ADAMA SCIENCE AND TECHNOLOGY UNIVERSITY

School of Business and Economics

Department of Economics

“The Contribution of Export Diversification for Economic Growth in

Ethiopia”

A Research Submitted To Department of Economics, ASTU, in the Partial

Fulfillment of the Requirements for the Degree of Bachelor of Art In Economics.

Prepared by- zekarias Belay

Advisor- Kidist________

2014Adama, Ethiopia
Acknowledgment

First and for most, I would like to extend my heartfelt gratitude to the almighty GOD for
invaluable cares, support, forgiveness, willingness and kindness and his mother saint marry and
other saint who anchored me throughout my life. I owe special debt and appreciation to my
advisor Kidist (Msc), for their constructive suggestion and expert guidance, without their advice
this paper would not have the present form. With a felling of humility I acknowledge and
appreciate the unfailing encouragement and support I received my family. Last but not least, I
am also grateful to my best friends who are extending their support in one way or another.
Abstract

Export diversification can leads to higher growth. Developing countries should diversify their
export since this can; for example, help them to overcome export instability or the negative
impact on foreign trade. The process of economic development is typically a process of
structural transformation where countries move from producing “poor-country goods” to “rich-
country goods”. Export diversification does play an important role in the process. I also provide
robust empirical evidence of a positive effect of export diversification on per capital income
growth this effect is potentially non-linear with developing countries benefiting from diversifying
their export in contrast to the most advanced countries that perform better with export
specialization.
Table of Content

Content Page

Abstract………………………………………………………………………….

CHAPTER ONE

1. Introduction................................................................................

1.1. Back ground of the study....................................................

1.2. Statement of problem..........................................................

1.3. Objective of the study..........................................................

1.3.1. General objectives.........................................................

1.3.2. Specific objectives........................................................

1.4. Significance of the study..........................................................

1.5 Hypothesis................................................................................

1.6 Scope of the study....................................................................

1.7 Limitation of the study...............................................................

1.8 Methodology of the study..........................................................

1.8.1 Data type and source …......................................................

1.8.2 Methodology or data analysis ….............................................

1.9 Organization of the study ….....................................................

CHAPTER TWO

2. Literature review

2.1 Definition and concept...................................................................

2.2. Theoretical literature review.................................................. …......

2.2.1 Traditional argument for export diversification........................

2.2.2 The new argument for export diversification...........................

2.2.3. The argument against export..................................................

2.2.4. Export diversification and economic growth..................................

2.2.5. The contribution of export diversification.....................................

2.2.6. The major determinants of export diversification...........................

2.3. Empirical literature.....................................................................................

and country example.................................................

2.1.7. Export diversification and economic growth...............

2.1.8. Export diversification & growth: some

Preliminary evidence..................................................

2.1.9. export diversification: policy portfolio approach.........

2.2. Empirical evidence of literature...............................................

CHAPTER THREE

3.Data analysis...............................................................................
3.1. Data type and source............................................................

3.1.1. Overview of the export sector of Ethiopia............................

3.1.1.1. Export diversification and policy perspective of the two regime ….

3.1.1.2. Derg Regime...................................................................................

3.1.1.3.Post derg regime...................................................................

3.2. The export structure

3.3. Commodity concentration and geographic concentration.....................

3.3.1. Commodity concentration.................................................................

3..3.2. Geographic concentration................................................................

CHAPTER FOUR

4. Recommendation and conclusion.......................................................

4.1. Conclusion...................................................................

4.2. Recommendation.....................................................................

Reference......................................................................................
CHAPTER One

Introduction

1.1 Back Ground of the Study

For long period in history, counties find it trade with each other. This is because countries
believed that they get a surprising benefit from trading with other countries. According to the
principle of absolute advantage, countries beneficiary when they get a product on which they are
advantageous through trade.(Melkamu, 2003/04).

Export trade and diversification is one of the most important activities in economic growth and
economic development of any country. Export trade and diversification plays a crucial role in
creating employment opportunity for masses of unemployed classes, improving production
capacity and as per absolute advantage principle, it reduces production cost. (Melkamu,
2003/04).

Diversification is a process by which a country introduces products, which may or may not be
related to the present product. The major purpose of export diversification is to reduce the bias or
reliance of the economy on the the major export to play important. (Benjamin,1959).

export diversification is widely seen as a positive trade objective in sustaining economic growth.
Diversification makes countries less vulnerable to adverse terms of trade shocks by stabilizing
export revenue. (Ghosh and Ostry,1994). Makes it easier to channel positive terms of trade
shocks in to growth, knowledge spillover and increasing return to scale, creating learning
opportunities that lead to new forms of comparative advantage. (Pineres and Ferantino, 2000).
Export diversification can leads to a higher growth. Developing countries should diversify their
exports since this can help them to overcome export instability or the negative impact of terms of
trade in primary product. And the process of economic is typically process of structural
transformation where countries move from producing “poor country good” to “rich country
good”. Export diversification has important role in this process and also a positive effect of
export diversification on the per capital income growth. (Heik Hess, 2007).
Though most of the early theories predicted a monotonic relationship between diversification and
growth, some recent studies like Imbs and Wacziarg (2003) and Hesse (2008) found evidences of
a u-shaped pattern.

There is also a non-linear relationship between the two. The non-linear implies that through
diversification is associated with growth; countries specialize only after a threshold level of
export concentration has been reached. However, the spread of the sample differs in the two
year.

The Ethiopian merchandise export has been dominated by agricultural products, which accounts
for 80-90% of the total merchandise export receipts. The major export commodities in the order
of the total export share are coffee, oilseeds, pulses, flower, chat, leather and leather products and
gold (NBE, 2007/08).

Ethiopia's export diversification has been in the development plan for more than 40 years
(starting form 1957), while the export structure remained fixed with greater concentration on few
traditional export items. The NBE reports indicate that traditional export items are still the
dominant in the country export and accounted 80.2% of the total export of the country. From this
coffee, oilseeds, pulses, chat and other items accounts, 35.5%, 14.9%, 9.8% and 12.3%
respectively (NBE, 2007/08).

Ethiopia's pattern of external trade statistics indicates that exports are consisting almost entirely
of primary products i.e agricultural products and import largely dominated by manufacturing
products and raw materials (Yohannes Ayalew, 1992).

the major Ethiopian export commodities are coffee, hides and skins, pulses and seeds, which
account from 80.2% of the total export during the period (2007-2008) on average. (NBE,
2007/08). The share of non-traditional export, such as flowers, textiles, garments, honey and
natural rubbers has begun to play important role as a source of foreign exchange and
employment generation in Ethiopia. In the late 2000 the share of non-traditional export reached a
record level of about 11% more than double what it was in the 1990`s (Heike Hess, 2007).
This dramatic increases in non-traditional export is partly explainable by the overall policy
stance and stable macroeconomic environment that characterized by the Ethiopia economy over
the last decades and half (ECA, 2007).

1.2. Statement of the problem

In most developing countries like Ethiopia, there is an imbalance in the composition of domestic
production and domestic demand and the shortage of exports proceed to finance imports make
the country rely on other source of finance such as loan. Aid etc. which results debt burden. This
problem will persists as long as we fail to diversify Ethiopia, like most low income countries in
SSA has relied on traditional export such as coffee, oil seeds, hides and skins, pulses and other
export crops to earn foreign exchange during the period 1980-1990. The share of traditional
exports in total export was closed to 95 %.( economic reports on Africa, 2007).

It is obvious that the bulk of Ethiopia export trade consists of agricultural products depends of on
a few agricultural products for export has heavily undermined the export growth in particular and
the economic growth in general. This problem calls for diversification of export item.

Undiversified structure of the export sector brings a problem of export instability, which can
limit the import capacity of the country mainly to depend on import goods for industrialization
process. This negatively affects the overall activity of the economy.

Different policies of both the imperial and the military government had identified the source of
export instability and acknowledged the importance of export diversification. Similarly the
current government (TGE) together with IMF and WB also underlined the significance of export
diversification as it is explicitly stated in its agricultural development led-Industrialization
strategy (ADLI) and also different researches have been done by different researchers like
Berhanu Lakew (2003), Shewanigizaw Silesh (2003), Teshale Nega (2005) in the hope of
diversifying export trade, particularly non-traditional export. However, the problems of
dependence on agricultural commodities export were not addressed.
Therefore, the main interest of the researcher is to identify the major factors that affect the
country's export diversification and finally to assess its role to economic growth of the country
using empirical analysis.

1.3. Objective of the study

1.3.1. General Objective

The general objective of this study is to see the contribution of export diversification to
economic growth in Ethiopia.

1.3.2. Specific Objective

To discuss the structure and characteristic of the export sector.

To assess export diversification and policy perspective.

To examine the contribution of diversification of export sector to the economic growth.

To suggest suitable policy measurement.

To suggest suitable policy measurement.

1.4. Significance of the study

Conducting frequent research development on the export sector accelerates the achievements of
the sector and hence, it would be the pace of economic growth. This study can also have
significance on policy makers on their task of formulating appropriate and right policy in order
to foster the growth and performance of export sector by way of diversification. Furthermore this
study will also have a significance importance for thus who are interested to study export
diversification. In less developed country as a guide or highlight for sector class who studies the
export sector of Ethiopia.
1.5 hypotheses

Export diversification plays a vital role in facilitating or fostering economic growth in general
and the export sectors in particular especially less developed countries like Ethiopia.

1.6. Scope of the study

This study will be cover the period between 1986 up to 2013; to it attempt to compare the export
diversification during the two regimes in this period. That is the derg regime and the current
government.

1.7. Limitation of the study

When the researcher conducts, this study faced several challenges, like lack of Internet access,
financial problems, and the shortage of data collection. this study also had the limitation of lack
of organized and full information about the export sector of Ethiopia and lack of experience for
the study of research.

1.8. Organization of the study

This paper contains four chapters and organizes as follows.

Chapter one covers the overall introduction of the paper.

Chapter two review of related literature.

Chapter three over view of the export sector and data analysis

Finally,chapter four contained conclusion and recommendation.

CHAPTER TWO

2. Literature Review

2.1. Definition and Concept

Export diversification refers to changing the composition of exports or the relative

contribution of each export product to total export earning with a view of establishing a
wider variety of export with good market prospects abroad and not subject to in the same
manner by fluctuations of international price. This implies changing the composition of
export with the purpose of increasing the country’s foreign exchange earnings (IMF, 1987,
Cited by ssemogrce &kasekonde, 1994).

Export diversification can takes place in different form and dimension. Ali and others have
noted that export diversification can be achieved either by adjusting the share of
commodities in existing export mix or by including new commodities in the export
portfolio, a country can attain export diversification. In this context there are two well
known forms of export diversification that are commonly found in trade literature, namely
horizontal and vertical export diversification. Horizontal diversification entails changing of
the primary export mix in order to neutralize the volatility of international commodity
prices. While vertical diversification involves creating further use for existing and new
commodities through value added ventures such as processing and marketing (IMF, 1987).

2.2. Theoretical Literature

2.2.1 Traditional Argument for Export Diversification

The traditional argument for export diversification is based on the idea that the instability index of export
earing is higher for developing countries that have narrow export base than developed countries with
wider base of export (Bamou, 2003).Wilson (1984) also argued that, when economies are depend on just
one export commodity there foreign exchange position is frequently precarious and this makes the
implementation of development project difficult. According to Marshal (1994) and love (1983),
concentration on a narrow range of export product is the source of fluctuation in export earnings
instability caused by cyclical volatility (fluctuation) in international commodity price.

2.2.2 The New Argument for Export Diversification

on of the major events of 1970”s was the sectors declining in intentional price of primary
commodities. This has also proved the theoretical interest and regiments for diversification based
on comparative advantages, the element include demand and supply enhance industrial
capability, risk evasion, environmental consideration , debt problem and change commercial
policies.

The new argument on the demand side is that, exporter facing autonomous factors such as rising
income and change in taste in importing counties have to diversify their exports towards income
elastic ones. The supply side argument is interns of production structure adjustment to changes in
production technology and input mix, better land utilization, the introduction of new skills,
change in the availability of imported inputs, in response to potential competitor, etc. The
proposal to diversify products with different price elasticity of supply which minimizes the risk
of export earning instability (Swaggers et at, 1994).

2.2.3 The Arguments against Export Diversification

Export pessimism refers to the belief that developing countries cannot successfully penetrate in
to the market of the industrial countries.

In spite of the drive for export diversification, export pessimism had been dominated in the
development literature and it has shaped the trade policy of the countries to accommodate certain
degree of protection. The pessimistic views revolve around the decline in the rate of growth of
demand for primary products in the industrial countries and an oversupply of manufactured
goods if many LDC diversify at the time (Panoutsopoulos, 1992).

Cline (1982, p.81) argued, export-led growth “many break down if a large majority of
developing countries seeks to pursue it at the same time, because the resulting output of
manufactured exports might be more than western markets could absorb”.
Considering the similarity in terms of factor endowments and the stage of industrial
development. Some academicians argued that the scope for market diversification by penetrating
developing countries market is very limited (Tecson,1992). The other variant of export
pessimism, as indicated in Sodersten BO et.al (1994), is in terms of the provoked protectionist
reaction by developed market economies if more rapid growth of LDC exports is going to
happen , thus proposing import substitution policies. There are other augments that consider
factor endowments as a limit on export diversification, highlighting the possible loss of welfare
if productions of non-traditional goods are expanded beyond the limit (Derosa, 1992). such
pessimistic view had, however, been challenged in the development literature on account of
increased exports of manufactured goods from some developing countries taking advantage of
opportunities for product differentiation and economies of scale as well as their comparative
advantage in labor incentive manufacturing proponents of the challenge include , among others,
Panoutsopoulos (1992), Gunasekera (1992), Tecson (1992).

2.2.4 Export Diversification and Economic Growth

The idea that expanding export benefit for economic growth is much earlier. Mercantilist at their
time strongly suggested that the necessity of expanding and promoting exports and increasing
trade surplus by minimizing import to accumulate precious metal, wealth and national mercantile
power. Beginning from classical theories introduced by Adam Smith (1776) and David Ricardo
(1817), the common theory was that each country has a “comparative advantage in producing
some goods in exporting some particular products and that specializing in export on these
products will create gain from trade”.

During the industrial revolution times when production and exports expand most classical
theories follow mill (1848) debated on the source of comparative advantage. Hescher and Ohlin
introduced the most debated comparative advantage theory in 1930`s. The theory focused on
expanding trade, export and evolution by the relative factor or resources abundance. This theory
was useful for explaining some developing countries trade over the year but not all trade.
Therefore, comparative advantage theories developed in order to explain trade by other means
such as economies of scale, increasing return and others. Hence both classical and neoclassical
economies argued that countries should specialize in producing and exporting according to their
comparative advantage.

However, after the second world war with the reconstruction of Europe and and increasing
independence of many developing countries, one of the new ideas in the emerging new discipline
of development economics was diversification, not specialization for economic growth and
development. Seminal contribution in this regared Peribisch and Singer, 1950 argued that
developing countries dependence on primarily commodity production and export leaves them
vulnerable to commodity stocks, price fluctuation and declines terms of trade, especially since
the income elasticity of primarily commodity is low. This in turn affects countries foreign
exchange reserves and their ability to afforded imported inputs, become subject to fluctuation
and uncertainty (Wim @wider.unv.edu, 2008).

Moreover, the modern theory of portfolio management introduced by Markowitz increased the
importance of the concept of diversification. Diversification based on a wise common saying
“don't pull all your eggs in the same basket “ and encouraged by modern portfolio selection
theory, has come to be considered as a means of to decrease dependence of country on a
particular product or narrow range of primarily products that are usually exported before
processing to final goods. For many developing countries, heavily relying on the trade of handful
commodities and having low economic growth rates, it would be beneficial for income and
employment in the country to diversify the economies by selection such export portfolio that will
optimize the anticipated returns with market risk (Arailym Kadyrove,20011).

Originally, the theoretical interest was on what role of export diversification could play in
reducing the variability of export earnings from the cyclical fluctuation in the international price
of primary commodities so as to attain sustainable economic growth (Mac Beanet al.1980).

Cyclical variable doesn't by itself a sufficient case for diversification since there are schemes to
deal with it, price stabilization schemes at home to produce the income of export producers and
commodity schemes abroad to reduce fluctuation in intentional price (Gerere and
Kasekende,1994).
Countries that specialize in a narrow range of primary commodities are currently faced with
declining export earnings and a loss in their share of the intentional export markets which
directly affects negatively the countries well being (IMF, 1987).

compared to primary exportable commodities, the volume of selected manufactured exports may
be raised without a compensating fall in price because there is price elastic (IMF, 1987).
Moreover, the industrial environment is easier to control compared with the unpredictable
weather changes for agriculture commodities. In addition industrialization brings within it or
encourage s the developments of generalized infrastructure within which it is easier to reduced
unit cost by supplying reliable water supply, better communication and information, etc. lower
cost thus increase the competitiveness of home country in the industrial market there by facilities
economic growth (Ibid).

The current argument for export diversification and development are partly opposite from the
development literature against the Riparian static concept of comparative advantage which
advocated complete specialization to maximize the gain from trade (Chenery, 1961).

the trend since 1970s has also produced a theoretical reaction which argues that in a world of
changing demand and supply conditions, international trade should be based on dynamic
comparative advantage. The dynamic elements focused up on demand and supply changes, risk
evasion given imperfect foresight, environmental concentration and changes in commercial
policies (Salvatore, 1983).

Eagle's law predicts that necessities are income inelastic. As income in the consuming country
increase the proportion spent on necessities decline. An export facing rising income in the import
countries have to diversify by increasing the proportion of commodities which are income
inelastic and reducing the proportion of necessities in order to realize rising export earnings
(Gerere and Kasekend, 1994).

Even if income in the importing countries are constant changes and in difference maps shift over
time, which changes in the psychological reference on difference generation of customers. this
call for diversification to generate new exports to think for the changing desire and needs. Both
incomes and tastes have been changing over time in the European and USA market which are the
main customers of Africa exports, including Ethiopia (IMF, 1987).

Change in supply dynamic comparative advantage for diversification to develop new exports as
the country adjusts its productive structure to changes in domestic resource endowments such as
skills from education, or better land utilization that staves of diminishing returns, or change in
production technology and response to the foreign exchange constraint (Gerer and Kasekende,
1994). even if the resource base and inputs remained unchanged the country's intentional
competitiveness change in response to the domestic macroeconomic environment, such as the
rate of inflation and the competitiveness of other supplies identical commodities such change
will be reflected in movement of the real effective exchange rate that signals a relocation of
resource in to a new diversity of exports.

Lyakurwa (1990), point out that the high dependence of the country's export earnings on a
limited number of products justifies the emphasis on export diversification. Diversification plays
an important role in establishing various export earnings sources while at the same time
positively affecting total export and local production growth rates.

A diversified national trade portfolio enable a country's stability by providing a broader export
base and enhance growth by substituting commodities with passive price trends for these with
declining trends in price, through increasing value added of export commodities, through
additional processing and marketing (Ali.et al, 1991).

the more diversified export earnings have a potential to stabilize country's economic performance
and promote Ethiopia growth by increasing the exchange rate sources. However, this
achievements might be at the expense of advantages associated with specialization (Ibid).

Export diversification was an important strategy to overcome the emerging challenges of

agricultural products, following the economic reforms and it has become an integral part of the
structural adjustment program (SAP) in developing countries to derive a potential benefits of
globalization (Josh, 1998).
Hesse (2008) suggests that export diversification could assists developing countries in
overcoming export instability, terms of trade shocks and macroeconomic instability. Moreover,
he argued that export diversification is associated with higher income growth rates and a number
of spillover benefits (production, management, marketing and information which further serve to
foster higher economic growth).

Recently export diversification is being linked by economic literature to the self-discovery or

innovation process that means new export products discovery by firms, farms or government.
That is the role of externalities associated to the new export products discovery process (Kilinged
and Lenderman, 2005).

Therefore, thus all theoretical review indicates that export diversification play a great role to
economic growth through decreasing export instability by reducing the dependence on limited
number of commodities that are subject to fluctuation in price and volume, creating spillover
effect and increasing productivity growth, making countries less vulnerable to sector specific
adverse shocks and making it easier to channel positive terms of trade shock in to growth.

2.2.5 The Contribution of Export Diversification

when export is concentrated in a few primary commodities, there can be serious economic risks.
Therefore export diversification aims at mitigating this economic risk. Economic risks to be
mitigating include: in short term, volatility and instability in foreign exchange earnings which
have adverse macroeconomic effect on growth, employment, investment planning, import and
export capacity, cash flow, inflation, capital flight on under-supply of investment by risk averse
investors, debt repayment, and in the long term, secular and unpredictable declining terms of
trade trends which exacerbate short run effects.

Another objectives of diversification to reduce dependence on one or limited number of

geographical for its export. This because when one country depends on the market of few
developed countries, there will be occurrence of fluctuation in foreign exchange earnings if that
country faces any economic crisis. It also can aim expands opportunities for export improvement
of backward and forward linkages to domestic inputs and services.
(Merron, 2005 ) said that Ethiopia has a potential to diversify in both primary and manufactured
commodities. Policies like export diversification can bring about improved utilization of existing
factor of production, expanding factor endowment and linkage effects.

Heavy dependence on a small number of primary commodities exposes a country to the negative
effect of unfavorable characteristics of world demand and negative supply side features of
primary products. On the demand side low income elasticity of world demand for primary
commodities can lead to falling export earnings which can be exacerbated by historically
downward trends in primary commodities relative to manufactures.

on the supply side, the combined effect of lower skill and technology content of commodity
production and negligible backward and forward linkages with the rest of the economy usually
lead to little growth spillovers. hence the need for diversification to minimize volatility in export
earnings and boost overall growth by replacing commodities with positive price trends products
and adding value through additional processing or marketing. Diversification away from
traditional export supposed to rise growth rates at traditional exports face limited demand due to
their low income elasticity and decline terms of trade and to lower variability of growth rates as
traditional exports are particularly vulnerable to exogenous shocks.

Therefore, commodity diversification was found to be a major factor in import-export earning

growth, reducing instability and economic growth at large.

2.2.6 The major determinants of export diversification

Human capital: - mean of the production elements which can generate added value through
inputting it. In this study it is measured through enrollment rate. The greater variability of
specialized humane capital and the consequent lower relative cost allow firms to employ a larger
amount of human capital for the development of R&D tasks which implies a larger number of
varieties of goods produced and this increase the number of exported commodities and markets.
Foreign direct investment (FDI):- is defined as an investment involving a long term
relationship and reflecting a lasting interest in and control by resident entity in one economy
(foreign direct investor or parent enterprise) of an enterprise residents in different economy (FDI
enterprise or foreign affiliation ). Shasheen Dileepa Jayawee (2009) shows that FDI is a deriver
of export diversification with emphasis based on FDI leading to improve productivity in the host
nation, together with a number of spills over benefits which help local firms to become
comparative leading to an increase export diversification. He also suggested that FDI stands as
catalyst for local industry development through competition effect, i.e. where the foreign entrants
increase competition in the industry forcing domestic firms to increase efficiency, and backward
linkage effect where the foreign entrants boos domestic demand for intermediate suppliers
helping them to grow generate scale economies. It also contribute to diversification of export
through “market spillover” where firm learn about foreign markets and those reduce their export
discovery cost a vital components of the fixed cost of establishing export market.

Real effective exchange rate (REER):-which is calculated as a weighted average of the

bilateral exchange rates that have been adjusted for relative price level of each economy. In the
case of overvalued exchange rate indirectly reduce export portfolio or indirectly through an
increase uncertainty. However, devaluation promote for diversification through augmenting
export by shifting price burden, making the product competitive in foreign market.

Openness: - which is the ratio of export plus import to GDP. It contribute to export
diversification through external effect such as expose to foreign competition, transfer of
technology and economies of scale and also from increased speed of convergence towards richer
countries. It also contributes through reduction in tariff rates, simplification of export licensing
requirements’ procedure and suppressions for import licensing.
2.3 Empirical literatures

Based on the popularity of the hypothesis diversification led export growth, there has been
remarkable imperial evidence or investigation in to the implied linkage between export
diversification and growth.

Tsega Abreham(1998) used statically methods such as percentage, rations and moving averages
to see terms of export trade over time. In that study he attempted to study many aspects of export
diversification such as the prospects of export diversification, the problem and the needs for
diversification. In this conclusion part attempts has been made to see the main source of foreign
exchange in developing countries in general and Ethiopia particularly. He also raised the
potential area of the sector and he concluded that Ethiopia has a potential to diversify its export.

The study conducts by Alemayehu Geda and Dr. Brehanu entitled the export sector of Ethiopia
employed mainly empirical in his method of analysis. They showed there is causal lationship
between export instability and degree of diversification.

Endogenous growth model emphasize the importance or leaning by doing manufacturing sector
for sustained growth related to export diversification. There could be knowledge spillover from
new techniques of production, new management or marketing practices potentially benefiting
other industries. (Amine pinatos Ferrantina, 2000).

Producing an expanding set of export products can be seen as a dramatic effect of export
diversification on higher per capita income growth, (Heiko Hess, 2007). Agosin (2007)
developed a model of export diversification and growth where countries below the technological
renter widen their comparative advantage by limiting and adopting existing products.
Furthermore, models in the products cycle literature (Uernon, 1966; Krugman, 1979, Grossman
& Helpman, 1991) obtain diversity of export products by the North innovating end the South
predominantly imitating and exporting the products from cheap labor countries.

Lederman and Maloney (2007) in a dynamic cross-country penel model also find some evidence
in support of diversification lead growth. Within a country studies by Amin Gutierrez Depineres
&Ferrantino (1997) as well as Harzer and Nowak-Lhmann D. (2006) examine the link between
export diversification and economic growth in Chile and their findings to suggest that Chile has
benefited greatly from diversifying its export base.

Imbs and Wacziag (zan), based on domestic production and labor data investigate the relation
ship between sect oral concentration and per capita income patterns across countries. Their
empirical investigation, develop some theoretical arguments for countries incentives to
domestically diversify and specialize reasons for economic diversification both include,
preference based and portfolio argument under certain assumptions single effect imply with
increasing income levels, agents demand a large diversify of goods for consumption.

Acemoglu and Zilibotti (1997) develop the portfolio argument whereby diversification is an
endogenous process and producers invest in wide rang risky sectors, wrich leads to
diversification. There is a new literature by Hausmann and Rodrik (2003) that analysis the
benefits of export diversification and exports in general for economic growth, both empirically
and theoretically. In their framework, economic growth is not driven by comparative advantage
but by countries' diversification of their investment in to new activities. An essential role is
played by the entrepreneurial cost discovery process.

According to the model of Housman and Roderick (2003), entrepreneurs face significance cost
uncertainties in the production of new goods if they succeed in developing new goods, the gains
will be socialized (information spillover) but the losses from failure end up being private. This
leads to an under provision of investments in to new activities and a suboptimal level of
innovation. The bottom line is that according to Hausmann and Rodrik (2003), the government
should play an important role in industrial growth and structural transformation by promoting
entrepreneurship and creating the right incentive for entrepreneurs to invest in a new range of
activities. Related to cost discoveries, can be important (Vettas,2000). Sometimes, domestic
producers do not know whether there will be enough foreign demand from producing and
exporting an existing or a new good.

Only when they start exporting the product, foreign consumers become more aware of the
product and its features, possibly triggering more foreign demand. Since other domestic
producers of the same product observe its failure, or success, imitation is an externality that
could be conducive to higher growth.

Housmann, Hong and Roderik (2006), measure is significantly positively affecting economic
growth, in other words countries that produce high productivity goods enjoy faster growth than
countries with lower productivity goods,the author develop a model based on the cost discovery
process from lower productivity to higher productivity goods with the presence of elastic
demand of these goods in export market generates higher economic growth.

Housmann and Klinger (2006) develop a model of structural transformation in the product space
and show that the speed of structural transformation depends on current export goods being
closely related to other goods of more hesitation and higher values. They find that density of the
product space near its productivity capabilities.
CHAPTER THREE

Methodology of the study

3.1. Data type and source

The data in this paper collected from various secondary data sources like book, report and
bulletins to obtain detail information about the diversification and contribution of export
sectors for economic growth in Ethiopia.

3.2. Methodology or data analysis

Descriptive analysis will be used in analysis the data collection collect from secondary
source. Tabular presentation is the main tool for data analysis part and simple percentages.
CHAPTER FOUR

Data analysis

4.1. Overview of the export sector of Ethiopia

4.1.1. Export diversification and policy perspective of the two regimes

4.1.1.1. Derg Regime

In the Derg regime there was a high restriction on private sectors to participate in export sector in
particular and the economy in general. The policies were expanding collective and public
enterprise through central planning. It was inward looking behind a highly protective for it and
quantity restrictions. In the Derg regime 10 years perspective plan, it was planned export orient
towards manufacturing and mining to increase the country’s foreign exchange earnings. During
the plan period the reduction of the share of the traditional export commodity (coffee, hides and
skins, oilseeds and pulses) was from its level of 79.5 percent in 1980/81 to 61.5 percent in the
end of the period (NBE, 2007/8).

The planned period emphasized diversification mainly in the mineral products like copper,
potash, marble sodash, etc. the other effort consider relevant for export diversification was the
export of raw hides and skins was increased from 92,705 in 1980/81 in 1980/81 to 134,045 in
19889/1990 in millions of birr (NBE, 2007/08)
 Table 1. Value of major export items in the Derg regime.

Particulars 1980/ 1981/ 1982/ 1983/ 1984/ 1985/ 1986/ 1987/ 1988/ 1989/
81 82 83 84 85 86 87 88 89 90

Coffee 524325 480287 495873 590445 466269 664790 524348 439181 626448 405103

Oil seeds 28371 19533 15349 27859 15640 7686 9793 22015 11029 8387

Hides & 92705 96319 77302 93817 95408 119459 108291 133004 123528 134049
skins

Pulses 23693 30871 28790 20623 16817 12635 8481 16093 16317 35961

Meat 6310 5324 10249 5869 3922 3866 5370 5142 2089 1149

Fruits & veg. 3634 5533 3427 4214 6015 6027 12847 11787 8999 4068

Sugar& molasses 7775 7007 10416 10110 9342 10401 12629 14850 10003 37409

Flowers 0 0 0 0 0 0 0 0 0 0

Live animals 9800 8296 16344 14780 19173 18908 15646 32357 23539 10821

Chat 22349 31236 37171 29001 15903 8477 28677 21323 7906 21024

Petrol 79091 53832 68836 73942 65959 44249 27294 36098 18752 26238
Product

Bee’s wax 5583 1473 2348 4625 3374 12721 764 2469 0 1700

Gold 0 0 0 0 0 0 0 0 0 0

Others 41583 31709 35201 36985 26685 24095 41143 39318 54133 50855

Re-export 371 214 136 1259 7 502 1 5 10 39

Total 842695 761634 801442 913529 744572 923816 795284 773642 902753 736805

Source: NBE, and staffs computation

The growth rate of coffee was 524325 in the 1980/81 and 268,451 in the 1990/91, implies that
the decrease in growth rate of coffee in the Derg regime. Among the total exports, leather and
leather products was continuously increased in the Derg regime between 1980/81 to 1989/90
from 92,705 to 134,049 but the remaining export item was decreased from time to time by its
value and negative effects to the economy. In general export sector in particular as indicated
earlier in the above table (NBE, Staffs authority).

Export subsidy and preferential interest rate were the support rendered in which export sub sector
was given 2 preferential interest rate of 6 percent on bank loans while 8 percent for importing
activities. However, there was unfavorable tax on exports, which offsets the subsidies (MEDAC,
1997).

4.1.1.2. Post Derg regime

The transitional government at Ethiopia comes up with a new trade policy which characterized
by free trade and tries to change the socialist oriented economy of Ethiopia to accepted and
implanted SAP (structural adjustment program). Export diversification is one of the agenda of
the 10 years perspective plan. It is explicitly stated in agricultural development led
industrialization (ADLI).

Some of the export measures which are being taken place is diversifying the countries few
commodity based exports by changing the structure of the sub sector in particular and the
economy in general. This all is in order to bring about socio-economic development. Ethiopia’s
broad based economic growth continued for the sixth time in a row in 2008/9 making Ethiopia
area of the faster growing economies in the world. With a 42.6 percent share in GDP, agriculture
and allied activities rose 6.4 percent contributing 27.2 percent to the overall economic growth
recorded in the fiscal year (NBE, annual report, 2011/12).

As for external sector development the fiscal year 2008/09 witnessed a strong import, slower
export of goods, growth in services and narrowing current account deficit, export proceeds at
USD 1.45 Billion were about 1.2 percent lower relative to last year, well in contradiction to high
average growth rates recorded in the preceding years (ibid).

Poor export performance was attributed to lower export earnings, from coffee, pulses, leather and
leather products and fruits and vegetables among other. On the other hand, export earnings, from
flowers, oil seeds, meat and meat products, chat and gold, exhibited significant improvements
relative to the preceding year. Overall, the ratio of exports to GDP dropped from 5.5 percent to
4.6 percent reflecting structural rigidities in export sector and lack of competitiveness (ibid).

The growth in agricultural outputs was largely attributed to improved productivity through better
use of modern agricultural inputs, favorable weather condition and 2.3 percent expansion in
cultivated land. In general, the overall economic growth of the country was highly dictated by
the performance of the agricultural sector. Looking in to the sub-components of agriculture, the
crop sub-sector has always been the main driving force. The production of major crops including
cereals, pulses and oilseeds increased by about 6.2 percent in 2008/09.

4.2. The export structure

The export structure of country can be classified as concentrated and deconcentrated.

Concentration of export implies a dominance of one or two commodities in the export of the
country. Deconcentration on the other hand, show the absence of any dominance by any one or
few products from the total export. It also implies the introduction of new export products and
consequently building wide and diversified export structure. The export structure of a country
can also be seen from the composition of export dominance of primary commodities such as,
food, raw material, minerals, etc:, in the silent features of the less developed countries. The
conventional wisdoms is the dependence on primary commodity export is liable to quantity and
price fluctuation as a result of supply side, demand side or the combination of the two shocks.
Ethiopia’s external trade is characterized by exports of primary commodities and imports of
manufactured goods. The export sector in particular was characterized by huge fluctuation and
extreme dependence on few primary commodities (Alemayehu and Berhanu, 1998).

The Ethiopian export sector can be said a three commodity sector in the sense that its foreign
trade heavily on export of few products such as coffee, hides and skins, and pulses, Ethiopia’s
diversification index of which is an evidence of near complete specialization of the export sector
in a few commodity (Yohannes Ayalew, 1997/98). Being under developed economy that heavily
depends on agriculture. The structure of Ethiopian export is dominated by agricultural products,
which alone accounted for more than 90 percent of the export proceeds of the country in
complete agricultural products, coffee account the lion’s share with around 35.8 percent in total
exports a year earlier. On the other hand, export item, increased by 62.8 percent due to 88.7
percent surge in volume off setting 13.7 percent decline in international price. Consequently, the
share of oil seeds in the total exports rose to 24.6 percent from 14.9 percent in the preceding
fiscal year (NBE, annual report, 209/10).

Similarly, due to increased export to the Middle East and better international prices, revenue
from meat and meat products and live animals went up by 27.3 percent, respectively. Similarly,
export revenue from pulses dropped to 36.8 percent because of 40.8 percent fall in the volume of
export despite 6.7 percent increase in international prices. Thus, the share of pulses in total
exports shrank from 9.8 percent to 6.3 percent during the review period (ibid).

Developing countries such as Ethiopia are characterized by shortage of foreign exchange

required to realize most development projects. One of sustainable sources of financing is growth
of the export sector. As can be read below from the table, however, exports as percentage of
GDP were in the vicinity of 6.7 percent in the last decade while import as GDP range from 33.2-
27.8 percent.

Table 2. Component of external trade as percentage of GDP

Particulars 2010/11 20011/12 2012/13 Percentage change

A B C B/A C/B

Export 6.7 8.7 9.5 29.9 9.2

Imports 27.8 26 33.2 -6.5 27.7

Trade balance -21.1. -17.4 -23.7 -17.5 36.2

Net service 1.5 2.2 0.2 40.9 -89.6

Net private transfers 15.5 14.5 15.1 -6.5 3.9

Current account deficit -10.4 -6.5 -13.8 -37.4 110.6

(without official transfer)

Current account deficit (with -4.0 -0.7 -8.4 -

official transfer)
Source: NBE, annual report, 2011/12

4.3. Commodity concentration and geographic concentration

4.3.1. Commodity concentration

Commodity concentration is to mean the export of a country is constituted of a few commodities.

In the case of Ethiopia like other less developed countries is constituted of primary commodities
which are mostly agricultural base or origin. Ethiopia’s exports are largely concentrated on
primary commodities such as hides and skin, oilseeds, pulses, fruits and vegetables, chat, coffee,
flowers, live animals and meat and meat products. The concentration of commodities is
measured by using Gini-coefficient/Hirschman coefficient.

2 cov (X−Y )
Gini-coefficient =
X

X = share of export dominance commodity

Y = share of other commodity

x = mean of share of dominance commodity

The coefficient is expressed in percentage terms. It is indicated that the lower the coefficient will
be the larger the number of goods to be exported that is to say exported is diversified.
Table 3. Commodity wise export performance of Ethiopia

Year Coffee Oil Hide Pulses Meat& Fruit& Live Chat gold Flower Other Total
seeds & meat veg. animal
skin prod.

1991/92 52.8 0.12 18.4 0.12 28.5 100

1992/93 56.6 0.13 14.2 0.43 28.7 100

1993/94 50.6 3 14.3 0.2 30 100

1994/95 63.5 2 13.2 4 18 100

1995/96 66.1 2 12 4 17 100

1996/97 59.6 2 11 2 27 100

1997/98 69.8 8 8 3 12 100

1998/99 58.1 7.5 11 2 27 100

1999/00 63.5 6.5 7 2 15.6 15.4 100

2000/01 38.5 7 13.5 2 5.5 33.5 100

2001/02 36.1 7 11 7.3 37 100

2002/03 34 9.5 7.2 4 12 29.5 100

2003/04 37.2 7.2 8 3.7 14.7 30 100

2004/05 39.6 8 8 5 11.8 27.6 100

2005/06 35.4 10.8 8 14 8.9 12.9 100

2006/07 33.8 15.8 7.6 5.9 1.3 1.4 3.1 7.8 8.2 5.4 7.7 100

2007/08 35.8 14.9 6.8 9.8 1.4 0.9 2.8 7.4 5.4 7.6 7.2 100

2008/09 26 24.6 5.2 6.3 1.8 0.8 3.6 9.6 6.8 9 6.3 100

2009/10 26.4 17.9 2.82 6.5 1.7 1.56 4.53 10.46 14.05 8.5 5.62 100

2010/11 30.64 11.89 3.78 5.02 2.31 1.15 5.4 8.7 16.81 6.4 7.98 100

2011/12 27.05 15.4 3.6 5.02 2.44 6.5 7.84 19.44 6.48 6.32 100

Source: NBE, annual report 2011/12

The share of coffee decrease from 1991/00 average level of 60 percent to 33.4 percent in
2000/01 – 2011/12 but in the share of other commodity or addition of new commodity to export
has increased in 1991/92 -1999/00 average level of 22.6 percent to 38.34 percent in 2000/01 –
2011/12. in general decrease share of dominance commodity of high percentage share increase
the other commodity come to export item and the introduction of new export commodities in
international trade.

The major four commodities (i.e. coffee, pulses, and oilseeds, hides and skins and chat) alone
accounting for over 70 percent of total export. This shows that there is no significant change in
the concentration of Ethiopia’s export and almost all Ethiopia’s export are concentrated or
classified as agricultural products.

4.3.2. Geographic concentration

In general, Ethiopia’s export are characterized by high commodity concentration and this
concentration is on primary commodity especially coffee. Besides to this the export structure of
Ethiopia is highly undiversified that dependence on a single commodity which highly subjected
to both internal and external shocks. This circumstances or conditions result in the reduction of
foreign exchange earnings and in return has a negative impact on the export sector in particular
and the growth of the economy in general (NBE, 2011/12).

The bulk of less developed countries export continues to be consigned for developed market
economy countries, which are mostly western countries. Ethiopia like the rest of developing
countries has trade relation with a few countries. This explains the presence of geographic
concentration most of the export-import relationship was established with non-African countries,
which are more developed countries. The most important market for Ethiopia’s exports are
Germany, Saudi-Arabia, Japan, Italy, USA and China, Asia, Europe remaining the largest market
for Ethiopia’s exports during 2011/12 accounting for 41.7 percent of the country’s total exports.
Among the European countries, Germany, which mainly imported coffee and flowers, was the
largest buyer of Ethiopian goods. The Netherlands, the main destination for Ethiopian flower
exports during the review period, was the second biggest market in Europe followed by
Switzerland, the sole importer of gold from Ethiopia. Italy whose main imports include leather
and leather products, coffee and textile and garments held the fourth place. Exports to the Asian
market accounted for 35.6 percent, of which 35.3 percent went to China, 21.6 percent to Saudi-
Arabia, 11.2 percent to United Arab Emirates (UAE) and 7.8 percent to Israel, while meat, the
major export items to China include oilseeds, leather and leather products and skins. Meat and
meat products, coffee, live animals as well as oilseeds consisted of the bulk of exports to Saudi
Arabia, while meat and meat products, pulses and live animals were the major items exported to
UAE. Israel mainly imported oilseeds from Ethiopia. Meanwhile, 16.6 percent of Ethiopia’s
exports were exported to three neighboring countries namely, Somalia, Sudan and Djibouti
(ibid).

Chat was the principal export item to Somalia followed by live animals. The major export to
Djibouti includes chat, pulses, fruits and vegetables. Sudan mainly imported coffee, pulses, live
animals and species.

The share of the America’s in total exports was 5.4 percent of which 13 percent was to the
United States of America 9.8 percent to Canada and 1.6 percent to Mexico. The main export
items to the US were coffee and oilseeds.

Table 4. The major markets of Ethiopian export in percentage

Country Export share in %

Europe 41.7

America 5.7

Asia 35.6

Africa 16.6

Oceania 0.4

Source: NBE, annual report of 2011/12

During the third quarter of 2009/10 Europe was accounted for 38.5 percent of the country’s total
export. Among European countries, Switzerland, the sole importer of Ethiopia’s gold, remained
the biggest market followed by German, which mainly imports flower. The Netherlands, the
main importer of flower and vegetables was the third largest destination for the country’s export
commodities, followed by Belgium that principally imports coffee.

Exports shipped to Asian markets during the review quarter constituted 32.7 percent of the total
export volume of the exports to Asia, China and accounted for 39.7 percent, Saudi Arabia 17.9
percent, Israel 12.7 percent and United Arab Emirates (UAE) 8.8 percent. The major export item
in China was oilseeds, while live animals, pulses, meat and meat products were the main export
items to UAE. Export products to Saudi Arabia comprised of coffee, oilseeds, and meat and meat
products, while oilseeds were the main export to Israel.

About 24.7 percent of total exports went to African countries of which Somalia, South Africa
and Sudan together accounted for 77.5 percent.

Somalia was the main market of Ethiopia’s chat (92.2 percent) Gold was major export to south
Africa whereas pulses, coffee and live animals were export Sudan America accounted for 3.8 of
Ethiopians total exports of which USA and Canada make up 86.1 and 13.1 percent respectively.
The principal export products sent to USA include coffee and oilseeds while canapé imported
coffee. (NBE,quarterly bulletin, 2011/12)

From the above analysis, it can be concluded that Ethiopian export is dominated not only by
commodity concentration, but also geographic concentration. In general, it can be concluded that
few primary commodities which have limited market outlet, dominate Ethiopians export sector.
This makes the country is more vulnerable to these countries the number of countries that
Ethiopians export is arrived as much as possible by making the exportable items qualitative and
competent.
4.4 The contribution of export diversification

Many studies explain Ethiopia has potential to decertify in both primary and manufactured
commodities polices factor endowment and linkage effect (Gila, 1996 commodity export
diversification must however take in to account current and future demand and supply export
diversification must however take in to account current and future demand and supply of many
commodities and possible constitution among products (UNCTAD,1987).

In less developed continues like Ethiopia which are characterized by exporting of primary
commodities’ are particularly suffering from fluctuation in their export earning and these
fluctuations constrictive of developing countries when economies are dependent on just one
export commodity their foreign exchange position is frequently price fluctuation in export
markets may make implementation of development project as foreign exchange earnings cannot
be relied up on in so far as this case some diversification out of primary product in to secondary
good is cleanly described (Wilson,1984).

Other purpose of diversification measure is it often provide valuable means of earning, positive
impact on the balance of payments recorded a surplus of USD 88.1 million compared to a deficit
of USD 40.5 million in the corresponding period of last year this reflects good export
performance, higher receipts from net service and private transfers as well as increased loan
disbursements from abroad and growing foreign direct Investment (NBE, quarterly bulletin
200/10).

According to many studies diversification measure towards commodities to which world demand
is relatively dynamics accepted by less developed countries like Ethiopia from this we can
observe that there is financial recovery therefore, commodity diversification was found to be a
major factor in improving export earnings growth reducing export instabilities and increase
economic growth at large.
Table 5: the performance of export sector (in thousands of birr)
year export import GDP Export Export/import
GDP

1996/97 3,901,671 7,708,246 58318580 0.067 0.51

1997/98 4,141,582 8,505,200 56,375,892 0.074 0.49

1998/99 3,637,260 9,338,459 55,536,406 0.065 0.39

1999/00 3,957,802 11,70,004 62,907,790 0.063 0.34

2000/01 3,856,606 11,438,661 63,667,854 0.061 0.34

2001/02 3,864,320 12,313,956 62,152871 0.062 0.31

2002/03 4,142,350 14,485,289 68,713,124 0.06 0.29

2003/04 5,176,644 16,067,348 79,779,366 0.065 0.32

2004/05 7,331,258 22,295,670 98,688,560 0.075 0.33

2005/06 8,685,376 39,873.075 122,950,117 0.071 0.22

2006/07 10,457,615 45,126,438 161,003,200 0.065 0.23

2007/08 13,643,332 63,146,946 233,477,821 0.058 0.21

2008/09 15,217,279 84,677,193 319,186,908 0.048 0.18

2009/10 25,115,306 108,956,272 348,686,562 0.072 0.23

2010/11 44,525,565 129,693,362 466,215,319 0.096 0.34

2011/12 54,494,767 191,587,139 681,723,612 0.079 0.28

2012/13 56,014326 196,871,016 782,084,364 0.077 0.28

Source Ethiopian customs authority (ECA)(2012/13).

Export earnings have should a continues revival in the years following the reform reaching a
level of 56,014,326 thousands of birr in 2012/13 restoring the export earnings capacity of
financing import a back to the 1996/97 at level of 6.5 percent share of GDP.
The performance of export sector sub-sector during the 1980’s as characterized by stagnation
with the same erratic fluctuation in the same years. During the early 1990’s and the late 2000,s
however, a clear trend of decline in share of export earning was observed further compromising
the performance of export sector.

A marginal decline in share of export earnings on GDP was observed at a level of 9.6 percent in
2010/11 to 4.8percent in 2008/09 which was mainly attributed to the reversal of trends on world
coffee price as compared to the previous years.

From table3 above, coffee was the dominant export commodity accounting for 47.7 percent of
the country’s export earnings and non-coffee commodity accounting for 52.3 of them country’s
export. From this, we can observe that coffee was the dominant country’s export commodity as
compared to the other export items. As a result, this dominance of one commodity leads to the
fluctuation of export earnings of 52 percent from 1991/92 to 27 percent in 2011/12. Therefore,
commodity diversification was found to be a major factor in improving export earnings and
economic growth and reducing export instabilities.
CHAPTER FIVE

Recommendation and Conclusion

5.1 Conclusion

in this study attempts have been made to see the structure and main source of foreign exchange
of the Ethiopian export sector and its impact on the overall economy during the specified period
has been considered from the experience of more developed countries. It can be conclude that in
the process of economic development and growth of as a whole, intentional trade plays a
significance role. However, the role of intentional trade as an engine of the growth in the case of
less developed countries in general and Ethiopia in particular has not been satisfactory. This is
also because the country produces and supplies those goods that have high price and few
agricultural commodities.

As a result of this, the poor nations in general and Ethiopia in particular experienced a reduction
of foreign exchange and declining economic growth throughout their participation in the world
trade activities. Like many less developed countries, Ethiopia was exporter of few commodities
mainly agricultural products and exports to few developed countries.

This concentration of export on few commodities has been dangerous for the economy as the
stability of the export earnings mainly depend up on the value and volume of these few
agricultural commodities in general and that of coffee in particular.

In Ethiopia, the concern for export diversification has started during imperial first five year
development plan, which acknowledged the economic instability of the dependency on the few
products.

Such objectives were strengthened in the second five years development plan and the share of
non coffee commodity products increased and the commodity concentration was relatively small.
Export diversification was also one of the objectives of the ten year perspective plan of the gerg
regime.
Finally, the current government (EPRDF) also acknowledged the importance of export
diversification and is started in the ADLI as well as the accompanying export development
strategy.

The trade strategy of the Ethiopia following pre 1992 has been classified as a strongly inward
looking (oriented) one which made use of extensive tariff and non tariff barriers. Since 1992
there has been progress in policy reforms towards market and price deregulation step been taken
in liberalizing the foreign exchange market, attaining macroeconomic stabilization attracting
investors towards the sector.

Primary products are subject to large shift in the demand schedule because of the change in the
cyclical character of industrial activity in the more developed economies, while other products
have been relatively stable demand pattern. Therefore, primary products can be expected to be
more volatile than manufactured goods, and the export of the country is typically more highly
concentrated on those commodities. In this respect, if the country specializes in the more volatile
products it will tend to show a more marked instability of export revenues for a given
concentration of export than the portfolio consists primarily stable and diversified products.

The case of the diversification rests of the arguments that the major contributes
disproportionately to the fluctuation in the total export earnings. Therefore, it is possible to
conclude that for the country for which the major commodity disproportionately contributes to
the instability of total export receipt, there is a positive relationship between concentration and
earning instability.

5.2. Recommendation

Based on the findings of this study the following policy implication would be drawn. Ethiopia
should take measures to encourage export diversification in terms of both quality quantity
(product differentiation) and niche market for coffee and non coffee commodities.
Based on the export items in which the country has comparative advantage. New commodities
have to be included and efforts should be made to increase their share in the export composition.

Like most developing countries, Ethiopia is characterized by shortage of foreign exchange

earnings as a result of declining export, particularly primary commodities, which are a
significant part of total export earnings of the country and destined to a small number of export
market, mainly the European Union and North America. The problems related to regional trade
is that it is constrained by poor transport and communication system. For this reason, it should be
increase the export items by reducing geographic and commodity concentration by using
diversification of commodities and foreign to increase the foreign markets exchange earning and
to created good communication system.

In addition to the exiting export items like coffee, hides and skins and chat, pulses and oilseeds
flower and live animal, other mainly agricultural commodities such as sesame seeds, maize,
beans, horticulture, cotton, fish, bee's wax, teff, sorghum, processed and semi processed product
should be add to export mix to enhance the export performance of the country.

Trade liberalization policy and devaluation in Ethiopia should be expected to increase the value
and volume of agricultural export, which are the main sources of foreign trade and enhancing the
country's competitiveness in the foreign market.

They should develop research and development on export and market structure and diversifying
the potential resource or agricultural commodities through efficient utilization of resource.
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