AKSUM UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

THE ROLE OF EXPORT DIVERSIFICATION ON ECONOMIC

GROWTH(IN CASE OF ETHIOPIA)

A RESEARCHPROPOSAL SUBMITTED TO THE DEPARTMENT OF

ECONOMICS IN PARTIAL FULFILMENT OF THE REQUIREMENTS
FOR BA DEGREE IN ECONOMICS

BY: WELAY HAILU

ID.NO:AKU1100707

ADVISOR:DAWIT ZEKIROS(MSC)

JUNE 2021

AKSUM,TIGRAY,ETHIOPIA
ACRONYMS

WB: World Bank

EEA: Ethiopian Economic Association

IMF: International Monetary Fund

NBE: National Bank of Ethiopia

MTI: Ministry of Trade and Industry

GNP: Gros National Product

CSA: Central Statistical Authority

ADLI: Agricaltural Development Led Industrialization

GDP: Gross Domestic Product

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 ABSTRACT

There has been considerable discussion during the past five decades on the problems of export
diversification and its impact on economic development in LDCs. Countries with low income
such as LDC are known by fluctuation in theirproceeds than most developed countries. One of
the rationales for diversification is the problems associated with export instability. The
hypothesis is that undiversified export inflicts serious damage upon the economies of LDCs.
Nowadays the problem facing Ethiopian export sector is diversification which in turn have a
large effect on the growth of the economy.The poor performance of exports in Ethiopia has
largely been blamed on the poor domestic policies, deteriorating terms of trade and export
earnings instability. Attempt will make to examine the possible methods of export diversification
and the extent to which it affects economic growth in the context of Ethiopian
Economy.Diversification of the export base helps to reduce the level of fluctuations in export
earnings and, hence, economic growth. So the country shall be moving from very few primary
products to more diversified export commodities.

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 TABLE OF CONTENTS
ACRONYMS.......................................................................................................................................................... I

ABSTRACT........................................................................................................................................................... II

TABLE OF CONTENTS.......................................................................................................................................... III

CHAPTER ONE..................................................................................................................................................... 1

INTRODUCTION.................................................................................................................................................. 1

1.1. BACKGROUND OF THE STUDY...................................................................................................................................1

1.2. STATEMENT OF THE PROBLEM.................................................................................................................................4
1.3. RESEARCH QUESTION.............................................................................................................................................5
1.4. OBJECTIVE OF THE STUDY........................................................................................................................................6
1.4.1. The general objective.................................................................................................................................6
1.4.2. The Specific Objectives...............................................................................................................................6
1.5. SIGNIFICANCE OF THE STUDY...................................................................................................................................6
1.6. SCOPE OF THE STUDY.............................................................................................................................................6
1.7. LIMITATION OF THE STUDY......................................................................................................................................6
1.8. ORGANIZATION OF THE PAPER.................................................................................................................................7

CHAPTER TWO.................................................................................................................................................... 8

LITERATURE REVIEW........................................................................................................................................... 8

2.1. THEORETICAL LITERATURE.......................................................................................................................................8

2.1.1.The definition and benefit of export diversification....................................................................................8
2.1.2. Dimensions of Export Diversification.........................................................................................................8
2.1.3. Levels of Diversification.............................................................................................................................9
2.1.4. Product and market diversification............................................................................................................9
2.1.5.Diversification versus Specialization.........................................................................................................10
2.1.6. Export Diversification and Growth-theory...............................................................................................11
2.1.7. Export Instability and Economic Growth..................................................................................................14
2.2. EMPIRICAL LITERATURE.........................................................................................................................................15
2.2.1 Export and Economic Growth...................................................................................................................15
2.2.2.Growth and Growth Instability.................................................................................................................17

CHAPTER THREE................................................................................................................................................ 19

METHODOLOGY................................................................................................................................................ 19

3.1. TYPE AND SOURCES OF DATA.................................................................................................................................19

3.2. METHOD OF DATA COLLECTION..............................................................................................................................19
3.3. METHOD OF DATA ANALYSIS..................................................................................................................................19

REFERENCES...................................................................................................................................................... 20

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 CHAPTER ONE
INTRODUCTION
1.1. Background of the Study

In recent decades, several developing economies have undertaken structural reforms aimed to
improve economic performance that particularly targeted export diversification. Recently, export
diversification has been at the center of the debate about how developing countries can improve
their economic performance and achieve higher income and alsoseveral researches proved the
positive effect of diversification on growth.

Export diversification is important for enhancing export performance because it overcomes the
problem of terms of trade volatility and inelastic and declining global demand associated with
traditional primary exports. If thedomestic market is also small,like it isin Ethiopia, export
diversification can be an important channel of development by opening up new export market.
Diversification reduces dependence upon one or a limited number of geographical destinations
for its exports.

Diversification can also aim at expanding opportunities for export and improvement of backward
and forward linkages to domestic inputs and services. Heavy dependence on a small number of
primary commodity products exposes a country to the negative effects of unfavorable
characteristics of world demand and negative supply side features of these primary products.
Diversifying away from traditional exports is supposed to raise growth rates as traditional
exports face limited demand due to their low income elasticity and declining terms of trade and
to lower variability of growth rates as traditional exports are particularly vulnerable to exogenous
shocks.

Like most Sub-Saharan African countries, Ethiopia has an agrarian economy with a very small
industrial sector. That is to say, the performance of the economy as a whole is greatly influenced
by agricultural sector, which is the basic feature of these countries. Being under-developed
economy that heavily depends on agriculture, the structure of Ethiopian export is dominated by
agricultural products. Other developing countries that are heavily dependent up on earnings from
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primary commodities and concentrating on a few products and market outlays to finance much
needed capital goods imports have shown substantial concern with the instability of their export
proceedings (Abay, 1995).

In the large part, this concern is originates from the fact that commodities’ price and
consequently foreign exchange earnings have exhibited a tendency towards secular instability
(Ibid, 1995).

Thus the overall performance of Africa in terms of export diversification has been far from
satisfactory and most countries continued to be totally dependent on a few traditional exports. As
argued by the World Bank (2000), many African countries have lost market share in their
traditional exports while at the same time failing to achieve significant export diversification in
the past 50 years. Such unsatisfactory performance given the region's huge potential for more
diversified production and exports signify the existence of some constraints either on the supply
or demand sides or both.

Agriculture is a major source of inputs into manufacturing, mainly processing of agricultural

produce. Policies directed to develop the agriculture sector, given its importance and linkages
with other sectors in the economy especially in income generation, can make a major
contribution to economic growth in Ethiopia.

Therefore, Ethiopia’s long term development strategy is based on Agricultural Development Led
Industrialization (ADLI). The implication is that the pace of economic growth will be set by
agriculture directly through its contribution to growth of GDP, and indirectly as a market for the
rest of the economy. In this endeavor the development strategy has given emphasis to the
promotion of exports accordingly an export development strategy has been devised to increase
and diversify the country's exports.

For developing countries, export provides exchange earnings to pay for many products that
cannot presently produced domestically and advanced opportunities (Dominick, 1990). That
means the more diversified the export the more stable the growth of that country. In Ethiopia,
export diversification has been in the development plans for more than many years while the
export structure remained fixed with greater concentration on few traditional exports such as

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coffee, hides and skins and oilseeds and pulses. These traditional exports accounted for 83
percent of the total export earnings of the country in 1970/71 and they are still dominant in the
country's export structure accounting for about 82 percent of total exports during the current
government, indicating the continuing concentration of the country's exports on few traditional
exports and the vulnerability associated thereof. And coffee dominates export earning providing
about half of total export earnings. Since dependence on a single commodity export makes the
national economy unduly vulnerable to fluctuation of foreign exchange earnings.

Thus, while the present effort of the country must concentrate on diversifying its exports, it
would also be necessary to continue increasing the volume and quality of exportable coffee.
Since it is and would continue to be the main foreign exchange earner for the country for some
time to come.

Hence, it is important to deal with problems and prospect related with coffee market that largely
attributable to the fluctuations in foreign receipts. Thus, improving the performance of the export
sector is instrumental in restoring the country's balance of payment by increasing export earnings
and reducing fluctuations in revenues from exports.

Generally Ethiopia’s external trade statistics from a familiar country pattern of export consists
almost entirely of primary product and backward which is characterized by unstable export
sector. Its export is concentrated in a few primary commodities. These sectors have been lagging
its contribution to the growth of the economy.

Thus, improving the performance of the export sector is instrumental in stabilizing the country's
balance of payment by increasing export earnings and reducing fluctuations in revenues from
exports. One of the major ways of doing this is through diversifying Ethiopian exports.
Accordingly, identifying and examining the major economic issuestouching upon export
diversification in Ethiopia is central to initiatives that are geared towards the designing of an
Ethiopian economic policythat employs export diversification as one of the major instruments of
elevating exports that stabilizes balance of payment and export earnings.
Consequently, this study dwells on the description and analysis of economic concepts that shed a
light on the role of export diversification in Ethiopia.

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1.2. Statement of the Problem

Ethiopian export trade consists of agricultural product and raw material or the export is highly
concentrated on agricultural product. Depending on a few agricultural products for export has
heavily undermined the export sector growth in particular and the economy in general. These
problem calls for the need for diversification of export items. Export diversification is crucial to
sustainable foreign exchange earnings to promote economic growth.

Export diversification reduces the fluctuation of export earnings and raises the growth of both
export and domestic output. The potential for higher growth in Ethiopia failed to be realized
partly on account of policy formulation and implementation. Economic activity in Ethiopia was
adversely affected by both draught and war. Moreover, weak prices for its main exports (coffee)
have been causing export earnings instability. Changes in the prices of agricultural commodities
in 2000 shows large variations, reflecting significant changes in the balance of supply and
demand as well as changes in stock levels.

Prices of key agricultural products remains weak owing to weak demand and continued
production increases. Continued high output of commodities such as coffee, cocoa and rice
resulted in further down ward pressure on prices as supply appear to have exceed the demand.
Coffee prices continued to fall sharply in 2000, after a cumulative decline of 45 per cent over the
two preceding year also due, in part to weak demand, particularly in Europe and the United
States. But a significant increase in coffee production in Viet Nam, which became the world’s
second largest coffee exporter after Brazil, also contributed to the downward trend in coffee
prices.

Moreover, since the 1970s, there have been secular declines in the international prices of primary
commodities. Countries that specialized in a narrow range of primary commodities are currently
faced with declining export earnings and a loss in their share of international export markets
(IMF, 1986).

Ethiopia’s export portfolio is characterized by a highly concentrated on a few groups of

commodities (coffee, sometimes called a one crop economy) which are highly vulnerable to
changes in prices of primary commodities. Needless to say, Ethiopia is a price taker in almost all

4
of its export commodities. The world price for Ethiopian coffee usually depends on the
performance of the major coffee suppliers (like Brazil and Vietnam) to the world market.
Ethiopian coffee price booms were associated with some form of supply short falls from major
coffee suppliers.

Ethiopia is typically developing country heavily dependent on imports for the various activities
of the national economy. Among the total imported goods are investment goods, equipment, raw
material, few and semi finished goods. These major imported goods account 71percent of the
total volume of imports (Yohannes, 1992).

Depending on a few products especially primary commodities suffer two major problems;
First, these products are susceptible to the vagaries of nature and international price fluctuation.
Second, commodity exports are not supportive technology transfer unlike to merchandize export.

In Ethiopia, export diversification has been a major concern since1950s. For example, the
Ethiopian first five year plan stated that undue reliance on the export of two or three
commodities constitutes a danger to economic stability. To avert this danger long term plan is
needed to achieve a more diversified structure of export. The economic policy of the transitional
government of Ethiopia has also showed similar concern and states the importance and
increasing export diversification.

Although the focus of the economic reform progress has been to make export as an engine of
growth, it doesn’t seem that the government’s attempts has brought the required result and thus
whether export determine GDP growth need to be empirically probed. Undiversified structure of
export sector brings a problem of export earning instability which can limit the import capacity
of the country, since the country mainly depend on imported goods for industrialization process.
Finally, the study focuses on what role export diversification would play in economic growth.

1.3. Research Question

 How does export diversification contributes to the foreign exchange earning of the
country?
 What are the major problems and constraints of export sector in Ethiopia?

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1.4. Objective of the Study
1.4.1. The general objective

The general objective of this study is to assess the role of export diversification on econmic
growth.

1.4.2. The Specific Objectives

 To examine the contribution of export diversification to the foreign exchange earnings of

the country
 To identify the major problem and constraints of export sector
 To assess the consequence of non-diversification on export on foreign exchange earnings

1.5. Significance of the Study

It can be right to say that the outcome of this study will fill the gap in existing knowledge in the
area through analyzing role export diversification and mainly to create understanding about the
linkages between export diversification and economic growth. It is also expect that the study will
aid policy makers in their effort to revamp the sector through examining the role of
diversification in accelerating the economic growth and to get more benefit from the sector by
putting in place appropriate policies and strategy.

1.6. Scope of the Study

The study will focus on the role of export diversification in increasing the growth of the
economy which is a serious problem facing the export sector in Ethiopia. The study covers the
period from 1960/61-2011/12. This is the period for which published data is available.

1.7. Limitation of the Study

Due to the following problem the study do not cover other multi dimension .Since the study is
entirely based on secondary data, it lacks originality and the information are inadequate and in
available. The other limitations are shortage of finance, time constrain and lack of experience in
doing research.

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1.8. Organization of the Paper

Theversion of this paper is structured as follows. Chapter 1 provided an introduction in the

research topic with major sub-topics under it. Chapter 2 reviewed the relevant theoretical and
empirical literature regarding the subject. Chapter 3 summarizes the methodologies used to
collect data and types and sources of data. In chapter 4, data presentation, analysis and
interpretation are made. Finally, chapters 5 conclude the paper and provide relevant policy
recommendations.

CHAPTER TWO
LITERATURE REVIEW

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2.1. Theoretical Literature
2.1.1.The definition and benefit of export diversification

Export diversification is variously defined as the change in the composition of a country’s

existing export product mix or export destination (Ali, Alwang and Siegel, 1991), or as the
spread of production over many sectors (Berthelemy and Chauvin, 2000). For many developing
countries, and as part of an export led growth strategy, export diversification is conceived as the
progression from traditional to non-traditional exports.

The ability to develop superior export performance is considered to be vital to public policy
makers and business managers (Katsikeas, Leonidou, & Morgan, 2000). Policy makers are
interested in exporting as a vehicle for accumulating foreign exchange reserves, increasing
employment levels, increasing productivity, and enhancing social prosperity (Czinkota, 1994).

Generally by providing a broader base of exports, diversification can lower instability in export
earnings, expand export revenues, upgrade value–added, and enhance growth through many
channels. These include: improved technological capabilities via broad scientific and technical
training as well as learning by doing, facilitation of forward and backward linkages within output
of some activities which then become input of some other activities; increased sophistication of
markets, scale economies and externalities, and substitution of commodities with positive price
trends for those with declining price trends.

2.1.2. Dimensions of Export Diversification

In the trade literature, export diversification can take several dimensions and can be analyzed at
different levels. There are two well known forms of export diversification;

i. Horizontal Diversification
Horizontal diversification takes place within the same sector (primary, secondary or tertiary), and
entailsadjustment in the country’s export mix by adding new products on existingexport baskets
8
within the same sector, with the hope to mitigate adverseeconomic (to counter international price
instability or decline) and political risks.

ii. Vertical Diversification

Vertical diversification into processing of domestic manufactured goods entails a shift from the
primary to the secondary or tertiary sector. It entails contriving further uses for existing products
by means of increased value added activities such as processing, marketing or other services.
Vertical diversification can expand market opportunities for raw material and help enhance
growth and stability since processed goods generally have greater price stability than raw
commodities.

Requirements for successful horizontal and vertical can vary considerably in terms of skills and
capital investments, technology, managerial competences and marketing skills. Sustainable long
term export growth requires both horizontal (e.g. adding new products on existing ones), and
vertical (e.g. move from commodity to higher value added manufactures), diversification. This
can be achieved either by adjusting shares of commodities in the existing export mix or by
adding new products to the export mix.

2.1.3. Levels of Diversification

Export diversification can also be analyzed at many levels (farm, plant, country, or regional
level). At each level, a focus can be put on different forms of diversifications (horizontal,
vertical).

2.1.4. Product and market diversification

i. Product Diversification

Product diversification is the way in which adding a new product on the existing commodities.
For example in case of Ethiopia coffee is major commodity the country have been exporting
since 1960’s and adding other product like leather product and flower are Product diversification.
This kind of diversification helps the country to minimize the problem related with export
earning instability.
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 ii. Market Diversification
Market diversification on the other hand is diversifying a market for country’s export. It is
exporting to several countries in world market.

2.1.5.Diversification versus Specialization

Despite the well known efficiency benefits expected from specialization, the risks of too little
specialization have been long acknowledged in development literature. Export diversification
concept may seem to be in contradiction with the concept of comparative advantage which posits
that the more a country becomes open and involved in international trade, the more specialized it
becomes. Because countries specializing in commodities where they have comparative
advantage may achieve better resource allocation efficiency, some economists argue that better
international competitiveness would require more specialization in exports rather than better
diversification.
In line with the Presbisch-Singer hypothesis, it is widely recognized that specialization in a
narrow group of export products exposes a country to increased instability in export earnings
which can be made worse when concerned products are subject to secular declining terms of
trade.

This volatility exposure can be mitigated, through diversification, by expanding production and
trade of a variety of commodities with different price trends, which can potentially help achieve
some stability in economic performance. While specialization related potential benefits in terms
of resource allocation efficiency should be acknowledged, cost associated with greater
specialization into a narrow range of vulnerable products (in terms of increased volatility of
export earnings) should be kept in mind.

It should also be acknowledged that for a country to specialize successfully, it must adjust and
restructure its economy. Such adjustment or restructuring can entail a range of short term
financial, personal and social costs including: loss of Government revenue, decline of some
industries unable to face increased competition from imports and rise of others, elimination of
some sectors and devastation of some regions, relocation of employment, family disruption, and

10
loss of industry skills in declining sectors. These short term adjustment costs can be mitigated
with a range of accompanying, compensatory or complementary policy measures.

2.1.6. Export Diversification and Growth-theory

The role of export development and diversification in growth in developing countries has
received considerable attention in development literature over the last 50 years. During the 1960s
and 1970s,and largely influenced by R.prespish(1950) and H.W Singer (1950),the prevailing
development strategy in many developing countries and particularly in Latin America, Africa
and south Asia, was in favor of import substitution and extensive use of restrictive trade policy
for economic diversification.

Export diversification is based on its role in reducing export earnings instability caused by
cyclical fluctuation in international commodity prices. The notion of commodity concentration
and the inability to offset the fluctuation in the principal commodity exports by counter
fluctuations and/or stability in the export of others has been at the center of the argument.

Wilson (1984, p.86) argued "when economies are dependent on just one export commodity, their
foreign exchange position is frequently precarious." According to Massel (1964) concentration
on a narrow range of export products is the source of fluctuations in export earnings. He cited
Ghana and Sudan as examples of "one crop economies" dependent on cocoa, and cotton,
respectively and argued for diversification to achieve greater degree of earnings stability.

In the light of the success through import substitution involve considerably towards promotion
and outward orientation in the 1980s,1990 and early 2000s because many developing countries
are heavily dependent on commodity export, making them extremely vulnerable to external
shocks, a key challenge confronting policy makers in those countries is that of expanding export
revenues, stabilizing export earnings, and up grading value added in a changing north-south
trading structure(world bank,2005).

As early prespish(1950) and Singer (1950) economist have warned of the detrimental effects of
terms of trade shocks in developing countries that depended on a few products for their export
earnings, leading to a widespread adoption of import substitution and export diversification

11
strategy. While since then more outward oriented trade policies have become prominent, there
still general concern about high vulnerability of many developing countries to negative shocks.

Although the prevailing view prior to the First World War was pro free trade premised on
comparative advantage, specialization ,international labor division ,inspired by classical trade
theories developed since Adam smith(1776)and E .Ricardo (1817),this view has been challenged
following the second world war by R.Presbish (1950) and singer (1950)who argue that too much
specialization of developing countries implied that patterns characterized by reliance on export
of raw material and agricultural commodities in exchange of consumer and investment goods
manufactured in developed countries .

Based on the presibish singer hypothesis, free trade and its corollary specialization were to
confine developing countries in the production of primary product which are subject to short and
long term detrimental effect for developing countries .hence, in order to stabilize export earnings,
boost income growth, and upgrade value added, developing countries had to increase the variety
of export baskets. (World Bank, 2005)

In the light of dismal economic performance of many developing countries that implemented
trade restrictive protectionist policies in the 1960’s and 1970’s many policy maker have ,since
the 1980’s been seeking to expand their export and have increasingly been recommending
development strategies based on out ward orientation including reduction of trade barrier and
opening of international foreign competition .

Before 1974, the foreign trade policy of the country was largely informed by the free trade
doctrine of the Ricardian type .Various measures to facilitate trade as the establishment of the
chamber of commerce, the establishment of various boards (coffee boards, grain marketing
board, and office of national standards) were taken .The measures were aimed at controlling the
quality of in ports and exports and facilitating trade.

In terms of imports, imports of capital goods and raw materials were free of duty while other was
taxed (Ministry of Trade and Industry [MTI], 1987). Because export supply response following
first generation of outward oriented trade policy reforms have been mixed and expanding and
diversifying export remain a major concern for policy makers in many country. In many case

12
diversification of export product and makers destination is viewed as means to meet the
challenge of unemployment and lower growth in many developing countries.

The success strong of high performance Asian economics that experienced substantial increase in
export, and specially exports of manufactures goods and high growth rate of their crop over
many decades promoted much analysis to view development and diversification as the new
engine of growth (World Bank, 2005). To controversy on the nation trade as an engine of growth
led developing countries pursue different trade strategies for development. In what follows we
present the two trade policies adopted by many developing countries namely; import substitution
and export promotion (Todaro, 1994).

Jung and Marshal (l985) argue that growth in real export tends to cause growth in real GNP for
three reasons. First, export growth may represent on an increase in the demand for countries
output and thus serve to increase real GNP. Second, an increase in export may loosen a binding
foreign exchange constraint and allow increases in productive intermediate imports and hence
results in the growth of output. Third, export growth may result in enhanced efficiency and thus
may lead to greater output.

It is well known that the most developed countries tend to exhibit a more diversified export
supply compared to low-income countries. For the latter, export supply is usually more
concentrated in few agricultural or mining products. This has given rise to the assumption that
development is a process associated with growing export diversification. However, some
approaches suggest that export diversification can foster development, opening a debate on the
usefulness of public policies to induce a more varied range of export products.

In an application of the financial portfolio theory, following Ghosh and Ostry (1994) various
authors have suggested that export diversification reduces risks and reduces instability of
aggregate export flows. By reducing macro instability related to foreign exchange revenues,
fiscal receipts and possibly exchange rate and interest rate levels a lower variability of export
revenues could lead to a higher aggregate level of investment. This argument requires assuming
that entrepreneurs are risk averse and therefore invest more in more stable macroeconomic
environments (Bleaney and Greenaway, 2001).

13
A broad range of arguments has also been developed in support of the importance of developing
growing exports of manufactured good and therefore diversifying exports related to the
knowledge spillovers that may give rise to new production, management and marketing
technologies, many of which can benefit other industries ( Gutierrez de Piñeres and Ferrantino,
2000).

Lin (2009) suggests the process of diversification is a necessary process for development, which
may require government interventions so as to facilitate the processes of change and innovation.

A more controversial view was the structuralist vision that suggests that the diversification
towards manufactured goods is a necessary condition for sustained economic growth. This vision
was derived from a normative interpretation of growth patterns in developed countries or from
the old theses of Prebisch (1950) and Singer (1950) on the downward trend in the terms of trade
of raw material vis-à-vis manufactures. Not far from these arguments, a vast literature has been
developed on the so-called “curse” caused by abundant natural resources (the Resource Curse).
According to this view, an excessive dependence on the production and export of primary
products harms development prospects. One of the reasons quoted most often for justifying this
pessimism is the Dutch Disease effect hindering the development of other tradable and “modern”
activities in the economy.

2.1.7. Export Instability and Economic Growth

Understanding the impact of instability of export receipts on the economic growth of developing
countries has been an important area of research in development Economics for a long time.
Export instability induces short-run domestic instability largely through theimpact on producers’
incomes and government revenues and, hence, on important components of aggregate demand.
Particularly where the productive structure is composed of small-scale unit, where
producers’money income are determined primarily by current receipts from exportproduction
and where producers’ have low marginal propensity save out ofcurrent income, export instability
is thought to induce similar short-runinstability in producers’ incomes.

The impact on the government sector arises because export instabilitymay impart similar
instability to total government revenues. Thesensitivity of revenues is taken to be a consequence

14
of the dependence oftotal revenue on proceeds from taxes on foreign trade and resulting
influctuation in government expenditure. An important dimension of the instability problem is
the generation ofuncertainty and this held to exert adverse effects in two ways. First,uncertainty
about the availability of government revenues is thought tocomplicate further the already
difficult task of development planning.

Secondly, uncertainty is taken to affect private sector investment. Short run export-induced
instability in domestic demand suggests to private investors the prospect of over-and under
utilization of productive capacity. Moreover, for both government and private investors export
instability may mean discontinuity in the flow of essential imports for investment projects.

Consequently, the short-run instability is thought to reduce an economy’s long-term rate of

growth through altering the path of economic progress by increasing the uncertainty of financial
resources needed to purchase capital goods. This, in turn, reduces the overall level of efficiency
of a country because the formation of capital is distorted by bad investments planning.

2.2. Empirical Literature

2.2.1 Export and Economic Growth

Several Empirical studies supported the argument that the positive association of the economy’s
growth rate with the growth of the export share and this appeared to be particularly strong among
more developed countries.

Maezels (1968), he established that there is a positive relationship between export growth and
the growth of Gross National Product, GNP. Krueger and Truncer (1980) and Nishimizu and
Robinson (1984) have shown that growth in factor productivity is enhanced by export
expansion,while import substitution has a diminishing effect.

The results of different studies on export expansion and economic growth has broadly classified
economists into those that support the hypothesis that export growth has a positive impact on
economic growth and those that doubt the existence of such relationship. Adam Smith’s theory
of international trade assumes that a previously isolated country about to enter into international
15
possesses a surplus productive capacity above the requirements of domestic consumption. With
trade the country is able to re allocate the given resources as to provide the new effective demand
for the output of the surplus resources. Hence, a surplus Productive capacity suitable for the
export market appears as a costless means of acquiring imports and expanding domestic
economic activity [Meier, 1995 and Myint, 1958].

In a similar analysis, Debel (2001) using Ethiopian data series covered the period 1960-2000 had
found that export growth has a positive and strong impact on the Ethiopian economy. He adopted
two different models to show the causation and the relationship between export and economic
growth. Export instability may have also deleterious impact on the economic growth in
developing economies by disrupting or discouraging capital formation and hence output. It
would seem reasonable to build a stable source of foreign earnings for the timely flow of capital
formation. One way of doing this is changing the highly concentrated primary products export
structure and form a more diversified and stable export portfolio.

Chow (1987) suggests that in small open economies, export growth can expand their limited
domestic markets, and contribute to the economics of scale necessary for industrial
developments. Furthermore, export growth integrates domestic economy with regional and/or
global economies thereby expanding the dimension of competition to the international markets.

Most empirical studies have focused on the role of exports in explaining growth in LDCs, and
have been based on the estimation of an "augmented" production function. Recently, there has
also been an examination of the role of export instability. It has been argued that economic
growth of less developed countries suffers from the deleterious effects of the export instability
they experience as they export mainly primary products.

Export instability results from either fluctuations in export prices or quantities or both. Export
instability of developing countries which manifests in deteriorating terms of trade are explained
by the structuralism and Marxists as resulting from low demand and prices of primary
commodities (Glezakos, 1973). They argue that this trend is caused by the protectionist policies
of the developed countries and the use of Synthetics in place of agricultural raw-materials in
their industries.

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Esfahani (1991) emphasized that the first and foremost purpose of exports is to relieve the import
shortage that many developing countries confront. According to him although the externality
effect of exports (efficiency of resource allocation, economy of scale and various labor training
effects) may carry some weights of their own, the major purpose of exports toGDP growth is
alleviating the import shortages, which restrict the growth of many LDCs.Thus exports can fill
the “foreign exchange gap” that was perceived as obstruction to growth.
In general all the above theories explain the different channels through which exports can induce
economic growth.

2.2.2.Growth and Growth Instability

There are several arguments to support the instability-reduces growth hypothesis. First, growth
instability can discourage private investment. Collier and Gunning (1999) have argued that the
sub-Saharan countries are characterized by high degrees of risk, which impacts negatively on
investment by domestic producers and foreign companies. Growth instability is an aggregate
signal of this risk and uncertainty. Second, with regard to governments, excessive fluctuations in
the growth rate have a negative impact on the ability to manage monetary and fiscal policy. Even
if monetary instruments were effective, their use to reduce fluctuations could undermine the
private sector’s ability to anticipate policy changes.

On the fiscal side, instability results in fluctuations in revenue, which make it more difficult for
governments to manage and programme expenditures, especially if the government is operating
under deficit conditionalities by external donors and lenders whose behavior may be
unpredictable (Lensink& Morrissey).

Third, instability can affect household welfare. Mendoza (1997) comments, ‘growth effects that
could result from uncertainty and risk aversion in the presence of terms-of-trade effects, as well
as uncertainty with the regard to other growth determinants, are generally ignored in growth
models’ and proceeds to construct a model of household behavior based on the savings under
uncertainty framework of Phelps (1962) and Levhari and Srinivasan (1969). His empirical results
provide robust support for hypothesis that instability in the terms of trade lower the growth rate,

17
and he concludes that ‘the proposition that indicators of risk are relevant for growth can be
extended to the other variables typically emphasized in empirical growth analysis.

The negative impact of the variability of the terms of trade has also been found in other empirical
studies (Barro&Sala-i-Martin 1995; Easterly, Prichett& Summers 1993; and Fischer 1993).
Based on the hypothesis that instability of growth has a negative impact on the average rate of
growth, and investigate the causes of variability, in order to consider policies to reduce it.

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 CHAPTER THREE
METHODOLOGY
3.1. Type and sources of data
Data concerning the volume and value of selected major export commodities will collect.
Besides, qualitative data or information on the subject is explor in order to supplement the
quantitative data.The data can collect mainly from the following sources;

 National bank of Ethiopia (NBE)

 World Bank (WB)
 Ethiopian economics association (EEA)
 Websites of major international organization such as IMF
 Relevant survey report from different ministries of the government of Ethiopia; and other
source of data are different published and unpublished documents of export institution,
different research work conducted by different researchers, internet, etc…

3.2. Method of data collection

As already mentioned above, secondary data will use for this study.As a means of data
collection, the quarterly and annual reports of the above source organization can explor.More
specifically, survey of Ethiopian economy’s macro economic data and annual export reports of
ERCA are reviewed as a secondary source. Research on the website of IMF and WB were
employed.

3.3. Method of data analysis

Descriptive technique of analysis employs for this study .In this method quantitative data will
present by using table, graph. Descriptive statistics such as percentage, simple averages, growth
rate, proportion, etc is in data analysis.

On the other hand, qualitative information such as policies and strategies concerning the export
sector, existing opportunities that can help to improve the sector and major challenges hindering
its growth will analyz in words.

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REFERENCES

 (AbayAsfaw, ZewduBelete(1999), “Export Earnings Instability and Export Structure in

Ethiopia’’: Department of Ethiopia’s export performance publishing Addis Ababa.
 BerhanuLakew, (2003),” Prospects for Export Diversification in Ethiopia”, Addis Ababa.
 Debel (2002), “Export and Economic Growth in Ethiopia: An Empirical Investigation”,
Unpublished MA, Faculty of Business and Economics, Economics Department, Addis
Ababa.
 Dominick Salvotor, (1990),”International Economics”, 3rdedition, Macmillan, the
Universityof California, California.
 Ethiopian Economic Association and Department of Economics, (1983).
 John madeley, (1992)”Trade and the Poor”, 2ndedition, intermediate technology
publication, the university of California, California.
 Ministry of Economic Development and Commerce, (1997),”Survey of Ethiopian
economy” Addis Ababa.
 National Bank of Ethiopia (2010)”Annual report and quarterly Bulletins” National Bank
of Ethiopia, Addis Ababa.
 Prebisch, R. (1950), The Economic Development of Latin America and its Principal
Problems. United Nations, Lake Success.
 Singer, H. (1950), “The Distributions of Gains Between Investing and Borrowing
Countries”, American Economic Review: Papers and Proceeding May, 473-85.
 Tayler. W.G. (1981), “Growth and Export Expansions in Developing countries”, Journal
of Development Economics.
 Todaro Michael,(1990) “Economic development “, 10th edition, newyork university
publishing, newyork.
 World Bank, (2005),”Export and Economic growth”, Growth and crisis of the World
Bank institute publishing, Washington D.C.
 Yohannes Ayalew (1994).”export instability and economic growth in Ethiopia, Addis
Ababa publication

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