HARAMBE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

PERFORMANCE OF ETHIOPIAN EXPORT AND ITS CONTRIBUTION

A SENIOR ESSAY PROPOSAL SUBMITTED TO THE DEPARTMENT OF

ECONOMICS IN PARTIAL FULFILMENT REE IN ECONOMICS

PREPARED BY:

NAME ID NO:

Waktola Gemechu ……………………………………. HU/ECO/219619/14 R

ADVISOR: Mabrat T. (Msc)

December, 2023

Adama, Ethiopia

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Table Contents

Contents
Table Contents..............................................................................................................................................i
List of Acronyms......................................................................................................................................ii
CHAPTER ONE..............................................................................................................................................1
1. INTRODUCTION...................................................................................................................................1
1.1. Background of the study...................................................................................................................1
1.3. Objective of the study.......................................................................................................................3
1.3.1 General Objective:......................................................................................................................3
1.3.2 Specific Objectives:.....................................................................................................................3
1.4 Research questions............................................................................................................................3
1.5 Hypothesis of the study.....................................................................................................................3
1.6 Significance of the study....................................................................................................................3
1.7. Scope of the study............................................................................................................................4
1.8. Limitation of the study......................................................................................................................4
CHAPTER TWO.............................................................................................................................................5
2. LITERATURE REVIEW................................................................................................................................5
2.1 Definition of Export...........................................................................................................................5
2.2 Theoretical Review............................................................................................................................5
2.2.1 Theory of international Trade.....................................................................................................5
2.3 Empirical literature............................................................................................................................7
2.3.1 Empirical literature on Ethiopian Export.....................................................................................7
2.4 Review of the Export Policy in Ethiopia...........................................................................................10
2.4.1. Pre1974/75-periods.................................................................................................................10
2.4.2. The Derg Regime (1974/75-199O/91)....................................................................................11
2.4.3. The Post 1990/91 Periods........................................................................................................11
CHAPTER THREE........................................................................................................................................13
3. METHODOLOGY OF THE STUDY.............................................................................................................13
3.1. Research Methodology and Data Sources......................................................................................13

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 3.1.1 Data Type and Sources.............................................................................................................13
3.2 Data Analysis Method......................................................................................................................13
3.3. DESCRIPTIVE ANALYSIS OF PERFORMANCE OF ETHIOPIAN EXPORT SECTOR AND ITS
CONTRIBUTION......................................................................................................................................13
3.2 Variables and Its Nature..................................................................................................................15
3.3. Model Specification........................................................................................................................15
3.3.1. Dynamic Model........................................................................................................................15
3.3.2 Brief Explanation of dependent and Explanatory Variables......................................................16
3.4. Econometric Analysis and Result Discussion...................................................................................17
3.4.1 Stationarity test (Unit Root Test)..............................................................................................17
3.4.2 Co-integration Test...................................................................................................................17
3.4.3 Long Run Model Specification...................................................................................................18
3.4.5 Short Run Model Result Based On ECM Method......................................................................18
3.4.6. Post Estimation/Diagnostic Test..............................................................................................18
CHAPTER FOUR..........................................................................................................................................19
4. BUDGET LINE AND TIME SCHEDULE..................................................................................................19
4.1 Time Schedule.................................................................................................................................19
4.2. Budget line......................................................................................................................................20
References.................................................................................................................................................21

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List of Acronyms
CSA Central Statics Agency

DCs Developed Countries

LDCs Least Developed Countries

GDP Gross Domestic Product

NBE National Bank of Ethiopia

MEDAC Ministry of Economic Development Cooperation

MOFED Ministry of Finance and Economic Development

OLS Ordinary Least Square

WB World Bank

ADF Augmented Dickey-Fuller

DW: Durbin-Watson

EE Ethiopian Economics Association

EG Engel Granger

ERCA Ethiopian Revenue and Customs Authority

RGDP Real Gross Domestic Product

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i
 CHAPTER ONE
1. INTRODUCTION

1.1. Background of the study

Economic development is one of the main objectives of every society in the world and economic
growth is fundamental to economic development. There are many variables that contribute to
economic growth. Export is considered as one of the very important accelerators of growth. The
economics literature supports the contention that development requires economic growth to
alleviate poverty, and greater access to world markets is perceived as a necessary condition for
more rapid growth. For example, using cross-sectional regression, Agosin (2007) finds that
export diversification has a stronger effect on per capita income growth. There are also some
concerns about the trade especially, between the primary and industrial goods exporting
countries where the terms of trade are deteriorated against the poorer countries.

Export is a function of international trade where by goods produced in one country are shipped
to another country for future sale or trade. The sale of such goods adds to the producing nation
gross output. The term export means shipping the goods and service out of the port of the
country.(According to Todaro 10th edition,2003)

As in the case of many developing countries, Ethiopia’s export has been limited to few primary
products, which are mainly agricultural commodities. Coffee export has taken the biggest share
compare with others commodity. However, the share of country supplies to world market is very
few compare with the top coffee exporter countries, such as Colombia, Brazil and Vietnam.
Coffee exporter reached high export and the country share of trade to world market was 199,446
metric and 0.01ton respectively in the year 2009 (WTO, 2009). According to Alemayehu (2006)
the main reason of Ethiopia export constraint comes from the supply side .The entrepreneurs
depend on export of very few products for a century. On the other hand the demand aspect also
has impact on export volume because of depending with very few trade partners.

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Low foreign exchange earnings reduced the import of essential capital goods; induced
deterioration in the quality of socio economic infrastructure, which are indispensable for the
nation. To overcome such chronic micro economic in balance and realize developed socio
economic infrastructure, Ethiopia need to increase as well as exploit agricultural potential. Since
agriculture is the base for the economy and it has significant contribution for development of
industrial sector of the country. Ethiopian export concentration is observed not only on the type
of commodity of export but on the market to which exports are destined.

1.2 statement of the problem

Majority of developing economies imports the industrial commodities that help for their
development, while they depend on very few primary products for their export. Due to excess of
their import payment over earnings from export, most of them have the deficit on current
account. The famous economist such as Todaro and other economists agreed that the export
potential of most of the third world countries has been relatively weak compared with export
performance of the developed countries (Todaro, 2009).

Exports (both agricultural and non-agricultural) in Ethiopia are subjected to varies of natural
condition and suffer from supply side constraint caused by domestic factors. These constraints
including traditional production system, inadequate infrastructure, weak extension system and
shortage of production input increased from home consumption of exportable product.

The way for success of any policy and strategy designed to increase export calls for a complete
survey or investigation of factors, which affect export performance and the action of economic
agents, consequently, better understanding of the determinant of export performance and
direction and magnitude of relevant elasticity is mandatory. Wondaferahu (2013), has studied the
determinants of export performance in Ethiopia. While Tigist (2015) has undertaken a study on
impact of selected agricultural exports in Ethiopia and Samuel (2012) has conducted a study on
the factors affecting agricultural export. Although those studies had takes place concerning the
study area and their study is on the export of the Ethiopia there are some gaps. Which are there
has been no consensus in terms of sign, significance and long lasting effects of determining
factors of export performance in Ethiopia. This paper tried to find an appropriate answer for the
following questions by using updated data and different variables than the preceding works.

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What kind of relationship exists between economic growth (real GDP) and share of export in
Ethiopia? What are the major factors affect the performance of export sector in Ethiopia? These
are the reason for conducting this study.

1.3. Objective of the study

1.3.1 General Objective:
The main objective of this study was to assess the performance of the export sector in the
Ethiopian economy.

1.3.2 Specific Objectives:

 To investigate the relationship between Export of the country and economic growth
using econometric model: Ordinary Least Squares (OLS) techniques.
 To address factors affecting of export performance in Ethiopia.

1.4 Research questions

1. What are the factors affecting Ethiopian export performance?

2. What are the relationship between Export of the country and economic growth of the country?

1.5 Hypothesis of the study

The researcher was used various explanatory variables such as private consumption, openness
(the sum of export and import) to GDP ratio, Gross capital formation, domestic output and Real
Effective Exchange Rate. Therefore, the researcher would expect the effects of these variables on
export performance and it's contributions to economy.

1.6 Significance of the study

Export sector plays a great role in economic growth and development of a country. So the result
of this research believed to provide the following advantages:

The paper investigated the major trend and performance determining factors of the country’s
export. Thus, it helps to generate information that policy makers can make use of it to design
proper and effective policy by taking in to consideration all the problems on export growth and
foreign exchange earnings which are revealed by the research findings.

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Moreover, this study enables subsequent researchers in the area to focus on significant factors
that hinder the growth of exports and also will serve as reference for further analysis concerning
the study area.

1.7. Scope of the study

Due to the wideness and complex nature of the study, this investigation limited to the
performance of Ethiopian export sector and its contribution to Ethiopian economy. This study is
limited both in time and in scope its geographical is restricted in Ethiopia. The studies try to see
the export sector performance and its contribution to the Ethiopian economy from early up to
present.

1.8. Limitation of the study

While under taking this investigation, the paper encounters several problems. Such us, inadequate and
unavailable information and source of data, lack of supporting material like reference book, journal,
magazine, and lack of recent review literature.

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 CHAPTER TWO

2. LITERATURE REVIEW
2.1 Definition of Export
Export refers to the sending of goods or services to other countries for sale. The term export also
tells us a product or services sold abroad. What produced locally (domestically) and sold to
someone in abroad (foreign country) are also considered as an export. Exports are also one of
the oldest components of International trade.

According to Todaro 10th edition, Export is a function of international trade where by goods
produced in one country are transported to another country for future sale. The sale of such
goods adds value to the producing nation gross output. If used for trade, exports are exchanged
for the other products or services. The term export means shipping the goods and service out of
the port of the country.

According to Todaro 10th edition, Export is a function of international trade where by goods
produced in one country are transported to another country for future sale. The sale of such
goods adds value to the producing nation gross output.

2.2 Theoretical Review

2.2.1 Theory of international Trade
Theoretically, the nation of trade believed to have originated with mercantilism school of thought
dating back to early 17th century. Adam smith formulated classical theory of trade for the first
time in his well-known book wealth of nation. He hesitates to accept the mercantilist’s zero-sum
game theory of trade. Mercantilism considered that international trade as the one in which the
gain of one nation is necessarily the loss of another. This means that one nation can gain at the
expense of another nation. In the Adam smith’s view, the trade take place between two countries
is a result of absolute advantage in the production of particular goods, relative to each other.
According to Smith, each nation benefits by Specializing in production of goods that it can
produce at a lower cost than other nations (Salvatore, 2004). According smith, from trade all
nation would gain through division

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of labor and specialization. He considered trade as a positive- sum game in which all nations
would benefit from it. Smith is also in favor of a minimum intervention of government in a trade
(laissez-faire). Smith’s international trade model can make better off every one without harming
another.

According to Ricardo, trade benefits a country by specializing in areas of comparative

advantage. To put it in other ways, a country involved in trade that specialize it in what it
produce at least cost. A country sells or exports what it produce at least cost in the international
market and imports what requires it high cost to produce. On the other hand, Ricardo answered
one big question left unanswered by Smith. For instance, what if a country doesn’t have an
absolute advantage? What would be the structure of the trade?

David Ricardo answered the question through comparative advantage (Ibid). He pointed out that
countries should specialize in production where there is greatest comparative advantage,
Economic welfare (Salvatore, 2004). Ricardo’s comparative advantage helps us to express trade
better than most people’s awareness and Smith’s original explanation (Pugel Linder, 2000).

The absolute advantage and comparative advantage constitutes only what is said to be the
“supply version” of the classical theory of international trade. However, the demand structure in
two countries does also affect the structure in two countries as well as the benefit from trade.
The latter classical economists like Mill, Marshal and Edge Worth developed the theory of
reciprocal demand offer curve to bring together the “demand version” of classical theory with its
supply version. Their merit lies in the fact that they overcome the problem of determining the
exact terms of the trade that emerged in trade equilibrium.

General equilibrium analysis uses offer curves to establish the relative price at which quantity
supplied equals quantity demanded for both exports and imports. The offer curve of a nation,
also called the reciprocal demand curve, shows at each relative price the quantity supplied of
exports and the quantity demanded for imports. International equilibrium occurs when the
quantity supplied of exports equals the quantity demanded for imports by the other country, or
where the offer curves intersect. This offer curve tries to show how the term of trade is
determined by the interaction of demand and supply (Meier, 1995).

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2.3 Empirical literature
2.3.1 Empirical literature on Ethiopian Export
Due to different constraints such as that of policies and others that were followed by the various
regimes, the performance of export sector in the country has been less satisfactory. According to
Mulugeta ( 2005), the country’s output and export are strongly depend on agricultural products
which accounts for about 80 to 90% of export merchandise.

Amin (2001), in his thesis empirically analyzed the effect of export instability on economic
growth of Ethiopia both in short run and long run in his econometric analysis. He comes up with
the short run analysis that entails the significance of the magnitude of the coefficient of the
export earning instability.

This suggests that the shortness of the time period to cushion the effect of instability relative to
the insignificant but negative result of long run models, the short run effect can be probably due
to unexpected loss of foreign exchange which in turn may be due to unexpected short fall caused
by either internal or external shocks.To insulate the effect of instability on the economy,
according to him is that in the long run economic agent may have many ways to adjust.

Another study related to the determinate of export performance is conducted by Berhane (2000).
According to this result, the world demand is found to be important determinant of export
performance. On the other hand, the presence of demand for export from consuming countries
therefore seems to be the driving force behind the growth of the export. He concluded that
economic activities in the major industrial countries remain the overall determinants of export in
Ethiopia. According to Berhane, the domestic consumption adversely affects export
performance.

The export sector performance in the country said to be the weakest even when compared with
other developing countries. In 2017/18, Ethiopia export trade contributes only about 9.654% to
the GNP. Where as in the same year, most of developing countries the export trade has been
accounting for about 23.5% (statistical bulletin, number, 230; 5).

Wolde (2006) run multivariate time series approach for Ethiopia and found a long run
equilibrium relationship among the variables and the existence of causality between export and
GDP at least in one direction.He concludes that consistent with expectation export growth and

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output growth was found to be positively related supporting the export led growth hypothesis.
This export expansion brings economic growth in various ways. In contrast to this, his result
danger causality tests at different lag lengths show that the causation is weak indicating that
export growth affects output growth through another channel.

Only four out of the top ten markets for Ethiopia export we related in the conventional West
(Switzerland, Germany, Netherland and USA):, whereas the rest six countries are in what might
be considered as the South (China, Somalia, Saud Arabia, Sudan, UAE and South Africa).The
report stated that it is also striking that countries with very low PCI and highly unsettled. Sudan
and Somalia are now larger market for Ethiopia exports than some of the worlds advanced
countries. Thus, with neglecting long standing historical trade links Ethiopia exporters would be
well served by paying equal attention to increasingly important neighboring and regional market
in the developing world. The report further noted that beyond the top three markets, surprising
shifts are taking place in the markets for Ethiopian export (Custom Authority, 2010).According
to Girma (1982), GDP and exports are highly correlated with correlation coefficient of 96% and
the determination coefficient of 81%. Nevertheless, his work did not take in to consideration the
effect of the other important variables.

The Ethiopian export sector found to have a significant impact on the country growth process.
However, the government focus on this sector is minimal. The impact of export is less than that
of investment in terms of magnitude.The result allows one to stress that given the countries
current economic condition; policy emphasis should be towards the export sector and raising the
level of nnational income. To this end, both domestic and foreign private investors should be
encouraged. Ayalew ( 1991).

According to the estimation of Gemechu (2002), one percent increase in export leads to a 0.16
percent increase in the country’s economy. In addition, although there is a direct contribution of
export to economic growth, indirectly exports can foster economic growth substantially by
inducing public savings, attracting foreign capital and hence promoting investment. It also found
that there is appositive and significant output exports growth relationship. That is the hypothesis
that a growth in output can positively influence export growth statistically supported.

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Although the empirical literature on export and growth can be considered to be vast, the results
there of are clearly contradictory for both LDCs and industrialized economies. This is one
scenario that could explain why this topic is still at the top of the agenda for many economists.
According to the so-called new orthodoxy, promoting exports and achieving export expansion
(ELG) are beneficial for both developed and developing countries for many reasons such as: 1)
generating a greater capacity utilization; 2) taking advantage of economies of scale; 3) bring
about technological progress; 4) creating employment and increase labor productivity 5)
improving allocation of scarce resources throughout the economy; 6) relaxing the current
account pressures for foreign capital goods by increasing the country’s external earnings and
attracting foreign capital goods by increasing the country’s external earnings and attracting
foreign investment; and 7) increasing the total factor productivity (TFP) and consequently the
well-being of the country (World Bank,1993)

According to Morton (1977), the decrease in the terms of trade and its undesirable out come on
economic growth is a result of supply and demand constraints and market imperfection. Mortor,
further explained that the rapid development of technology in advanced countries as a major
obstacles in its synthetic product substitution to developing countries. In the world of Morton,
exports of many processed agricultural goods and of labor- intensive manufactures through
which developing countries have a clear comparative advantage visa- vis. Developed countries
are subject to various tariff and other restrictions imposed by such countries to protect their
relatively uncompetitive domestic industries. Even raw materials for which demand is generally
more buoyant, face competition from synthetic substitutes, while technological change in
developed countries have acted generally to reduce this trend is expected to continue.

Another serious critique from various angle as cited in Felipe (2003) is that of Blecker (2003)
and Kaplinisky (2000) who are based on the experience of some Asian countries, have recently
begun questioning the advantage of ELG on grounds of “fallacy of composition “ or “adding up
constraints” . These authors argued that if too many countries try, simultaneously, to rely on
ELG strategy to stimulate growth under a given set of global demand condition, the market for
developing countries export is restricted by the capacity of the industrialized nations, and this
leads them to excess capacity and possibility of growth. A quote from Bhagwati (1998) seems to
reinforce the argument.

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The big question is here is that, can most developing countries become successful exporter
simultaneously? Alternatively, focusing on the successful Asian Exporters, the question may be
put together like this: can the Asian export model be successfully exported to all? The suspicion
still lingers that the success of a few was built on the failure of the many and that, if all had
shifted to the export promotion (EP) strategy, none would have fared well (Ibid).

The argument has still continued to be one the top issue in literature. Such issues are further
discussed in greater detail below. Bhagwati (1958) used the term to refer to the situation where a
number of developing countries try to export their way out of underdevelopment by specializing
in a range of similar products, most of them could end up losing from insufficient foreign
demand and possibly depressed international prices which in turn would lead to declining of their
terms of trade (TOT).

To sum up, the above-mentioned issues expresses that the export and economic growth linkage
need further investigation. Although most of the cross sectional studies indicated that the export
and economic growth is positive and significant.

2.4 Review of the Export Policy in Ethiopia

2.4.1. Pre1974/75-periods
The imperial regime was pursued import substitution industrial promotion and infrastructure like
road development and the likes. Diversification of the export structure by exploiting the large
livestock population, and products of ago-processing industries to obtain average annual export
growth of 9% and 11% share of exports in national income. There was also the formation of
government foreign trade corporations, revisions of existing custom tariffs to protect domestic
products and stimulate exports, directing credit and subsidy policies towards the production and
promotion of exports, conclusion of a series of bi-lateral and multilateral agreements and better
participation at international trade fairs .The formation of private sector was also another
initiatives. After the military junta called the Derg came to power, the above-mentioned
initiatives culminated or abandoned. It is indicated that private sector participation in the export
sector was marginalized with government enter prices taking the dominate role Ethiopian
Economic Association (2007).

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2.4.2. The Derg Regime (1974/75-199O/91)
The foreign trade policy of the Derg had four major goals: those are mobilizing government
revenue by imposing taxes on imports and exports, protection domestic economy participant
from foreign competition, providing favorable balance of payment at sustainable level, and the
gradual prevention of the private sector from foreign trade participation.

Consistent with the last objectives, the government discourages exporters from exporting
traditional export items, such as coffee, pulses and oilseeds and the likes. In turn, public
enterprises have been established to turn such objectives.

During this regime, the exporters were not allowed to export commodities at a price that was less
than the reference prices provided by the government, the exporters were also forced to surrender
100 percent of the foreign exchange they obtained to the government. Moreover, there was a
restrictive foreign exchange licensing system for private use. The exchange rate was fixed at Birr
2.07 for a dollar for quite a long period. Government provides marketing channels for all
important and major exports of the country Negatu Legesse and Aklilu Amiga (2007), Ethiopian
Economy.

2.4.3. The Post 1990/91 Periods

After over throw of the Derg, the Transitional Government of Ethiopia (TGE) started taking a
number of foreign sector policy measures since 1992 .The government has changed the fixed
exchange rate regime to that of managed floating exchange rate regime. It also introduced
weekly foreign exchange auction system is changed to daily basis. The other main external
reform measure was the suspension of taxes and duties levied on export except on coffee. It was
introduced in January 1993. However, the tax on coffee was also removed after the recent
historic coffee price decreased in order to reduce the adverse effects of this price decline on
coffee growers and other citizens are participating in the coffee market.

This tax removal on export of all commodities provides a strong incentive to exporters together
with the devaluation as it allows them to receive the equivalent of the world price for exportable
commodities. Government subsidy to exporters was also terminated when export taxes were
lifted. In with governmentpolicyto build a market –based economy, the external sector has also
benefited from the abolition of monopolistic operations of public enterprises, which used to
dominate the export and import sector and the like. Since then, the private sector has been

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encouraged (include the simplification of entry to market) to participate in the external sector
Negatu Legesse and Aklilu Amiga (2007), Ethiopian Economy.

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 CHAPTER THREE

3. METHODOLOGY OF THE STUDY

3.1. Research Methodology and Data Sources
3.1.1 Data Type and Sources
The time series data will be used based on data availability particularly on some key variables.
The data that will be used in the study is secondary type data and collected from national bank
(NBE), central statistics agency(CSA) , ministry of finance and economic development
(MoFED), world bank(WB), journal bullets, and other sources associated with the study. To
analyze the country’s export performance, the export equation in the study will be estimate using
time series data starting from the period of 2011/12 up to the period of 2021/22.

3.2 Data Analysis Method

Econometric analysis employed to study both the relation and significance of the variables by
using time series method. The data analysis mainly on the trends and performance of export can
be using OLS method. Statistical measures such as ratio, percentage, tables, average and graphs
have been us

3.3. DESCRIPTIVE ANALYSIS OF PERFORMANCE OF ETHIOPIAN EXPORT

SECTOR AND ITS CONTRIBUTION
3.3.1 Descriptive Analysis

3.3.1.1. The Structure of Ethiopian Economy

In developing countries like Ethiopia, the size of their domestic market is limited and they are
heavily depending on the imports of intermediate and capital goods. The expanding of exports
and increasing international competitiveness can play a paramount role (MEDac, 1999).

The country lack structural transformation which means that sustain export on the primary
commodities (Berhau and Befekadu, 2001/2002). Among those primary commodities, coffee
took a lion share. There was also an import of manufactured goods about half a century ago and
the absence of structural transformation has resulted in the poor country’s export capacity.

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3.3.1.2 Commodity and Sect oral Structure of Export
The Ethiopian export sector depends on a very few primary goods. The non-agriculture products
contribute less to export. In the below table the paper has tried to indicate the share of major
primary products to total export and average growth during the study.

3.3.1.3. Sectorial Structures

The very high structural dependency of the economy on agriculture indicates that it has high
structural effect on export.

Here, the role of agriculture is such that its performance affects the whole economy, Growth of
GDP follows closely that of agricultural sector. Food supply to urban areas, supply raw materials
for the manufacturing sector and export commodities of the country comes from the single
sector; agriculture. However, they are also based on a few commodities.

The manufacturing sector of the Ethiopia economy is also agricultural dominated. Manufacturing
industry which takes for about 23.58% of GDP is heavily dependent on agriculture (World Bank,
2017). Thus, like the commodity structure and the sector structure of Ethiopia’s exports is very
much concentrated on primary agricultural products.

3.3.1.4. The Role and Contribution of Export in the Ethiopian Economy

Like in most of the Sub-Sahara African and other developing countries, exports can play a
paramount role in the growth and development of the Ethiopian economy.

To avoid the possibility of spurious regression results, and to test co-integration, the estimation
procedure use Unit root test of stationarity.

For this purpose, the study will use software known as STATA series and Augmented Dickey
Fuller (ADF) test. Augmented Dickey Fuller taken as a Unit root procedure. Augmented Dickey
Fuller for export written as EXP=ϕ +δX t-1+∑ i=1 ∆βEx t-1+Ut. Whereas β is coefficient of the
lagged variables β=1-δ, Ho: β=0 vs H1; β<0. In the last phase, we can estimate the short run
models by using the Error Correction Model (ECM). The variables that are going to be employed
in the studies are both explanatory and dependent variables.

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3.2 Variables and Its Nature
The variables under consideration are both explanatory and dependent variables. Because of it is
not possible to consider all variables that affect performance of export sector in the country
owning to the lack of tactical information on some variables, the study uses five explanatory
variables of the major determinants Ethiopian export sector. These contain private consumption,
openness (the sum of export and import) to GDP ratio, Gross capital formation, domestic output
and Real Effective Exchange Rate.

3.3. Model Specification

3.3.1. Dynamic Model
The model will be used in the analysis is formulated as follows:

Exp=f(reer, k, rgdp, opn, c ).

The regression equation is expressed as:

LnExp=β0+β1LnREER+β2LnGCF+β3LnRGDP+β4LnOPN+β5LnCON+Ui.

Regressing dependent variables on in dependent variables involving time series data, it is

possible for the export to depend up on the certain variables in the previous time and recent time.
This means that there may be a non-contemporaneous or lagged relationship between dependent
and the explanatory variables.

Therefore, the long run model for the above explanatory variable formulated as

LnExpt=β0+β1LnREER+β t-12LnGCF t-1+β3LnRGDP t-1+β4LnOPN t-1+β5LnCON t-1t-1+Ut-1

Where: LnExp: Logarithm for the value of export

LnREER: Logarithm of real effective exchange rate (weighed by Birr or USD)

LnGCF: Logarithm for Gross capital formation (investment) which provides in terms of GDP
ratio.

LnRGDP: Logarithm of average income of importer country

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LnOPN=Logarithms of (sum of export and import) as a percentage of GDP, a proxy of degree of
opoenness.

LnCGDP:Logarithm of domestic consumption to gross domestic product ratio.

Ui is a residual term or an error term that may present as a variation in export.

This is not explained by the variables. It expresses the effect of other explicit and implicit
variables which can affect performance of export sector. However, they are not incorporated in
the model. This may be due to the lack of necessary data on them and other related reasons.

3.3.2 Brief Explanation of dependent and Explanatory Variables

1) Export Performance (ExP): Exports are the goods and services produced in one country and
purchased by residents of another country (Tran, 2020). It involves the merchandise value,
insurance, freight, all transport, travel, royalties, fee of license and other services such as
telecommunication, financial, informational, business, construction and government services
(Uysal & Mohamoud, 2018). In this case, it is total goods and services produced in Ethiopia and
consumed by other abroad countries. In the analysis, it can be used as a dependent variable and
measured by the total value of export of goods and services by USAD. Also to make linear it was
used in the Logarithm form.

2. Real effective Exchange rate (REER): is defined as a real worth of foreign exchange in
terms of a given domestic currency. The specification of export model to handle real effective
exchange rate is based on the premise that the depreciation of the currency has great impacts in
improving export.

3. Gross Capital Formation (GCF): is defined as outlays on additions to fixed assets, plus the
net change in inventories. Fixed assets include plant, machinery, equipment, and buildings, all
used to create goods and services World Bank (WB). The export models assume it has a positive
impact.

4. Real Gross Domestic Product (RGDP): is a measure of a country's gross domestic product
that has been adjusted for inflation. Contrast this with nominal GDP, which measures GDP using
current prices, without adjusting for inflation. RGDP is an important indicator of a country's
economic power.

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5. Openness (OPN): The Openness is an economic concept which is defined as the ratio of
country's total trade, the sum of exports plus imports, to the country's gross domestic product.
OPN= (Exports + Imports)/(Gross Domestic Product).

The interpretation of the Openness is: the higher openness the larger the influence of trade on
domestic activities and the stronger that country's economy.

6. Domestic Consumption (CON): Consumption is defined as the use of goods and services by
a household. It is a component in the calculation of the Gross Domestic Product (GDP).
Macroeconomists typically use consumption as a proxy of the overall economy.

3.4. Econometric Analysis and Result Discussion

3.4.1 Stationarity test (Unit Root Test)
Estimation of parameters and hypothesis testing using time series data requires an investigation
of the data generating process of the variable under consideration. This investigation helps to
avoid estimating spurious correlation between variables in regression. Where what actually
existed is correlated time trend rather than meaningful economic relationship. Combination of
variables that contain time trend or non-stationary may amount to spurious correlations. To avoid
such problems of spurious correlation due to the presence of non-stationary variables in
regression model, the time series property of the variables used in the model are investigated. A
series is referred as covariance stationary if it has constant mean, finite time invariant variance
and a constant as well as a covariance between any two times periods that depends only on the
lag between them. Hence each series is checked for stationary using the standard Augmented
Dickey fuller (ADF) test.

3.4.2 Co-integration Test

Co integration refers to a linear combination of two or more time series variables. In essence, it
tells us the long run relationships that exist among variables. This method helps us to simply
determine whether the variable is stationary or not. If the residual tests are stationary, then the
variables are known as co-integrated variables. That means they have long run relationship
(Gujarati, 2004). There are a number of co integration test, but for this study the researcher used
Johansson Co-integration test.

17
3.4.3 Long Run Model Specification
The long run model is estimate using the ORDINARY LEAST SQUARE method of estimation.
The model specified estimation purpose has been the following:

LnEXPt=β0 +β1LnREERt-1 + β2Kt-1 + β3LnRGDPt-1 + β4Ln OPNt-1+β5 LnCt-1+Ui

3.4.5 Short Run Model Result Based On ECM Method

The ECM (error correction model) helps us to obtain the short run relationships among the
variables while they are in a state of long run equilibrium. An error correction model (ECM) is
constructed and estimated in this section as the first difference of the dependent variable is
regressed on the first difference of explanatory or independent variables and the first lag of the
residual obtained in the first step. It indicates that the short run dynamics of the OLS estimation
results and its adjustment towards the long run equilibrium.

3.4.6. Post Estimation/Diagnostic Test

There are four diagnostic tests that have been employed in this study in order to detect the
problem of multicollinearity, heteroscedasticity, serial correlation, normality test.

18
 CHAPTER FOUR

4. BUDGET LINE AND TIME SCHEDULE.

4.1 Time Schedule:-

The following time schedule when the proposal will be done.

No Activity performed Oct Nov Dec Jaun Febr March

1 Topic selection 

2 Collection and reading 

of more literature

3 Proposal writing ✓ 

4 Data collection and data 

analysis

5 Proposal submitting 

19
 4.2. Budget line
The study will contain the following different types of expenditures that will incur in the whole
course of research.

Items Quantity Per unit (Birr) Total Cost

(Birr)

Equipment and Paper 120 1 120.00

stationery
Pens 3 25 75

Total Cost - - 195

Personal cost

Internet 540 0.25 135

minutes

Typist 52 4 208.00

Transportation - - 1060.00
cost

Total cost - - 1648.00

Contingency - - 500.00

Overall total - - 2148.00

cost

20
References
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Agosin, R. (2007), “Export Diversification and Growth in Emerging Economies”, Working

Paper No. 233. Departamento de Economía, Universidad de Chile.

Ahmed, E. and Majeed, M. (2006), “Determinants of export in Developing Countries”, The

Pakistan development review. 45: 4 pp.1265-1276

Ahmed, U. (2000), “Export Responses to Trade Liberalization in Bangladesh: A Co-integration

Analysis”, Applied Economics, 32, 1077-1084.

Alemayehu G. (2006), “Openness, Inequality and Poverty in Africa”, DESA Working Paper No.
25

Amin A. (2007), “The booming non-traditional export commodities: The case of cut- flower”,
Paper presented for the 5th annual international conference on Ethiopian economy, EEA, AA.

Amin Abdella (2001), Export instability and economy growth in Ethiopia, MSC thesis,

BefekaduDegefe and BerhanuNega (2000/01), The Ethiopian Economic Association (EEA),

Second Annual report on Ethiopian economy, vol 1.

Devries,Berend A.(1967),”export experience of developing countries.”

Ethiopia Economic Association [EEA] (2004, 2005), Bulletin , vol2, vol3

Ethiopia Revenue and Customs Authority Annual Report (2010)

Gujarati, damodar, N (2003), Basic Econometrics, 3rd edition.

Henory Thompson Free trade and income redistribution in some developing countries and newly
industrial countries

Johnson, H G (1996), International trade and Economic growth, London, George Allen and
Unwin

Negatu Legesse and Aklilu Amiga (2007), Ethiopian Economy.

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