ETIOPIAN ECONOMICS ASSOCIATION DHUGAA

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Acknowledgement

First of all I would like to thank GOD for the help that I receive from the beginning to the
end.

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Then my deepest gratitude goes to may advisor Ato JIBREL HAJI (Msc) without whose
support and assistance the completion of this research would have been impossible.
I am also indebted to my secretary W/O Ledet Abera She bore with my illegible
handwriting script and produce a document.
The assistance of my family and my friends cannot be left unmentioned.

Abstract

Ethiopia like other developing countries is highly dependent up on earnings from the
sales of primary commodities and concentrating on small range of export commodities
and market outlays to finance much needed capital goods imported. Thus, the country’s
exports have failed to finance its import demand this makes the country to record

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frequent trade deficit in international trade. So that, investigation on trade balance, its
structure, volume and value and the factor that affect it is necessary. The research
therefore, aims at dealing mainly with determinant of trade balance in Ethiopia and
investigating the structure, value, volume and direction of export and import in Ethiopia.

This study uses unit root test,

The main finding of this paper are : (1 lag trade balance and REER shows a long run
positive relationship with trade balance .However , Real GDP is insignificant in the long
run. (2) REER shows a short run negative relationship with trade balance. On the other
hand Real GDP, lag trade balance, and trade openness are insignificant in the short run
estimation.

List of Acronyms
GDP = Gross Domestic Product
NBE = National Bank of Ethiopia
LDCs = Leas Developed Countries
BOPs = Balance of Payments
WTO = World Trade Organization

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IFS =International Financial Statistics
OECD = Organization for Economic Cooperation and Development
GATT = General Agreement of Tariff and Trade
TOT = Terms of Trade
CSA = Central Statistical Authority
MOFED = Ministry of Finance and Economic Development
FDI=Foreign Direct Investment

TABLE OF CONTENTS

Acknowledgement........................................................................................................I
Abstract........................................................................................................................II
List of acronyms ..........................................................................................................III
List of tables and figure................................................................................................VI

IV
CHAPTER – ONE

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

1.1 Background of the Study ...........................................................................1

1.2. Statement of the problem..........................................................................4

1.3 Objective of the study ...............................................................................6

1.4 Significance of the study ...........................................................................6

1.5 Scope of the study .....................................................................................7

1.7 Limitation of the study...............................................................................7
1.8 Hypothesis ...............................................................................................8
1.9 Organization of the study...........................................................................8
CHAPTER TWO

2. LITERATURE REVIEW

2.1 THEORETICAL REVIW

2.1 .1 DEFINITION AND CONCEPTS OF TRADE BALANCE

2.2. Determinantes of Trade Balance...........................................................................11
2.2.1.1 Commodity Concentration.......................................................11
2.2.1.2 Trade policy in developed countries........................................12
2.2.1.3 Price and income elasticity for exports....................................12
2.2.1.4 Trade Policies in Developing Countries .................................13
2.2.1.5 Real Exchange Rate and Trade Balance ..................................16
2.2.1.6 GDP and trade balance ...........................................................17
2.2.1.7 Trade openness and Trade Balance .........................................18
2. 3 Empirical Literature.............................................................................................. 19

CHAPTER THREE
Ethiopian Foreign Trade ..............................................................................................22
3.1 Foreign Trade polices ............................................................................................22
3.1.1 The Pre-Reform Trade Policy ................................................................22
3.1.2 The post Reform Trade Policy ...............................................................23
3.2 The Performance and structure of Export ............................................................25

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 3.2.1 The Role and performance of Export .....................................................25
3.2.1.1 Trends in volume and value of Export (pre-reform period) ....26
3.21.2 The Trend in volume and value of export
(Post Reform period) ...........................................................................29
3.2.2 The Structure of Export ..........................................................................33
3.3 The Structure and Performance of Imports .......................................................................36
3.4 Trade balance .....................................................................................................................40
CHAPTER – FOUR
4. Econometric Analysis .........................................................................................................44
4.1 Data Sources and Methodology .........................................................................................44
4. 2 Model Specifications ........................................................................................................46
4.3 Explanation of the variable ................................................................................................46
4.4 Estimation Results and Analysis .......................................................................................48
4.4.1 Time Series Characteristics of the Data ...........................................................48
4.4.2 The long Run Trade Balance Equation .............................................................49
4.4.3 Dynamic Specification of Trade Balance ..........................................................51
CHAPTER FIVE
5. Conclusion and recommendation ........................................................................................54
5.1 Conclusion ......................................................................................................................54
5.2 Recommendation ............................................................................................................56
Reference .................................................................................................................................58

LIST OF TABLES AND FIGURES

Table: 3.1 percentage of export (EXP) to GDP, Import to GDP and Exp/imp ........................25
Table 3.2 volume of exports by major commodity Groups (million of kgs)............................27
Table 3.3 The value of major Export commodities (in million of birr)....................................28
Table 3.4 volume of Export in the post reform period..............................................................30
Table 3.5 The share of major export commodities in the total export value.............................32
Table 3.6 Direction of trade (percentage of Total)....................................................................35
Table: 3.7 percentage share of the value of imports, by end use........................................39

Table: 4.1 Dickey Fuller class Test ..........................................................................................48

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Table: 4.2 The long run OLS estimation ..................................................................................50

Table: 4.3 Modeling the Dynamic of Trade balance by OLS...................................................50

Fig 3.1 total export and import .................................................................................................41

VII
 CHAPTER - ONE
1.Introduction
1.1 Background of the Study

International trade has been going for thousands of years. Different thinkers have been
writing lots about the causes of international trade. including the merchandise idea, which
missed the main point of what trade is all about and there by failed to recognize that its
conclusions were valued only in certain cases rather than in general (Willian Son, 1982),
lots have been said on the issues.

It is clear that every nation is operating in international trading system. An international

trading transaction takes places because someone in one country has something that some
on another want to buy. Nature has also endowed different countries with different
resources. The differences among countries in terms of natural resources oblige countries
to involve in international transactions of good and service. Though, Ethiopia is a country
endowed with favorable environment and enormous natural resources, the country’s
involvement in international trade is inevitable and very important for its development;
accordingly, the country has been involving in the system (Tura, 2001)

with the country moving towards market-oriented economic system, trade reforms as an
integral part of the structural adjustment program have been implemented. Essentially,
the policy regime has shifted from a controlled regime towards ‘more liberalized’ one. By
so revising its trade and exchange rate regimes the country was adjusting its trade to the
rest of the world, which was globalizing at a fast pace, and the international monetary
fund inspired and supported structural Adjustment program(EEA Annual Report,2001).

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In their effort for faster economic growth, developing countries heavily depend on import
or capital goods and intermediate goods from developed countries. To finance their
import, they depend on their export earnings. However, developing countries export
sector is characterized by fluctuation in both value and volume and this instability
restraint the economic growth of developing countries. In addition, as some portion of
their GDP is derived from trade, developing countries are high vulnerable to the external
world (Ibid).

As we said above developing countries experience fluctuation in the price of their

primary exports. The main reasons for this according to Salvatore (1998) are inelastic
demand and unstable supply. The demand for primary exports of developing nations is
price inelastic since households in developed nations spend only a small proportion of
their income on primary commodities. And on the supply side, the supply of the primary
exports of developing nations is price inelastic because of internal rigidities and
inflexibilities in resources used in mast developing nations.

On the other hand, developing countries are importing those commodities whose prices
are increasing over time. Hence the foreign earning they get from their deteriorating
exports will not be enough to cover their import .Adding to this; their import demand is
increasing over time, which will worsen the situation. Thus, the problem faced by
developing countries could be judged from their economic interaction with others
countries and this interaction is reflected in the country’s Trade balance. This being the
case, we could argue that, for many developing countries the Trade balance has not been
satisfactory. Ethiopia is one of the developing countries cannot escape this fact(Ibid).

In spite of those various policy measures, growth in revenue from export was not only
unstable but also failed to match the increase in volume (Annual Report on the Ethiopia
economy, 1991/00). Moreover, basic structure of the Ethiopia is export remain
unchanged.

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On the contrary, the country’s import as percentage of Gross Domestic product (GDP)
has sharply increased from 4.7% in 1950, 9.5% in 1996 and 9.2% between 1970 and
1974 (sheferawe,1995) to 13.5% and 24% of GDP in 1992/93 and 1999/00 respectively
(NBE,2001).Import as percentage of GDP keep on increase like, 26.4% and 30.4% of
GDP in 2006/07 and 2007/2008 respectively (NBE,2007/08).As a result, Ethiopia trade
deficit increased on average per annum by 2.3% during the period of 1967/68-1973/74
(Equar,2001).In a similar way, the deficit increased on average per annum by 8.5% and
12.7% during the period 1985/86-19991/92 and 1992/93-1999/00 respectively
(NBE,Annal Report). Reflecting a continuous surge in imports, which more than offset
the considerable rise in exports, merchandise trade deficit widened from USD 3.59 billion
(23.7 percent of GDP) in 2005/06 toUSD3.94billion(20.3 percent of GDP)in 2006/07 and
further to USD 5.34 billion (23.8 percent of GDP) in 2007/08 (NBE, annual Report).

For a country to have a sustainable positive balance and to set out of the trade deficit and
its consequence, a study on the factors behind the problem and the trade balance in
general has importance.

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1.2. Statement of the problem

Ethiopia ,one of Least developed countries (LDCs ), besides their poor economic
performance are often exposited to trade deficit ( the value of good and service they
export is by far less than the value of good and service they import). The country apart
from being the poorest nation in the world is running a persistent trade deficit, the main
reason for such deficit is its commodity concentration (exceedingly high depend on a
agriculture exports, coffee in particular) and geographical market concentration (export
and import concentration mainly on Europe, north America and Japan) on the hand and
import of basic goods on the other hand (Alemayehu, 1999). Basically, there has been no
decline in the dependency level of primary commodities. In other word no shift towards
the export of semi-processed or manufactured goods this implies the earning from export
is very law and unable to cover to import need of the country.
The country has implemented several foreign trade reforms with the objective of
encouraging export and liberalizing import since 1992 (Mulu and Tarekgn, 1999).
Consequently, the previous restrictive trade policies have been relaxed, various measures
have been taken since Oct 1992, subsequent to the initial measures of devaluation of
national currency. In spite of these facts, Ethiopia has never experienced surplus trade
balance in its history except in 1972 /73 and 1973/74 (NBE reports, various issues). More
specially, the trade deficit of the country as a percentage of GDP widened by 58% from
an average of 8% during the per- reform period relative to 13% of the post reform period
(Annual Report on the Ethiopia economy, 1999/00).

However ,the country implemented several trade reforms, it is still running a

persistent trade deficit .This implies, the existence of internal and external factors that
may affect the trade balance of the country from the internal point of view, different
literature Stated that GDP of the country, trade liberalization, Natural obstacles to trade
(transportation cost), foreign exchange availability, exchange rate, and government
policies as determinant factors .The availability of foreign exchange rate and the rise in
national income of the country may encourages the demand for import and thereby
deteriorate the trade balance Alemayehu (1999) also noted that commodity concentration

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and market (geographic) concentration as factors that make the trade balance of the
country worsen.
The external factors involve international and individual country’s trade and related
policies. The rules established by international organizations such as the world Trade
organization (WTO) may in the long run promote external trade. In the short run
however, the degree to which globalization pressurizes developing economies to open up
without allowing enough time to prepare for the challenges, could have a serious
repercussion on their export performance (World Bank policy research paper, 2002). The
protective polices of countries through tariffs and now tariff barriers, such as agricultural
polices of some European countries under pressure from internal industries constrain
exports of developing countries (Shafadin, 2002).The world income also affects the trade
balance of the country positively through encouraging exports.

Thus, because of the above mentioned and other related problem, the Ethiopian Foreign
trade sector is unable to play most of its major role in the development process of the
country. It is this scenario that initiates me to do this research.

This study, therefore, is intended to deal with those factors that influence the countries
trade balance.
Therefore, this study trie to answer the following question.
 IS there any possibility that help to improve trade deficits of the country?
 How trade deficit affect balance of payment?
 How much income Ethiopia received from the foreign trade?

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1.3 Objective of the study
The general objective of the study is to examine the determinants of trade balance in
Ethiopia.

The specific objective of the study will be to:-

 Analyze the structure, volume, value and direction of export and import of
the Country.

 Examine the impacts of trade deficits on balances of payment.

 Give highlights on policies and measures taken by the government to deal

with the problem in the both sector.
 Examine the contribution of export and import in the country GDP.

1.4 Significance of the study

Being one of the poorest of LDCs Ethiopians export is dominated by few agricultural
primary products and has been controlled with structural rigidities and demand side
problem. Since an expansion in import has to be matched by the corresponding expansion
in exports it needs a closer look at it.
Therefore, by identifying the determinants of the trade balance, the study may help in
designing measures to improve the country trade deficit. It is important to note that this
study is not the beginning in the study area. So far, there are many researches done by
this Topic.
What makes this study to be unique from pervious studies is that additional variables are
included into the model. The other is the time period included in this study is long
enough.
In addition, the study can be as a reference for those who are interested in making further
investigation the same area of Research in the future.

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1.5 Scope of the study

The study uses different macro- economic variable that are affecting trade balance in
Ethiopia The coverage in terms of time span will be determined based on the availability
of data source on majority of the explanatory variables. For the explanatory part the
research is cover the time span of 1990/91-2010/11. This period is chosen due to the
availability of reliable data.

1.7 Limitation of the study

To compute this research I am faced many constraint and problem like time
constraint ,shortage of computer and internet access ,lack of availability of continuous
time serious data on some macroeconomics variables ,and financial constraint are main
difficulty that are mentioned. Finally because of the absence of data some variables are
gone out of the model .despite, the above difficulty by changing the constraint into
opportunity it is able to accomplish the research in a good manner.

1.8 Hypothesis
At the end of this study it is expected that the sign of each variables as follows:
 Lagged trade balance is negatively related to the trade balance due to the
adverse effect of the previous year trade balance on the current trade balance.
 The gross domestic product (GDP) is negatively related to trade balance this is
because the rise income is expected to encourage import and thereby bringing
about deterioration in trade balance.
 Real Effective exchange rate is assumed to be positively or negatively related
to the trade balance due to the overvaluation or devaluation of domestic
currencies .If the domestic currencies devaluated exchange rate are expected
to be positively related to trade balance The reverse is true.
 Trade openness will have positive effect on trade balance this is because
openness removes trade barriers, directing the illegal exports to official
channels and increasing the countries Competitiveness in international market.

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1.9 Organization of the study

This Research paper is organized and classified into five chapters. The first chapter is the
introduction part which contains the background, the statement of the problem, objective
of the study, scope, methodology, significance, hypothesis and limitation of the study.
The second chapter will be concerned with review of related literature this part contain
both the theoretical and empirical literature. The third chapter will discuss about trade
regime on Ethiopia, volume and value, structure and direction of export and import of the
country. The fourth chapter will focus on methodology and model specification with
estimation and interpretation of the results finally; the last chapter of the paper will be
conclusion of the study and recommendation based on the finding of the study.

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CHAPTER TWO
2. LITERATURE REVIEW
2.1 THEORETICAL REVIW
2.1 .1 DEFINITION AND CONCEPTS OF TRADE BALANCE

Trade balance is the Relation between the Merchandise exports and imports of a
country .The concept first became important in the 16 th and 17th centaury with the growth
of Mercantilism. Mercantilist theorists believed that a country should have an excess of
exports over imports (i.e. favorable balance of trade) to bring money, which they
confused with wealth, into the country. The urged legislation to restrict the use of foreign
good, encourages exports, and forbid the export of bullion. The importance of a favorable
balance of trade remained unchallenged until David Hume, Adam smith, David Ricardo,
and John Stuart Mill concerned themselves with theories on the adjustment of balance of
trade. The classical theory of the mechanism is that country whose exports fall short of its
imports must export part of its stock of gold there by affecting its price structure and its
ability to compete on the world market. Today the balance of trade is regarded as only
one of several elements that make up the BOP of nation; the U.S department of
commerce issues reports on the current status of the BOT in goods and services on a
monthly basis. since the 1980 the value of U.S import has greatly exceeded exports,
resulting in large trade deficit that complicated U.S relation with its trading partner,
particularly Japan, china, and united states partner in the North American free trade
Agreement Canada and Mexico (The Columbia Encyclopedia, 2004).

Douglas (1983) and Meade (1951) define trade balances as the difference between the
value of good that a nation export and the value of the good that it imports. Douglas
furthers remarked that the trade balance differs from the BOP in that it excludes capital
transactions, payments of service and shipment of good. In other words, trade balance is
only one part of the total BOP.

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Trade balance according to Mannur (1983), is said to be favorable when exports of good
exceed imports “Unfavorable otherwise .But for Salvatore. D (1990), this is not always
the case he noted that a positive trade balance being favorable is somewhat misleading.
The reason mentioned by him is that a nation having a positive trade balance means the
nation has fewer goods to consume domestically, due to high domestic price. There is
also a case that higher credit balance as compared to debit balance is favorable .This is
when an economy wants to encourage domestic investment, which demand modern
technology

2.2 DETERMINATES OF TRADE BALANCE

2.2.1 Commodity Concentration
Lack of diversity and lack of ability to change are two of the main symptoms of
underdevelopment .Many poor countries lack financial and technical capacity to support
a wide range of industries and particularly of secondary industries capable of exporting
processed good and services. The implication of this is, the cash economy of many
LDC’s become based almost exclusively on the export of few commodities in their raw
and unprocessed form (Khar Mohesions ,1974).

As per the word discussion paper (2001), Africa is more heavily dependent on
agricultural exports than any other developing countries. Besides, it is also most heavily
dependent on a narrow range of agricultural export commodities. Fosu (2001) also noted
that, a number of structural impediments hamper export diversification (which
appreciates the trade balance) into Manufactures in the poorest countries especially in sub
Saharan Africa. In general, the more is a country’s dependence on one commodity or on a
narrow range of products, the greater is the likelihood of fluctuations on total export
earning and trade balance.

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Market concentration is the other problem that Affect the trade balance of developing
countries .According to, Baban and Greene (1992) noted that one of the reason for the
poor export performance of developing counties in general and sub-Saharan Africa in
particular is the failure of these countries to make major inroad on to new geographical
markets for their export.

2.2.1.2 Trade policy in developed countries

Trade barriers in the industrialized countries impose cost up the developing world which
substantially exceeds, in the aggregate, the total flow of official development assistance
(G.K Helleiner, 1994).The common wealth secretariat (1982) stated “protectionist
measures (in industrial countries) discriminate against developing countries has been on
the products on which these countries are primarily interested that most of the new
quantitative restrictions has been imposed, but it is also the developing countries
(especially the poorer ones) which severed most.

The restrictive measures applied to imports by the industrial countries, according to

World Bank report (1994), lower the whole vast range of primary items, except for those,
which by their nature can be produced domestically in these developed countries.
Currently in spite of the large number of African countries are in the world Trade
organization (WTO). Their bargaining power, as a group is quite Weak, and they have
usually not acted in concert to articulate and defend their common interest’s .To some
extent the negative impact of excessive tariffs is offset by preferential access schemes
such as the generalized system of preferences (GSP) and other related programs. These
should, in principle, help developing country exports overcome high tariff hurdles. In
practice, Preferences tend to be limited (The World Bank Economic Review, 2002).

All the above policy measures in industrialized countries against developing countries
exports result in a decline on the expansion of export, which means shortage of export
earnings and thereby a decline in the trade balance.

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2.2.1.3 Price and income elasticity for exports

Developing countries that are heavily dependent up on earnings from the sale of primary
products and concentrating on small range of communities and market out lays to finance
much needed capital goods imports, have shown substantial concern with the instability
of their export proceeding In the large part, this concern is emanated from the fact that
commodity prices and consequently foreign exchange earnings have exhibited a tendency
towards secular instability (International Economy, 1996).

Because of lower income and price elasticity of demand for agricultural and primary
products and also due to unstable supply of these products, due to factors such as weather
condition greater specialization, on them can result great instability of income. The
general point is that the developing countries exports, which are mainly primary, are sold
in a few industrialized countries where their demand is very low. According to singer
(1987), a principal factor that has reduced relative demand growth for developing
countries export products is the growth of synthetic products, which have displaced
natural products. This reduction on the growth of demand has therefore, other thing being
equal, resulted in less upward pressure on primary products price.
In short, since developing countries exports with low price and income elasticity and
import goods with high price and income elasticity, they are highly suffer from foreign
earning instability and trade balance deterioration.

2.2.1.4 Trade Policies in Developing Countries

Among the various determinant factors of developing countries’ trade balance domestic
trade policies have also played a notable role (World Bank various reports).These trade
polices affect the trade balance of the country directly through trade and exchange rate
polices and indirectly through a direct influence on agriculture and manufacturing
sectors.
World Bank reports (1994and2002) noted that, African farmers have faced the world’s
heaviest rates of agricultural taxation. They were taxed explicitly through producer price
fixing, export taxes, and taxes on agricultural inputs. They were also taxed implicitly
through overvalued exchange rates that reduces the prices they obtained for their exports,
and through high levels of industrial protection, which raised consumer price index. Due

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to this excessive direct and indirect taxation of farmers by African government, the
African agriculture (the lion share of Africa export) has been in poor performance .In a
similar fashion; the African industrial sector also faced various restrictive trade policies
like overvaluation of exchange rate, tariff and quantitative restrictions price control and
nationalization.

2.2.1.5 Real Exchange Rate and Trade Balance

Exchange rate is the price at which one national currency can be exchanged for another.
An increase in the price of foreign exchange from the viewpoint of the home country is a
decrease in the price of that country’s currency for the rest of the world. The term
overvaluation and devaluation refers to exchange rate change in response to market force
(chacholiade, 1981.).Overvaluation of a currency means that the currency becomes
expensive relative to other country currencies. Similarly, devaluation of a currency means
that the currency becomes cheaper relative to other country currencies

Depreciation of the currency has great impacts to trade balance but the impact may vary,
probably due to different level of economic development one of the prominent impact is
the marshal- Lerner condition, which represents that real depreciation leads to increase
the trade balance in the long run if sum up value of import and export demand elasticity
exceed one .Real depreciation improves the trade balance through two different channels.
Firstly, increase quantity of export. Depreciation of the currency reveals the domestic
goods cheaper as compared to the foreign goods, thus making export more competitive.
Secondly, quantity of import decreases as import is relatively more expensive.
Alternatively, amount of export and import may not responsive at initial period of
depreciation .Thus; trade balance may be worsening first due to decrease in value of
export and increase in value of import but improves after some time. This make scenario
knows as J-curve (Fan and shek, 2006).

13
2.2.1.6 GDP and trade balance

The demand theory of Money is that when income increases, people will have more
money and the purchasing power rises so that they tend to buy more domestic and foreign
goods and services. Hence, imports also increase. Theoretically, the income elasticity of
demand for import is positive in some cases, it may be negative theoretically if imports
are lower in consumption “if imports are the excess of domestic consumption over
domestic supply, then income elasticity for import could be Negative if domestic supply
is more income elastic than domestic consumption (EQwalkahide, 1999:13-14).”

Trade balance is a component of GDP other things equal; a surplus increase GDP and
deficit reduce it. It this impact is strong enough, it gives rise to the traditional Keynesian
multiplier effect with consumption moving in the same direction. In particular, long
lasting trade deficit can lead to foreign debt, on which country has to pay interests. If this
debt is Judged by market agent as uncontained because, a currently crises can erupt. Even
before that this perspective Materialize. The government can be induced to dampen GDP
growth (Patrick, 2001)

Perhaps the great emphasis placed on national Income accounting today is an important
reason the naïve form of Mercantilism lives to basic National income accounting GDP is
consumption (c) plus investment (I) plus government spending (G)plus export(X) Minis
import (M) that is
GDP = + G +I + G+X-M

2.2.1.7 Trade openness and Trade Balance

Trade openness refers to the level which countries or economies allow or have trade
with other countries or economies. The trade openness index is used to calculate the
trade openness. More open economies generally have greater market opportunities,
but may simultaneously also face greater competition from businesses from other
nations. The Openness Index is an economic metric calculated as the ratio of country's
total trade, the sum of exports plus imports, to the country's product. The interpretation
of the Openness Index is the higher the index the larger the influence of trade on
domestic activities.
The trade-to-GDP ratio is frequently used to measure the importance of international
transactions relative to domestic transactions. This indicator is calculated for each

14
country as the simple average (i.e. the mean) of total trade (i.e. the sum of exports and
imports of goods and services) relative to GDP. This ratio is often called the trade
openness ratio, although the term "openness" may be somewhat misleading, since a
low ratio does not necessarily imply high (tariff or non-tariff) barriers to foreign trade,
but may be due to -factors such as size of the economy and geographic remoteness
from potential trading partners.
Indicator definition
The indicator is defined as follows (at current prices, current exchange rates):

Imports + exports (both goods and services)

----------------------------------------------------------------
GDP

2. 3 Empirical Literature
Ethiopia, like other developing countries is highly dependent up on earnings from the sale
of primary commodities and concentrating on small range of export commodities and
market outlays to finance much-needed capital goods imported .Thus, the country’s
exports have failed to fiancée its import demand. Basically, there has been no decline in
the dependence level; however, the government has undertaken several reforms. A
number of empirical studies on the factors that affect trade balance have been done
nationally and internationally.

Commodity and market concentration is one of the factors that affect the trade balance of
the country, according to Alemayehu (1999), are the two notable determinant of
Ethiopian external trade has major structural problems. It is extremely dependent on few
primary commodities, which have low and/or insignificant price and income
elasticity.Tura(2001)also tried to show that commodity concentrations has a negative
impact on export demand .From the market concentration point of view, Alemayehu
(1999) further remarked that the destination of Ethiopian export very limited mainly
Europe, north America and Japan, Among these countries according to him, Europe has
got the lions share. Finally, he concluded that commodity and market concentrations have
made the Ethiopian Export performance poor and inadequate to cover its import need.

15
Trade openness is thought to be one of the factors affecting the trade balance.
Equar(2001) and berhanu (2001) proved that, trade openness in general and exchange
rate policy .in particular are important tools of increasing incentives for export
production. In other terms, trade liberalization makes exports more competitive in
international markers. They also argued that overvaluation of domestic currencies
deteriorates of the economy in general and external sector in particular.

Against the above Findings, Solomon (2000) and Mulu(1999) found that devaluation
could not effectively help in the effort to improve balance of payment deficiencies in
general and trade balance in particulate in Ethiopian by reducing imports and or
increasing exports. Elias (1998) also marked the rational and selective protection can
bring about a superior growth performance than non selective liberalization.

The other determinate that affects trade balance is GDP it is obvious that, the growth in
GDP (nation income) of a nation leads to an increase in demand for manufactured goods
(which have low income elasticity of demand) and a decline for primary product (which
have low income elasticity of demand). On the basis of this, Tura(2001) and
Muluneh(1982) found that, the growth in real GDP has a positive influence on Ethiopian
imports, which adversely affected its trade balance. They also show that the growth in
world GDP has an insignificant impact on the Ethiopian Export.
Real exchange rate is one of the determinant of trade balance .Rose(1991) paper
examined the empirical relation between real effective exchange rate and trade balance of
major five OECD countries in the post Britton Woods era. Rose’s study depicts the
exchange rate as insignificant determinant of balance of trade. Rose and yellen (1989)
could not reject the hypothesis that the real exchange rate was statistically insignificant
determinant of trade flows. They examined the bilateral trade flows between the United
States and the DECD countries using quarterly data.

16
Herman Rincon (1999) examined the relationship between trade balance and exchange
rate test for Marshall-Lerner condition in Colombia using Johansen-Juselius method. His
empirical results provided significant evident for the Marshall-Lerner condition.
Rose(1991) reported the Marshal –Lerner condition does not exist in five major OECD
countries (UK, Canada, Germany, Japan, and the USA).Her results also showed
insignificant relationship between trade balance and exchange rate, thus implying that
devaluation could improve trade balance in the long-run .Rose(1991) predicted it would
reveal significant through trade balance treated as exogenous with respect to the
exchange rate-Using co integration test, Hatemi and Irandaust’s (2005)study showed did
not satisfy Marshall-Lerner condition .This might be due to the trade balance in Sweden
is not sensitive in real exchange rate but only sensitive in changes in income .Wilson and
kua(2001) examined the relationship case between Singapore and united states. Their
result indicated exchange rate does not have significant impact on the bilateral trade
balance. Hussein (2002) studied based in as countries. He suggested that trade balance is
affected by a real money rather than the exchange rate. Thorbecke(2006) indicated that
the change in the exchange rate could affect trade within Asia. His empirical studies
demonstrated an appreciation in Indonesia, Malaysia, and Thailand would decline export.

17
 CHAPTER THREE

ETHIOPIAN FOREIGN TRADE

3.1 Foreign Trade polices

3.1.1 The Pre-Reform Trade Policy

Among the policies that have implemented by different governments that ruled the
country for the last four decades, the policy adopted in the pre 1991/92 period (both
during the imperial and Military government of Ethiopia) was characterized by strongly
inward oriented development strategy, which used a prolonged appreciation of the Birr,
high tariff rates, extensive foreign exchange control and other non-tariff barriers as well
as heavy taxation on exports( Deble G, 2004).These policies are likely to have a
detrimental impact on export by influencing directly or indirectly the profitability and
competitiveness of exports.

Before the 1974 popular revolution an import Substititution strategy with some export
promotion elements was adopted. The regime’s trade policy main objectives were to
protect domestic industries from external competition (to encourage domestically
produced goods). Taxes on exports were reasonable and government intervention in the
export sector was limited to some regulation and quality control. Tariff and non-tariff
measures were used as a policy mechanism to achieve the objectives (Eshetu, 1995) .The
economic rational of trade policy of the Imperial period was the classical goal of
mobilizing government revenue by imposing taxes on exports and imports, maintaining
the balance of payment at a sustainable level as well as providing domestic economy with
the degree of protection demand necessary (EEA, 1999-2000).

After the coming to power of Derge, despite the fundamental shift in ideological outlook,
the trade regime was adopted from the imperial government. The exchange trade regime
Was adopted from the imperial government. The exchange rate policy and exchange
rate, were left intact as were the systems and institutions governing the state’s role both in
export and import trade; an attempt to closely monitor the price quantity and distribution
of goods; giving special emphasis to external trade sectors deemed essential for economic

18
growth and in the trading of medical equipment and goods ensure the Health and security
of the population; an attempt to diversity the type and destination of goods externally
traded.

Thus, one of the major proposes of the private sector and most importantly the
socialization of economic activity. The private importers were driven out of the business
while the private exporters were prohibited from exporting traditional commodities. The
export of such commodities was taken over by public enterprises created for the purpose.

Berhanu and Befekadu(1999/2000) also summarized the major policy packages

governing external trade of the regime as follows: .
Fixed official exchange rate.
Restive foreign exchange licensing system for private use.
Very high and escalating import tariff made up of several layers and categories
with the maximum rate as high as 230% of its value.
Reference price schemes for exports, below which export was prohibited and
Government marketing channels for all imports and major exports.

In Short, almost all the economic activates of the regime were under control of public
enterprise, which means centralized .such measures resulted in the country’s poor
performance of export sector by reducing the competitiveness of the country’s exports in
the world market

3.1.2 The post Reform Trade policy

Ethiopia has after the downfall of the Derge regime undertaken a number measures and
reforms to change the structure of the economy and bring about rapid economic growth
and development.
Hence in Ethiopia, Similar to other developing countries, trade Liberalization is one of
the comprehensive policy reform taken by the transitional government of Ethiopia (TGE)
to address the foreign trade problems. The TGE launched the new economic policy in

19
November 1991/92 .The reform consisted of transition from command to a market
economy Economic stabilization and structural adjustment.

The undertaken policy measured have mainly concerned with the correction of price
distortions, lifting of restrictions on private sector, instituting Markets for factors of
productions, reducing macroeconomic imbalance and trade Liberalization (Ministry of
Trade and Industry, 1994/45).

The Liberalization measures were initiated by the devaluation of Birr by 142% (From
Birr 2.7 per USD to Birr 5 per USD). The stream ling of administration controls as well
as the reduction in tariffs and elimination of Export duties with the exception of that
imposed on coffee (EEA, 1999/2000).

As Berhanu and Befekadu (1999/2000) cited, the major foreign trade reforms undertaken
by the government are summarized below.

 Liberalization of the foreign exchange control. Foreign exchange was to be made

available to dully licensed importers through the auction markets.
 Enormously simplifying licensing procedure.
 A supportive service to private exporters is designed in areas of transport,
package, training, overseas market research etc.
 The ratification of those goods controlled through the quota system.
 The drastic reduction of custom duties from an average high of 230% to an
average maximum of 50%.
 Elimination of duty on all exportable with exception of coffee.
 Move towards a more market determined exchange rate with the introduction of
the auction pricing system.
 Introduction of foreign exchange retention scheme to encourage exports.
 Re-addressing the external sector imbalance and improving the foreign reserve
position of the country.
 Issuing a proclamation code that redefined the position of foreign investors giving
tight to permit their profits and dividends and to pay related fees, royalties and

20
 other foreign exchange costs. The code reserves certain sectors, financial,
energy and rail/air transportation.

3.2 The Performance and structure of Export

3.2.1 The Role and performance of Export

Foreign trade is one of the major economic sectors which should play significant role in
the Ethiopian economy. Thus, there is a need to analyze the performance of and role of
foreign trade closely.

The performance of Ethiopian export was sluggish over the period of mid 1970-mid-
1990s.This can be particularly observed if we look at the ratio of export to GDP and to
imports as well as its contribution in the world market. Accordingly, export as a
percentage of GDP that registered on average 8.86% in the second five years of the 1970s
declined successively to 6.65%, 5.62% and 4.28% during the period of 1980/81-84/85,
1985/86-89/90 and 1990/91-1994/95 respectively and 7.42% and 8.13% during the period
of 1995-200/01 and 2001/02-2007/08 respectively (Table 3.1)

Table: 3.1 percentage of export (EXP) to DGP, Import to GDP and Exp/imp

Year Exp/GDP Imp/GDP Exp/imp

1975/1976-1979/80 8.86 11.12 71.12
1980/81-1884/85 6.65 16.52 47.02
1985/86-1989/90 5.62 15.4 39.68
1990/91-1994/95 4.28 14.82 28.8
1995/96-2000/01 7.42 23.6 35.4
2001/02-2007/08 8.13 32.5 24.9
Source: NBE and own Calculation
Concerning the Ethiopian export contribution in the global export Market, Various
literatures had shown its insignificance. For instance, Brook (1999) explanted that
Ethiopian contribution to the world market is on average about 2.5 percent. Befekadu and
Berhanu (1999/200) also argued that its contribution to word trade as well as to the
annual increased global wealth is so insignificant.

21
Due to such unsatisfactory performance of export sector, receipts obtained were
insufficient to finance imports. The share of exports in import financing had declined
successively from 71.12% during 1975/76-79/80 to 47.02%(1980/81-84/85)
39.68%(1985/86-89/90) and 28.08%(1990/91-94/95).This implies the importation of
basic investment good; Which increases productivity has been hampered by the poor
export performance. There has been a recovery in the export performance during
1995/96-2000/01 .However; it starts to decline again during the period 2001/02-1007/08.

The poor performance of the export sector during 1980s was attributed to different
factors these include, among others, bad weather conditions, Problems in production and
marketing, pervasive impact of international commodity market on exports and low
elasticity of demand and supply for exports (Ghiorgis, 1992).
In the early 1990s, the declining trend in total export as a percent of GDP was even
severe. This was the lowest figure ever registered during the 1975/76-2000/01.The main
reason for such low record in export earnings was the augmented civil war in the country
at the time (Tura, 200). However, if we observe the 1990s in general, there was a sign of
recovery in export performance. Export earnings as a percentage of GDP grew from
4.95% in 1980s to 6.11% in 1990s. This recovery in exports in attribute to good weather
conditions and partly to current policy reforms. Even if exports relatively grew, the
percentage of import payments they covered in the 1990s (32%) was low than that of
1980s (42.4%) chiefly because of a rise in import to GDP ratio during 1990s.

3.2.1.1 Trends in volume and value of Export (pre-reform period)

One basic justification behind trade-Liberalization is its capacity to improve its

competitiveness in the world market and bring about significant increase in the volume,
diversity and export earnings.

The average total volume in the period between 1980/81-1990/91 was about 376.30
millions of kg. The maximum volume was exhibited in 1983/84 which is about 475.30
million kg.The trend of total volume was, however, has been fluctuating and diminishing
in the last four year of the period under refernce.since 1978/88 the total volume decreased

22
 consequently to reach the smallest total volume registered in those periods which is about
269.85 millions of kgs in 1990/91(NBE annual Report, 2003/04).

The major single commodity of export of Ethiopia, coffee, amounted an average of 80.8
million kgs in the period. Similar to the value of coffee, the volume of coffee was
stagnant in those periods besides its fluctuating trend. The highest volume coffee was
exported in 1988/89 which is 92.14 million kg followed by the 1983/84 91.18 million
kgs(see table3.2).

Table 3.2 volume of exports by major commodity Groups (million of kgs)

c/year 1980/ 81/82 82/83 83/84 84/85 85/86 86/87 87/88 88/89 89/90 90/91 Aver
81 age
Coffee 88.4 80.18 87.6 91.18 73.8 70 88.2 71.16 92.14 88.13 58.23 80.8
Oilseeds 16.43 12.17 11.55 33-61 12.47 5.63 8.2 17.82 5.39 6.91 2.56 12.06
Hides and 8.9 10.19 7.73 9.15 10.15 12 1025 8.62 9.67 8.59 5.66 9.22
skins
Fruit and 5.11 35.54 6.4 7.04 9.88 9.23 12.07 10.9 10.18 8.64 12.96 9.11
vegetables
Pulses 24.52 7.81 36.24 27.55 19.95 7.55 4.43 12.5 11.94 23.36 14.76 19.8
Chat 2.22 35.54 3.34 2.56 1.38 0.71 2.93 3.63 0.50 1.82 1.82 2.12
Coffee% share 22% 2.37 19% 19 19% 20% 22% 18% 26% 27% 22% 20%
Oilseeds% 4% 23% 2% 7% 3% 2% 2% 4% 2% 2% 1% 3%
share
Hides% share 2% 3% 2% 2% 3% 3% 3% 2% 3% 3% 2% 2.2%
Fruit% share 1% 2% 1% 1% 3% 3% 3% 23% 3% 3% 5% 2.5%
Pulse% 6% 10% 8% 6% 6% 2% 1% 3% 3% 7% 5% 5%
Chat% share 1% 1% 1% 1%
Source: NBE and own calculation

On average the total value of export in the period under consideration was about 806.8
million birr. In those periods the total value of export was stagnant and fluctuated widely.
This will be clear when we look at the value difference between the highest and the
lowest in those periods. For instable, the maximum total value of export was recorded in
1985/86 which is about 927.32 million birr, and after two years that is in 1981/88, this
value diminishes to 773.63 million birr. The minimum total value was in 1990/91 which

23
 is 614.01 million birr. The difference between the maximum and the minimum also
reveals the high fluctuation of the total export earnings in those periods (see table, 3.3)

However, the growth rates of some commodities recover. The value of oil seeds, for
instance on average increase by 5.6% per year in the same manner, the growth rate of the
total value of pulse exhibited increment by about 4. % per year.

Table 3.3 The value of major Export commodities (in million of birr)
c/year 1980/81 81/82 82/83 83/84 84/85 85/86 86/87 87/88 88/89 89/90 90/91 Average
Coffee 524.32 480.29 495.87 590.40 466.27 664.79 524.35 439.18 626.45 405.1 268.45 498.683
Oilseeds 28.37 19.53 15.35 27.86 15.24 7.69 9.79 22.01 11.03 8.39 3.63 15.39
Hides and skin 92.7 98.32 77.3 93.82 95.41 119.46 108.29 133 123.53 134.05 92.21 106.19

Fruit and 3.63 5.53 3.34 4-21 5.01 6.02 12.85 11.79 9 4.07 12 7.14091
vegetables
Pulses 23.69 30.87 28.79 20.62 16.87 12.64 8.48 16.09 16.32 35.96 15.72 120.55
Chat 22.35 21.24 37.17 29 19.90 8.47 28.68 21.32 7.91 21.02 20.42 21.2313
Coffee% shave 61.86% 61.86 59.81 63.71 62.62 71.69 65.93 56.77 69.32 54.98 43.72 61.81
Oilseeds% 3.35% 2.52 1.85 3.01 2.10 0.83 1.23 2.85 1.22 1.14 0.5.9 1.41
share
Hides% share 10.94% 12.66% 9.32% 10.12% 12.81% 12.88% 13.62% 17.19% 13.67% 17.19% 15.02% 13.6%

Fruit% share 0.43% 0.71% 0.41% 0.45% 0.81% 0.65% 1.62% 1.52% 1.0% 0.55% 1.95% 0.89%

Pulse% share 2.80% 3.98% 3.47% 2.23% 2.27% 1.36% 1.07% 2.06% 1.81% 4.88% 2.56% 2.55%

GRVC -17.0% -8.4% 3..2% 19.1% -21.0% 42.6% -21.1% -16.2% 42.6% -35..3% -33.7% -4.1%

GRVO 105.6% -31.2% -21.4% 81.5% -43.9% 50.8% 27.3% 124.8% -49.9% -23..9% -56.7% 5.6%

GRVP -29.8% 30.3% -6.7.2% -28.4% -18.2% -25.1% -32.9% 89.7% 1.4% 120.3% -56.3% 4.0%

Source: NBE and own calculation

GRVC: growth rate of the value of coffee

GRVO : " " " " " oilseeds

GRVP : " " " " " " pulse

24
3.21.2 The Trend in volume and value of export (post Reform period)

One basic justification behind trade openness is its capacity to improve its
competitiveness in the world market and bring about significant increase in the volume
diversity and export earnings.

In post reform period the volume of some important commodities increased sharply. The
volume of coffee, for instance, increased pre-reform average of 80.8 million kg to an
average of 115.2 million kgs in the post-reform period. This implies that it was growing
by an average of 42% per year (see table 3.4)

The second major export commodities that showed tremendous increment in volume in
the post reform period was oil seeds. The volume of this commodity increased; from an
average of 12.06 million kgs in the post reform period between 1980/81-1990/91 to 79.5
million kgs in the post reform period which implies that it increased by about 559 %( see
table 3.4).

Pulses, which is one of the major export commodities of the country increased from
19.85 million kgs in the pre-reform period under reference to 66.6 million kgs in the post
reform period which is about 235.5% increment.

The other major export commodity which is characterized by an increase in volume

overtime has been chat. It volume showed over 409.4% increment from 2.12 million kgs
in the period 19890/81-1990/91 to 10.8 million kgs in the post Reform period(see table
3.4)
On the other hand some commodities have showed a relative decrease in volume while
some other was stagnant over time in the post reform period.

25
Table 3.4 volume of Export in the post reform period

Year Coffee Oil seeds Hides Pulses Fruit and Chat

&skin vegetable
1991/92 32.3 1.8 3.7 1.4 7.2 2.6
1992/93 67.5 0.4 5.6 1.5 6.1 2.0
1993/94 69.5 10.2 7.8 9.8 15.9 2.9
1994/95 82.2 12.1 8.4 25.8 19.5 4.1
1995/96 97.7 7.8 7.6 29.0 19.0 3.7
1996/97 123.2 14.1 8.7 30.5 21.8 5.1
1997/98 120.1 66.6 7.6 30.5 17 6
1998/99 101.2 51.4 5.9 29.9 19.4 9.8
1999/00 116.6 43.2 8.7 23.6 20.8 15.7
2000/01 99.2 55.1 12.5 26.9 17.1 12.0
2001/02 110.4 76.7 10.4 109.3 29.7 9.4
2002/03 126.2 82.9 10.6 66.2 25.4 6.2
2003/04 156.5 106 9.5 73.3 36.9 18.6
2004/05 161.1 170.8 15.7 121.7 38 19.4
2005/06 147.7 265.7 15.4 110.4 34.8 22.3
2006/07 176.5 235.0 15.8 158.8 41.0 22.7
2007/08 170.8 152.1 12.3 286.1 40 22.5
average 115.2 79.5 9.8 66.6 24.1 10.8
Source: NBE

During the period under review, five primary agricultural products coffee, hides and
skins, chat, pulses and oil seed accounts for more than 79 percent of he total export
earnings coffee alone averaged nearly 48.5 percent of the total export earnings.

The share of the value of chat came to be third in the post reform period next to coffee
and hides and skins .This is because the share of the value of chat in the pot-reform
period on average has increased from 2.63% in the period 1980/81-1990/91 to 9.2% in
the post reform period .On the other hand, the total average share of hide and skins
decreased from 13.16% to 10.6% in the period between 1991/92-2007/08(see table 3.5).

Export earnings from coffee grew by 23.6 percent owing to the rise in the international
price despite the decrease in volume. The slowdown in volume was presumably due to
the high domestic auction price of coffee that made coffee less profitable in the
international market. In addition, the sharp decline in the export of coffee to Japan, the
second largest destination for Ethiopia coffee, during the month of May and June 2008

26
 also contributed to all this effect. Hence, the share of coffee in the total export stood at
35.8 percent similar to the last year (NBE annual reprt, 2007/08).

The total average value of export increased from 806.34 million Birr in the period
between 1980/81and/1990/91 to 5,077.159 million Birr in the post reform period i.e
1992/92 and 2007/08.Theis figure showed about 529.6% increment in the post reform
period.

% Growth % Growth % Growth % Growth % Growth

share rate rare share rate share rate share rare
share
1991/92 52.8 -3730% 18.4 -37% 1.6 -77% 0.1 -98% 0.1 37.3% 73.0
1992/93 56.6 219.0% 14.2 129.4% 6.9 1196% 0.4 965.8% 0.1 219% 78.2
1993/94 63.6 33.7% 14.3 51.4% 7.6 64% 2.0 584.4% 3.1 36.13% 77.7
1994/95 66.1 150.6% 13.2 83.5% 6 60% 3.6 272.9% 1.7 13.4% 88.0
1995/96 59.3 -4.2% 11.9 -73.1% 6.7 12% 3.0 -25.21% 1.6 -16.3% 89.4
1996/97 69.7 33.8% 9.6 202% 5.6 14% 2.0 13.8% 1.9 77% 78.4
1997/98 58 25.1% 8.4 -6.6% 12.2 36% 2.5 17.2% 7.6 323.8% 94.8
1998/99 53.9 -26.8% 6.7 -30.1 15.6 63% 2.8 -1.3% 7.4 -13.7% 87.1
1999/00 39.9 1.0% 7.2 17.9% 13.9 39% 2.0 -21.3% 6.4 -5.9% 85.1
2000/01 36.3 -28.8% 16.8 121.2% 10.9 -17% 1.9 -9% 7.0 5.5% 79.1
2001/02 36 -8.3% 12.4 -25.1% 12.5 -18% 7.3 288.6% 7.3 3.4% 74.2
2002/03 37 1.8% 11.2 -5.6% 14.7 19% 0.4 -39.1% 9.9 41.9% 70.6
2003/04 39 35.8% 7.3 -16.1% 11.8 52% 3.8 13.7% 13.8 80.2% 76.6
2004/05 39 50.5% 7.9 55.7% 8.9 14.2% 4.2 57.5% 14.7 51.8% 77.6
2005/06 35.4 6.03% 7.5 11.3% 7.9 -10.8% 3.7 4.7% 21.1 69.5% 76.9
2006/07 35.8 21.6% 7.6 21.1% 7.8 5.6% 5.9 93.% 15.8 -9.8% 72.9
2007/08 35.8 30.8% 6.8 16.1% 7.4 22.5% 9.8 115.2% 14.9 231.% 74.7
Average 48.5 -187.5% 10.6 9.2 86.1% 3.2 129.4% 7.9 253.9% 79.6
The total value in those periods has been increasing over time except ups and downs in
some selected years. It starts from total value of export 319.13 million Birr in 1991/92
and end up the periods maximum value which is 13,843.332 million birr registered in

27
2007/08.In general, the trend in total value of export has showed increasing trend after
the coming to power of EPRDF.

The major five commodities in terms of value covered about 79.5% of the total earnings
in the period under reference. The highest share of these commodities was in 1997/98
which is about 94.8% of total export value .And the least total value of these
commodities was in 2002/03 which is 70%.
Coffee, which has been a single major commodity in the pre reform period, continued to
be dominant in the post reform period. It took the total export earnings.
However, the share of coffee in terms of value to the total value of export showed
diminishing trend in the post reform period.
The average value of coffee in the post reform period is about 48.5 of the total value of
export. This is much lower than the average share of this commodity registered in the
period between 1980/81-1990/90, which was about 61.8% this shows that the share of
coffee decreased by about 13.3% in the period between 1991/92-2007/08(see table 3.5)
3.5 The share of major export commodities in the total export value
Source: NBE and own Computations

3.2.2 The Structure of Export

The structure of Ethiopia exports remained unchanged for a very long period of time .The
country still continues to export the same primary commodities, dominated by coffee, as
it did half a century ago. The consequence of this absence of Structural transformation is
that the capacity of exports is declining and fails to match the increase in imports .This
result in a decline in trade balance.

The first five major export commodities alone accounted for about 79.6% of the total
export earnings in the post reform period. These commodities are dominant in terms of
value as well as volume both in the pre reform and post reform period indicating that the
Ethiopian export sector is highly undiversified in the period under investigation (see table
3.5).

28
Moreover, UNCTAD calculation also supports the factors explained above. Accordingly,
Ethiopia’s export diversification index is about 0.92 1, which is a reflection of the
countries less diversified exports.

The above explanations therefore clearly confirm the limited diversification of the
exports items before and after the reform period (1992).This implies that the attempt by
the government, to boost exports in general and to encourage non-traditional exports in
particular through various reforms, has not yet produced the desired result.

Such depended of the country on exports of primary products, whose price and income
elasticity of demand less than unity, forced the country to be a price taker and suffer from
a declining of foreign exchange earnings (International Economy, 1996).

3.3 The Structure and Performance of Imports

The structure of Ethiopia imports. Like exports, has failed to show any significant
structural changes with the exception of miscellaneous goods. Accordingly, the structure
of imports has been largely constituted by capital and consumer good, semi-finished
good, fuel and raw materials.

As percent of GDP, post-reform import of goods registered an increase of 45% from 15%
to 12% relative to the pre-reform period under the previous regime, imports as share of
GDP claimed a high of 15 percent of GDP but then declined to less than 10 percent in
1991/91 During the post 1992 period, the value of imports as share of GDP increased
continusly (see annex C).

On average about 63% of the country import has been capital (33%) and consumer goods
(330%). However, there is a declining trend of the share of capital goods in total imports
in the 1990s chiefly because of the increase in non-durable consumer goods perhaps this
is related to the relaxation of the control on the non- durable commodities following the
change of government. Among the consumer good the non-durables ones (Specifically
Cereal and other foods) are the dominant. This implies the insufficiency of the domestic
production to satisfy the domestic demand (see table 3.7).

29
Imports of raw materials rose by 73.5percent to USD 257.8 million in 2007/08 period
exhibiting the steady growth in international prices as well as vibrant domestic Economic
activates. Hence the share of raw materials in the total imports went up from 2.9 percent
in the preceding fiscal year to 3.7 percent in 2007/08 (see table 3.7).

The share of semi-finished goods fuel, consumer goods showed slight increase in the post
perform period. However, the share of raw materials and capital goods in the total value
showed decrease in the same period. Neverththeless, it does not imply does the value of
those import commodities have decreased in the post reform period. Rather their value
increase sharply in the post reform period.

Import of capital goods showed 4.9 percent decline compared to 2006/07 year and stood
at USD 1,777.4 million. The decrease in the import of capital goods specially was
mainly attributed to the fall in import of transport capital goods specifically heavy road
motor vehicles. Imports of industrial and agricultural capital goods, however, tended to
increase.

Import of consumer goods, grew by 15.1 percent to USD1, 515.7 million from USD
1,317 million 2006 107 year largely due to higher imports of non-durables which include
cereals, medical and pharmaceuticals as well as textile. On the other hand, the imports of
durable goods exhibits decline during. The share of consumer goods in total import slid
down to 22.3 percent from 27.7 percent in 2006 (see table 3.7 and Annex C).

Meanwhile, fuel import surged 85.3 percent to USD 1,621.4 million in 2007/08 period
from USD875.1 million a year ago mainly on account of oil price. Accordingly, the
share of fuel in the total import bill rose from 17.1 percent 2006/07 years to 23.8 percent
in the year 2007/08 (see table 3.7 annex C).

30
In general, the country has highly concentrated on the same imported item after the
reform. However, imports as percentage of GDP, on the other hand, have been
increasing continuously and at a vigorous pace.

31
 Table: 3.7 percentage share of the value of imports, by end use

AVERAGE
1995//96
1986/87

1987/88

1988/89

1989/90

1990/91

1991/92

1992/93

1993/94

1994/95

1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2007/08
2006/07
Row 2.2 2.4 2.6 3.2 2.7 1.6 2.0 1.8 2.0 2.3 2.2 2.4 1.7 1.4 1.6 1.8 1.2 1.0 1.3 1.7 2.9 3.7 2.09

2
material
Semi- 12.0 1.4 16.9 17.6 11. 8.8 9.0 16.3 17.0 16.4 19.2 18.6 16.8 14.8 16.8 18.3 14.8 16.8 18.3 17.8 15.0 18.5 15.0
finished 1
material
s
fuels 10.1 9.5 10.1 12.3 9.9 13. 22.7 15.3 15.2 12.5 16.6 17.6 11.4 17.8 17.7 15.5 15.5 14.5 18.4 18.7 17.0 23.8 15.2
8

Capital 42.8 47.1 39 38.6 45. 25. 35 29.2 31.9 33.7 36 32.2 33.5 30.1 30.1 28.3 29.5 40.9 33.0 31.6 36.4 26 33
good 3 8

Consum 32.6 26.3 30.8 28.1 30. 29. 31.3 35.1 32.5 31.6 23.0 27.1 30.3 31.7 31.7 34.6 35.2 22.1 27.1 28 25.6 38.8 30.0
er good 2 8

miscell 0.3 0.23 0.7 0.2 0.9 0.3 0.1 2.2 1.5 1.9 0.9 7.7 14.5 2.8 2.8 2.9 2.5 1.6 1.8 2.1 2.9 5.7 2.9
aneous

Import 15.5 15.5 13.4 10.9 11.7 8.7 13.6 16.7 19.3 20.4 22.4 22.1 24 25.5 25.5 27.8 27.8 29.3 28.1 30.3 26.4 30.4
as % of
GDP
Source: - NBE annual report (2007/08) and own calculation

39
According to Befekkadu and Berhanu (1999/00), the increase in import as a share of
GDP is consistent with the two phenomenon of the post-1991/Ethiopian economy. The
first is the growth of GDP. As the GDP increase, consumers demand for consumption of
imported items and investor’s demand to purchase more investment goods from abroad
also increase. This in turn tends to increase the volume of imports.

The second phenomenon that explains the growth in imports is the policy domain.
Where the post 1991 period was one of liberalization. Tura (2000) also remarked that
trade liberalization measures such as eases of foreign exchange control, the
rationalizations that have been adopted by the current government have made imports to
increase highly during the post-reform than the pre-one. In addition to this an increase in
imports in a common and standard phenomenon under the IMF/world Bank inspired SAP
because of the reduction of import barriers including the removal of quotas and the cut in
tariff-rates.

Despite the increase of imports as a share of GDP, their brake down with respect to the
purpose for which goods are imported have a total import while capital goods and
consumer goods absorb nearly 63% together semi-finished products and fuel account for
nearly a 32.2% of total imports (see table 3.7).

These statistics reveal important signals about the structure of the economy as well as
being suggest policy direction with respect to imports.

3.4 Trade balance

When the value of import increase in a large proportion than the value of export then
there will be a trade deficit. Because there is higher expansion of imports which is more
than what can be financed by export earnings, Ethiopia’s trade balance is characterized
by deficits and as shown in figure the deficit is widening over time. As Salvatore (1990)
reasoned it out, developing countries face trade deficit because of the primary nature of

40
their exports and the unfavorable international market price, which could not general
enough foreign exchange to finance the imported goods.
Fig 3.1

Total Export and Import Trend

EXPORT AND IMPORT

90000
80000
70000
60000
50000 IMPORT
40000 EXPORT
30000
20000
10000
0
1972/73
1974/75
1976/77
1978/79
1980/81
1982/83
1984/85
1986/87
1988/89
1990/91
1992/93
1994/95
1996/97
1998/99
2000/01
2002/03
2004/05
2006/07
YEAR

Source, NBE

The openness of the Ethiopian economy as measured by total trade (i.e. the ratio of the
sum of imports and exports to GDP increased significantly from about 12.6 percent in
1946/65 to more than 30 percent in 2.07/08. During 1960/61-1972/73, exports were
growing on average by 5.5 percent while imports were an annual average growth of 6.9
entailing an annual average trade of deficit of 1.3 percent of GDP. The export sector
suffered much in the 1980s mainly due to the inward looking policy of the “socialist”
government. In 1973/74 -199/91 the annual average growth of export was 7.1 percent
against an import sector that grew of export was 7.1 percent against an import sector that
grew by 13.9 percent per annum. The next effect of the stated increase in imports against
the dreary of export during 1973/74-1990/91 was the study increase in the country’s trade
deficit. As a ratio of GDP the trade deficit, which was 3.3 percent of GDP in 1974/75
claimed to percent in 1990/91 (see annex A)

During 1991/92-200/08, an average of about Birr 4.7 billion worth of goods was exported
while imports amounted, on average, to about Birr 16.5 billion. The relatively high

41
quantity of imports is mainly attributed to trade liberalization measures (such as lifting of
import restrictions) taken by the government as part of its reform program. The effect of
the liberalization however, is felt more in the growing trade deficit, which rose from 3.4
percent of GDP in 1992/93 to reach 19.9 percent in 2007/08. The ever widening trade
balance has meant that export earnings are coequally dwindling and not being able to
cover import bills of the economy. This calls for measures to be taken to diversify
exports, which are currently concentrated on some of agricultural exports whose price has
continually been declining in the international market (see annex A).

In sum, the export is still very much dependent on few agricultural products with no
sign of structural change. In addition the amount of export earnings of the economy has
bee secularly declining due to slow down in commodity price in international markets.
The ever widening trade balance has lead to an increasing reliance on external financing
in the form if aid and credit.

42
 CHAPTER – FOUR

4. Econometric Methods

4.1 Data Sources and Methodology

Data Sources
This study employee secondary data obtained from different institutions such as, Ministry
of Finance and Economics Development (MOFED), National Bank of Ethiopia (NBE),
customs authority and central statistics authority. morever, the data also collected from
international journals, magazines, periodicals, different websites which are related to the
study area.

Methodology

When we use a time series data in estimation, the estimation procedure will have three
stages: the first is the test of stationary in order to eliminate the possibility of spurious
regression results; the second stage is test for co-integration. The essence of co-
integration is to ascertain whether the residual of the regression estimated using the non
stationary variables is stationary. In the last stage the short run models are estimated
using Error correction model (ECM).

a) The Unit Root test of stationary

The first step in time series Regression analysis is to test stationary of each variable. The
need to test stationary of the variables arises because estimating regression using non-
stationary base on OLS leads to spurious and in consistent result (Gujarat, 1995). In
addition, if variables are non –stationary it is difficult to conduct hypothesis testing as the
classical assumption on the property of the error term namely that it has zero mean,
constant variance, and is non-auto correlated is violated (Rao, 1994). Therefore,
stationary test is important.

43
There are different ways of testing stationary. In this paper, the two widely applicable
(and most available in statistical software) test of unit root, namely the Dickey-fuller
(DF) and Augmented Dickey-Fuller (ADF) are used.
It is known that most time series variables are non-stationary at level. Differencing the
respective variables and running regression on the same can handle the non-stationarity
problem. However, this method suffer from the problem that information about the long
Run relationship between the variable is lost, sine in the long run first difference of these
variable are zero (Yuananc Kochhar, 1994).
The concept of co-integration means that despite being individually non-stationary, a
linear combination of two or more time series variables can be stationary (Rao, 1994).

b) Approaches of Testing co-integration

Co-integration of two (or more) time series variables suggests that there is a long-run
equilibrium relationship between the variables. The two widely employed approaches for
testing co-integration relationship are the Engle-Granger (1997) two step procedure and
Johansen (1988) maximum likelihood approach. In this paper, the Engle and Granger
two-step residual based procedure is used. In the Engle-Granger approach the first step is
to estimate the co-integrating regressions and then to test whether the residual obtained
form the co-integrating regression is stationary or not, if the residual is stationary then the
independent and dependent variables have long-run relationship (Rao, 1994).

c) Error Correction Model (ECM)

The ECM indicates the short run dynamics of the OLS estimation results and its
adjustment towards the long-run equilibrium. Error correction Model (ECM) removes
non-stationary from the individual series in order to make the conventional classics
regression techniques applicable and to correct the disequilibria error created in the short
run (Gujarati, 1995).

44
Regressing the first difference of the dependent variables with the first difference of the
independent variables (s) using OLS shows the short-run dynamics of the model but we
can use the one period lagged error term to tie the short run behavior of the dependent
variable to its long run value (Gujarat, 1995).

4. 2 Model Specifications
Trade Balance at the aggregate level, Specified at the function of some relevant variables
was employed in the econometric modeling of the level of trade balance. Therefore, the
model is mainly concerned with identifying the elasticity of trade balance in Ethiopia
with respect to its main determinants.
In specifying the trade balance models, it is hypothesized that trade balance is to be
dependent on the lag trade balance (TBlag), Real output (RGDP), Real Effective
Exchange Rate (REER), and trade openness (TO).
Therefore in this particular study the trade balance function have the following form:
TB= F (TB t-1, RGDP, REER, TO) or
TB= 0+ 1TBt-1 + 2 RGDP + 3 REER+ 4TO + e
Where TB= Trade balance defined as the ratio of export to import.
TBt-1 = lagged trade balance
RGDP = Real output of the country
REER = Real Effective exchange rate
TO = Trade openness
= Error term
E

4.3 Explanation of the variables

The Dependent Variable

Usually Trade balance is measured by the difference of value of total export and value of
import. In this study, trade balance is measured as the ratio of export value (x) to import
value (M). The ration of X to M (i.e. X/M or its inverse has been widely used in many
empirical investigation of trade balance exchange rate relationship, such as Bahmani-
oskooee and brook (1999), lowinger (2001) and onafoowora (2003). This Ratio is
preferable because it is not sensitive to the unit of measurement and can be

45
interpreted as nominal or real trade balance (Bahmani-Oskooee, 1991). The
other reason is since negative number is not transformed in to log trade balance as a
ratio of export to import is used for regression.

The Explanatory variables

1. Lag trade balance (TBlag): The inclusion of this variable is based on the argument
that the deficit in previous year affects the current trade balance as it is financed by the
next subsequent years and disturbing the trade balance equilibrium. This is what is
expected.

2. Real output (RGDP): The inclusion of the real output is based on the argument that
the growth in GDP of a nation leads to an increase in demand for manufactured goods
(which have high income elasticity of demand). The growth in real GDP has a positive
influence on Ethiopian imports, which adversely affected its trade balance (Tura, 2001)
and (Muluneh, 1982).

3. Real effective exchange state (REER): The specification of trade balance model to
handle real effective exchange rate is based on the premise that depreciation of the
currency has great impacts to economic development. One of the prominent impacts is
the marshal-Lerner condition, which represents that real depreciation leads to increase the
trade balance in the long run if sum up value of import and export demand elasticity
exceed one. Herman Rincon (1999) examined the relationship between trade balance and
exchange rate test for marshal- Lerner condition. His empirical results provided
significant evident for the marshal-Lerner condition.

4. Trade openness (TO): The inclusion of this variable in the model is based on the
premise that trade openess is expected to improve the trade balance by reducing tax and
tariff and also by providing different subsidy. However, there is also other premise that
trade openess affect trade balance adversely. Santos-pulino and Thirwall (2004) who find
robustly negative impact of trade openness on the overall trade balance. This is contrast
to what is hypothesized before.

46
 4.4 Estimation Results and Analysis
4.4.1Time Series Characteristics of the Data

Table: 4.4 Dickey Fuller class Test

Dickey Fuller Class Test

Variables Dickey Fuller Augmented Dickey Fuller

Lag lengths Lag Lengths -1 Lag Lengths -2

Constant Trend Constant Trend Constant Trend

DLTB -6.606** -6.505** -5.270** -5.021** -4.569** -4.473**

DLTBt-1 -7.175** -6.360** -5.982** -4.982** -5.020** -5.064**

DLRGD -5.145** -5.588** -0.3145 -3.7775* -0.08640 -3.6680*

DLREER -4.045** -3.928** -8.047** -3.959** -5.477** -5.405**

DLFEA -5.695** -5743** -3.754** -3.718** -3.819** -3.974**

** And * refer to significance level of 1% and 5% or 99% and 95% confidence interval.

Prior to performing any meaning full regression with the time series variables, it is
essential to test time series characteristics of the data and hence to establish their order of
integration. The variables used in the analysis need to be stationary and/or should be co-
integrated in order to infer a meaningful relationship from the regression. This involves
unit root tests or exploring the time series properties of the variables by using the
standard dickey-fuller (DF) and augmented dickey fuller (ADF) statistics. This is testing
whether the sample data used for each variable exhibits stationary or non-stationary
trend along a constant mean or trend first by including a constant only and then by
including both a constant and the time trend. Here the null hypothesis (Ho) is a series
contains a unit root (non-stationary) stochastic trend) against the alternative stationary
(deterministic trend). This test has conducted for each variables First at level and then in

47
their first difference. The test conducted with the variable in level indicates that no
variables are stationary except for some the ADF statistics result in table 4.4 shows that
the null hypothesis of a unit root test rejected for all variables with the exception of real
GDP with a constant/drift term included. However, when the trend term is included the
null hypothesis is rejected for Real GDP at 5% significance level for both lag 1 and
2.This indicate that including trend term improves the stochastic nature of the data. Thus,
we can conclude that all the variables are integrated of order one (1) with a trend term.

Following the examination of the unit root characteristics of the variable, both the long
run and the short run growth impact of the variables used in this study are estimated .as
already known the Engel-Granger single dynamic model procedure is used to estimate the
long run parameters while the short run estimation is carried which involves simplifying
the model into more interpretable (parsimonious) characterization

4.4.2The long Run Trade Balance Equation

The Engle-Granger single dynamic long run parameters estimate starts from testing the
appropriate lag length of the variables in the model. The WALD test of the solved static
long Run Equation is chi^2(5) =86.3541 (0.0000)** .This implies that lag two is the
appropriate lag length for long run estimation at 1% significance level.

In the estimated trade balance equation, the parameters real effective exchange rate and
foreign exchange availability have the expected sign in line to economic theory. On the
other hand, the parameters of lag trade balance has unexpected sign against the economic
theory this may be due to the shortage of the lags year so it needs more investigations. In
addition, the test of significance shows that lag trade balance, real effective exchange rate
and foreign exchange availability are significant at 1% and 5% level of significance.
However, real gross domestic product and trade liberalization are found to be
insignificant.

On the other hand the multivariate system diagnostic test of the residuals (shown in the
lower block of Table 4.4) indicates that the model has the desirable property of OLS
estimation. Test for serial correlation (AR Test), which is used to check whether the error
terms are correlated to each other or not, indicates non-existence of serial correlation in

48
the trade balance function. The result of hetroscedasticisy test (ARCH test) of the
residuals also does not show evidence for autoregressive conditional hetroscedastic errors
which it present would result in biased variance of estimates and would also be made the
least squares estimates inefficient.

The jargu-Bera test of skew ness and kurtosis of the residuals revealed normality
implying the absence of outliers in the data. The Ramsay’s regression specification error
test (RESET), on the other hand, provides no indication that the function form of the long
run model is inappropriate the model is appropriately specified.

Table: 4.2 The long run OLS estimation

sigma 0.201056 RSS 1.17227689

R^2 0.829511 F(5,29) = 28.22 [0.000]**
log-likelihood 9.77415 DW 2.02
no. of observations 35 no. of parameters 6
mean(LTB) 3.6923 var(LTB) 0.196456

AR 1-2 test: F(2,27) = 0.47079 [0.6295]

ARCH 1-1 test: F(1,27) = 0.90511 [0.3499]
Normality test: Chi^2(2) = 1.7126 [0.4247]
hetero test: F(9,19) = 1.0206 [0.4587]
Not enough observations for hetero-X test
RESET test: F(1,28) = 1.9852 [0.1699]

Coefficient t-value Part.R^2

Constant 4.0358 3.30 0.2730
LTBlag 0.5927 4.87 0.4503
LRGDP-1 -0.0974 0.899 0.0271
LREERI-1 0.2371 -2.76 0.2108
LFEA-2 -0.2671 -3.04 0.2422
dummy -0.0269 -0.236 0.0019

ECM [1974 to 2008] saved to Data3

We tested the order of integration of residuals using ADF statistics and the result
indicates that we can reject the null hypothesis of non-stationery that is the residual is
stationary of I(1) order (result is presented in Annex D).

49
The Durban Weston (DW) test shows that the variables are highly co-integrated in the
long run.

4.4.3 Dynamic Specification of Trade Balance

Having already obtained the long run model and estimated the coefficient, the next step
will be estimating the coefficient of the short run dynamics that have important policy
implication. Hence an error correction model (ECM) will be estimated that incorporate
the short term interactions and the speed of adjustment towards long run equilibrium.
Since all variables in the model are now I (1), statistical inference using standard T and F
tests are valid. The estimation result is reported below.

Table: 4.3 Modeling the Dynamic of Trade balance by OLS.

Coefficient t-value Part.R^2
Constant -0.0538 -0.935 0.0314
DLTBlag 0.3258 1.08 0.0417
DLRGDP-1 -0.1685 -1.14 0.0457
DLREERI-1 -0.1798 -2.46 0.1832
DLFEA-2 -0.2480 -1.42 0.0698
dummy 0.5460 1.49 0.0760
ECM-1 -0.7003 -1.90 0.1183

sigma 0.205301 RSS 1.13800636

R^2 0.519643 F(6,27) = 2.754 [0.032]*
log-likelihood 9.50649 DW 1.99
no. of observations 34 no. of parameters 7
mean(DLTB) -0.0506307 var(DLTB) 0.053954

AR 1-2 test: F(2,25) = 0.73861 [0.4879]

ARCH 1-1 test: F(1,25) = 0.036110 [0.8508]
Normality test: Chi^2(2) = 2.5898 [0.2739]
hetero test: F(11,15) = 0.36070 [0.9531]
Not enough observations for hetero-X test
RESET test: F(1,26) =1.6812e-005 [0.9968]

Note: ECM-1 lagged co-integrating vector saved from the estimated long-run equation.

The results reveals that all the variables included in the dynamic short run model
except, lagged trade balance, real GDP, FEA and Trade Liberalization are significant.
Though they are insignificant, they are retained in the short run in order to model the
system (Harris 1995:136). The speed of adjustment has a negative sign and is
significant with a fairly magnitude (-0.70). Its magnitude indicates that the 70% of the

50
 disturbance in the short run will be corrected each year, the coefficient of determination
(R2), indicates that 51.9% of Trade balance is explained by the variable included in the
regression. The overall significance, F-test, established shows that the explanatory
variables jointly explain trade balance significantly which is different from zero at 5%
significant level.

Similarly to that of the long run, the multivariate system diagnostic test of the residuals
(Shown in the Table 4.3) indicates that the model has the desirable property of OLS
estimation.

4.5 Economic Interpretation of the Parameters

We begin discussing the condition variables; real GDP and trade openness are
insignificant in both the long run and short run. Lagged Trade balance significant in the
long run but insignificant in the short run. The rests are significant both in the long-run
and short-run.

Theory predicted that the trade balance of the country in the last year has effect on the
current year trade balance. The lag Trade Balance is insignificant in the short run.
However, it is significant and positive in the long run. This result is contrast to the
expected hypothesis at the initial time.

The impact of real GDP on Trade Balance is Negative in the long-run, Because It is
obvious that, the growth in Real GDP (National Income) of a nation leads to an increase
in demand for manufactured goods (which have high income elasticity of demand) and a
decline for primary products (Which have low-income elasticity of demand),this result is
consistent with the finding of Tura (2001) and Muluneh (1982) they found that, the
growth in real GDP has a positive influence on Ethiopian imports, which adversely
affected its trade balance. However, in the short run the effect of real GDP on trade
balance is insignificance.

The result shows us that the effect of real effective exchange rate on the trade balance is
positive and significant in the long run. This is because firstly, increase quantity of
exports. Deprecation of the currency reveals the domestic goods cheaper as compared to

51
the foreign goods, thus making export more competitive. Secondly, quantity of imports
decrease, as import is relatively more expensive. So that, the Marshall-Lerner condition is
fulfilled. This result is consistent with the finding of shirvani and wilbratte (1997).

In the short run, the effect of REER on trade balance is Negative and Significant. This is
because trade balance may be worsening first due to decrease in value of export and
increase in value of import of improves after some time. This is referred to as the J-curve.

In the estimation result the effect of foreign exchange availability on trade balance is
negative and significant in the long-run. But it is insignificant in the short run This result
is consistent with the findings of Tura (2001) that exchange receipts and lagged official
reserves have a positive and significant inference on imports.

Finally, the effect of trade openness on the trade balance in the long run is insignificant.
This result is similar to that of Santos Pauline and Thirwall (2004) that showed that for
the period 1972-1997 Trade openness worsened the trade balance of developing
countries. They also showed that trade openness caused both import and export grow
faster, but the growth of import was faster than that of export for a panel of 12 developing
countries. However, the effect of trade openness on the trade balance in the short run is
insignificant. This result is consistent with the expected hypothesis.

52
 CHAPTER FIVE
5 .CONCLUSION AND RECOMMENDATION
5.1 CONCLUSION
Ethiopia, like most developing countries has been running a persistent trade deficit except
in the 1972/73 and 1973/74. Several internal and external Factors may attribute to this
deficit problem.

Many empirical studies show that LDCs have been marginalized from world economy
and from international market because of the structure, composition, and performance of
their trade (particularly of their export sector). Ethiopia is a typical of such countries
where the majority of the export earnings come from agricultural sector in the form of
raw materials and semi processes commodities.

The finding of the study shows that the composition of Ethiopian exports remained the
same in the both the Derg and in the post reform period although relative share of the
various agricultural exports had changed. Coffee has been a major commodity for about
of the total average export earnings in the periods between 1980/81 and
2007/08 .However; both the value and volume of export have a significant increment in
the post reform period.

The study has also tried to show the trend in the country’s commodity and geographic
concentration. In this period under discussion the study showed that the country was
highly dependent on few primary agricultural commodities i.e. high commodity
concentration this Trend is continued also in the post reform period. Moreover, Ethiopia’s
export sector in those periods can also be characterized by geographical concentration.
Major portions of the export which are mostly agricultural products go to Europe
(particularly to Germany, UK and France); USA and to Asian countries such as Japan
and Saudi-Arabia.

Thus the country’s export had confined to a few industrial countries that are price makers
in the international market. Specifically trade with African countries is very much
limited.

53
With regard to imports, the study revealed that the country has been importing many
items and the trend showed that Ethiopia is highly import dependent and has been
importing strategic goods and other like finished and semi finished good the price of
which are high in international market.

Following the trade reform program by the current government the assumed benefit of
the country from the export sector, has constrained by both internal and external problem
such as the long term decline in price level in the international market, low price, and
income elasticity demand for Ethiopia exports, unfavorable demand for such primary
products, high commodity and market concentration, trade policies in both developed and
developing countries and so on.

As stated at the outset the main objective of the paper was model based identification of
the Trade Balance there by highlighting possible intervention areas to reduce the
problems. In this respect a model incorporating Lagged Trade balance, Real GDP,
REER,and trade openness was estimated based on the Engle-Granger single equation
dynamic analysis procedure. REER and lagged Trade balance are positively and
significantly related to the trade balance in the long run. However, Real GDP and Trade
liberalization are insignificant in the long run. In the short run REER is significant and
negatively related with the trade balance. However, the remaining variables are
insignificant.

54
5.2 Recommendations
Based on the finding of the paper the following policy recommendations are presented as
follows.

Export diversification towards high potential areas since Ethiopia has various
advantages for the development of its export sector. These include the abundant
and capable labor Force; low wage level; a wide range of weather and soil
conditions; preferential access to European market and proximity to the middle
East markets. Moreover the preferential access to the common market for
eastern and southern African states (COMESA) with a total population of more
than 260 million also offers substantial market opportunities for several export
items for the country.

Policies that enhance the diversification and facilitate the shift to wards the
export of semi processed and manufactured goods are essential. One obvious
option in this case is to make huge investment in the export sector through a
coordinated effort between the private sector and the government. Moreover,
policies that diversity the destination of export to new inroads, in addition to the
already existing is also essential.
As implication, in order to achieve the desired effects on trade balance,
Ethiopia should depend on policy that focusing on the variable of real
exchange rate, which is the nominal exchange rate to aggregate price level. At
the same time, the devaluation-based policies (affected through changes in
nominal exchange rate) must cooperate with stabilization policies (to ensure
domestic price level stability) to achieve the desired level of trade balance.

Create awareness among the people to change their attitude towards domestic
products which is highly in favor of foreign product goods.
Rationing the available foreign exchange that is allowing foreign exchange
only for necessary products.

55
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145. –

58
 Annex A
Year GDP Total Total import X M X X M rate Trade
export GDP GDP (%) M (%) Rate (%) Balance
(%) GDP (%)
1960/61 3640.4 192.6 219.3 5.36 6.00 87.8 0.7
1961/62 3784.6 188.7 235.6 5 6.2 80.1 -20% 7.4% -1.2%
1962/63 3953.8 199.5 257.4 5 6.5 77.5 5.7 9.3 -1.5
1963/64 4,30.5 223.4 276.2 5.4 6.7 80.9 12 7.5 -1.3
1964/65 4494.8 262.5 307.6 5.8 6.8 85.3 17.5 11.4 -1
1965/66 4837.3 289.8 375.7 6.0 7.8 77.1 10.4 22.1 -1.8
1966/67 5123.7 277 404.3 5.4 7.9 68.5 -4.4 7.6 -2.5
1967/68 5452.1 252.7 357.7 4.6 6.6 70.6 -8.8 -11.5 -2
1968/69 5723.2 266 432.5 4.6 7.5 61.5 5.3 20.9 -2.9
1969/70 6335 298.1 388.3 4.7 6.1 76.8 12.1 -10.2 -14
1970/71 6745.5 306.4 429.1 4.5 6.4 71.4 2.8 10.5 -1.9
1971/72 6003.5 318.2 467.1 5.3 7.8 68.1 3.9 8.9 -2.5
1972/73 6,,333.7 452.1 467.1 7.1 7.4 96.8 42.1 0.0 -0.3
1973/74 7022.1 452.09 489.1 8.4 7.0 120.8 30.7 4.7 1.4
1974/75 6470.8 525.6 648.3 7.0 10 69.9 -23.4 32.5 -3
1975/76 6989.1 636.8 674.6 7.5 9.7 77.9 16.1 4.1 -2.2
1976/77 7990 650.9 749.3 8.0 9.4 85 21.2 11.1 -1.4
1977/78 8454.2 710.2 673.3 7.7 8.0 96.7 2.2 -10.1 -0.3
1978/79 9407.8 948.5 1192.8 7.5 12.7 59.2 9.1 77.2 -5.2
1979/80 9087.3 8475 1432.9 10.4 15.8 66.2 33.6 20.1 -5.4
1980/81 9324.6 776084.2 1384.2 9.4 14.8 61.2 -10.6 -3.4 -5.7
1981/82 9811.8 829.14 1641.7 7.9 16.7 47.3 -8.4 18.6 -8.8
1982/83 11117.7 926.23 1752.9 7.5 15.8 47.3 6.8 6.8 -8.3
1983/84 10007.8 744.61 2067 9.3 20.7 44.8 11.8 17.9 11.4
1984/85 12101.9 927.32 1770.4 6.2 14.6 42.1 -19.7 -14.3 -8.4
1985/86 12565.1 795.28 2201.3 7.4 17.5 17.5 42.1 24.3 -10.1
1986/87 13312.5 773.63 2236.7 6.0 16.8 35.6 -14.2 1.6 -10.8
1987/88 13786.8 903.75 2274.6 5.6 16.5 34 -2.7 1.7 -10.9
1988/89 14545 736.77 2110.4 6.2 14.5 42.8 16.8 -7.2 -8.3
1989/90 15,698.5 61401 1832.3 4.7 11.7 40.2 -18.5 -13.2 -7
1990/91 17,978.8 752.9 2130.3 3.4 11.8 28.8 -16.7 16.3 -8.4
1991/92 19897.2 319.13 1811.2 1.6 9.1 17.6 48 -15.0 -7.5
1992/93 25209.23 949 3618.8 3.8 14.4 26.2 197.4 99.8 -10.6
1993/94 26282.7 1419.17 4740.4 5.4 18.0 29.9 49.5 31.0 -12.6
1994/95 31434.4 2825.12 6546.4 9.0 20.8 43.2 99.1 38.1 -11.8
1995/96 35093.4 2607.28 7416.9 7.4 21.1 35.2 -7.7 13.3 -13.7
1996/97 38189.4 3901.64 8511.3 10.2 22.3 45.8 49.6 14.8 -12.1
1997/98 41357.9 4137.56 9337.9 10.0 22.6 44.3 6 9.7 -12.6
1998/100 44810.2 3637.24 11702.1 8.1 26.1 31.1 -12.1 25.3 -18
1999/100 47648,9 3957.81 11438.4 8.3 24.0 34.6 8.8 -2.3 -15.7
2000/01 48261.1 3866.58 12313.9 8.0 25.5 31.4 -2.3 7.7 -17.5
2001/02 52.313.7 3835.96 14485.3 7.3 27.7 26.5 -0.8 17.6 -20.4
2002/03 57.369,4 3988.35 15929.6 7.0 27.8 25 4 10.0 -20.8
2003/04 63016,2 5176.58 18476.7 8.2 29.3 28 29.8 16.0 -21.1
2004/05 79149 7331.258 28295.69 9.26 28.169 32.9 41.6 38.8 -18.9
2003/06 131,648 18685.37 39873.075 6.5 30.3 21.8 18.47 18.8 -23.8
2006/07 171,989 10457.61 45126.438 6.08 26.2 23.2 20.4 13.175 -20.1
2007/08 24860.5 13,643.3 63146.146 5.48 25.4 21.6 30.5 39.9 -19.9
Source: National Bank of Ethiopia Annual Report

59
Annex D
--- GiveWin 2.02 session started at 17:33:46 on Monday 03 May 2010 ----

Ox version 3.00 (Windows) (C) J.A. Doornik, 1994-2001

Ox version 3.00 (Windows) (C) J.A. Doornik, 1994-2001

---- PcGive 10.0b session started at 17:33:46 on 3-05-2010 ----

Algebra code for Data1:

LTB = log(TB);
var3_1 = lag(var3,1);

Algebra code for Data3:

LTB = log(TB);
LTBlag = log(TBlag);
LRGDP = log(RGDP);
LREERI = log(REERI);
LFEA = log(FEA);
dummy = dummy(1992,1, 2008,1);
DLTB = diff(LTB,1);
DLTBlag = diff(LTBlag,1);
DLRGDP = diff(LRGDP,1);
DLREERI = diff(LREERI,1);
DLFEA = diff(LFEA,1);
Results saved to C:\Documents and Settings\welcome\My Documents\trans

Unit-root tests for 1977 (1) to 2008 (1)

DLTB: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.719** -0.77289 0.2199 1.391 0.1752 -2.913
1 -5.158** -0.40748 0.2234 1.105 0.2784 -2.908
0.1752
0 -6.606** -0.17883 0.2243 -2.930
0.2204

DLTBlag: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.655** -0.75973 0.2216 1.220 0.2328 -2.897
1 -5.270** -0.43765 0.2234 1.127 0.2690 -2.908
0.2328
0 -7.175** -0.19332 0.2244 -2.928
0.2659

DLRGDP: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -1.933 -0.67448 0.2754 0.9420 0.3543 -2.463

60
 1 -3.531* 0.10572 0.2748 -0.2430 0.8098 -2.494
0.3543
0 -5.145** 0.063678 0.2705 -2.555
0.6280

DLREERI: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.742** 0.13905 0.1518 0.7313 0.4707 -3.654
1 -4.054** 0.23313 0.1506 0.8582 0.3978 -3.698
0.4707
0 -4.045** 0.29436 0.1499 -3.735
0.5401

DLFEA: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.798** -0.20878 0.2296 1.354 0.1865 -2.827
1 -3.614* 0.031546 0.2329 -0.3835 0.7042 -2.826
0.1865
0 -5.695** -0.042531 0.2295 -2.883
0.3832

DLTB_1: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.655** -0.75973 0.2216 1.220 0.2328 -2.897
1 -5.270** -0.43765 0.2234 1.127 0.2690 -2.908
0.2328
0 -7.175** -0.19332 0.2244 -2.928
0.2659

DLTBlag_1: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -5.264** -0.93331 0.2286 1.353 0.1869 -2.835
1 -5.982** -0.58366 0.2319 1.659 0.1079 -2.834
0.1869
0 -6.966** -0.25419 0.2386 -2.806
0.1158

DLRGDP_1: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -0.8552 -0.066573 0.2735 0.8819 0.3853 -2.477
1 -0.3145 0.73091 0.2724 -0.7963 0.4323 -2.512
0.3853
0 -5.134** 0.065420 0.2708 -2.553
0.5034

DLREERI_1: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -5.340** -0.14526 0.1610 0.4156 0.6809 -3.537
1 -8.047** -0.076256 0.1587 0.4648 0.6455 -3.593
0.6809

61
 0 -16.31** -0.021529 0.1566 -3.648
0.8270

DLFEA_1: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.920** -0.24104 0.2286 1.383 0.1776 -2.835
1 -3.754** 0.0087986 0.2322 -0.3004 0.7660 -2.831
0.1776
0 -5.806** -0.048286 0.2287 -2.891
0.3797

Unit-root tests for 1977 (1) to 2008 (1)

DLTB: augmented Dickey-Fuller tests (T=32, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.688** -0.81075 0.2227 1.447 0.1593 -2.862
1 -5.087** -0.41500 0.2270 1.115 0.2744 -2.849
0.1593
0 -6.501** -0.17917 0.2279 -2.869
0.2029

DLTBlag: augmented Dickey-Fuller tests (T=32, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.588** -0.78617 0.2250 1.221 0.2326 -2.841
1 -5.164** -0.45502 0.2269 1.149 0.2604 -2.850
0.2326
0 -7.039** -0.19605 0.2282 -2.866
0.2599

DLRGDP: augmented Dickey-Fuller tests (T=32, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -2.546 -1.1809 0.2607 1.288 0.2085 -2.546
1 -4.123** -0.13449 0.2638 0.4034 0.6897 -2.549
0.2085
0 -5.668** -0.053699 0.2600 -2.605
0.4132

DLREERI: augmented Dickey-Fuller tests (T=32, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.673** 0.13965 0.1545 0.7268 0.4736 -3.592
1 -3.966** 0.23428 0.1532 0.8418 0.4070 -3.636
0.4736
0 -3.941** 0.29166 0.1524 -3.673
0.5493

DLFEA: augmented Dickey-Fuller tests (T=32, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.016** -0.30528 0.2275 1.459 0.1562 -2.818
1 -3.784** -0.040609 0.2320 -0.2092 0.8358 -2.805
0.1562

62
 0 -5.845** -0.082535 0.2282 -2.866
0.3517

DLTB_1: augmented Dickey-Fuller tests (T=32, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.588** -0.78617 0.2250 1.221 0.2326 -2.841
1 -5.164** -0.45502 0.2269 1.149 0.2604 -2.850
0.2326
0 -7.039** -0.19605 0.2282 -2.866
0.2599

DLTBlag_1: augmented Dickey-Fuller tests (T=32, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -5.262** -0.95014 0.2303 1.337 0.1923 -2.794
1 -5.986** -0.60228 0.2335 1.655 0.1090 -2.792
0.1923
0 -6.949** -0.27080 0.2404 -2.761
0.1193

DLRGDP_1: augmented Dickey-Fuller tests (T=32, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -1.419 -0.75952 0.2606 1.214 0.2354 -2.547
1 -0.7736 0.33938 0.2628 -0.4773 0.6368 -2.557
0.2354
0 -5.698** -0.058240 0.2592 -2.611
0.4376

DLREERI_1: augmented Dickey-Fuller tests (T=32, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -5.189** -0.12745 0.1622 0.4202 0.6776 -3.496
1 -7.723** -0.057256 0.1598 0.3884 0.7006 -3.552
0.6776
0 -15.70** -0.010524 0.1574 -3.609
0.8517

DLFEA_1: augmented Dickey-Fuller tests (T=32, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.085** -0.30581 0.2272 1.473 0.1524 -2.821
1 -3.875** -0.035989 0.2319 -0.2093 0.8357 -2.806
0.1524
0 -5.914** -0.076369 0.2281 -2.867
0.3450

Unit-root tests for 1978 (1) to 2008 (1)

DLTB: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.615** -0.76095 0.2229 1.425 0.1657 -2.882
1 -4.904** -0.38883 0.2270 0.9006 0.3755 -2.874
0.1657

63
 0 -6.584** -0.19329 0.2262 -2.910
0.2556

DLTBlag: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.644** -0.77663 0.2237 1.339 0.1918 -2.875
1 -5.076** -0.42248 0.2269 1.144 0.2625 -2.875
0.1918
0 -6.471** -0.17794 0.2281 -2.894
0.2267

DLRGDP: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -1.906 -0.68030 0.2801 0.9281 0.3616 -2.425
1 -3.481* 0.10180 0.2794 -0.2290 0.8205 -2.458
0.3616
0 -5.070** 0.061384 0.2748 -2.521
0.6381

DLREERI: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.671** 0.084156 0.1535 0.5319 0.5992 -3.628
1 -3.828** 0.13788 0.1515 1.026 0.3138 -3.682
0.5992
0 -4.034** 0.27846 0.1517 -3.710
0.5280

DLFEA: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.679** -0.19771 0.2334 1.293 0.2070 -2.790
1 -3.529* 0.039121 0.2362 -0.4350 0.6669 -2.795
0.2070
0 -5.627** -0.046318 0.2328 -2.852
0.4059

DLTB_1: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.644** -0.77663 0.2237 1.339 0.1918 -2.875
1 -5.076** -0.42248 0.2269 1.144 0.2625 -2.875
0.1918
0 -6.471** -0.17794 0.2281 -2.894
0.2267

DLTBlag_1: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.569** -0.75654 0.2253 1.217 0.2342 -2.861
1 -5.135** -0.43136 0.2272 1.124 0.2706 -2.872
0.2342
0 -6.761** -0.18731 0.2282 -2.893
0.2681

64
DLRGDP_1: augmented Dickey-Fuller tests (T=31, Constant)
D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -0.8440 -0.070884 0.2782 0.8661 0.3941 -2.439
1 -0.3151 0.72581 0.2770 -0.7795 0.4422 -2.476
0.3941
0 -5.059** 0.063352 0.2751 -2.519
0.5170

DLREERI_1: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.773** 0.099993 0.1531 0.7789 0.4428 -3.633
1 -4.058** 0.20418 0.1521 0.9056 0.3729 -3.675
0.4428
0 -4.032** 0.27280 0.1516 -3.711
0.5018

DLFEA_1: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.794** -0.22833 0.2323 1.377 0.1797 -2.800
1 -3.593* 0.021598 0.2360 -0.3222 0.7497 -2.796
0.1797
0 -5.623** -0.041833 0.2323 -2.857
0.3804

DLTB_2: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.569** -0.75654 0.2253 1.217 0.2342 -2.861
1 -5.135** -0.43136 0.2272 1.124 0.2706 -2.872
0.2342
0 -6.761** -0.18731 0.2282 -2.893
0.2681

DLTBlag_2: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -5.020** -0.86242 0.2276 1.309 0.2014 -2.841
1 -5.675** -0.52234 0.2305 1.502 0.1442 -2.844
0.2014
0 -6.779** -0.21802 0.2354 -2.831
0.1529

DLRGDP_2: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 3.08640* 1.1794 0.2756 0.3306 0.7435 -2.458
1 0.5921 1.7277 0.2712 -0.8692 0.3921 -2.518
0.7435
0 -0.05003 0.95756 0.2700 -2.556
0.6610

DLREERI_2: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob

65
 2 -5.477** -0.17157 0.1597 0.4910 0.6274 -3.549
1 -8.177** -0.090168 0.1575 0.5375 0.5951 -3.605
0.6274
0 -16.45** -0.027069 0.1556 -3.659
0.7721

DLFEA_2: augmented Dickey-Fuller tests (T=31, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.819** -0.24285 0.2328 1.358 0.1856 -2.795
1 -3.654* 0.0098439 0.2363 -0.2966 0.7690 -2.793
0.1856
0 -5.672** -0.048100 0.2326 -2.855
0.3927

Unit-root tests for 1978 (1) to 2008 (1)

DLTB: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.640** -0.80894 0.2247 1.540 0.1356 -2.839
1 -4.841** -0.39181 0.2304 0.8842 0.3844 -2.816
0.1356
0 -6.505** -0.19700 0.2295 -2.852
0.2217

DLTBlag: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.638** -0.82892 0.2261 1.406 0.1716 -2.827
1 -5.021** -0.44144 0.2301 1.197 0.2416 -2.819
0.1716
0 -6.360** -0.17727 0.2319 -2.831
0.1969

DLRGDP: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -2.526 -1.2034 0.2649 1.282 0.2110 -2.510
1 -4.071** -0.14308 0.2681 0.4195 0.6781 -2.513
0.2110
0 -5.588** -0.057140 0.2641 -2.571
0.4141

DLREERI: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.575* 0.081668 0.1564 0.5023 0.6197 -3.564
1 -3.699** 0.12938 0.1542 1.018 0.3176 -3.619
0.6197
0 -3.928** 0.27984 0.1543 -3.645
0.5404

DLFEA: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.884** -0.31223 0.2318 1.432 0.1640 -2.777

66
 1 -3.663** -0.036761 0.2363 -0.2197 0.8278 -2.766
0.1640
0 -5.743** -0.082497 0.2322 -2.828
0.3641

DLTB_1: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.638** -0.82892 0.2261 1.406 0.1716 -2.827
1 -5.021** -0.44144 0.2301 1.197 0.2416 -2.819
0.1716
0 -6.360** -0.17727 0.2319 -2.831
0.1969

DLTBlag_1: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.473** -0.78002 0.2291 1.206 0.2386 -2.800
1 -4.982** -0.44930 0.2310 1.132 0.2676 -2.811
0.2386
0 -6.541** -0.19177 0.2322 -2.829
0.2696

DLRGDP_1: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -1.422 -0.79676 0.2648 1.212 0.2362 -2.511
1 -3.7775* 0.32383 0.2671 -0.4554 0.6525 -2.52
0.2362
0 -5.620** -0.062434 0.2633 -2.577
0.4429

DLREERI_1: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.695** 0.097435 0.1560 0.7573 0.4557 -3.569
1 -3.959** 0.19942 0.1548 0.8482 0.4038 -3.611
0.4557
0 -3.927** 0.25886 0.1540 -3.650
0.5350

DLFEA_1: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.951** -0.30780 0.2316 1.444 0.1607 -2.779
1 -3.718** -0.040734 0.2362 -0.1935 0.8480 -2.766
0.1607
0 -5.721** -0.080124 0.2321 -2.830
0.3604

DLTB_2: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -4.473** -0.78002 0.2291 1.206 0.2386 -2.800
1 -4.982** -0.44930 0.2310 1.132 0.2676 -2.811
0.2386

67
 0 -6.541** -0.19177 0.2322 -2.829
0.2696

DLTBlag_2: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -5.064** -0.86635 0.2261 1.293 0.2073 -2.827
1 -5.750** -0.53287 0.2289 1.479 0.1508 -2.829
0.2073
0 -6.905** -0.23594 0.2337 -2.816
0.1616

DLRGDP_2: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.6680* -0.47527 0.2654 0.8735 0.3904 -2.506
1 0.08324 1.1050 0.2642 -0.5547 0.5837 -2.542
0.3904
0 -0.4826 0.59168 0.2609 -2.595
0.5926

DLREERI_2: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -5.405** -0.15123 0.1585 0.5289 0.6014 -3.537
1 -7.938** -0.064505 0.1564 0.4468 0.6586 -3.591
0.6014
0 -16.05** -0.011849 0.1541 -3.648
0.7907

DLFEA_2: augmented Dickey-Fuller tests (T=31, Constant, Trend)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
2 -3.974** -0.29737 0.2312 1.437 0.1626 -2.782
1 -3.771** -0.028284 0.2357 -0.2219 0.8261 -2.770
0.1626
0 -5.783** -0.071976 0.2317 -2.833
0.3615

EQ( 1) Modelling LTB by OLS (using Data3)

The estimation sample is: 1974 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant 4.34059 2.557 1.70 0.104 0.1158
LTBlag 0.626841 0.2086 3.01 0.007 0.2910
LTBlag_1 -0.0446700 0.2163 -0.207 0.838 0.0019
LRGDP -0.118381 0.1817 -0.651 0.522 0.0189
LRGDP_1 0.214417 0.2320 0.924 0.365 0.0374
LRGDP_2 -0.0444206 0.2239 -0.198 0.845 0.0018
LREERI 0.0160768 0.1189 0.135 0.894 0.0008
LREERI_1 -0.230498 0.1049 -2.20 0.039 0.1800
LREERI_2 -0.0292558 0.1085 -0.270 0.790 0.0033
LFEA -0.0120923 0.2328 -0.0519 0.959 0.0001
LFEA_1 0.0896793 0.2572 0.349 0.731 0.0055
LFEA_2 -0.319302 0.1973 -1.62 0.120 0.1064
dummy -0.0391925 0.1457 -0.269 0.790 0.0033

68
sigma 0.226482 RSS 1.12847474
R^2 0.835881 F(12,22) = 9.337 [0.000]**
log-likelihood 10.4406 DW 2
no. of observations 35 no. of parameters 13
mean(LTB) 3.6923 var(LTB) 0.196456

AR 1-2 test: F(2,20) = 0.41192 [0.6679]

ARCH 1-1 test: F(1,20) = 1.2627 [0.2745]
Normality test: Chi^2(2) = 1.7195 [0.4233]
hetero test: Chi^2(23)= 28.847 [0.1854]
Not enough observations for hetero-X test
RESET test: F(1,21) = 2.6533 [0.1182]

Solved static long run equation for LTB

Coefficient Std.Error t-value t-prob
Constant 4.34059 2.557 1.70 0.100
LTBlag 0.582171 0.1887 3.09 0.004
LRGDP 0.0516160 0.1851 0.279 0.782
LREERI -0.243677 0.2235 -1.09 0.284
LFEA -0.241715 0.1830 -1.32 0.197
dummy -0.0391925 0.1457 -0.269 0.790
Long-run sigma = 0.226482

ECM = LTB - 4.34059 - 0.582171*LTBlag - 0.051616*LRGDP + 0.243677*LREERI

+ 0.241715*LFEA + 0.0391925*dummy;
WALD test: Chi^2(5) = 86.3541 [0.0000] **

Analysis of lag structure, coefficients:

Lag 0 Lag 1 Lag 2 Sum SE(Sum)
LTB -1 0 0 -1 0
Constant 4.34 0 0 4.34 2.56
LTBlag 0.627 -0.0447 0 0.582 0.189
LRGDP -0.118 0.214 -0.0444 0.0516 0.185
LREERI 0.0161 -0.23 -0.0293 -0.244 0.223
LFEA -0.0121 0.0897 -0.319 -0.242 0.183
dummy -0.0392 0 0 -0.0392 0.146

EQ( 2) Modelling LTB by OLS (using Data3)

The estimation sample is: 1974 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant 4.29555 2.353 1.83 0.081 0.1266
LTBlag 0.624859 0.2006 3.12 0.005 0.2967
LTBlag_1 -0.0393679 0.1865 -0.211 0.835 0.0019
LRGDP -0.121410 0.1683 -0.721 0.478 0.0221
LRGDP_1 0.214232 0.2269 0.944 0.355 0.0373
LRGDP_2 -0.0445865 0.2190 -0.204 0.840 0.0018
LREERI 0.0184222 0.1075 0.171 0.865 0.0013
LREERI_1 -0.229058 0.09893 -2.32 0.030 0.1890
LREERI_2 -0.0286854 0.1056 -0.272 0.788 0.0032
LFEA_1 0.0819689 0.2054 0.399 0.694 0.0069
LFEA_2 -0.318828 0.1928 -1.65 0.112 0.1063
dummy -0.0402903 0.1410 -0.286 0.778 0.0035

sigma 0.221518 RSS 1.1286131

R^2 0.835861 F(11,23) = 10.65 [0.000]**
log-likelihood 10.4384 DW 2

69
no. of observations 35 no. of parameters 12
mean(LTB) 3.6923 var(LTB) 0.196456

AR 1-2 test: F(2,21) = 0.42588 [0.6587]

ARCH 1-1 test: F(1,21) = 1.3740 [0.2542]
Normality test: Chi^2(2) = 1.6486 [0.4385]
hetero test: F(21,1) = 0.16794 [0.9764]
Not enough observations for hetero-X test
RESET test: F(1,22) = 2.7932 [0.1088]

EQ( 3) Modelling LTB by OLS (using Data3)

The estimation sample is: 1974 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant 4.50995 1.951 2.31 0.030 0.1820
LTBlag 0.621059 0.1953 3.18 0.004 0.2965
LTBlag_1 -0.0468003 0.1777 -0.263 0.794 0.0029
LRGDP -0.117475 0.1634 -0.719 0.479 0.0211
LRGDP_1 0.217804 0.2213 0.984 0.335 0.0388
LRGDP_2 -0.0438776 0.2144 -0.205 0.840 0.0017
LREERI_1 -0.232039 0.09539 -2.43 0.023 0.1978
LREERI_2 -0.0311676 0.1024 -0.304 0.764 0.0038
LFEA_1 0.0682594 0.1853 0.368 0.716 0.0056
LFEA_2 -0.319363 0.1888 -1.69 0.104 0.1065
dummy -0.0487280 0.1294 -0.376 0.710 0.0059

sigma 0.216992 RSS 1.13005339

R^2 0.835651 F(10,24) = 12.2 [0.000]**
log-likelihood 10.4161 DW 1.99
no. of observations 35 no. of parameters 11
mean(LTB) 3.6923 var(LTB) 0.196456

AR 1-2 test: F(2,22) = 0.36714 [0.6969]

ARCH 1-1 test: F(1,22) = 1.2779 [0.2705]
Normality test: Chi^2(2) = 1.2767 [0.5282]
hetero test: F(19,4) = 0.39795 [0.9241]
Not enough observations for hetero-X test
RESET test: F(1,23) = 2.5860 [0.1215]

EQ( 4) Modelling LTB by OLS (using Data3)

The estimation sample is: 1974 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant 4.37713 1.805 2.43 0.023 0.1905
LTBlag 0.614109 0.1886 3.26 0.003 0.2978
LTBlag_1 -0.0398376 0.1710 -0.233 0.818 0.0022
LRGDP -0.116102 0.1601 -0.725 0.475 0.0206
LRGDP_1 0.192913 0.1813 1.06 0.297 0.0433
LREERI_1 -0.232540 0.09352 -2.49 0.020 0.1983
LREERI_2 -0.0327250 0.1002 -0.327 0.747 0.0043
LFEA_1 0.0712339 0.1812 0.393 0.698 0.0061
LFEA_2 -0.327842 0.1807 -1.81 0.082 0.1164
dummy -0.0507187 0.1266 -0.401 0.692 0.0064

sigma 0.212793 RSS 1.13202472

R^2 0.835365 F(9,25) = 14.09 [0.000]**
log-likelihood 10.3856 DW 1.97

70
no. of observations 35 no. of parameters 10
mean(LTB) 3.6923 var(LTB) 0.196456

AR 1-2 test: F(2,23) = 0.35336 [0.7061]

ARCH 1-1 test: F(1,23) = 1.2590 [0.2734]
Normality test: Chi^2(2) = 1.3442 [0.5106]
hetero test: F(17,7) = 0.64754 [0.7813]
Not enough observations for hetero-X test
RESET test: F(1,24) = 2.5540 [0.1231]

EQ( 5) Modelling LTB by OLS (using Data3)

The estimation sample is: 1974 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant 4.34833 1.767 2.46 0.021 0.1888
LTBlag 0.586215 0.1430 4.10 0.000 0.3925
LRGDP -0.113980 0.1569 -0.727 0.474 0.0199
LRGDP_1 0.187624 0.1765 1.06 0.298 0.0416
LREERI_1 -0.229444 0.09087 -2.52 0.018 0.1969
LREERI_2 -0.0374805 0.09626 -0.389 0.700 0.0058
LFEA_1 0.0726327 0.1778 0.409 0.686 0.0064
LFEA_2 -0.326909 0.1773 -1.84 0.077 0.1156
dummy -0.0459427 0.1226 -0.375 0.711 0.0054

sigma 0.208887 RSS 1.13448249

R^2 0.835007 F(8,26) = 16.45 [0.000]**
log-likelihood 10.3477 DW 1.92
no. of observations 35 no. of parameters 9
mean(LTB) 3.6923 var(LTB) 0.196456

AR 1-2 test: F(2,24) = 0.37400 [0.6919]

ARCH 1-1 test: F(1,24) = 1.0647 [0.3124]
Normality test: Chi^2(2) = 1.6094 [0.4472]
hetero test: F(15,10) = 0.64175 [0.7881]
Not enough observations for hetero-X test
RESET test: F(1,25) = 2.6663 [0.1150]

EQ( 6) Modelling LTB by OLS (using Data3)

The estimation sample is: 1974 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant 3.87571 1.264 3.07 0.005 0.2582
LTBlag 0.610789 0.1263 4.84 0.000 0.4641
LRGDP -0.119468 0.1538 -0.777 0.444 0.0219
LRGDP_1 0.189038 0.1737 1.09 0.286 0.0420
LREERI_1 -0.226325 0.08908 -2.54 0.017 0.1929
LFEA_1 0.0813787 0.1736 0.469 0.643 0.0081
LFEA_2 -0.311667 0.1702 -1.83 0.078 0.1105
dummy -0.0378537 0.1189 -0.318 0.753 0.0037

sigma 0.205579 RSS 1.14109812

R^2 0.834045 F(7,27) = 19.38 [0.000]**
log-likelihood 10.2459 DW 1.99
no. of observations 35 no. of parameters 8
mean(LTB) 3.6923 var(LTB) 0.196456

AR 1-2 test: F(2,25) = 0.63256 [0.5395]

71
ARCH 1-1 test: F(1,25) = 1.2619 [0.2720]
Normality test: Chi^2(2) = 1.5083 [0.4704]
hetero test: F(13,13) = 0.87193 [0.5957]
Not enough observations for hetero-X test
RESET test: F(1,26) = 2.6194 [0.1176]

EQ( 7) Modelling LTB by OLS (using Data3)

The estimation sample is: 1974 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant 3.92376 1.243 3.16 0.004 0.2626
LTBlag 0.608205 0.1244 4.89 0.000 0.4604
LRGDP -0.109622 0.1502 -0.730 0.472 0.0187
LRGDP_1 -0.193485 0.1710 1.13 0.268 0.0437
LREERI_1 -0.234888 0.08597 -2.73 0.011 0.2105
LFEA_2 -0.245359 0.09337 -2.63 0.014 0.1978
dummy -0.0276565 0.1153 -0.240 0.812 0.0021

sigma 0.202695 RSS 1.15038955

R^2 0.832694 F(6,28) = 23.23 [0.000]**
log-likelihood 10.104 DW 1.99
no. of observations 35 no. of parameters 7
mean(LTB) 3.6923 var(LTB) 0.196456

AR 1-2 test: F(2,26) = 0.33756 [0.7166]

ARCH 1-1 test: F(1,26) = 1.0455 [0.3160]
Normality test: Chi^2(2) = 2.1910 [0.3344]
hetero test: F(11,16) = 0.90987 [0.5526]
Not enough observations for hetero-X test
RESET test: F(1,27) = 2.2718 [0.1434]

EQ( 8) Modelling LTB by OLS (using Data3)

The estimation sample is: 1974 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant 4.03587 1.223 3.30 0.003 0.2730
LTBlag 0.592739 0.1216 4.87 0.000 0.4503
LRGDP_1 -0.0974873 0.1084 0.899 0.376 0.0271
LREERI_1 0.237177 0.08521 -2.78 0.009 0.2108
LFEA_2 -0.267162 0.08775 -3.04 0.005 0.2422
dummy -0.0269462 0.1143 -0.236 0.815 0.0019

sigma 0.201056 RSS 1.17227689

R^2 0.829511 F(5,29) = 28.22 [0.000]**
log-likelihood 9.77415 DW 2.02
no. of observations 35 no. of parameters 6
mean(LTB) 3.6923 var(LTB) 0.196456

AR 1-2 test: F(2,27) = 0.47079 [0.6295]

ARCH 1-1 test: F(1,27) = 0.90511 [0.3499]
Normality test: Chi^2(2) = 1.7126 [0.4247]
hetero test: F(9,19) = 1.0206 [0.4587]
Not enough observations for hetero-X test
RESET test: F(1,28) = 1.9852 [0.1699]
ECM [1974 to 2008] saved to Data3

Unit-root tests for 1976 (1) to 2008 (1)

72
ECM: augmented Dickey-Fuller tests (T=33, Constant)
D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
1 -4.684** -0.19836 0.1911 0.8524 0.4007 -3.223
0 -5.827** -0.043246 0.1903 -3.260
0.4007

Unit-root tests for 1977 (1) to 2008 (1)

ECM: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
1 -4.557** -0.20668 0.1943 0.8550 0.3996 -3.188
0 -5.719** -0.043260 0.1934 -3.225
0.3996

ECM_1: augmented Dickey-Fuller tests (T=32, Constant)

D-lag t-adf beta Y_1 sigma t-DY_lag t-prob AIC F-
prob
1 -4.580** -0.19998 0.1944 0.8324 0.4120 -3.187
0 -5.735** -0.043861 0.1934 -3.226
0.4120
EQ( 2) Modelling DLTB by OLS (using Data1)
The estimation sample is: 1975 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant -0.00445624 0.08977 -0.0496 0.961 0.0001
DLTBlag 0.553110 0.5728 0.966 0.347 0.0492
DLTBlag_1 -0.105385 0.1898 -0.555 0.586 0.0168
DLRGDP -0.0909927 0.1717 -0.530 0.603 0.0154
DLRGDP_1 0.200674 0.2055 0.976 0.342 0.0503
DLRGDP_2 -0.0207418 0.1527 -0.136 0.893 0.0010
DLREERI -0.123344 0.1758 -0.702 0.492 0.0266
DLREERI_1 -0.301912 0.1643 -1.84 0.083 0.1579
DLREERI_2 -0.0753600 0.08957 -0.841 0.411 0.0378
DLFEA -0.139030 0.2470 -0.563 0.581 0.0173
DLFEA_1 -0.0392728 0.2371 -0.166 0.870 0.0015
DLFEA_2 -0.298002 0.2257 -1.32 0.203 0.0883
dummy -0.569240 0.2405 -2.37 0.029 0.2374
dummy_1 0.591389 0.3514 1.68 0.110 0.1360
dummy_2 0.0227027 0.3602 0.0630 0.950 0.0002
ECM_1 -1.14298 0.7497 -1.52 0.145 0.1144

sigma 0.198983 RSS 0.712696409

R^2 0.61149 F(15,18) = 1.889 [0.100]
log-likelihood 17.4621 DW 2.19
no. of observations 34 no. of parameters 16
mean(DLTB) -0.0506307 var(DLTB) 0.053954

AR 1-2 test: F(2,16) = 1.9703 [0.1718]

ARCH 1-1 test: F(1,16) = 0.11998 [0.7336]
Normality test: Chi^2(2) = 0.41660 [0.8120]
Not enough observations for hetero test
Not enough observations for hetero-X test
RESET test: F(1,17) = 0.68295 [0.4200]

73
EQ( 3) Modelling DLTB by OLS (using Data1)
The estimation sample is: 1975 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant -0.00382831 0.08731 -0.0438 0.965 0.0001
DLTBlag 0.560046 0.5556 1.01 0.326 0.0508
DLTBlag_1 -0.0970435 0.1749 -0.555 0.585 0.0159
DLRGDP -0.0901926 0.1671 -0.540 0.596 0.0151
DLRGDP_1 0.203363 0.1992 1.02 0.320 0.0520
DLREERI -0.128145 0.1677 -0.764 0.454 0.0298
DLREERI_1 -0.307698 0.1546 -1.99 0.061 0.1726
DLREERI_2 -0.0787766 0.08372 -0.941 0.359 0.0445
DLFEA -0.138785 0.2406 -0.577 0.571 0.0172
DLFEA_1 -0.0433948 0.2290 -0.189 0.852 0.0019
DLFEA_2 -0.302922 0.2169 -1.40 0.179 0.0931
dummy -0.568179 0.2341 -2.43 0.025 0.2367
dummy_1 0.591313 0.3422 1.73 0.100 0.1358
dummy_2 0.0184118 0.3494 0.0527 0.959 0.0001
ECM_1 -1.15008 0.7283 -1.58 0.131 0.1160

sigma 0.193775 RSS 0.713427189

R^2 0.611092 F(14,19) = 2.132 [0.063]
log-likelihood 17.4447 DW 2.2
no. of observations 34 no. of parameters 15
mean(DLTB) -0.0506307 var(DLTB) 0.053954

AR 1-2 test: F(2,17) = 2.0890 [0.1545]

ARCH 1-1 test: F(1,17) = 0.13626 [0.7166]
Normality test: Chi^2(2) = 0.46057 [0.7943]
Not enough observations for hetero test
Not enough observations for hetero-X test
RESET test: F(1,18) = 0.59991 [0.4487]

EQ( 4) Modelling DLTB by OLS (using Data1)

The estimation sample is: 1975 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant -0.0143196 0.06586 -0.217 0.830 0.0024
DLTBlag 0.497761 0.4370 1.14 0.268 0.0609
DLTBlag_1 -0.107271 0.1623 -0.661 0.516 0.0214
DLRGDP -0.101231 0.1528 -0.663 0.515 0.0215
DLRGDP_1 0.184871 0.1695 1.09 0.288 0.0562
DLREERI -0.112130 0.1413 -0.794 0.437 0.0305
DLREERI_1 -0.290929 0.1236 -2.35 0.029 0.2169
DLREERI_2 -0.0781648 0.08162 -0.958 0.350 0.0439
DLFEA -0.116520 0.2048 -0.569 0.576 0.0159
DLFEA_2 -0.282735 0.1843 -1.53 0.141 0.1052
dummy -0.552622 0.2139 -2.58 0.018 0.2503
dummy_1 0.607287 0.3236 1.88 0.075 0.1498
dummy_2 -0.0130543 0.2999 -0.0435 0.966 0.0001
ECM_1 -1.06418 0.5562 -1.91 0.070 0.1547

sigma 0.189047 RSS 0.714775346

R^2 0.610357 F(13,20) = 2.41 [0.037]*
log-likelihood 17.4126 DW 2.2
no. of observations 34 no. of parameters 14
mean(DLTB) -0.0506307 var(DLTB) 0.053954

74
AR 1-2 test: F(2,18) = 2.1798 [0.1420]
ARCH 1-1 test: F(1,18) = 0.093196 [0.7637]
Normality test: Chi^2(2) = 0.47043 [0.7904]
hetero test: Chi^2(23)= 23.497 [0.4321]
Not enough observations for hetero-X test
RESET test: F(1,19) = 0.68478 [0.4182]

EQ( 5) Modelling DLTB by OLS (using Data1)

The estimation sample is: 1975 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant -0.0136443 0.06246 -0.218 0.829 0.0023
DLTBlag 0.503022 0.4099 1.23 0.233 0.0669
DLTBlag_1 -0.110032 0.1458 -0.755 0.459 0.0264
DLRGDP -0.0991019 0.1412 -0.702 0.491 0.0229
DLRGDP_1 0.185653 0.1645 1.13 0.272 0.0572
DLREERI -0.114682 0.1254 -0.914 0.371 0.0383
DLREERI_1 -0.292313 0.1166 -2.51 0.020 0.2304
DLREERI_2 -0.0775949 0.07862 -0.987 0.335 0.0443
DLFEA -0.120312 0.1809 -0.665 0.513 0.0206
DLFEA_2 -0.285702 0.1672 -1.71 0.102 0.1221
dummy -0.554647 0.2037 -2.72 0.013 0.2609
dummy_1 0.596747 0.2094 2.85 0.010 0.2789
ECM_1 -1.07667 0.4651 -2.32 0.031 0.2033

sigma 0.1845 RSS 0.71484304

R^2 0.61032 F(12,21) = 2.741 [0.021]*
log-likelihood 17.411 DW 2.19
no. of observations 34 no. of parameters 13
mean(DLTB) -0.0506307 var(DLTB) 0.053954

AR 1-2 test: F(2,19) = 0.89648 [0.4246]

ARCH 1-1 test: F(1,19) = 0.10093 [0.7542]
Normality test: Chi^2(2) = 0.48436 [0.7849]
hetero test: Chi^2(22)= 21.244 [0.5057]
Not enough observations for hetero-X test
RESET test: F(1,20) = 0.30858 [0.5847]

EQ( 6) Modelling DLTB by OLS (using Data1)

The estimation sample is: 1975 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant -0.0283704 0.05766 -0.492 0.628 0.0109
DLTBlag 0.380622 0.3616 1.05 0.304 0.0480
DLTBlag_1 -0.100533 0.1433 -0.702 0.490 0.0219
DLRGDP -0.121755 0.1353 -0.900 0.378 0.0355
DLRGDP_1 0.156265 0.1564 0.999 0.329 0.0434
DLREERI -0.0904414 0.1185 -0.763 0.453 0.0258
DLREERI_1 -0.268413 0.1095 -2.45 0.023 0.2146
DLREERI_2 -0.0846555 0.07691 -1.10 0.283 0.0522
DLFEA_2 -0.268513 0.1630 -1.65 0.114 0.1098
dummy -0.551210 0.2010 -2.74 0.012 0.2547
dummy_1 0.593197 0.2067 2.87 0.009 0.2725
ECM_1 -0.959504 0.4249 -2.26 0.034 0.1882

sigma 0.182147 RSS 0.729904361

75
R^2 0.60211 F(11,22) = 3.027 [0.013]*
log-likelihood 17.0565 DW 2.09
no. of observations 34 no. of parameters 12
mean(DLTB) -0.0506307 var(DLTB) 0.053954

AR 1-2 test: F(2,20) = 0.49021 [0.6197]

ARCH 1-1 test: F(1,20) =0.0048358 [0.9453]
Normality test: Chi^2(2) = 0.39605 [0.8203]
hetero test: F(20,1) = 0.084145 [0.9975]
Not enough observations for hetero-X test
RESET test: F(1,21) = 0.073731 [0.7886]

EQ( 7) Modelling DLTB by OLS (using Data1)

The estimation sample is: 1975 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant -0.0179936 0.05512 -0.326 0.747 0.0046
DLTBlag 0.452409 0.3430 1.32 0.200 0.0703
DLRGDP -0.126839 0.1336 -0.949 0.352 0.0377
DLRGDP_1 0.163798 0.1543 1.06 0.299 0.0467
DLREERI -0.0876976 0.1171 -0.749 0.462 0.0238
DLREERI_1 -0.282243 0.1065 -2.65 0.014 0.2339
DLREERI_2 -0.0944770 0.07478 -1.26 0.219 0.0649
DLFEA_2 -0.289083 0.1586 -1.82 0.081 0.1262
dummy -0.548649 0.1988 -2.76 0.011 0.2488
dummy_1 0.585940 0.2041 2.87 0.009 0.2638
ECM_1 -1.02872 0.4087 -2.52 0.019 0.2159

sigma 0.180126 RSS 0.746243831

R^2 0.593203 F(10,23) = 3.354 [0.008]**
log-likelihood 16.6802 DW 2.1
no. of observations 34 no. of parameters 11
mean(DLTB) -0.0506307 var(DLTB) 0.053954

AR 1-2 test: F(2,21) = 1.0500 [0.3676]

ARCH 1-1 test: F(1,21) =0.0037696 [0.9516]
Normality test: Chi^2(2) = 0.11180 [0.9456]
hetero test: F(18,4) = 0.13972 [0.9988]
Not enough observations for hetero-X test
RESET test: F(1,22) =0.0024476 [0.9610]

EQ( 8) Modelling DLTB by OLS (using Data1)

The estimation sample is: 1975 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant -0.0120011 0.05403 -0.222 0.826 0.0021
DLTBlag 0.413254 0.3358 1.23 0.230 0.0593
DLRGDP -0.146808 0.1297 -1.13 0.269 0.0507
DLRGDP_1 0.135521 0.1482 0.914 0.370 0.0337
DLREERI_1 -0.222233 0.06952 -3.20 0.004 0.2986
DLREERI_2 -0.0695199 0.06633 -1.05 0.305 0.0438
DLFEA_2 -0.289553 0.1571 -1.84 0.078 0.1239
dummy -0.575663 0.1937 -2.97 0.007 0.2690
dummy_1 0.625520 0.1953 3.20 0.004 0.2994
ECM_1 -0.957641 0.3939 -2.43 0.023 0.1976

sigma 0.17847 RSS 0.7644406

76
R^2 0.583283 F(9,24) = 3.733 [0.005]**
log-likelihood 16.2706 DW 2.03
no. of observations 34 no. of parameters 10
mean(DLTB) -0.0506307 var(DLTB) 0.053954

AR 1-2 test: F(2,22) = 0.76574 [0.4770]

ARCH 1-1 test: F(1,22) = 0.088202 [0.7693]
Normality test: Chi^2(2) = 0.38800 [0.8237]
hetero test: F(16,7) = 0.24490 [0.9906]
Not enough observations for hetero-X test
RESET test: F(1,23) = 0.23570 [0.6319]

EQ( 9) Modelling DLTB by OLS (using Data1)

The estimation sample is: 1975 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant -0.0253283 0.05186 -0.488 0.629 0.0095
DLTBlag 0.245079 0.2801 0.875 0.390 0.0297
DLRGDP -0.159367 0.1286 -1.24 0.227 0.0579
DLREERI_1 -0.202703 0.06594 -3.07 0.005 0.2743
DLREERI_2 -0.0807915 0.06496 -1.24 0.225 0.0583
DLFEA_2 -0.251425 0.1510 -1.66 0.108 0.0998
dummy -0.575447 0.1931 -2.98 0.006 0.2622
dummy_1 0.653680 0.1923 3.40 0.002 0.3162
ECM_1 -0.782747 0.3432 -2.28 0.031 0.1722

sigma 0.177884 RSS 0.791067359

R^2 0.568768 F(8,25) = 4.122 [0.003]**
log-likelihood 15.6885 DW 2.04
no. of observations 34 no. of parameters 9
mean(DLTB) -0.0506307 var(DLTB) 0.053954

AR 1-2 test: F(2,23) = 0.38650 [0.6838]

ARCH 1-1 test: F(1,23) = 0.20296 [0.6566]
Normality test: Chi^2(2) = 0.96592 [0.6170]
hetero test: F(14,10) = 0.40149 [0.9420]
Not enough observations for hetero-X test
RESET test: F(1,24) = 0.043129 [0.8372]

EQ(10) Modelling DLTB by OLS (using Data1)

The estimation sample is: 1975 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant -0.0163427 0.05189 -0.315 0.755 0.0038
DLTBlag 0.371771 0.2636 1.41 0.170 0.0711
DLRGDP -0.154670 0.1299 -1.19 0.244 0.0517
DLREERI_1 -0.179739 0.06396 -2.81 0.009 0.2329
DLFEA_2 -0.255131 0.1526 -1.67 0.106 0.0971
dummy -0.591169 0.1947 -3.04 0.005 0.2619
dummy_1 0.667463 0.1939 3.44 0.002 0.3130
ECM_1 -0.914801 0.3298 -2.77 0.010 0.2284

sigma 0.179744 RSS 0.840008561

R^2 0.542089 F(7,26) = 4.397 [0.002]**
log-likelihood 14.6681 DW 1.99
no. of observations 34 no. of parameters 8
mean(DLTB) -0.0506307 var(DLTB) 0.053954

77
AR 1-2 test: F(2,24) = 0.77174 [0.4733]
ARCH 1-1 test: F(1,24) = 0.18346 [0.6722]
Normality test: Chi^2(2) = 0.50723 [0.7760]
hetero test: F(12,13) = 0.56348 [0.8353]
Not enough observations for hetero-X test
RESET test: F(1,25) = 0.033675 [0.8559]

EQ(11) Modelling DLTB by OLS (using Data1)

The estimation sample is: 1975 to 2008

Coefficient Std.Error t-value t-prob Part.R^2

Constant -0.0538330 0.05756 -0.935 0.358 0.0314
DLTBlag 0.325805 0.3006 1.08 0.288 0.0417
DLRGDP -0.168599 0.1482 -1.14 0.265 0.0457
DLREERI_1 -0.179807 0.07306 -2.46 0.021 0.1832
DLFEA_2 -0.248022 0.1742 -1.42 0.166 0.0698
dummy_1 0.546069 0.07791 1.49 0.126 0.0760
ECM_1 -0.700374 0.3679 -1.90 0.068 0.1183

sigma 0.205301 RSS 1.13800636

R^2 0.519643 F(6,27) = 2.754 [0.032]*
log-likelihood 9.50649 DW 1.99
no. of observations 34 no. of parameters 7
mean(DLTB) -0.0506307 var(DLTB) 0.053954

AR 1-2 test: F(2,25) = 0.73861 [0.4879]

ARCH 1-1 test: F(1,25) = 0.036110 [0.8508]
Normality test: Chi^2(2) = 2.5898 [0.2739]
hetero test: F(11,15) = 0.36070 [0.9531]
Not enough observations for hetero-X test
RESET test: F(1,26) =1.6812e-005 [0.9968]

78