,
1998). This is because the LDCs export is mainly primary commodity export. Such export as
commonly argued is subject to deteriorating terms of trade.

Theoretically there are many factors affecting export performance. Among several factors
real output of exporting country, real output of importing countries, availability of credit to
private sector, the relative price of goods or real exchange rate, infrastructural developments
are those variables that can potentially affect export performance of a given country.

8.2. Empirical Literature

Different studies have been conducted by different people to analyze the determinants of
exports and to analyze their impact on export performance. Export demand functions at the
aggregate level, specified as a function of relative export price and real income of importing

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countries, has been employed in econometric modeling of export performance and the
functions has been estimated in log-linear form using ordinary Least Squares Method. Such
an approach was, however, challenged by some empirical researchers such as Goldestein and
Khan (1985), Prasad (1992), Goldar (1989), who maintained that the supply-side should also
be taken in to account as there exist a simultaneous relationship between quantities and
prices. For example Riedel (1988) argues that the typical demand function of exports yields
biased estimates of the parameters if the supply side variables are not taken into account.
Thus, ideally, export equation should be estimated simultaneously. However, such an
approach tends to be constrained by data availability.

Therefore, to account for such simultaneity, a number of empirical studies in this research
area (e.g., Goldstein and Khan 1985, Bushe et al. (1986), Arndt and Huemer 2004, Athukorala
2004, Prasad (1992) examine export behavior using a singleequation approach where both
demand and supply equations are solved together to yield an expression for the equilibrium
volume of exports. That is the model IS derived from the conventional equations of demand
for and supply of exports.

Similarly, many studies have included demand-side and supply-side determinants of export
performance in the same regression equation. For instance, Beng (1992) for exports of
manufactures from Malaysia and Goldar (1989) for exports of engineering products from
India have specified a reduced form equation for export behavior incorporating both demand
and supply side factors in a single regression equation. This latter model is termed as export
function or export determination model because it is neither an export demand function nor
an export supply function. Different studies used the imperfect substitution model proposed
by Goldstein and Khan (1985) to analyze the determinants of countries export performance.
For example Munoz (2006) analyze the impact of parallel market and governance factors

9. RESEARCH METHODOLOGY

9.1 Description of the Study Area

Even though the performance of Ethiopia’s aggregate exports revealed some improvements
currently, an important concern that needs a careful scrutiny is diversification in the range of
export goods. In this section, effort is made to analyze the diversification and improvement of
the country’s exports.

9.2 Sources and Methods of Data Collection

The data will be collected from National Bank of Ethiopia, International Monetary Fund and
World Bank and the methods of data collection is Secondary data collection from the above
data sources.

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 9.3 Methods of Data Analysis

9.3.1. Econometrics model

The response of export performance to changes in macroeconomic variables depends
primarily whether those changes are transitory or permanent. Therefore, it is imperative
that this decomposition is undertaken in the context of econometrics estimation". Here, the
author outlines an econometric model that distinguishes between the permanent (trend) or
transitory (short-run) components of export earnings and its macroeconomic determinants.
Transitory fluctuations are defined as deviations from the trend or permanent components.

This study will focuses on demand and supply side factors affecting Ethiopia's export
performance. Hence, the study will signifies Ethiopia's export performance as a function of
real GDP of trading partners, real effective exchange rate, and openness, real GDP of home
country, infrastructural development, and financial development.

To be specific, let YEt be the export earnings for Ethiopia in year t and XEt be a set of its
economic determinants. Following Calderon et al (2000), the permanent and transitory
effects are given by yEt = yTEt +y PEt And XEt = XTEt + X PEt

Where, the superscripts T and P represent the transitory and permanent components,
respectively. Transitory fluctuations are defined as deviations from the trend or permanent
components. In practice, whereas the transitory component represents short lived
fluctuations, the permanent component represents movements in the (longrun) tendency of
a variable.

Export performance (EX) =f (RGDPTP, REER, OPN, RGDP, TCEX, PRC)…… Economic model

lnEX = α+β1lnRGDPTP + β2lnREER + β3lnOPN + β4lnRGDP + β5lnTCEX + β6lnPRC +

εt ……Econometric model

EX = Export earnings at time t in log form is the dependent variable

RGDPTP =Real GDP of trading partners

REER = Real Effective Exchange Rate in log form (which is found by trade weighted
birr/foreign currency*foreign price index/domestic price index)

OPN = Exports plus imports as a percentage of GDP, a proxy for degree of openness in log
form

RGDP= Real GDP at home country in log form

TCEX = Public expenditure in transportation and communication as a ratio of GDP as a proxy

for infrastructural development in log form

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PRC = Private sector credit as a ratio of GDP in log form

εt= Error term

9.3.2. Definition of variables and working hypothesis

The first three variables in the model are called external (demand side) factors affecting
export performance. Ethiopia is one of the countries whose export performance depends on
overseas economic situation. On the other hand, the last thee variables are regarded as
internal (supply side) of factors affecting export earnings. The inclusion of real output in the
model is based on the argument that the output capacity of an economy is an indication for
future supply capacity. Thus, an increase in output will enhance export earnings.

An increase in the real GDP of Ethiopia's major trading partners increases the demand for
Ethiopia’s product and hence increases the country’s export earnings. So the variable has
positive relationships.

The movement in value of export also correlates with relative prices. In theory, real effective
exchange rate movements are also negatively correlated with the growth in exports
performance. Thus, the expected sign of the REER coefficient is ambiguous. This is because it
depends on the exchange rate regime that the country experiences.

In short, an increase in openness will have positive impact on export performance. However,
if openness leads to shocks in the goods market that declines in export demand, it will
decrease exports earnings and has negative impact

An increase in GDP will enhance export earnings and has positive impact.

Expanding infrastructure density of various types with an acceptable level of quality or the
increase in public investment in infrastructure to GDP ratio (TCEX) in Ethiopia will have
positive impact on export growth.

Private sector credit as a ratio of GDP (PRC) by the banking system is added as an
explanatory variable in export model in order to examine whether there is a friendly credit
access by banks to country's export performance. In this case, the impact of PRC on exports is
positive.

Working hypothesis

Export sector of Ethiopia is dominated by few primary products and is the performance of
the sector is improved.

Ethiopia's export performance is positively related with real income of trading partner, real
effective exchange rate, openness, real GDP of home country, infrastructural and financial
development in the long run.

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 Real effective exchange rate affects export performance of Ethiopia negatively in the short
run.

10. WORK PLAN

Table: 1 work plan

no Activities Sep.2 Oct.20 Nov Dec. Jan. Feb. Mar Apr May Jun. Jul. Aug
022 22 .20 202 202 202 .202 i.20 .202 202 202 .20
22 2 3 3 3 23 3 3 3 23
1 Proposal   
submission and
approval
2 Data collection    
3 Data entry  
4 Writing up related  
literature
5 Data edition,  
preliminary
analysis
6 Final data analysis  
7 Write-up of report 

11. LOGISTICS
Personal cost =10,000

Supplies and Publication cost 9000

Transportation cost and Communication cost =6000

Total Budget Summary =25,000 birr

12. REFERENCES

https://en.wikipedia.org/wiki/trade
Majeed and Ahmad, 2006

Belayneh Kassa, 2012

Carnegie Endowment for International Peace, 2022

World Bank 2018

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World Bank Groups, 2021

https//tradingeconomies.com, 2021

Krugman, 1983

13. APPENDIX

14. APPROVAL SHEET

AMBO UNIVERSITY

SCHOOL OF POST GRADUATESTUDIES

Approval sheet

I hereby certify that I have read and evaluated this thesis proposal entitled “FACTORS
AFFECTING ETHIOPIAN EXPORT PERFORMANCE” prepared under our guidance by Derese
Getachew (Assistant professor). Therefore, I recommend that it be submitted as fulfilling the
thesis proposal requirement.

Submitted by:

1. Lechisa Bekele __________ May 30, 2022

PG Candidate Signature Date

Approved by:

2. Derese Getachew (Assistant professor) _________ May 30, 2022

Major advisor Signature Date

_______________ _________ ______

3. Head, Department Signature Date

_________________ _________ ______

4. College/Institute Dean Signature Date

_______________ _________ ______

5. Director School of Graduate Studies Signature Date

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_______________ ___________ _________

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