THE ROLE OF EXPORT DIVERSIFICATION ON ETHIOPIAN

ECONOMY

A RESEARCH SUBMITTED TO THE DEPARTMENT OF ECONOMICS IN

PARTIAL FULFILMENT OF THE REQUIREMENTS FOR BA DEGREE IN
ECONOMICS

BY: HAWI ABERA

ADVISOR: YILKAL WASSIE (MSC)

JIMMA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

JUNE, 2014
JIMMA, ETHIOPIA
 ACKNOWLEDMENT

Above all I would like to thank the almighty God for helping me through all things and to

accomplish this study. Secondly I would like to thank all my family whom I love for their

continuous support until now. And I like to express my deepest gratitude to Mr.Yilkal Wassie

my advisor for his effective advice and comment. I also like to thank my all respondents for their

good willingness and giving the necessary information and other things that help for the success

of this research.

i
 ACRONYMS

WB: World Bank

EEA: Ethiopian Economic Association

IMF: International Monetary Fund

NBE: National Bank of Ethiopia

MTI: Ministry of Trade and Industry

ERCA: Ethiopian Revenue and Custom Authority

EPDRF: Ethiopian People Democratic and Republic Front

CSA: Central Statistical Authority

GDP: Gross Domestic Product

ii
 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 their proceeds 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 was made 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 should be moving from very few primary products to
more diversified export commodities.

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 TABLE OF CONTENTS
ACKNOWLEDMENT.............................................................................................................................................. I

ACRONYMS......................................................................................................................................................... II

ABSTRACT.......................................................................................................................................................... III

LIST OF FIGURES AND TABLES............................................................................................................................ VI

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

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

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

1.2. STATEMENT OF THE PROBLEM....................................................................................................................................4
1.3. OBJECTIVE OF THE STUDY..........................................................................................................................................6
1.3.1. The general objective...................................................................................................................................6
1.3.2. The Specific Objectives.................................................................................................................................6
1.4. SIGNIFICANCE OF THE STUDY......................................................................................................................................6
1.5. SCOPE OF THE STUDY................................................................................................................................................6
1.6. LIMITATION OF THE STUDY.........................................................................................................................................6
1.7. 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...........................................................................................................................................16
2.2.1 Export and Economic Growth.....................................................................................................................16
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

CHAPTER FOUR................................................................................................................................................. 21

DISCUSSION AND ANALYSIS.............................................................................................................................. 21

4.1. INTRODUCTION......................................................................................................................................................21
4.2. EXPORT DIVERSIFICATION POLICES IN HISTORICAL PERSPECTIVE.....................................................................................21

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 4.2.1. The Imperial Regime (1960/61-1973/74)..................................................................................................21
4.2.2 The Military Regime 1974/75-1990/91......................................................................................................23
4.2.3 The EPRDF Regime (post 1990/91).............................................................................................................23
4.3 SIGNIFICANCE OF EXPORT IN THE GROWTH PROCESS.....................................................................................................24
4.4. SHARE AND STRUCTURE OF MAJOR EXPORTS..............................................................................................................26
4.5. MAJOR EXPORT ITEMS IN TERMS OF VALUES..............................................................................................................29
4.6. VOLUME OF MAJOR EXPORTS..................................................................................................................................31
4.7. TRENDS IN EXPORT PERFORMANCE...........................................................................................................................32
4.8. STRUCTURE OF ECONOMIC SECTOR ON EXPORT OF THE COUNTRY..................................................................................33
4.9. THE CONTRIBUTION OF DIVERSIFICATION IN FOREIGN EXCHANGE EARNING STABILITY........................................................35
4.10. THE PROBLEMS AND CONSTRAINTS OF EXPORT SECTOR IN ETHIOPIA............................................................................36
4.10.1. The Internal (Supply Side) Constraints.....................................................................................................36
4.10.2. The External Constraints (Demand Side).................................................................................................37
4.11 THE CONSEQUENCE OF NON DIVERSIFICATION EXPORT...............................................................................................37
4.11.1. Economic Risks.........................................................................................................................................37
4.11.2. Political Risks...........................................................................................................................................38

CHAPTER FIVE................................................................................................................................................... 39

CONCLUSIONS AND POLICY RECOMMENDATIONS............................................................................................. 39

5.1. CONCLUSIONS........................................................................................................................................................39
5.2. RECOMMENDATIONS...............................................................................................................................................41

REFERENCES...................................................................................................................................................... 43

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 LIST OF FIGURES AND TABLES
Title Page

Table 4.1: Average share of export in GDP (% of total) 1960/61-2011/2012 …….………25

Table 4.2: Share and structure of major exports (% of total)………………………………27

Table 4.3: Values of major export items (in millions of US$)……………………………...30

Table 4.4: Volume of major export commodities (in millions of kg)………………………31

Table 4.5: Growth rates of major export components (% of total)…………………………32

Figure 4.1: Average share of economic sector on export of the country (% of total)………34

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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 also several 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 the domestic market is also small, like it is in 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
primary commodities and concentrating on a few products and market outlays to finance much
1
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
coffee, hides and skins and oilseeds and pulses. These traditional exports accounted for 83

2
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 issues touching upon export
diversification in Ethiopia is central to initiatives that are geared towards the designing of an
Ethiopian economic policy that 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.

3
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 showed large variations, reflecting significant changes in the balance of supply and
demand as well as changes in stock levels.

Prices of key agricultural products remained 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 appeared to have exceeded 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 and
also tries to answer the question like:
 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?

5
1.3. Objective of the Study
1.3.1. The general objective

The general objective of this study is to assess the role of export diversification in Ethiopia.

1.3.2. 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

1.4. Significance of the Study

It could be right to say that the outcome of this study would 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 expected that the
study would aid policy makers in their effort to revamp the sector through examining the role of
diversification in accelerating the economic growth and to reap more benefit from the sector by
putting in place appropriate policies and strategy.

1.5. Scope of the Study

The study is focused 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 covered the
period from 1960/61-2011/12. This is the period for which published data is available.

1.6. 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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1.7. Organization of the Paper

The version 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.

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 CHAPTER TWO
LITERATURE REVIEW
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;

8
 i. Horizontal Diversification

Horizontal diversification takes place within the same sector (primary, secondary or tertiary), and
entails adjustment in the country’s export mix by adding new products on existing export baskets
within the same sector, with the hope to mitigate adverse economic (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

9
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.

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

10
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
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
11
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
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
12
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
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.

13
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).

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 the impact on producers’

14
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 export production and where
producers’ have low marginal propensity save out of current income, export instability is thought
to induce similar short-run instability in producers’ incomes.

The impact on the government sector arises because export instability may impart similar
instability to total government revenues. The sensitivity of revenues is taken to be a consequence
of the dependence of total revenue on proceeds from taxes on foreign trade and resulting in
fluctuation in government expenditure. An important dimension of the instability problem is the
generation of uncertainty and this held to exert adverse effects in two ways. First, uncertainty
about the availability of government revenues is thought to complicate 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.

15
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
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
16
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.

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 to GDP 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

17
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,
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.

18
 CHAPTER THREE
METHODOLOGY
3.1. Type and sources of data
Data concerning the volume and value of selected major export commodities is collected.
Besides, qualitative data or information on the subject is explored in order to supplement the
quantitative data. The data is collected 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 is used for this study .As a means of data collection,
the quarterly and annual reports of the above source organization is explored .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 is employed for this study .In this method quantitative data is
presented 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 could help improve the sector and major challenges hindering
its growth are analyzed in words.

19
20
 CHAPTER FOUR
DISCUSSION AND ANALYSIS
4.1. Introduction

In recent decades, several developing economies have undertaken structural reforms aimed to
improve economic performance, targeting export diversification in particular. Therefore, it is
important to analyze the effect of some reforms, such as trade liberalization and economic
integration on export diversification. In this chapter role of diversification on the growth of the
economy and analyzing the effects of export diversification in the growth process of the country
is to be assessed. It also over views the share of sectors in export and volume of export.

The good performance of export is greater contribution to GDP. Most of the time Ethiopian net
exports are negative because imports are greater than export by volume and value. When export
are diversified the total volume of export and value of export are increased. Generally the chapter
involves a review of policy documents and summary of data obtained from various government
institutions such as from Customs Authority, National Bank, Center Statistical Authority and
Ministry of Finance and Economic Development.

4.2. Export Diversification Polices in Historical Perspective

4.2.1. The Imperial Regime (1960/61-1973/74)

The Ethiopian government had been trying to enhance and accelerate economic growth through
national development plans. However, the expected achievement had been so poor or limited that
it remained unsatisfactory. The Imperial regime had designed three consecutive development
plans starting 1958. The first five-year plan (1957-1961), which emphasized on industrialization
and construction of infrastructure, was in favor of the export sector. The plan gave due attention
to export diversification to reduce export (economic) instabilities and to finance the country's
deficit.

21
Measures were also taken to promote export diversification such as expansion of infrastructure,
especially road, improvement of the quality of export products and the exploitation of the
country's agricultural potential in diversifying and increasing exports.

The second five-year plan was initiated and further strengthened the objective of the first five-
year plan. The second five-year development plan (1963-1967) envisaged a structural
transformation of the economy and export diversification. The plan intended to reduce the share
of agricultural export commodities by increase the share of manufactured goods whose market
prices are relatively stable and competitive and exports were expected to increase on average by
11 percent per annum.

The plan also gave equal motivation for both the public and private sectors and recognized their
role in the process of diversification. The implementation of this plan was accompanied by
incentives like income tax holidays, simplification of export licensing. Furthermore, Embassies
also carried out trade missions for trade partners and provided information about potential
markets to business community. Although the second five-year plan was projected to increase by
11 percent per annum, the registered actual growth rate was only 5 percent (Second Five Year
Plan).

The third five-year development plan (1968-1973) similar to the previous two development
plans, also acknowledged the importance of the export sector especially the role of the
nontraditional export items. And hence, export was projected to rise on average 10.7% annually.
During this period agricultural export products represented almost 75%. From this, coffee
constituted about 55% of the total exports but it was intended to reduce the share of coffee to
40% through processing of hides and skins, canning fruits, vegetables and meat products,
minerals including potash and gold, textiles and chemicals.

To achieve this goal, export diversification, fiscal and monetary policies were revised and other
packages of incentives were also provided including simplification of licensing, credit, subsidy,
reduction of transport tariffs, etc. In addition to this, the route of Ethiopian Air and shipping lines
were expected to provide market opportunity and rapid growth for the export sector.

22
4.2.2 The Military Regime 1974/75-1990/91

The military government ten year plans were run from the year 1985/86- 1994/95. The export
objectives of the ten years perspective plan of the dergue regime were increasing foreign
exchange earnings, reducing the dependence of the country's export sector on limited export
markets, increasing the amount and composition of manufactured exports and increasing the
socialization of the export sector (Provisional Military Government of Socialist Ethiopia, 1985).
By emphasizing the role of state owned export companies, geographic diversification of exports
towards the markets of socialist countries and neighboring African countries as well as
diversification towards manufactured products, to a greater extent, were the agendas of the
perspective plan.
During the plan period, average annual export growth rate of 15.4 was targeted and state export
companies were expected to play a critical role by occupying 90 percent of the export business.
New export products such as copper, potash, marble, soda ash, cement, ceramics and leather
products were planned to be forwarded to the international market starting from the second half
of the perspective plan. The military governments have used favorable tax, tariff reduction, and
foreign exchange rate measure improving export in term of quantity were the military
government tools for promotion of export to achieve the ten years plan objective.

4.2.3 The EPRDF Regime (post 1990/91)

The economic policy of the Transitional Government of Ethiopia acknowledged the importance
of increasing and diversifying the country's exports to ease foreign currency shortages along a
free market-based economic path (Transitional Government of Ethiopia, 1991). By minimizing
the role of the state in foreign trade sector and by ensuring adequate private capital participation
in the export business, the government aimed at increasing exports and foreign exchange
earnings. To this end, measures such as provision of fiscal incentives to exporters, the
replacement of quantitative restrictions with tariffs, encouraging export-oriented investment,

23
minimizing administrative and bureaucratic procedures and promotion of the use of trade
information were highlighted.

In October 1992 International Monetary Fund (IMF) and World Bank supported structural
adjustment programme was launched whose basic role in the exchange and trade system was to
strengthen incentives for diversified export production thereby attracting foreign exchange flows
away from parallel markets.

Pursuant to the new economic policy and the associated structural adjustment programme a
bunch of policy measures targeted at stimulating export growth and diversification have been
enacted. Export licensing procedures were streamlined and the bureaucratic trade licensing
chains were practically abandoned. The Birr was devalued by about 59 percent (from the 2.07
US dollar to 5.0 US dollar which the objective to promote the volume of export) and the foreign
exchange market was step-by-step liberalized.

With the view of enhancing export competitiveness all taxes on exports (except coffee) and
subsidies to enterprises that were favored by the state were abolished. An Export Trade Duty
Incentives Scheme was introduced. In order to facilitate exporters’ access to bank credit thereby
exploiting and enhancing the competitiveness of our exporters in the international market, an
export credit guarantee scheme was introduced since 1999. Foreign exchange retention scheme
was introduced in order to encourage exporters. A legal base was created for the registration of
external loan and suppliers' or foreign partners' credit.

Among these measures, devaluation of the local currency (Birr), make export market more
attractive than the domestic market which, therefore, shifts resources from production of goods
for home consumption to the export market. The import and export licensing were simplified and
become more transparent.

4.3 Significance of Export in the Growth Process

The ability to develop superior export performance is considered to be vital to public policy
makers and business managers (katsikeas,leonidou and morgan,2000). Export serve as a vehicle
for accumulating foreign exchange reserves, increasing employment levels, increasing

24
productivity and enhancing social prosperity. Exporting affords firms the opportunity to dispose
excess production to enter new international markets, or expand existing market in foreign
countries.

Now days the growth process of one country is heavily dependent on its export because export
cover the cost of import. An improvement in export earnings facilitates greater import of capital
goods for badly needed investment and would lead to more import of production inputs for
agriculture and industry which are in short supply.

An improvement in the availability of imported inputs associated with sustained export growth
would lead to an increase in production of goods and services. In Ethiopia many industries are
import dependent for capital goods and inputs and also the higher demand for imported non-
substitutable consumer and intermediate goods, the need for accelerating export growth is
essential.

This would enable export to play its role as an engine in the growth process. In this regard,
therefore, any retardation in export performance like export earnings instability will have a direct
repercussion on the national income and growth performance of the economy.

Table 4.1 Average share of export in GDP (%)

period Average share of export
In GDP (%)

1960/61-1973/74 10.9
1974/75-1990/91 10.0
1991/92-2001/02 13.9
1960/61-2011/12 11.6

Source: Computed based on Ethiopian Revenue and Custom Authority

(ERCA)

It can be seen that on average exports contributed about 11.6 percent to Gross Domestic Product
(GDP) during the past five decades. Since the volume and value of export commodities are small

25
the contribution of export sector GDP of the country is very small compared to the other sector.
For example the agricultural sector contributes about 44.1 percent of the GDP. The industry and
the service sector account for 13.0 percent and 42.9 percent respectively in 2008/09(NBE,
2007/08; CSA, 2007/08).

The average share of export during the period of imperial was 10.9 percent that is greater than
that of military regime which was 10.0 percent. The decline during this period was due to the
poor performance in the export of pulse and oilseeds.

During the EPRDF regime its share to GDP on average is 13.9 percent showing more
improvement from the previous regime. On average from the period from 1960/61-2011/12 the
share of export to GDP was 11.6 showing slow increment but it is still insignificant.

4.4. Share and Structure of Major Exports

Ethiopia is one of the emerging countries, its economic growth and development is highly linked
with the development of agricultural sector. The sector contributes about 44.1 percent of the
Gross Domestic Product (GDP) and it provides income and employment to about 82 percent of
the population.

For the last five decades, the export sector was largely characterized by high dependency on few
agricultural export commodities. Among these commodities, coffee alone constituted for about
54.9%, 60.5% and 47.75% of the total export earnings in Imperial, Dergue and EPRDF regimes
respectively.

Due to the instability and transition (revolution) of 1974/75 the share of the coffee in the total
export declined to 27 percent and the maximum share was 70 percent in 1997/98 because of
government’s campaign efforts.(see table 4.2 below)

26
Table 4.2 Share and structure of major exports (% of total)

commod Imperial Regime Dergue Regime EPRDF Regime

ities 1960/61 1967/68 1960/61 1974/75 1983/84 1974/75 1991/92 1997/98 2004/05 1991/92
- - - - - - - - - -
1966/67 1973/74 1973/74 1983/84 1990/91 1990/91 1996/97 2003/04 2011/12 2011/12
Coffee 56.2 53.5 54.91 61.3 59.8 60.5 63.1 47.0 33.15 47.75
Hides 11.3 10.6 10.9 10.6 11.0 10.8 12.2 11.3 6.13 9.88
and skin
Oilseeds 8.9 10.1 9.5 4.7 1.6 3.2 1.7 4.5 18.28 8.16
Pulses 7.9 8.6 8.3 6.1 1.9 4.0 1.6 3.9 6.05 3.85
Chat 3.5 1.1 2.3 1.9 2.7 2.3 6.3 12.2 9.32 9.27
Flower - - - - - - - - 6.5 6.5
Others 11.6 16.1 13.8 15.4 25 20.2 13.9 19.9 20.57 18.1
Total 100 100 100 100 100 100 100 100 100 100

Source: Computed based on row data obtained from Ethiopian Revenue and Custom Authority
(ERCA)

During imperial regime coffee, hides and skins, oilseeds, pulses and chat which comprised 87
percent of the total exports. Coffee alone accounts 56.2 percent from 1960/61- 1966/67 and 53.5
percent in 1967/68 – 1973/74. Between 1960/61 and 1973/74 on average the share of coffee was
54.9 percent. Next to coffee, the other important export item was hides and skins that accounts
10.9 percent for the period of 1960/61 and 1973/1974. Oilseeds and pulses also constituted 9.5
and 8.3percent respectively in the same year.

During the Imperial period the country’s external trade strategy was oriented to import
substitution strategy. Even though the regime has tried to employ permissive and positive
policies such as income tax holidays, subsidies, credit, improving infrastructure, improving
quality of the export product and tried to revise tariff rates, but these improvements could not
promote export of the country.

During the period of the Dergue regime, the country’s export commodities also mainly depend
on few traditional items. Between 1974/75- 1982/83 the share of coffee to the total exports was
averaged 61.3 percent and 59.8 percent for the period of 1983/84- 1990/91. On average for the
27
whole period of the regime it constituted 60.5 percent. Hides and skins accounts about 10.6 and
11.0 percent in 1974/75-1982/83, and 1983/83-1990/91 respectively. On average between
1974/75 and 1990/91 its share was 10.8 percent. The share of oilseeds dropped from 9.5 percent
in 1960/61-1973/74 to 3.2 percent between 1974/75-1990/91.

Similarly pulses also declined from 8.3 percent to 4 percent in the same year. Generally during
this regime the export sector shown declining trends and export diversification had been
worsening. This decline was mainly due to the poor performance in the export of pulse and
oilseeds and political instability during the regime.

The structure of the Ethiopian export during EPDRF is not different from the other regimes. It is
dominated by primary products. Coffee continues its domination over the other export items. The
share of coffee was about 63.1, 47.0, and 33.15 percent for the periods of 1991/92-1996/96,
1997/98-2003/04, and 2004/05-2009/10 respectively. On average for the period of 1991/92-
2011/12 it accounts 47.75 percent. Hides and skins constituted a share of 12.2, 11.3, and 6.13
percent for the same periods and on average for the period of 1991/92-2011/12 it accounts 9.88
percent which are less compared with the Imperial and Dergue regime.

The share of oilseeds was 10.9 percent from 1960/61-1973/74. However, from 1974/75- 1990/91
it dropped to 3.2 percent. Even now the share of this item was only 8.16 percent, which is less
compared to the Imperial period. During the Imperial era the share of pulses was 8.3 percent. But
it declined to 4.0 and 3.85 percent in the Dergue and the current government respectively.
Between 1991/92-2011/12 on average the share of chat was 9.27 percent. According to this study
during the current government hide and skin can be ranked as the second export item as it shares
is 10.9, 10.80 and 9.88 percent in the Imperial, Dergue and EPRDF respectively.

The other export item is Chat. Chat is a green leaf flowering plant with stimulating drug content
which has become one of the top non-traditional export commodities. During the Dergue period
the share of chat was 2.3 percent the same with the imperial regime. However, during EPDRF
Chat witnessed an increase to 9.27 percent. For example Ethiopia was able to collect USD 271.5
million in 2011/12 Ethiopian government is currently working towards exporting 80% of the

28
total Chat production and discourage local consumption. To this effect, the government imposed
a tax of 5 Ethiopian birr per kilogram of Chat consumed locally in 2012.

The flower industry is another area of export that quickly grew into successful non-traditional
export products. It turned Ethiopia into the second largest flower exporter on the continent next
to Kenya. It took only five years until the sector fully developed. Starting from the year of 2007
the share of flower is increasing and the period 2007 to 2012 its share was 6.5 percent. Due to
the high ecological competitive advantage and following the favourable investment environment
created by the policy, the flower sector is growing at an impressive and fast rate.

4.5. Major Export Items in Terms of Values

Since Ethiopian export commodities are originated from agricultural products which are
unprocessed. Due to this reason the commodity’s demand are inelastic and their prices on
international market are instable and decreasing for the past decades. Because of the above
reason the values of export commodities in Ethiopia is very low and unable to cover the import
of the country which are processed industrial products and with high economic value. This
results in a negative balance of payments for many years.

However the values of these commodities are showing improvement due to increase in volume
of the export. During the period of EPDRF Earning from export of coffee rose sharply to USD
310.0 million. At the imperial, military time the values of the same item was 132.4 and 143.1
USD million respectively.

Table 4.3 Values of Major Export Items

Commodities/year Values of major export items

29
 1960/61- 1974/75- 1991/92-
1973/74 1990/91 2011/12
Coffee 132.4 143.1 310.0
Hides and skin 124.0 133.4 256.3
Oilseeds 68.2 62.0 224.0
Pulses 32.9 41.7 119.5
Chat 9.8 58.3 195.0
Flower - - 148.3
Others 59.3 67.2 140.9

Source: Ethiopian Revenue and Customs Authority

Similarly, Chat export proceeds expanded to USD 195 million, which was 9.8 and 58.3 USD
million during the imperial, military regime respectively. Pulses export proceeds increased to
USD 119.5 million wholly driven by moderate improvement in international prices.

Earning from export of flower during the current government is USD 148.3 million, showing
small increase solely due to a 15.6 percent growth in volume of exports despite 11 percent
decline in price (NBE, 2012). The values of hides and skin increased to 256.3 from 124.0 and
133.4 during the period of imperial and dergue respectively.

On the other hand, export of oilseeds fetched USD 224.0 million during the current period and
USD 68.2 and 62.0 million during the period of imperial and military respectively. The poor
performance was ascribed to the decline in volume of exports in spite of a 7.2 percent
improvement in world prices (Ibid, 2012).

4.6. Volume of Major Exports

The volume of Ethiopian export commodities was insignificant during the past two regimes.
However positive performance was observed for the past two decades and this is due to the
favorable condition the government made to encourage exporters and to improve the export
sector. (See table 4.4)

Table 4.4 volume of major export commodities (In Millions of Kg)

30
 Commodities/year volume of major export commodities
1960/61-1973/74 1974/75-1990/91 1991/92-2011/12
Coffee 76.0 62.0 267.4
Hides and skin 172.0 155.6 248.2
Oilseeds 150.7 120.3 98.0
Pulses 120.1 63.2 111.0
Chat 12.0 23.6 34.1
Flower - - 35.6

Source: Ethiopian Revenue and Customs Authority

The country’s volumes of exports were improving through time and as mentioned above it is
during the EPDRF regime that a better improvement has been shown. Prior to 1974(the imperial
era), the volume of coffee export was 76.0million kilograms and 62.0 million kilograms during
the dergue which is small compared to imperial and current government which is 267.4 million
kilogram. On the other hand the Oilseeds export volume also shows decline starting from the
dergue government. Similarly, pulses exports volume decreased to111.0 million kilograms,
which was 120.1million kilogram during the imperial regime

In addition the volume of export of chat wasn’t significant during the all three regimes but it is
showing more improvement. The other new and important export item is flower with 35.6
million kilograms and it is showing significant improvement.

4.7. Trends in Export Performance.

The value of goods and services exported has been growing at an average annual rate of 10.2
percent for the last five decades 1960/61-2011/12. During the period under consideration, the
revenue from exports of pulses and oilseeds has been growing at an average annual rate of 59.4
percent followed by chat whose rate was 59.1 percent. The revenue from the export of coffee and
hides and skins has been growing at average annual rate of 10.3 and 7.1 percent, respectively.

Table 4.5 Growth rates of major export components (% of total)

Period Growth Rates in Total and Major Components of Export

31
 Total Coffee Hides& Pulses& Chat
Export Skins Oilseeds

1960/61- 8.2 2.7 9.1 13.1 0.8

1973/74
1974/75- 4.7 7.1 5.6 2.4 69.8
1990/91

1991/92- 22.5 27.4 14.1 221.0 122.3

2011/12

1960/61- 10.2 10.3 7.1 59.4 59.1

2011/12

Source: Ethiopian Revenue and Customs Authority

Prior to 1974(the imperial era), there has been a modest growth in the total value of export
earning. The average annual growth rate of real value of exports was 8.2 percent. During the
period, the receipt from the export of pulses and oilseeds has been growing at an average annual
rate of 13.1 percent. Coffee, which is the largest export commodity, has been at an average
annual rate of 2.7 percent.

During the Derg regime (1974/75 – 1990/91), the growth rate of real exports was lower from the
rate recorded in the previous regime. The growth rate of total value of export earning registered
more than 42 percent decline from the growth rate recorded for the imperial regime (debel,2002).
This can be largely attributed to the poor performance in the export of pulses and oilseeds.

The proceeds from the export of the commodity, which was growing at an average annual rate of
13.1 percent during the imperial regime, declined to 2.4 percent during the Dergue regime.
During this regime, export revenue from chat has demonstrated an average annual growth of 69.8
percent compared to 0.8 percent during the imperial regime.

Under the period of Ethiopian Peoples’ Revolutionary Democratic Front (EPDRF), that is
1991/92-2011/12, the growth rate in the real value of total exports has shown a significant
increase. In real value, total exports grew by 22.5 percent. Owing to different policy measures
under taken by the government to promote exports, revenue from the various export commodities
32
has shown a remarkable increase. Proceeds from oilseed & pulses, which was growing at an
average annual rate of 2.4 percent during the previous regime started to grow at a rate of 221.0
percent. And the revenue from Chat export has been growing at an average annual rate of 122.3
percent.

Such an increase in the value of export of these commodities is mainly attributed to a very
significant growth rate recorded during the period 1991/92-1992/93. Owing to the favorable
environment created after the prolonged war that prevailed in the country, the proceeds from
these commodities escalated very sharply from the period 1991/92 to 1992/93.

4.8. Structure of Economic Sector on Export of the Country

Commodity structure of the Ethiopian export sub-sector is a mirror reflection of the country’s
overall economic structure at large. The nation’s output and exports are highly concentrated in
agricultural commodities, while the share of non-agricultural products in total merchandise
exports is almost insignificant.

For the past five decades, primary agricultural products accounted for 80-90 percent of the
merchandise export earnings of Ethiopia.

(Graph 4.1) Average share of economic sector on export of the country

33
 100
90
80
70
60
50
Agricultural sector
40
Manufacturing sector
30 service sector
20 trade and tourism
10
0
4 1 2
3 /7 0 /9 1 /1
9 7 9 9 0 1
-1 -1 -2
61 75 92
6 0/ 7 4/ 9 1/
19 19 19

Source; annual report of NBE and Custom Authority

Us the above graph shows the contribution of economic sector of the country to the export
sector. According to the graph the average share of agricultural sector dominate export sector.
The average share of the agriculture sector contributes 92.3, 90.3, and 82 percent during
imperial, dergue and EPRDF respectively. The other economic sectors listed are manufacturing,
service and trade and tourism and they have an insignificant average share in export of the
country which accounts 4.08, 2.29, and 0.57 respectively during the imperial period.

During the period of dergue regime the average share of these sectors was 5.4, 3.05 and 1.23
respectively and 8.53, 6.6 and 2.89 respectively. As we can see the average share of service and
trade and tourism sector in export are very low.

However, the contribution of agriculture to export overtime decline and decline due to the
contribution of other sector are increasing. The way of reduction agricultural sector contribution
to export and the increment of other sector is the upcoming of export diversification in export
sector. But, the share of manufacturing sector, service sector and tourism sector on export are

34
very low still. Due to this reason the Ethiopia’s export volume and value are minimum and
dominated by one sector of an economy which is agriculture sector.

4.9. The Contribution of Diversification in Foreign Exchange Earning

Stability

Diversification to national trade portfolio can help achieve export earnings stability and growth.
It can considerably minimize instability in export earnings by providing a broader base of
exports, and enhance growth by substituting commodities with positive price trends for those
with declining price trends, through increasing value-added of export commodities by additional
processing and marketing, and by substituting domestic production of food commodities and
industrial raw material commodities for imports.

The process of diversification may seem, at first, to contradict the concept of comparative
advantage. Specialization in activities in which a country has comparative advantage can lead to
greater allocative efficiency.

Trade theory argues that the more a country becomes involved in international marketing, the
more specialized it becomes. At the same time, specialization in a narrow group of exports can
conceivably lead to increased instability in export earnings. The production and trade of varieties
of commodities (a diverse export mix) can potentially stabilize a country’s earnings and
economic performance.

Export diversification contributes to the country’s foreign exchange earnings through

diversifying the export commodities to the other agricultural, non agricultural and manufacture
products that have low international price fluctuation. In addition diversifying to industrial
products gives country stable and high foreign exchange earnings because such product has high
and stable international price and their demand in international market will not be decrease as
economy become more developed. This is the problem that agricultural export is facing current
time.

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4.10. The Problems and Constraints of Export Sector in Ethiopia

There are several problems the export sector is facing in Ethiopia. But the major constraints are
discussed below. Export sector’s major problem can be seen from internal (supply) and external
(demand) side.

4.10.1. The Internal (Supply Side) Constraints

Irrelevant policy of governments specially during the pre reform including overvalued exchange
rate, bureaucratic procedure of licensing, high tariffs on exports and imports together with
shortage of foreign exchange rate which has important contribution in the process of production
for raw materials, intermediate and capital goods have essentially lowered the profitability and
competitiveness of the export sector.

One of the problems to export growth is the type and natures of the exported items are mainly
agricultural products which have less income elasticity. These products are unprocessed, low
quality standard and there is high reliance on few commodities. Scarcity of investment,
inadequacy of infrastructure, high cost on world market information and less technical assistance
to exporters has been significantly inhibited the production capacity of exportable goods.

Restrictions and discriminations of the private sector, in production and export process, lack of
supportive institutions, lack of credit access to all exporters and, skill and technological
improvements that can help to improve the quality of exportable commodities.

The current government recognized policy towards export promotion, such as services and
established export promotion agency 1998 with wide range of mandate including market
research, trade information, training export facilitation, product development, advisory services,
facilitating trade fairs, exhibition, and trade missions.

But because of financial and skilled personnel resources are restricted the function of the agency
to promote the export sector were not significant.

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4.10.2. The External Constraints (Demand Side)

The external constraints are usually occurred from the nature of the products and the level of
technology that employed in the process of production of the country’s exports.

These problems are that almost all of the export items are agricultural with low quality standard
which have low income elasticity of world demand and their demand also decreases as the
income of the people increases. They are subject to large price fluctuations.

Production of synthetic products by industrialized countries reduces the demand for natural
products. In addition the low level of population growth rate of the developed countries affects
the demand for agricultural products and different trade barriers and policies adopted by
developed countries including protecting and subsidizing their domestic agricultural sector,
discourage the demand of agriculture. The above constraints are the main problems that
essentially inhibit and lower the growth in the profitability of the export sector.

4.11 The Consequence of Non Diversification Export

Developing countries have been struggling with the challenge of expanding and diversifying
their export baskets for a long time. When export is concentrated in a few primary commodities,
there can be serious economic and political risks.

4.11.1. Economic Risks

In the short term volatility and instability in foreign exchange earning which have adverse
macroeconomic effects on growth, employment, investment planning, import and export
capacity, foreign exchange cash flow, inflation, capital flight an undersupply of investments by
risk-averse investors and debt repayment.

In the long term secular and unpredictable declining terms of trade trends which aggravate short
run effects.

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4.11.2. Political Risks

Political risks include worsened governance and risk of civil war in fragile states; as recent
research (Collier, 2002) shows that primary commodity dependence is associated with various
dimensions of poor governance and the risk of conflict is strongly related to the level and growth
of income, and to its structure as reflected in the dependence upon a few primary commodity
exports.

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 CHAPTER FIVE
CONCLUSIONS AND POLICY RECOMMENDATIONS

5.1. Conclusions

The trade strategy Ethiopia was following pre 1992 was classified as a strongly inward oriented
one which made use of extensive tariff and nontariff barriers. Since 1992 there has been progress
in policy reforms towards market and price deregulation. Steps have been taken in liberalizing
the foreign exchange market, attaining macroeconomic stabilization and attracting investors
towards the sector. The country has made significant policy reform in reducing the anti-export
bias in its trade policy. The foreign exchange market is liberalized and import protection has also
been reduced considerably. However, while the relative incentives to exporting have improved
export earnings, there exists severe lack of export diversification.

The concern for export diversification has started with the First Five-Year Development Plan
which acknowledged the economic instability consequences of the dependence on few
commodities. Such objective was further strengthened in the second Five-Year Development
Plan and the share of non-coffee commodity products increased. Export diversification was also
one of the objectives of the Ten Years Perspective Plan of the Dergue Regime. Finally, the
current government (EPRDF) also acknowledges the importance of export diversification and is
stated in the ADLI as well as the accompanying Export Development Strategy.

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Trade liberalization was designed, amongst other things, to reverse and even eliminate the trade
deficit through increasing export earnings and curtailing the demand for imports. Incentives
geared towards the export oriented trade and market-determined exchange rate policies are
expected to encourage both coffee and non-coffee exports. Nevertheless, merchandise exports
continued to rise while an import has been rising at increasing rate throughout the liberalization
period since 1992; thereafter, the value of exports improved markedly.

The persistent trade deficit simply reflects the composition of Ethiopia’s export basket (primarily
coffee and other primary commodities) and import basket (manufactures, equipment and
machinery) and the impact of deteriorating terms of trade. There are still a number of problems
that increase trade costs like paperwork and slow clearing procedures for exporting, the high
cost, and high freight charges. These high transaction costs make exporters less competitive in
export markets. It appears that although export earnings have been increasing since the trade
policy reform, more needs to be done on diversifying the country’s export composition.

Primary products are subject to large shifts in the demand schedule because of changes in the
cyclical character of industrial activity in the more developed economies, while other products
have a relatively stable demand pattern. Therefore, Primary products can be expected to be more
volatile than manufactured goods, and the export of the country is typically more highly
concentrated on those commodities. Moreover, products differ in the extent to which they are
subject to fluctuations on the supply side; some are affected by the weather or by the incidence
of various types of plant diseases. The overall result is that the extent of fluctuations in price and
volume traded differs markedly from one product to another.

In this respect, if the country specializes in the more volatile products it will tend to show a more
marked instability of export revenues, for a given concentration of exports, than the portfolio
consists primarily of stable and diversified products. In addition to the fluctuating prices of
commodities in the international market, the lack of diversification both in destination and the
kind of commodities is believed to take a major share in the serious decline of export revenue of
the country.

Empirical results and analysis presented in the previous sections suggest that foreign price level
and terms of trade have a significant positive relationship with export growth rate, and similarly
40
the gross domestic product have a positive significant relationship with export growth rate but it
is not statistically strong may be this due to the economy is small and the production is absorbed
by the domestic demand..

Therefore, diversification towards the commodities that enjoys higher prices like manufacturing
and low income elastic commodities could accelerate economic growth by reducing instability in
export revenue and stabilizing the balance of payment of the country.

5.2. Recommendations

The findings of this study and data trend indicates that there is a way to improve the export
sector‘s growth rate and this leads to improve the economy as a whole by understanding of the
country economic structure, situation and other policies related to the sector. Finding of this
study shows that the effect export diversification on the economic growth rate is positive and
significant but not statistically strong this may be due to the size of the economy is small and
poor countries tend to have highly homogeneous export structures, exporting goods belonging to
few groups of products and this leads no contribution for export diversification. Therefore, it is
of critical importance to maintain a high and sustainable economic growth rate.

To insulate the economy from adverse terms of trade and instability in export earnings associated
with commodity concentration, there has to be a policy shift to diversify the country's exports to
include non-coffee exports and manufactures. Based on the export item in which the country has
comparative advantage, new commodities have to be included and efforts should be made to
increase their share in the export composition.

In addition to the existing export items like coffee, hides and skin and chat, other mainly
agricultural commodities such as maize, beans, horticulture, cotton, fish and processed products
should be added to the export mix to enhance the export performance. There is also some gain in
choosing exporting food stuffs that will help reduce the fluctuations in providing the economy
with greater flexibility in adapting the structure of its production to changes in market
conditions.

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The government should attempt to diversify and promote exports in order to fully exploit the
benefits of the sector and promote economic growth. In this regard, the policies towards export
promotion are crucial. Ethiopia can take measures to encourage export diversification, both in
terms of quality and niche markets for coffee and non-coffee commodities. Trade policy reforms
are part of such a strategy.

In addition improving the road net work would enable producer especially in the agriculture
sector to sell their product in the nearby markets hence a shift from subsistence production to
commercial production and specialization on different group of products would lead to a bigger
proportion of the Gross Domestic Product constituting export volumes and this leads to
contribute to the increase of export sector.

Generally the agriculture exports (primary product) which cannot be compute in the international
market is better to be replaced by the industrial exports, which command reasonable and stable
prices in the world markets. Moreover, the industrialization will reduce the dependence on
imports by initiating the process of import substitution and directly increases to the growth of
export. So the country should be moving from very few primary products to more diversified
export commodities.

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 REFERENCES

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 Tayler. W.G. (1981), “Growth and Export Expansions in Developing countries”, Journal
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 DECLARATION

I undersigned declare that this student research is my original work and has not been presented
for a degree in any other university, and all the materials used for this study have been duly
acknowledged.

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This student research has been submitted for examination with my approval as a university
Advisor.

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