Adama Science and Technology University

School of Business and Economics

Department of Economics

Research Paper on the Effect of Foreign Aid on Economic

Growth in Ethiopia

A Senior Essay Submitted to the Department of Economics

in Partial fulfillment of the requirements for the degree
of Bachelor of Arts (BA) in Economics

Prep. By: Damto Muleta.T Id No 02024471

Advisor: Instructor Kassahun .D

June 10, 2012 ASTU

Acknowledgments
First of all, I have thanks to almighty God, who made all things possible.
I would like to express my very great appreciation to Ato Kassahun.D, my research advisor, for his
valuable and constructive suggestions. His patient guidance, enthusiastic encouragement, and
willingness to give his time so generously have been very much appreciated. My grateful thanks are
also extended to those help and encourage me in doing this paper.
I believe that I would not be able to name everyone separately and to thank for everything that they did
for me. However, I would like to acknowledge and extend my heartfelt gratitude to my parents for their
assistance and encouragement throughout my study.
Finally, I wish to thanks my friends for their assistance within the statistics used in this paper, and the
authors mentioned in the bibliography page.

Table of Contents

Contents page

Acknowledgment.........................................................................................................................I

Table of Contents........................................................................................................................II

Abstract..................................................................................................................................... 2

Acronyms and Abbreviations.....................................................................................................2

 Part I Introduction

1.1 Back Ground.....................................................................................................................1

1.2 Statements of problems.....................................................................................................3

1.3 Objectives of the study....................................................................................................3

1.3.1 General Objective..................................................................................................3

1.3.2 Specific objectives.................................................................................................3

1.4 Significance of the study......................................................................................................4

1.5 Scope and Limitations of the study......................................................................................4

1.6 Organization of the study.....................................................................................................5

Part I Review of Related Literature

2.1 Concept on foreign aid and related issues............................................................................6

2.2 Types of foreign aid..............................................................................................................7

2.3 The Theoretical rationales of Foreign aid............................................................................11

2.3.1 Foreign aid as a Political Motivations ….................................................................12

2.3.2 Foreign aid as an Economic Motivations …............................................................13

2.3.3 Foreign aid as a Humanitarian Motivation………………………………………...14

2.4 The Role of Nongovernmental Organizations in Aid …....................................................14

2.5 The Effects and Effectiveness of Foreign aid...................................................................15

2.6 Foreign aid and Domestic Capabilities..............................................................................18

2.7 Problems related with foreign aid ….................................................................................19

2.7.1 Conceptual Problems with Foreign aid ………………………………..…………19

2.7.2 Problems of Measurement with Foreign aid...........................................................20

2.8 Empirical studies of foreign Aid and Growth in Ethiopia……………………………….22

2.9 Foreign Aid and Economic growth in Ethiopia…………………………………………..24

 Part III Methodology

3.1 Variables Description and Data Sources...............................................................................26

3.2 Sources and types of data.....................................................................................................27

3.3 Method of data Analysis.......................................................................................................27

3.3.1 Model Specification....................................................................................................28

Part 4 Empirical Analysis and Interpretation

4.1 Overview of the Ethiopian Economy; The trends of Economic Growth………………….29
4.2 Testing, Identification of Order of Integration and Econometrics results ………………..31

Part 4 Conclusion and Recommendations

5.1 Conclusion………………………………………………………………………………...37
5.2 Recommendations………………………………………………………………………...40
Bibliography…………………………………………………………………….………..44
Annex…………………………………………………………………………….………46

Abstract
The stated purpose of foreign aid is the fundamental impulse to promote economic growth and human
development in recipient country. Recently, the ability of foreign aid to achieve its goals raise
important questions on the actual effectiveness of monetary and Technical assistance to LDCs.
Widespread conceptual and empirical literature suggests that foreign aid generate mixed results.
However, the success of aid depends on incentives faced by all parties in donor and recipient countries.
In addition, both donors and recipients must obtain the necessary information to actually target and
achieve desired goals. This paper analyzes the effects of foreign aid on economic growth in Ethiopia
over the period 1985-2010 by using secondary Time series analysis. Even if the analysis of effect of aid
on economic growth rate is difficult, the study try to attempts to discuss in some detail what little
evidence exists on the effect and role of foreign aid on economic growth rate in Ethiopian economy.
The results indicate that foreign aid has a positive impact on the economic growth in Ethiopia. In
addition, at the end conclusions and recommendations will summaries.

Acronyms & Abbreviations

AfDF African Development Fund

DMD Debt Management Directorate

IDA International Development Association

IMF International Monetary Fund

LDCs less Developed Countries

MDRI Multilateral Debt Relief Initiative

MoFED Ministry of Finance & Economic Development

NBE National Bank of Ethiopia

OECD Organizations for Economic Co-operations and Development

UNCDF United Nations Capital Development Fund
UNCTD United Nations Conference on Trade and Development

UNDP United Nation Development Program

UNFPA United Nations Fund for Population Activities

USAID United States Agency for International Development

WWII World War II

Part I Introduction
1.1 Back Ground of the study

The role of foreign aid in its implications for poverty reduction and growth process of developing
countries has been an important topic of intense debate.

Foreign aid is a significant source of income to developing countries, especially in Africa, where it
averages 12.5% of gross domestic product and establishes by far the important source of foreign capital
(Pallage and Robe, 2001). In such an environment, foreign aid has a potential to play a key role in
promoting developing countries’ economic growth.

Previous empirical studies on foreign aid and economic growth generate mixed results. The main role
of foreign aid in stimulating economic growth is to supplement domestic sources of finance such as
savings, thus increasing the amount of investment and capital stock. Developing countries need
financial support for development finance or unmet needs to promote long-term economic
development. After World War II (WWII), foreign development aid was emerged as a dominant
strategy for alleviating poverty and development assistance in developing nations, it started flowing
into Africa more than 50 years age, especially in the early 1960ś when a significant numbers of African
countries become independent from colonialism. This was a time of high hopes that technical and
capital assistance would bring about development of African countries and reduces poverty. (Hendrik
Van den Berg, 2001).

Despite the inflow of financial resources and technical assistance of aid over the years in many African
countries since the 1960ś, the socio-economic and development situation of the less Developed
countries (LDCś) of the world continue to deteriorate at an alarming rate, raising question of whether
foreign aid affect economic growth & development in recipient economies positively or negatively.

Many research on this issues where attempted the attention of many scholars. By using the set of cross-
countries data many finds that aid inflow from DCś affects positively the economic growth in
developing economies countries. Among those scholars, Papanck (1972), Snyder (1993), & Fiayissa &
El-kaissy (1999) find that aid positively affect economic growth in developing economies countries.

However, other studies support for the negative and strong effects of aid inflow on economic growth in
developing economies countries by stating, high level of aid inflow erodes institutional quality and
increases rent seeking and corruption. Among those scholars Knack (2000) and Levine & Roodman
(2003) finds the negative impact of foreign aid inflow on economic growth of recipient nations. Despite
these efforts, however, there is no solid consensus among scholars on actual effectiveness of foreign
aid inflows to LDCś. Means the overall result pointed the mixed impact of aid on growth

In general, Foreign aid designed to influence economic growth and promote development in recipient
nations. But in Africa, foreign-aid has apparently failed to promote development and influence
economic growth despite the fact that donor countries provide a billion of dollars annually to
developing economies nations to support poverty reduction and encourage community based
organizations and other development activities in LDCś. (source...

Even if there are enormous financial requirement because of large unmet needs in food production,
transport & communication, education, health, development of energy and minerals, and
industrialization, Ethiopia began to receive economic development assistance aid in addition to her own
effort, during World War II (WWII) from Western countries, originally the UK was the primary
sources of this aid, but they withdraw in 1952 to be replaced by United States. (…Source...........)

Therefore, this study examines the impact of foreign aid inflow both Official Development Assistance
and Private Development Assistance provide by NGO´s on economic growth of Ethiopia over the
periods 1985-2010 using secondary time series data analysis to see the effectiveness of foreign aid
inflow in Ethiopian economic growth.

1.2 Statements of problems E

As IMF (2010) sorted, most of developing economies nations, Ethiopia was one of the top aid recipient
(highly indebted) countries. Before this IMF (2002) calculated aid as percentage of GDP of the
recipient nations, based on only ODA, Ethiopia ranked at # 31 st with 10.8% of her GDP per capita. If
this much percentage of our GDP per capita is really the part of aid , as IMF reports only from ODA
types of foreign aid inflows, the effectiveness of this much capital & others form aid inflows on
economic growth have to be known because the aid inflows have to meet the designed plan of the
donors nations .

Therefore, this study attempt is to show the impact of the foreign aid inflows on economic growth of
Ethiopia, and also constructed to test the conditional effectiveness of aid by employing advanced
literature review and secondary time series data analysis.

1.3 Objectives of the study E

1.3.1 General Objective

The main objective of this study is to analysis the impact of foreign aid inflows on economic growth in
Ethiopia or to see whether the foreign aid inflows affect economic growth of Ethiopia after introduction
into economy.
1.3.2 Specific objectives

Specifically the study aims to identify factors that affect the effectiveness of foreign aid in enhancing
economic growth. Thus, the specific objectives of the study are analyzing:

 The impact of foreign aid inflows on economic growth

 The causal relationship between GDP and foreign aid inflows

 Reasons out why a developed nation gives foreign aid and also why developing nations usually
accept foreign aid-granting.

 The role of private NGOś in the field of development assistance and poverty alleviation program.

1.4 Significance of the study E

 The study will contribute to full the information gap on this issues and used as inputs for policy
makers on related issues.

 And also it will be input for others researchers those are interested for further investigation on this
area.

1.5 Scope and Limitations of the study E

Due to data availability issues and time constraints, I forced to restrict the range of this study to the
period from 1985-2010 G.C and employed secondary time series econometrics data by utilizing GDP
per capita, Bilateral aid, Multilateral aid and Private Development Assistance provided by(NGO).
Even if different types of aid have different impacts on the economic growth of recipients Nations. This
study also includes different anticipated results or findings and broad literature citations on the
variables employed in the study.

As the limitation of the study, all inflows of foreign aid can’t measured official because of its very
difficult to put aid in nominal dollar or birr amounts very difficult task. But the success of any
economic analysis especially time series econometrics analysis was ultimately depends on the accuracy
of data available for the economic research. This problem is the huge limitation of the empirical part of
this study, and unfortunately data on NGOs fund provide to Ethiopian society is not available, so I
forced to omit this variable from my the model proposed despite its great theoretical relevance in
explaining effect of foreign aid on economic growth. In addition to that time, cost and others
constraints make this study difficult.

1.6 The organization of the study E

The study organized as the following order: Part 2 of this paper gives the details theoretical related
literature reviews justification with various related empirical outcomes, Part 3 describes the
Methodology and data descriptions, Analysis and result interpretations discussed under Part 4of the
study as well as the last Part, Part 5 discussed about conclusion and policy implications of the study.
 Part II Review of Related Literature
2.1 Concept on foreign aid and related issues E
In international relations, Aid is a voluntary transfer of resources from Wealthier country to another
(Poor); given at least with the objectives benefiting the recipient country in ideal world. Todaro and
Smith (2003). The US has viewed foreign aid from its beginnings in the late 1990ś under the Marshal
plan, which aimed at reconstructing the war-torn economies of Western Europe, as a means of
constraining the international spread of communism. During 1950 & 1960, grants and loans from
development country governments to developing-countries governments made up largest share to
capital inflows to LDC's.

According Todaro and Smith (2003), aid is all governmental resource transfers from one country to
another should be included in the definition of foreign aid. However, Commercial flows of private
capital are not a form of foreign assistance, even though they may benefit the developing country in
which they take place. Moreover, they clearly point out two criteria to say funds inflows to LDC's is
aid;

(1) Its objective should be non- commercial from the point of view of the donor, and

(2) It should be characterized by concessional terms; that is, the interest rate and repayment period
for borrowed capital should be softer (less stringent) than commercial terms.

Normally, however, Military aid is excluded from international economic measurements of foreign aid
flows.
2.2 Types of foreign aid E
Different Types of Foreign Resource Flows: Tied and Untied; Bilateral and Multilateral; Project
and Programmes

The allocation of foreign resources can be performed in different forms. They can be tied to the imports
from donor countries (i.e. tying by sources); alternatively, their use could be linked to a specific project
(i.e. tying by end use). The reasons for such tying are not difficult to understand from the point of view
of the donor country.

 Tying helps to increase the exports of the donor countries and protects their income and
employment. However, such an argument is inconsistent with humanitarian motives for transferring
resources.

 Tying of resources by some deficit donor countries may increase pressure in surplus donor
countries to similar tying because tying by the deficit countries is supposed to enhance their
relative share in the competitive market for exports. Such a phenomenon is regarded as
‘competitive aid-tying’.

 Tying is supposed to result in efficient utilization of resources.

 Project tying is supposed to be effective as the projects could be identified easily. Also, such tying
is expected to enhance the reputation of the donor countries.

 When resources are tied both by sources and by uses, then it creates a monopolistic situation in
favor of the donor country, which it can easily exploit. (S. Ghatak,2005)

According to S.Ghatak cote in his book, the above point out why tying of resources has created so
much resentment among the recipient countries.

 -Tying does not help the recipient countries to obtain resources at the cheapest prices. In many
instances, prices paid by the LDC s are much above their world prices (Haq 1965).

 -Tying will not necessarily improve the balance of payments of the donor country if the cause of
such deficit is an excess demand for resources.
 -The objective of tying resources will be defeated if a recipient country decides to spend on goods
and services of the donor country, from its total reserves of foreign earnings. (Bhagwati, 1970)

 -Resources may be tied to the construction of a specific project that does not satisfy the objective of
the national plan.

 -In the event of a double tying (i.e. both by sources and by end use), the monopolistic position of
the lender may result in a situation which could be less than optimal from the point of view of
the recipient country.

 -Costs of tying of resources have been regarded as considerable for some LDCs (Bhagwati 1970).

 -The informal agreements about servicing over the life of the capital projects as well as some
indirect costs of tying (e.g. carrying the cargo in the ship of the donor country which charges a
higher than international price for freight) may well reduce the true value of the tied FR.

For this study the two broad categories foreign aid which was categorized by M. Todaro & Smith
(2003) as following in the form of assistance where used : Public Development Assistance and Private
Development Assistance.

1. Public or Official Development Assistance

 Individual government assistance, known as bilateral aid (country to country for example US to
Ethiopia.)

 Tied aid is Foreign aid in the form of bilateral loans or grants that require the recipient country to
use the funds to purchase goods or services from the donor country.

 Multilateral donor agencies such as the IMF, UN & W B offering multilateral aid to LDC s.

2. Private development assistance

Private (unofficial) assistance provided by nongovernmental organizations, such as religious groups,
charities, foundations, and private companies. Both of these activities are forms of foreign aid, although
only public aid usually measured in official statistics.
As stated in principle, all governmental resource transfers from one country to another should be
included in the definition of foreign aid, But Commercial flows of private capital are not a form of
foreign assistance, even though they may benefit the developing country in which they take place,
without expecting repayment or corresponding benefits in return. (Berg; 2001, Todaro & smith; 2003)

 Bilateral Aid Vs Multilateral Aid E

Unfortunately, Bilateral aid is usually tied to the condition that recipient nations gives reciprocal
through buying the equipment and commodities, follow the technical advice, and use the shipping
lanes of the donor nations. The bilateral aid has high cost because it’s tied types of assistance. The
instability in bilateral assistance has been checked by the more stable Multilateral flows of the World
Bank and others official multilateral agencies. (Berg; 2001)

However, the more important under these two types of aid is the discussion of the relative advantages
and disadvantages of bilateral (BL) and multilateral (ML) foreign aid.

According to Dr. Substrata Ghatak point out the BL flow of FR is advocated on the following
grounds:

 BL financing could be tied while a large part of ML financing is untied.

 The donor country can keep ‘operational control’ with less difficulty in the case of BL financing.

 Effective utilization of FR is more likely to take place if financing is BL rather than ML.

 Politically, BL rather than ML financing is more likely to be acceptable to the electorate.

Notice that the advantages from the standpoint of the donor country are not always so from the point of
view of the recipient country according to the idea of S. Ghatak. The major criticisms leveled at BL
financing can be summarized by Fulbright. W as follows:

1- BL financing is generally used to extend political influence over the LDC s; it is regarded as an
instrument for ‘buying’ friends.

2- BL financing is not always meant for the economic development of a country because, more often
than not, ‘strings’ are attached to it.

3 -Even without the ‘strings’, BL financing is regarded as morally indefensible since ‘extended in the
wrong way, generosity can be perceived by its intended beneficiary as insulting and contemptuous

The problem of BL financing is psychological and political rather than managerial’ (Fulbright 1966).

However, government -to- government aid began sharp decline for the because of aid reflects:

(1) the tremendous growth of private aid inflows to LDC's in the 1990's,

(2) The end of the cold war, and a growing dissatisfaction with the result of direct aid flows. And the
main reason for the actual aid inflows to LDC's is the simple fact that such aid has not always
worked very well in bringing economic growth to the developing-countries. (Hendrik Van den
Berg, 2001)

Despite these criticisms of BL financing, it is difficult to switch over from BL to ML financing. For
one thing, such a switch is likely to reduce the supply of FR simply because many donors, while
supplying resources, like to exercise some leverage over their use. For another, sometimes BL flows
take place on grounds of moral responsibility (e.g. between the donors and their ex colonies). However,
BL and ML foreign aid has the advantage of increasing the total volume of FR. In addition, ML
financing properly coordinated could eliminate the inefficiencies in the use of resources.

As Balogh (1967) point out, however, that ML foreign aid is unlikely to be optimum for several
reasons;

 There is absence of coordination among different donors and between donors and recipient
countries.

 Absence of skilled manpower may aggravate the problem.

 The decentralized and democratic controls of the present institutions are not always exercised.

On the other hand, the creation of a single agency has its own problems. For instance, donors may be
less willing to contribute to a single international agency and this could reduce the flow of FR. In
addition, there are many practical difficulties in the operation of a single monolithic agency. One of the
compromises could be the BL resource transfer within the ML framework (Rosen stein-Radon 1968).
2.3 The Theoretical rationales for a development Assistance E

It’s difficult to identify why donor-country give foreign-aid and also who developing countries often
receive foreign aid, because aid can and can be used as different instrument for both party.

Donor-country governments give foreign aid because it is in their political, strategic, or economic self-
interest to do so. Some development assistance may be motivated by moral and humanitarian desires to
assist the less fortunate (e.g., emergency food relief and medical programs). Still, there is no historical
evidence to suggest that over longer periods of time, donor nations assist others without expecting some
corresponding benefits (political, economic, military, counter terrorism, anti narcotics, etc.) in return.
This make the principal definitions of foreign resources transfer which say all governmental
and private resources transfer is the from one country to another country is the form of foreign
aid without expecting full repayment or corresponding benefits in return.(M. Todaro and
Smith,2003)

Now I want to examine the motives behind these foreign aid to less developing nations even if
it is becomes more difficult to provide an economic or political rationales (Real motives) for
foreign aid inflows the following rationales are listed:

2.3.1 Political Motivations; Foreign Aid as an Instrument of Foreign Policy

During the Cold War era, aid was part, and parcel of international power struggles between West and
East and was given to developing countries in order to keep them in the same camp or prevent them
from allying themselves to other side. (Source...

Foreign aid is and has been a tool of statecraft often used by the government providing it to encourage
or reward politically desirable behavior on the part of the government receiving it. It has been an
instrument of coercion and a tool for the exercise of power by the donors with little relevance to (and
possibly with negative consequences) for the lives of the recipients (Lancaster, 1999).

Political motivations have been by far the more important for aid-granting nations, especially for the
largest donor country, the United States. The United States has viewed foreign aid from its beginnings
in the late 1940s under the Marshall Plan, which aimed at reconstructing the war-torn economies of
Western Europe, as a means of containing the international spread of communism. When the balance of
Cold War interests shifted from Europe to the developing world in the mid-1950s, the policy of
containment embodied in the U.S. aid program dictated a shift in emphasis toward political, economic,
and military support for “friendly” less developed nations, especially those considered geographically
strategic. The behavior of other major donor countries such as Japan, Great Britain, and France has
been similar to that of the United States. (Source........

Most aid programs to developing countries were therefore oriented more toward purchasing their
security and propping up their sometimes shaky regimes than promoting long-term social and
economic development and changing evaluations of poverty problems and economic need. Much of
bilateral aid seems to be based largely on political and military considerations and serves as an
instrument for exercise of power over poor nations by donors. (Source.....

2.3.2 Economic Motivations; Foreign Aid as a Market/Economic Tool

Within the broad context of political and strategic priorities, foreign-aid programs of the developed
nations have had a strong economic rationale. This is especially true for Japan, which directs most of
its aid to neighboring Asian countries where it has substantial private investments and expanding trade.
Even though political motivation may have been of paramount importance for other donors, the
economic rationale was at least given lip service as the over- riding motivation for assistance.
Multilateral aid (e.g., from the World Bank and various UN agencies) is somewhat more economically
rational, although here too, the rich often seem to attract more resources per capita than the poor.
(Todaro and Smith, 2003)

In the World context the question, “who is helping who and who does aid actually assist” is raised at
different time. Hancock (1989) argues convincingly that aid to a large extent benefits those he calls
international civil servants in the aid industry. He vehemently argues: “Year in year out … there can be
no doubt that aid pays the hefty salaries and underwrites the privileged lifestyles of international civil
servants, development experts, consultants and assorted freeloaders who staff the aid agencies
themselves.” Foreign aid also indirectly takes care of the business interest of donors especially at the
project and sectoral levels.

Despite the allocation of foreign aid in either case, the money volume of official development
assistance (ODA), which includes bilateral grants, concessional loans, and technical assistance as well
as multilateral flows, has grown from an annual rate of under $5 billion in 1960 to $50 billion in 2000
and to over $128 billion in 2008. (Todaro and Smith, 2003)

2.3.3 Foreign aid as a Humanitarian Motivation

Some development assistance may be motivated by moral and humanitarian desires to assist the less
fortunate (e.g., emergency food relief and medical programs).

There is, however a growing international awareness that “poverty any where is a danger to prosperity
everywhere and prosperity anywhere must be shared everywhere.” Developed nations consider it to
their moral duty to help their less fortunate brethren in underdeveloped countries. In this case the
effectiveness of foreign aid is highly indicated because of such like forms of assistance which is
unquestionable surer massive in enhancing economic growth have targeted purposes for targeted
people so there is no wastage in resources allocations.

2.4 The Role of Nongovernmental Organizations in Aid

Nongovernmental organizations (NGOs) nonprofit organizations often involved in providing financial

and technical assistance to developing countries. It is one of the fastest-growing and most significant
forces in the field of development assistance and they are voluntary organizations that work with and
on behalf of mostly local grassroots organizations in developing countries. (Baro & Xavier, 2004)

They also represent specific local and international interest groups with concerns as diverse as
providing emergency relief, protecting child health, promoting women’s rights, alleviating poverty,
protecting the environment, increasing food production, and providing rural credit to small farmers and
local businesses.

NGOs build roads, houses, hospitals, and schools. They work in family-planning clinics and refugee
camps. They teach in schools and universities and conduct research on increasing farm yields. NGOs
include religious groups, private foundations and charities, research organizations, and federations of
dedicated doctors, nurses, engineers, agricultural scientists, and economists. There direct works on
grass roots rural development projects have two advantages;

1. Being less constrained by political imperatives, most NGOs are able to work much more effectively
at the local level with the people they are trying to assist than massive bilateral and multilateral aid
programs could.

2. By working directly with local people’s organizations, many NGOs are better able to avoid the
suspicion and cynicism on the part of the mostly poor people that they serve that their help is
insincere or likely to be short-lived.

NGOs have several other important comparative advantages in relation to government and the private sector but
also some serious limitations, sometimes called “voluntary failure”. One critical question is whether
international NGOs can sustainability transfers their knowledge and capabilities to domestic NGOs and other

community-based organizations. (Berg, 2001; Todaro and Smith, 2003)

2.5 The Effects and effectiveness of foreign Aid E

According to the views of Todaro and Smith (2003) on the issue of the economic effects of aid,
especially public aid, like that of the effects of private foreign investment, is fraught with disagreement.
On one side are the economic traditionalists, who argue that aid has indeed promoted growth and
structural transformation in many developing countries. On the other side are critics who argue that aid
does not promote faster growth but may in fact retard it by substituting for, rather than supplementing,
domestic savings and investment and by exacerbating balance of payments deficits as a result of rising
debt repayment obligations and the linking of aid to donor-country exports.

Official aid is further criticized for focusing on and stimulating the growth of the modern sector,
thereby increasing the gap in living standards between the rich and the poor in developing countries.
Some critics on the left would even assert that foreign aid has been a force for anti development in the
sense that it both retards growth through reduced savings and worsens income inequalities rather than
relieving economic bottlenecks and filling gaps between rich and poor, even create new ones.

Critics on the right charge that foreign aid has been a failure because it has been largely appropriated
by corrupt bureaucrats, has stifled initiative, and has generally engendered a welfare mentality on the
part of recipient nations. However, one of the most promising developments of the new century has
been the emphasis on rigorous testing of the impact of development assistance.

After years of aid weariness, polls have shown that the public is increasingly willing to support
increases in government aid budgets and to donate development assistance via NGOs, and the
development crisis in many of the least developed countries, especially in sub-Saharan Africa has
mobilized public opinion in support of greater development assistance.

In addition, foreign aid has played a crucial role in assistance with conflict resolution, post- conflict
recovery, and making the transition to resumed development. We take up the problem of violent
conflict in developing countries in the next section. (Berg, 2001)

The effectiveness of foreign aid inflows are depend not on amount or others measurement but it is
highly based on its means of uses either used for productive purposes like investing on different
community development based programs or used for unproductive purposes like consumption, war and
others nonprofit earning activities. Therefore, the huge questions and fair beyond aid inflows is for
what purpose the receipts country used aid and in which manner or environmental condition sound or
unsound economic policies are raised.

As S. Ghatak try to illustrate the R/ship b/n of Foreign aid and Economic Growth graphically based on
the theory, foreign aid should raise both consumption and investment of a developing country.
 Figure 2.1 Aid impact on Economic growth. (Source: S. Ghatak)

Without any foreign aid, an LDC can produce consumption and investment goods along the production
possibility frontier TT′. The indifference curves in the figure define community tastes and preferences.
If there is no inflow of FR, the optimal production of consumption and investment goods will occur at
E where the social indifference curve I1 is tangent to TT′. The economy produces C1 of consumer
goods and K1 of capital goods. With the inflow of FR, line TT′ shifts to T1T′′ as the lending country
offers EB of foreign ‘aid’. With extra FR, optimal production now occurs at E′, i.e. the new point of
tangency between T1T′′ and I2. Consumption in the borrowing country rises to C2 and investment rises
to K2. Hence, of the total foreign aid EB, EE1 is invested and E′E1 is consumed. However, if the
economy has a very high preference for consumption, then most of the foreign aid could be consumed,
i.e. points to the right of E1, 142 and as such the country’s future investment will suffer. Note that
some types of aid, e.g. food aid, could increase consumption rather than investment and project aid is
usually designed to raise investment rather than consumption. (S. Ghatak. 2005.)

2.6 Foreign aid And Domestic Capabilities

The domestic capacity have unquestionable super massive in enhancing economic growth and
development, the foreign aid may be used as impulse or additional force of domestic capacity in
economic growth if it’s used wisely for productive activities. As it is observed generally in developing
countries, the aid effectiveness in economic growth is closely linked to the local capacity and the
existence of favorable political climate, which cannot dry the root of growth rate in countries.

Many donor countries have come to realize that the quality of a country's political and economic
leadership is more important to economic growth than that is foreign aid. Rapidly growing economies
such as Taiwan, South Korea, and Chile have achieved their high standards of livings while receiving
little or no foreign aid over the past 30 years, although Taiwan and South Korea did receive very
substantial amounts of foreign aid in 1950's when they began their rapid ascent toward development.
However, those countries stand 0ut in terms of their economic policies and the efficient allocation of
government resources to education, infrastructure, & support of private innovation & production. (Beg;
2001, Peter Boone; 1994)

The capacity of the recipient’s country to use foreign aid productively is the key to successful foreign
aid. Craig Burnside &David Dollar have completed numbers of statistical studies of the effects of aid
on economic growth, & they manly focused on the important of recipient countries economic policies.
Foreign aid increases economic growth but only if the receiving nation’s economic policies are sound.
In Burnside &Dollar's Words, “aid can be a powerful tool for promoting growth & reducing poverty.
To do this effectively, it should be given to countries that are already helping themselves by putting
growth-enhancing policies into place. In the cold war period, donors _&bilateral donors in particular
did not do this effectively. The aid that went to countries with poor policies was wasted, although it
could have helped growth &poverty reduction in countries with sound policy environments.”

Because of the aid inflows to Ethiopia, that I concern on was through in the hand of government the
resource inflows importance in the country depends on what the government are identified as the
purposes which need additional; force (impulse) to do. The society may find it difficult to identify the
cases of policy failures and lack of necessary information to intervene in government actions to get the
designed result from resources inflows by their name.
2.7 Problems Related with foreign aid

Even though it is the 21st century, many developing countries still face the issue of serious resource
problems. A large portion of these countries are in the ongoing battle with severe debts and strictly
dependent on their financial aid inflows. Sadly, the burden placed on these countries by debt servicing
is too often overwhelming. Moreover, official development assistance (ODA) flows have fallen over
the past decade, and developing countries need to search for alternative ways to become more effective
with the utilization of aid inflows via the right policies and seek innovative methods to attract
additional aid. (Todaro and Smith, 2003)

2.7.1 Conceptual and Measurement Problems with Foreign aid

The concept of foreign aid that is now widely used and accepted is one that encompasses all official
grants and concessional loans, in currency or in kind, that are broadly aimed at transferring resources
from developed to less developed nations on development, poverty, or income distribution grounds.
Unfortunately, there often is a thin line separating purely developmental grants and loans from sources
ultimately motivated by security or commercial interests. (Subrata Ghatak, 2005)

The conceptual problem of aid associated with its definition by including or excluding unnecessary and
important concepts the issues. According to many writers, Economists have defined foreign aid as any
flow of capital to a developing country that meets two criteria:

I. Its objective should be non- commercial from the point of view of the donor, an

II. It should be characterized by concessional terms; that is, the interest rate and repayment period
for borrowed capital should be softer (less stringent) than commercial terms.

Even this definition can be inappropriate, for it could include military aid, which is both
noncommercial and concessional. Normally, however, military aid is excluded from international
economic measurements of foreign-aid flows.
2.7.2 Problems of Measurement within Foreign aid

Just as there are conceptual problems associated with the definition of foreign aid, there is
measurement in the calculation of actual amount of development assistance flows. In particular, three
major problems arise in measuring aid;

First, we cannot simply add up the dollar or birr values of grants and loans; each has a different
significance to both donor and recipient countries. Loans must be repaid and therefore cost the donor
and benefit the recipient less than the nominal value of the loan itself. Conceptually, we should deflate
or discount the dollar value of interest-bearing loans before adding them to the value of outright grants.

Second, aid can be tied either by source or by project. In either case, the real value of the aid is reduced
because the specified source is likely to be an expensive supplier or the project is not of the highest
priority.

Finally, this always needs to distinguish between the nominal and real value of foreign assistance. Aid
flows are usually calculated at nominal levels and tend to show a steady rise over time. However, when
deflated for rising prices, the actual real volume of aid from most donor countries declined substantially
in recent decades.

As Berg (2001) suggested that foreign aid, by easing temporary constraints and enabling countries to
better withstand bad economic policies in the short-run can actually weaken a country's ability to grow
and prosper in the long-term. Foreign aid therefore, may permits bad economic policies. Another view
is that inflows of foreign aid can cause a country's exchange rate to become overvalued, there by
hampering export.

Berg also point out another problems with aid is that even when it’s targeted to investment projects, it
often ends up “largely financing consumptions.” The reason is that the inflow of foreign aid cause
domestic saving decline.

There are two cases for and against Foreign aid arguments

 Case For Foreign Aid

Many economists argue that the inflow of foreign capital is indispensable for accelerating economic
development. It helps in industrialization, in building up economic overhead capital, and in creating
larger employment opportunities. Foreign aid not only brings money and machines but also technical
know-how. It opens up inaccessible areas and exploits untapped and new resources. Risks and losses in
the pioneering stage also go with foreign capital. Sources…

Further, it encourages local enterprise to collaborate with foreign experience. It obviates the balance of
payments problem and minimizes the inflationary pressures. Moreover, it helps in modernizing society
and strengthens both the private and public sectors. Foreign aid is thus indispensable for the economic
growth and development of LDCs. Sources…

 Case Against Foreign Aid

Few economists give the following argument who does not view foreign aid indispensable for
economic growth of LDCs. To them,

 Foreign aid is not necessary condition for development nor sufficient condition for emergence
from poverty.

 Foreign aid is often used for extremely wasteful projects that make large losses year after year.

 Foreign aid does not increase net investment which is the aim of development

 Foreign aid has failed to improve the income earning capacity of LDCs and they are now saddled
with large external public debts.

 Arguments to overcome balance e of payments difficulties and to avoid inflationary pressures are
not correct.

 Foreign aid influences policies into in appropriate directions by promoting unsuitable external
models, such as western-type universities whose graduates can’t get jobs, western-style trade
unions which are only vehicles for the self-advancement of politicians.

 Finances uneconomic activities or enterprises which produce neither food nor raw materials for
exports nor import substitutes like war.

 Foreign aid politicizes pubic life in LDCs there by contributes to social and political tensions.

 Foreign aid leads to dependency because the donors insist on aid tying to the purchase of goods
and survives at costs much higher than the competitive world prices. Souressssss…
Finally, as Berg cite in his book, Peter Boone found that foreign aid doesn't have a statistically
significant effects on economic growth by point out that foreign-aid is “entirely consumed and adds
nothing to total saving. Boone has concluded that aid most often supports the consumption of better-
educated and better-connected people in the poor countries. Moreover, Boone's conclusion reminds us
of the popular saying describes foreign aid as “poor people in rich countries helping rich people in the
poor countries.”

2.8 Empirical studies of foreign Aid and Growth in Ethiopia E

As Ethiopia’s economy is characterized by a massive inflow of foreign capital (most specifically
foreign aid), it is imperative to review studies conducted on similar area.

Mesfin (2007) examined the fiscal impact of foreign aid (disaggregated in to loan and grant) and its
overall relationships with economic growth in Ethiopia covering over the period 1960/61 to 2004/05.
He analyzes and result obtained shows that the inflow of foreign aid has a strong positive relationship
with growth in the long run. The result further indicated that the positive association between foreign
aid and economic growth is attributed to the incremental effect that aid has on government expenditure
i.e. the transmission mechanism of foreign aid to growth is through the channel of government
expenditure. The study also showed that foreign aid has a negative impact on tax revenue but it
improves the fiscal position (closing the fiscal gap) unlike government expenditure. Generally,
Mesfin’s (2007) study show that increases in foreign aid result in higher government expenditure, and
has significant positive long-term impact on economic growth. Despite a little problem, the study
indicated that there exists a role for aid effectiveness in Ethiopia in the long run.

Tolessa (2001) examined the relationship between foreign aid (in disaggregated form: loan and grant),
domestic savings, investment and economic growth for the period 1964/65 to 1998/99 His result
obtained from the investment equation showed that both foreign loan and domestic saving promote
domestic capital formation. However, the study found that the grant element of foreign aid has
negligible effect on domestic capital formation.

Tolessa also included an index of policy variables to see whether aid effectiveness is conditional on
good policy environment. The finding showed that policy affects growth significantly and negatively.

Another study by Wondwesen (2003) analyzing the impact of foreign aid on growth on annual data
covering the period 1962/63 to 2000/01 found that aid has significant contribution to investment both
in the short run and in long run. Aid is found to be ineffective in enhancing growth. However, he found
that when aid is interacted with policy, the growth impact of aid found to be significant-i.e. aid is
conditional on quality policy environment. His result further implied that attention should be focused
on improving the existing macroeconomic policy environment for an inflow of aid to be used
effectively. The study is better than the other study at least in two aspects; the first reason is that he
tried to incorporate recent advances in the aid-growth link literature, and the second one is that the
models are specified in a good manner. This study is different from the previous studies in the
following aspects i.e., it incorporates the recent advances in the literature, construction of a broader
policy index, and considering other variables (notably rainfall variability) to the growth equation.

2.9 Foreign Aid &economic growth in Ethiopia

In Ethiopia, an inflow of external resources such as loans and grants has started in 1950, the year in
which the relationship between the United States and Ethiopia reached a higher level. For instance, pre
1975, about 75% of the required total investment during series of five-year development plan period
(1957-1973) was covered by external public capital. The magnitude of loans and grants that Ethiopia
received in the years preceding the revolution was not even small. But due to the existing political
economic system it has never contributed to the economic progress and was characterized by trifling
development objectives. Similarly, during the post revolution period too, “37 percent of total
investment expenditure of the annual campaign of 1979-1983” was financed by foreign aid (Dejene
1989; p 13).

In 1980-97, Ethiopia’s total ODA receipt exceeds US $ 17 billion in nominal terms (US $23 billion in
real terms). This comes out to US $1.0 billion (nominal) or US $1.3 billion (real) of annual inflow.
Based on the 1996 prices, the annual inflow of net ODA (loans, grants, technical assistance, and food
aid) to Ethiopia averaged US$ 1.2 billion per year in the 1980s. It rose to US $1.4 billion per year in the
period 1991-1996 before slowing subsequently. This pattern suggests that the ODA premium for the
ambitious reform program of the 1990s has been a modest increase of 17%. Correspondingly, data on
effective development assistance, that is the “effective” grant equivalent rose from 21% in 1980s to
46% in the 1990s, which compares unfavorably with an average grant element of 70% for 1991-
1997(Abegaz, 2001)

The magnitude of loans and grants that the country received in subsequent years has increased
continuously. In real term over the period 1991/92-1998/99, it increased by 13.97%, to reach nearly
2853.80 million Birr in 1998/99 (MOFED, 2000).

Table 2.1: Share of Ethiopia ODA of total SSA and least developed countries.

The following table shows a comparison of Official Development Assistance provided to Ethiopia with
SSA and other least developed countries from 1997-2003 (US $) (UNDP Report 2003).

ODA as % of GDP ODA per Capita

in US$ Dollar

No Year Ethiopia SSA LDC Ethiopia SSA LDC

1 1997 1.10 6.7 11.10 10.40 33.50 29.10

2 1998 10.00 4.40 8.40 11.30 21.40 20.20

3 1999 11.30 5.30 7.00 11.80 1830 17.80

4 2000 15.50 6.20 7.60 14.50 19.40 19.10

5 2001 18.90 7.20 8.20 16.10 20.6 20.50

6 2002 21.40 - - 20.54 - -

7 2003 25.15 - - 27.67 - -

Source: UNDP Report (2003)

 Part III Methodology

3.1 Variables Description and Data Sources

Definitions of Variables

1) GDP-Gross Domestic product

Most often-economic growth is measured in terms of per capita real income or per capita real output.
GDP measures the total value of output within a country's border regardless of nationality of the
owners of the factors of production. In this study I will use GDP instead of GNP because the GNP
measures the value of output produced by the country's citizens and domestically owned factors of
production, regardless of where the production take place. And GNP measures thus part of output
produced in a foreign owned factory is added to the foreign country's GNP, and excluded from the
GNP of the countries where the factory is actually located.

In this study real figures of the variable(s) will used instead of nominal terms because the nominal
measures of output are distorted by inflation and don't give an accurate picture (status) of the actual
economic growth of the country.

2) Bilateral foreign aid

Bilateral aid is the part of official (public) Development assistance, which take place among Individual
government (country to country for example US to Ethiopia.)

3) Multilateral foreign aid

Multilateral aid is also part of ODA, in which the Developed-countries agencies such as the IMF, UN
and World Banks offering multilateral aid to LDC s.
Foreign aid is the international transfer of public funds in the form of loans or grants either directly
from one government to another (bilateral assistance) or indirectly through the vehicle of a multilateral
assistance agency such as the World Bank. Concessional terms for the extension of credit that

4) Nongovernmental organizations (NGOs)

The United Nations Development Program defines an NGO as any non-profit, voluntary citizens’ group that
organized on a local, national, or international level. Task-oriented and driven by people with a common interest,
NGOs perform a variety of services and humanitarian functions, bring citizens’ concerns to governments,
monitor policies and encourage political participation at the community level. They provide analysis and
expertise, serve as early warning mechanisms and help monitor, and implement international agreements. Some
of them organized around specific issues, such as human rights, the environment, or health. NGOs rely on
independent voluntary efforts and influence to promote their values and to further social and economic
development.

3.2 Sources and types of data E

All the secondary data employed in this study gathered from various international, national, and
regional and relevant documentations; such as, Ministry of Finance and Economic Development
(MOFED), National Bank of Ethiopia (NBE), Central Statistics Authority in Ethiopia, Ethiopian
Economic Association (EEA), International Monetary Fund (IMF) database, and other sources, which
are perceived to be relevant and reliable.

3.3 Method of data Analysis E

To point out the impact of different types of aid inflows on economic growth of Ethiopia for the
designed time, both Descriptive method and Time series economic analysis employed. In descriptive
method analysis, this study examine the situations of GDP and the trends of aid as well as their
relationships with GDP in the limited periods by making tables, percentages, ratios, and graphs. The
time series econometric analysis, on the other hand, the test will involves an OLS regression of the
original dependent variable on the original regressors to capture the degree of influences of aid on the
Ethiopia economic growth. And also various testing are performed including testing for stationary (unit
root test), Co-integration test and specification bias or errors are applied by looking the features of
results, such as the R-squared value, the estimated t ratios, the signs of the estimated coefficients, the
Durian -Watson statistic, and the like.

3.3.1 Model Specification

After considering different types of aid inflows have different impact the economic growth of recipient
nations like Ethiopia, the model adopted from the well known and mostly used form of Time series
econometrics model in which the dependent variables is the function of the regressors. And in this
model GDP per capita was taken as dependent variable, and three regressors that might be potentially
endogenous; Bilateral aid and multilateral aid where take as explanatory variables (or regressors), while
when due to data unavailability problems even this types of aid is very important for my study I was
forced to drop Private Development Assistance (NGO aid) from the proposed Model. That is the
dependent variable GDP is given by the function of the following variables;

GDP = f (Baid, Maid, NGOaid)…………………………………………………………

By employing the time t trend to both sides of the function, my model takes the following form:

GDPt = β0 + β1BAidt + β2 MAid t + β3NGOAid + Ut ……………………………………

Therefore, the newly employed model is

GDPt = β0 + β1BAidt + β2 MAid t + Ut …………………………………………………

Where β0 is the intercept /is a constant, and β1, β2 & β3 are parameters

GDP per capita = is represent economic growth

BAid= Bilateral aid, Maid = Multilateral aid

NGOs = is Non-governmental organizations aid

Ut = is the stochastic disturbance terms, / is white noise

And subscript t denotes the nth observations.

As of the marshal learner condition, the expected sign of the coefficient in the model will be

β1 , β2and β3 <0 It is expected that the variables employed in this paper encourage economic growth
and development this means the GDP per capita will affected positively by Multilateral aid, Bilateral
aid ,and Private fund and material assistances.

Part 32 Analysis and Interpretation

4.1 Overview of the Ethiopian Economy; The trends of Economic Growth:
The performance of an economy is highly explained by the soundness of the macroeconomic policy en-
vironment, the political framework, the various institutional setup of a country, and indeed the design
of the macroeconomic policy is a reflection of the political process. Economic performance in Ethiopia
is highly correlated with the political framework. Before 1974, the macroeconomic policy was largely
informed by a market-oriented economic system. The period 1974-1991(the Derg period) witnessed a
centralized economic system, where the state played a major role in all spheres of economic activity.
The post-Derg (EPRDF) period (since 1991) is again taking us back to the market-oriented system of
the Imperial regime. Frequent macroeconomic policy changes followed by a change in regime may
sometimes have an effect on the overall performance of the economy. In political terms, three main
regimes in the recent history of the country can be identified: the Imperial regime (1960-1974), the
Derg regime (1975-1991), and the Ethiopian People’s Revolutionary Democratic Front (EPRDF)
(1992-present). Economic performance in the Imperial regime was respectable, with real GDP growing
by four percent annually, while average growth of per capita GDP was 1.5 percent (Alemayehu, 2007).
The Derg took power in 1975 and embarked highly on the nationalization of almost all types of prop-
erty: land, private property, large-scale manufacturing firms and financial institutions. The period was
characterized by a huge role of the state in all aspects of economic activity. The regime was character-
ized by a centrally planned economic system with a strong military power and discrimination against
private property ownership and entrepreneurship. Eshetu (2004) (cited by Martins, 2007) showed that
economic performance under the regime was poorer than the past, with GDP growing at 1.9 % per
year, while growth was negative in per capita terms (-0.8 percent). The policy environment, erratic per-
formance of the agricultural sector (e.g. severe drought in 1984-85) and a lengthy civil war were the
main contributors to this sluggish economic record.
Another major change in the Ethiopian economic and political context occurred in 1991, when a coali-
tion of rebel forces (EPRDF) succeeded in overthrowing the military regime. In terms of macroeco-
nomic policy, 1991 witnessed a marked departure from the previous socialist system the Derg regime-
in openly adopting a market-oriented economic policy.
Growth during the post-Derg period is quite good where total and per capita GDP on average grew by
3.7 percent and 0.7 percent per annum, respectively. This figure rises to 5.6 percent (and to 2.6 percent
in per capita terms) if one excludes the abnormal years 1990-1992. (MoFED, IMF 2003 Report)

The Description and Interpretations of variables

 Summarize (from Normal Data)

variables obs Mean Std.Dev Min Max

year 26 1997.5 7.678529 1985 2010

Gdp 26 12859.73 6837.413 7791.2 32184.6

MuiLA 26 1.60e+09 1.05e+09 4.90e+08 4.58e+09

BiLA 26 2.19e+09 1.03e+09 1.11e+09 4.28e+09

 Correlate (obs=26)

Year lngdpbr lnmult lnbilt

Year 1.0000

lngdpbr 0.9571 1.0000

lnmult 0.7429 0.8317 1.0000

lnbilt 0.5989 0.4576 0.2837 1.0000

4. 2 Testing, Identification of Order of Integration and Econometrics results

Testing for Unit Root

Since the study uses time series economic data, testing the variables for stationarity in econometric
analysis is becoming mandatory. If variables entering a regression are not stationary, then the results
obtained using ordinary least squares (OLS) techniques would be spurious. That is the fact that the
variables share common trends will tend to produce significant relationship between the variables
rather than the true causation [(Harris (1995); Maddala (1992)].Therefore, inference made using the
standard statistical tests like the F- distribution and t-distribution produce misleading result.

Since most economic time series data are unlikely stationary, the first step is to test whether the
variables are stationary i.e. checking for the presence of unit roots, to avoid the problem associated
with spurious regression. Various mechanisms have been developed to transform non-stationary time
series variables to attain stationarity. If a variable has deterministic trend, including trend variable in
the regression removes the trend component and makes it stationary. Such process is called trend
stationary since the deviation from the trend is stationary.

However, most time series data have a characteristic of stochastic trend. If a variable has a stochastic
trend, it needs to be differenced in order to obtain stationarity. Such process is called difference
stationary process (Gujarati, 2004). The number of unit roots a given variable possess determines how
many times the variable should be differenced in order to make it stationary. In this paper unit root test
will be conducted using Dickey-Fuller (DF) and Augmented Dickey Fuller (ADF) tests.

A process is said to be stationary (weakly or covariance stationary) if the mean variance and auto-
covariance i.e. A process is said to be stationary (weakly or covariance stationary) if the mean variance
and auto-covariance i.e. the first two moments of distribution are time invariant. That is the exists
stationary process if it generates constant mean and variance and if the covariance depends only on the
time lag used in the calculation (Enders, 1996)

The hypothesis to be tested is formulated as follows: H0: βi=0

H1: βi<0

Testing for stationarity and the decision is made using τ-statistics. (Enders (1996)).If the calculated
value of τ is less than the critical value the null hypothesis is accepted and not if otherwise.

Accepting the null hypothesis implies the presence of unit root-i.e. the series is non stationary. If a
variable that is not stationary appears to be stationary after nth difference then the variable is said to be
integrated of order n-I (n). However, the DF test has a series limitation in that it suffers from residual
autocorrelation. To overcome this problem, the DF model is augmented with additional lagged first
differences of the dependent variable. This is called Augmented Dickey-Fuller model (ADF). The
advantage of using this model is that it avoids the autocorrelation among the residuals. Therefore
incorporating lagged first differences of the dependent variable.

Table 4.1 ADF unit root test result for employed Variables at lags (0)

Variables Test statistic 1% Critical 5% Critical 10% Critical ~p-Value

Value Value Value for Z(t)

lnGDP -3.666 -3.750 -3.000 -2.630 0.0046

lnMAid -7.548 -3.750 -3.000 -2.630 0.0000

lnBAid -4.138 -3.750 -3.000 -2.630 0.0008

Source: Stata Result.

If the estimated Augmented Dickey-Fuller (ADF) statistic is larger in absolute term than its ADF criti-
cal value the null hypothesis is rejected suggesting that the series are stationary (Asterious and Hall,
2007). The result indicated that all variables is greater than (in absolute term) than the critical value.
This means that these variable need not difference to render its stationary (Asterious and Hall, 2007)
The above-tabulated results indicate that all data series appear to have one unit root after a determinis-
tic trend, together with augmentation .at lags (0).
That is, they have an integrated order of zero. Thus, it has been proved that these data are stationary at
critical values of 1%, 5%, and 10%. For example the estimated ADF statistic of Gross domestic prod-
uct by taking its ln(lngdp) is -3.666 which is greater (in absolute) than critical -3.750, -3.000, -2.630 of
(1%), (5%) and (10%) respectively. The estimated ADF statistic of Multilateral aid (lnMAid) is -7.548
which is greater (In absolute) than critical values -3.750, -3.000, -2.630 of 1%, 5% and 10% respec-
tively And lastly the ADF statistical result of Bilateral aid (lnBAid) is -4.138 which is greater than -
3.750, -300,-2.630 respectively at chosen significance levels.

Test for Heteroskedasticity

 For heteroskedasticity Bruesch-pagan test shows that since the computed probability value is
 greater than the critical chi square Value (0.7249>0.12) at the chosen level of significance, we can
Fill accept null hypothesis of homoskedasticity which means there is a problem of
heteroskedasticity. This implies that the distribution of error term around the explanatory variables
have no constant variance

Test for Autocorrelation

 For Autocorrelation the durbin-watson d-statistics shows us that there is no problem of autocorre-
lation because the calculated d-value is sufficiently close to 2, in addition Breusch-Godfrey LM
test for autocorrelation also indicate that the calculated value is less than the critical shows no se-
rial correlation. Therefore, we can accept the null hypothesis, which says there is no Autocorrela-
tion. So, there is no interdependence among the error terms of our model

Econometric Results
After checking for the presence of unit roots, to avoid the problem associated with spurious regression
and some violations, run of OLS regression take place in the following manner to see the Long run
effect foreign inflow on economic growth in Ethiopia from the period 1985 up to 2010.

Table 4.2 The Econometric results/ the long run aid impact on economic growth

Variable Coefficient Standard Error t-ratio P>|t|

MAid .5337127 .0767429 6.95 0.000
BAid .2211332 .1007187 2.20 0.038
Constant 8.945055 2.298514 3.89 0.001
Number of obs = 26 F (2, 23) = 33.63

Prob > F = 0.0000

R2 = 0.7452 Adj R2 = 0.7230

The take the following form…

GDPt = β0 + β1BAidt + β2 MAid t + εt as it’s proposed with minor modifications and substituting the
resulted coefficient we can obtain the following the estimated long run equation;

GDPt = 8.945055 + 0.2211 BAidt + 0.5337 MAidt + εt

As the statistics associated with the estimated long run equation revealed all the explanatory variables
are statistically significant. The above result found that foreign aid has a positive and statistically sig-
nificant influence on economic growth in Ethiopia. The coefficient of Maid and BAid is positive show-
ing that as the both MAid and BAid inflows to the country grows the economic growth (GDP) would
tend to rise. In this study, the MAid to GDP is greater than that of BAid. i.e. 1% rise in booth MAid
and BAid increase the GDP by 53.37% and 22.11% respectively. This shows that the Ethiopian eco-
nomic growth needs small stimulation in addition to her domestic capacity. This showed that foreign
aid has played an important role in enhancing economic growth and also the strengthened the main idea
of the gap models in that foreign aid is used in capital scarce countries to bridge the resource gap.
The Coefficient of determination (R 2 ) shows that the extent to which the dependent variable explained
by the independent variable. The value of R2 lays between 0and 1 and the closer the value of R2 to one,
the more dependent variable is explained by independent variable, which is specified in the model. And
in this model R2 result shows that 74.52% of the economic growth was explained by the explanatory
variables. The slight difference between R2 and adjusted-R2 also shows that, as there is no exogenous
variable, which is cited in the model and has no any effect as if not specified in the model

Co integration Analysis E

Co integration is a powerful tool as it allows describing the existence of an equilibrium, or stationary,

relationship among two or more time-series, even if each of which is individually non-stationary. Or
Co integration means that despite being individually non stationary, a linear combination of two or
more time series can be stationary. Co integration among the variables reflects the presence of long run
relationship among non-stationary variables in the system. Testing for co integration is important be-
cause differencing the variables to attain stationarity generates a model that does not show long run be-
havior of the variables. Thus testing for co integration is the same as testing for long run relationship.
(Gujarati, 2004)

Economically, speaking two variables will be co-integrated if they have a long term or equilibrium
relationship between them. Economic theory is often expressed in equilibrium terms such as the
velocity of money circulation and the Modigliani’s permanent income hypothesis just to say a few
(Ibid, p.822). In short, the valuable contribution of the concepts of unit root and co-integration is to
force us to find out if regression residual are stationary. According to Granger note “a test for co-
integration can be thought as a pre test to avoid spurious regression” situations. To conduct a test for
co-integration, the study applied the ADF unit root test on the residuals estimated from the co-
integration is used. Now, the regression equation is estimated, the residuals are obtained and then the
ADF test are performed.

The regression result of the short run model reported that the variables are co-integrated since the
residual obtained was found to be stationary at 1%, 5%, and 10% level of specification. ) i.e. the
estimated ADF statistics of residual is -9.384 which is greater (in absolute term) than critical at 1%, 5%
and 10% of values-4.380, -3.600 & -3.240 respectively. Therefore, it provided a consistent estimation of
the long run relationship.

Error correction Method (ECM)

Until now, we have been dealing with the long run relationships of economic growth with foreign aid.
Now let us compute the short run relationship of the model. The set of co-integration indicated that the
variable under the consideration has a long run relationship. Since every co-integrated non-stationary
variable do have (ECM), the difference of dependent variable regressed on the first difference of the
explanatory variables and the first lag of residual obtained from the level of regression. The pattern of
the lagged residual( residual-1) shows that the foreign aid gets out of if long run equilibrium in the
short run and the co-efficient indicate how fast the economic growth (GDP) resulting from the
estimated residual (ECM)

Method: least square

Table 4.3: short run regression results of aid impact on economic growth:

variable Coefficient Standard error t-value t-ptob

lnMAid .533673 .0781938 6.83 0.000
lnBAid .2203088 .1026446 2.15 0.043
εt -.0387048 .0984622 -0.39 0.698
 cons 8.963686 2.34245 3.83 0.001
Number of obs = 26 F (3, 22) = 21.65 Prob > F = 0.0000

R2 = 0.7470 Adjusted_ R2 = 0.7125

In the long run relationship it is found that foreign aid has positive relationship impact on economic
growth in Ethiopia. And in the short run also it does the same result in improving economic growth in
short run relationship. This may because of the foreign aid to Ethiopia is dominated by food aid and
others assistance which was used in short range it is found that foreign aid has positive relationship
impact on economic growth. i.e in short run estimation shows similar to the long run the result that
foreign aid(booth Maid & BAid) improve economic growth in Ethiopia and they are significant
variables in affecting the economic growth of the nation.

Finally, the error correction term (residual-1) showed the expected negative sign implying that short
run disequilibrium adjusts to its long run equilibrium and it is found to be significantly different from
zero at 1%, 5%, and 10% level. The coefficient -0.0387 entails that the short run disequilibrium adjusts
showily to its long run equilibrium by removing about 3.87% of the disequilibrium. According to the
above result, foreign aid is found to have a positive and statistically significant in enhancing economic
growth in Ethiopia in general.
 Part 40 Conclusion and Recommendations
5.1 Conclusion
Despite the inflow of financial resources and technical assistance within the main role in stimulating
economic growth is to supplement domestic sources of finance such as savings, thus increasing the
amount of investment and capital stock over the years in many African countries since the 1960ś, the
socio-economic and development situation of the LDCś of the world continue to deteriorate at an
alarming rate, raising question of whether foreign aid affect economic growth & development in
recipient economies positively or negatively.

Based on their purpose and rationales the donors want to perform there are different Types of Foreign
Resource Flows: Tied and Untied; Bilateral and Multilateral; Project and Programmes. This is because
Donor-country governments give foreign aid because it is in their political, (Political Motivations;
Foreign Aid as an Instrument of Foreign Policy) strategic, or economic self-interest (Economic
Motivations; Foreign Aid as a Market/Economic Tool) to do so. Some development assistance may be
motivated by moral and humanitarian desires to assist the less fortunate (e.g., emergency food relief
and medical programs). Still, there is no historical evidence to suggest that over longer periods of time,
donor nations assist others without expecting some corresponding benefits (political, economic,
military, counter terrorism, anti narcotics, etc.) in return. Despite those types of foreign aid
Nongovernmental organizations (NGOs) are voluntary organizations that work with and on behalf of
mostly local grassroots organizations in developing countries and it is one of the fastest-growing and
most significant forces in the field of development assistance.

The effectiveness of foreign aid inflows are depend not only on amount or others measurement but it is
highly based on its means of uses either used for productive purposes like investing on different
community development based programs or used for unproductive purposes like consumption, war and
others nonprofit earning activities. And the domestic capacity have unquestionable super massive in
enhancing economic growth and development, the foreign aid may be used as impulse or additional
force of domestic capacity in economic growth if it’s used wisely for productive activities

Previous empirical studies on foreign aid and economic growth generate mixed results.

In Ethiopian case a large portion of foreign aid inflows within designed aims to alleviate poverty, to
encourages and support community development programs, and others productive development
activities, can’t shows the effective result on economic growth rather than creating the spirits of
dependency in the society and decreasing the willingness of capital formation (interest to save a portion
of their income because they lives in hopes of getting aid during difficult).

Despite the massive literature on the subject, the foreign aid inflow affects economic growth positively
in Ethiopia. The study has examined the impact of foreign aid on economic growth in Ethiopia and
makes an effort to establish whether there exists long run and short run relationship between foreign aid
& growth using annual data covering the period 1985 to 2010.
Since co integration necessitates the variables to be integrated of the same order, the series is tested for
unit root and the result found indicated that all the variables are stationary at I (0). As a result, we run a
test for co-integration on the result suffice the presence of long run relationship among the variables in
the model.
The empirical result from the equation estimated shows that foreign aid has a significant positive
impact on economic growth in the long run. Its positive impact is not limited only to the long run but
also foreign aid enhances and contributed positively to economic growth in the short run.

The result further shows that the effectiveness of debt is more conditional. The paper also examined the
growth impact of aid, among other variables and its interaction.

In the contrary, when aid is interacted with policy, the growth impact of aid is negative implying the
deleterious impact of bad policies on growth in the long run. Aid squared, unlike the theoretical view,
has a positive sign, pointing the absence of capacity constraint in the flow of aid to Ethiopia. Indeed,
this call for a deeper investigation and further research on the absorptive capacity of the country
regarding aid flow.

The result, which is in line dominant theoretical views point, that policy which are aimed to facilitate
investment also stimulate saving. Similarly, policies designed to stimulate domestic saving also
facilitates domestic capital formation activity.

At the end, the success of aid depends on incentives faced by all parties in donor and recipient
countries. In addition, both donors and recipients must obtain the necessary information to actually
target and achieve desired goals

5.2 Recommendations
Despite a rich natural resource endowment and receiving large amounts of foreign aid, Ethiopia has
failed to prosper.
۩ Ethiopia has to take the following actions to narrow the fiscal gap and decrease dependence on
foreign aid to meet the development needs by its own resource:
 Expanding the domestic tax base of the economy along with good institutions that can combat
fraud and corruption in the process of tax collection. The revenue from an extensive tax base
enables the country to finance its expenditure on domestic capital.
 In order to minimize the foreign exchange constraints which makes dependence on foreign aid
compulsory, diversification along with policies of export promotion are crucial. In addition, the
poor track of export in the past decades also points the need to reduce dependence on primary
commodities as the dominant way of foreign exchange earnings.
 As the variability in rainfall has produced a significant negative influence on the growth of the
economy, an alternative mechanism has to be sought to mitigate such unfavorable effects. When
the variability in the pattern of rainfall is coupled with the habit of producing only once in a year
depending on rainy season, it has a far reaching implication on the performance of the economy.
The most important mechanism is practicing irrigation agriculture in the dry seasons in the arid,
semi-arid and highland areas of the country.
 The weak effect of non-aid financed investment on growth appears on the surface to indicate
inefficiency in putting domestic capital for productive activity to promote growth.
Moreover, there are a number of actions that donors and Ethiopia Government can take jointly to bring
the desired economic growth within foreign aid. Because in the absence of foreign aid, there is no
doubt that the degree of poverty in Ethiopia would be even greater than that prevailing:
Firstly, greater targeting of foreign aid to those in the poorest regions of the country is required to re-
duce the very high level of inequality prevailing in Ethiopia. Reducing inequality will reduce tension
between different ethnic groups. A greater number of aid projects should therefore be established in
isolated and remote like Beneshangul Gumuz, Afar, Gambella and others regions. Foreign aid __as re-
moval of regional imbalances__this is social gain from aid. Reducing inequality may also reduce crime
and security problems.

Secondly, The vast majority of the Ethiopia population lives in rural areas and operates in the informal
sector. They have not participated in economic growth, which has been driven by the capital-intensive
sector. Although the Ethiopia Government is primarily responsible for pursing a growth strategy based
on the development of agriculture, donors can still play an important role. Donors can play a role in de-
veloping new agricultural methods, assist in expanding agricultural production, identifying niche mar-
kets and in assisting with more effective marketing of Ethiopia’s agricultural products.
Thirdly, the provision of a clean water supply must take a higher priority in donor aid programmes. Se-
curing a clean water supply to a greater proportion of the population can be expected to have ‘knock-
on’ effects, leading to improvements in both health and education indicators.
Fourthly, donors should assist in making financial services to the poor in rural areas. Microfinance
schemes should be encouraged to enable greater access to credit and insurance. Not only will this help
those in rural areas take advantage of Profitable investment opportunities it will enable them to manage
risk through savings. This is important due to the rural population’s vulnerability to natural disasters
and illness.
Donors should provide assistance to NGOs to assist in establishing these schemes.

Finally, it is argued that donors should prioritize the construction of new roads in addition to the main-
tenance of existing roads. Not only will this ensure greater access to health and education services, it
will ensure that small scale producers face lower transportation cost, have greater opportunity to get
their product to market and raise their rural incomes. Improving the transport networks across the coun-
try will improve communications between different ethnic groups and may reduce tensions and in-
crease security.
In general, the following recommendations are point out as the policy implication of this study;
 The most important factors is the will and the effort on the part of the recipient country to develop.
Aid received from abroad does not fructify, unless the role of foreign aid is to act as an effective
agent for the mobilization of a country’s will.
 A large proportion of the Ethiopian populations suffer from a lack of infrastructure, opportunity and
access to basic services. The primary responsibility to full such like shortage in Ethiopia rests with
the Government. The Ethiopian Government must pursue a much broader based growth strategy for
the poor to benefit from increases in foreign aid.
 In order for aid to be effective, donors must be able to gather critical information, requiring the
ability to tap into local knowledge. Donors must recognize that aid is needed, figure out exactly
what is needed, and who needs it, and evaluate whether or not what they are doing is working. This
involves some form of evaluation and feedback. Donors rely on the bureaucratic process to try to
solve these knowledge problems. The main obstacle in being able to tap into this necessary infor-
mation is the fact that foreign aid is managed and organized by governments and other bureaucratic
agencies.
 Even the aim of donor’s nations is not considering the development of recipient country they
should use aid wisely to escape from poverty and regain their glory like South Korea which reach
the today level in single generation.
 To shake off poverty and her dependence on primary products export, Ethiopia has to use foreign
capital inflows for productive activities by trickling down its benefits to different targeted society or
to all sectors of economy to raise the living standard and promote social welfare.
 The sound economic policies which is free from a vote-enhancing strategy (maximize chances of
re-elation can support and play key role in effectiveness of foreign aid.
 Technology transfer in the form of Embodied technology and disembodies (consulting, supervising)
as the form of foreign aid can improve the domestic absorption capacity of capital inflows.
 The Ethiopian aid authority body of state should use foreign aid wisely for directly or indirectly
productive purposes activities to provide more amenities in the form of improved means of
transport, communications, irrigation, power, etc.
 Foreign aid can acted as an engine of growth in Ethiopia, if Ethiopian government use with sound
economic policies by mobilization o f labor intensive activities to meet the needs of wide society.
 I order to evaluate the impact of foreign aid on, those changes which are the result of resources
inflows, need to be identified. Because from the empirical result interpretation which the numbers
tell us is not the true impact aid on economic growth and development. I can say this based on the
only impact of increasing in number are positively related to each other to decrease the
 inconvenience I want to
Finally, I call for a deeper investigation and further research on the effectiveness, absorptive capacity
of the country regarding foreign aid inflow.

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Todaro M. P and S .C Smith, 2003, Economic Development, 8th edition. Person Addition
 Wesley

ANNEX
___ ____ ____ ____ ____ tm

/__ / ____/ / ____/

___/ / /___/ / /___/ 10.0 Copyright 1984-2007

Statistics/Data Analysis Stata Corp 4905 Lake way Drive

Special Edition College Station, Texas 77845 USA 800-STATA-PC http://www.stata.com

979-696-4600 stata@stata.com 979-696-4601 (fax)

Unlimited-user Stata for Windows (network) perpetual license:

Serial number: 6855577242 Licensed to: ict pool

Notes: 1. (/m# option or -set memory-) 10.00 MB allocated to data

2. (/v# option or -set maxvar-) 5000 maximum variables

(4 vars, 26 obs pasted into editor)

tsset year time variable: year, 1985 to 2010 delta: 1 unit

  reg lngdpbr lnmult lnbilt( by lag at t-1)

Source | SS df MS Number of obs = 26

Model | 2.77941034 2 1.38970517 F (2, 23) = 33.63

Residual | .950371267 23 .04132049 Prob > F = 0.0000

Total | 3.72978161 25 .149191264 R-squared = 0.7452

Adj R-squared = 0.7230

Root MSE = .20327

lngdpbr | Coef. Std. Err. t P>|t| [95% Conf. Interval]

lnmult | .5337127 .0767429 6.95 0.000 .374958 .6924674

lnbilt | .2211332 .1007187 2.20 0.038 .0127807 .4294858

Cons | 8.945055 2.298514 3.89 0.001 4.190216 13.69989

 dfuller d(lngdpbr), lags(0)

Dickey-Fuller test for unit root Number of obs = 24

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

Z (t) -3.666 -3.750 -3.000 -2.630

MacKinnon approximate p-value for Z (t) = 0.0046

 dfuller d(lnmult), lags(0)

Dickey-Fuller test for unit root Number of obs = 24

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

Z(t) -7.548 -3.750 -3.000 -2.630

MacKinnon approximate p-value for Z (t) = 0.0000

 dfuller d(lnbilt), lags(0)

Dickey-Fuller test for unit root Number of obs = 24

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

Z(t) -4.138 -3.750 -3.000 -2.630

MacKinnon approximate p-value for Z(t) = 0.0008

 estat bgodfrey

Breusch-Godfrey LM test for autocorrelation

Lags (p) | chi2 df Prob > chi2

1 | 0.111 1 0.7395

H0: no serial correlation

 estat dwatson

Durbin-Watson d-statistic (2, 24) = 1.769022

 estat hettest

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance

Variables: fitted values of D2.lnbilt

chi2 (1) = 0.12

Prob > chi2 = 0.7249

 estat hettest, fstat

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance

Variables: fitted values of D2.lnbilt

F(1 , 22) = 0.02

Prob > F = 0.8814

 Predict ut

tsset year time variable: year, 1985 to 2010 delta: 1 unit

 reg lngdpbr lnmult lnbilt et

Source | SS df MS Number of obs = 26

Model | 2.78604159 3 .928680529 F (3, 22) = 21.65

Residual | .943748248 22 .042897648 Prob > F = 0.0000

Total | 3.72978983 25 .149191593 R2 = 0.7470 Adj.R2 = 0.7125

Root MSE = .20712

lngdpbr | Coef. Std. Err. t P>|t| [95% Conf. Interval]

lnmult | .533673 .0781938 6.83 0.000 .3715091 .695837

lnbilt | .2203088 .1026446 2.15 0.043 .007437 .4331807

et | -.0387048 .0984622 -0.39 0.698 -.2429029 .1654933

_cons | 8.963686 2.34245 3.83 0.001 4.105741 13.82163

 dfuller d(et), trend lags(0)

Dickey-Fuller test for unit root Number of obs = 24

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

Z (t) -9.384 -4.380 -3.600 -3.240

MacKinnon approximate p-value for Z (t) = 0.0000

UNIVERSITY ADAMA SCIENCE AND TECHNOLOGY
SCHOOL OF BUSINESS DEPARTMENT OF ECONOMICS

A Research paper submitted in partial fulfillment of the requirement of the

BA degree in Economics

The determinants of export in Ethiopia: The case study of manufacturing

goods.

Prepared by: ARARSO JOHAR

 Submitted to: DR.RAO

June, 2012

Declaration letter

I ARARSO JOHAR with ID. No 02024321 have did the research entitled
THE CHALLENGE OF FOOD SECURITY AND THE ROLE OF
GOVERNEMENT IN ETHIOPIA on my own. The research is done as
requirement for partial for fulfillments of the degree of Bachelor of art in
Economics, department Economics, School of Business Administration,
Management and Trade of Adama Science and Technology University

Student Name
ID.No Signature
Advisor Name signature
 Acknowledgements

First of all, it is no exaggeration to state that without insisting the Almighty God, ALLAH, would not
have been in a position to finalize successfully accomplished of this Research paper. So, glory to him.
Without him noting can possible for me in doing this paper.
Second, my Appreciation and gratitude are extended to all who have assisted me during the course and
in doing this paper. My special thanks go to my advisor DR.RAO for his unreserved help and intensive
advice in shaping the organization and content of the paper.
Thirdly, I owe more than I can say to my parents and all my relatives for their unreserved help, care
and encouragement throughout my school life.
Finally, my heartfelt thanks go to all my friends for their material and moral support.
 LIST OF TABLES

Table 2.1. Fixed effects and random effects regression on variables which affects export Performance.

Table 2.2 Nominal and Effective Rates of Protection: 1995 and 2001

Table 3.1 The expected sign of variables on the dependent variable (manufacturing Exports)

Table 4.1 stationary result

Table 4.2 Error correction result

Acronyms
 GDP: Gross Domestic product
 GTAP: Global Trade Analysis Project
  OLS: Ordinary Least Square
 EG: Engle-Granger
 AEG: Augmented Engle Granger
 R&D: Research and Development
 OEM: Original Equipment Manufacturing
 MNE: Multinational Enterprises
 FDI: Foreign Direct Investment
 COMESA: Common Market for Eastern and South Africa
 ERP: Effective Rates of Protection
 REER: Real Effective Exchange Rate
 ADF: Augmented Dickey-Fuller
 GMM: Generalized Method of Moments
 DFE: Dynamic Fixed Effect
 UDI: Urban Development Institute
 ECM: Error correction Method
 CIF: Cost- in- freight

Abstract
This descriptive research prepares wile devoted to examine the major determinants of exports of
manufacturing goods during 1981-2008 in Ethiopia. The paper will attempt to see major variables such
as gross capital formation (proxy for production capacity), share of trade in GDP (proxy for trade
liberalizations), real effective exchange rate and foreign income.

The study will make use of secondary data source from the concerned body & other relevant source for
the objectives of the study.

Finally, the paper will try to recommend and suggest some alternative idea to help the country for the
development of export sector and increase share of manufactured exports and density export base of the
country.

Table Content

Unit Page

UNIT ONE
1. Introduction…………………………………………………………………………………

1.1 Background………………………………………………………………………………

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

1.3. Objectives of the study ……………………………………………………………….

1.3.1 General objectives……………………………………………………………………

1.3.2. Specific objective………………………………………………………………………

1.4. Scope of the study …………………………………………………………………..

1.5. Importance of the study………………………………………………………….

1.6. Limitation of the study…………………………………………………………….

1.7 Paper Organization……………………………………………………………..

Unit Two

2. Review of Related Literature ……………………………………………………….

2.1. Theoretical Literature Review…………………………………………………………

2. Manufactured Exports and Economic Growth………………………………………..

2.2. Empirical literature review …………………………………………………………

2.2.1 Manufacturing Competitiveness, FDI and Investment Climate ………………….

UNIT THREE

3. Data and Methodology………………………………………………………………….

3.1. Data Type and Source…………………………………………………………………

3.2. Methods of Data Analysis …………………………………………………………………….

3.3. Model specification…………………………………………………………………………

UNIT FOUR
EMPIRICAL RESULTS AND DISCUSSIONS ……………………………………………….

4.1. Test for Unit Roots…………………………………………………………………………..

4.2 Estimation and interpretation of Econometric Results ……………………………………….

UNIT FIVE

5. Conclusion and Recommendation ………………………………………………………………….

5.1 Conclusion …………………………………………………………………………………………

5.2 Policy Recommendation ………………………………………………………………………………

 UNIT ONE
1. Introduction
1.1Background
Ethiopia is highly dependent on agriculture; through its share is declining. According to World Bank
report (2008) in 2006, value added in agriculture accounts for 47 percent of GDP while industry and
services account for 13 percent and 39 percent respectively. The manufacturing sector contributed 5%
of GDP and 37.8% to the total value of industrial production in 2008/09 (Central Statistical Agency
Statistical Abstract 2009). The major manufacturing activities are production of food, beverages,
tobacco, textiles and garments, leather goods, paper, metallic and non-metallic mineral products,
cement and chemicals. Under the export-led industrial development strategy, production of textile and
garments, leather products and agro-processing are priority areas for investment.

The textile industry is the largest manufacturing industry in the country. There are a number of state-
owned and private textile and garment factories. The industry contributes the lion-share of employment
in the manufacturing sub-sector. The main textile products manufactured are cotton and nylon fabrics,
acrylic yarn, wool and waste cotton blankets and sewing thread.

The availability of inexpensive labour and the main raw material, cotton, are the major factors for
considering this industrial sector as one of the strategic industries for export development.

Ethiopia exports processed and semi-processed hides and skins to the world market. Some of the
products, such as Ethiopian highland sheepskin (which has gained an international reputation for
making gloves), are known for their quality and natural characteristics. Ethiopian hide and skin exports
include pickled sheep skin, wet blue sheep skin, crust sheep skin, wet blue goat skin, crust goat skin,
crust cow hides, finished garment leather, finished glove leather, lining/upper leather, suede leather,
full grain leather, embossed leather and patent leather.

The manufacturing and export potential of finished leather and leather products (such as leather
garments, footwear, gloves, bags and other leather articles) is also highly promising.

Ethiopia has tremendous potential for investment in agro-processing. Many of its agricultural products
can be exported without being processed, while others can be processed before they are brought to
domestic and foreign markets. The government has also placed a priority on the export of processed
products, which involves and stimulates the growth of the agro-processing sector.

Specific opportunities in agro-processing include:

 Processing and preservation of meat and fish products, fruits and vegetables;
 Production and processing of dairy products;
 Manufacturing of starch and starch products; and
 Processing of animal feed, etc

In recent years, export promotion has been given priority and the public sector has made considerable
efforts to identify suitable export products and penetrate new markets. This policy has borne fruit as the
value of manufactured exports increased in the few years and the range of export products has
broadened slightly. Moreover, manufactures as a share of total exports have also increased over the
same period. The prospects for further expansion of manufactured exports seem bright. Alongside the
development of export markets for products originally complete for the domestic market, the
government is investigating a proposal to establish an export processing zone to attract export-oriented
industries financed by foreign capital, [MEDaC, 1999].

However, the least developed, traditional Ethiopian economy, the contribution of industry, particularly
manufacturing to the overall GDP of the country is one of the lowest in the world, assign post of its
least industrialized economic structure overall. In this regard, Ethiopian Industrial Manufacturing
growth has virtually stagnant per capita level of manufacturing value added relative to population
growth. As for the future, much depends on the successful implementation of the reform packages such
as managerial reform and the provision of a policy environment conductive to private investment will
accessible, then the rate of industrialization is closely linked to the performance of the economy as a
whole.

Ethiopia has been exporting mainly traditional export. Manufacturing exports were growing at an
average rate of 4 percent and its real exports were 92.3 million. The average share of manufacturing
exports during 1981- 2008 was around 14.4% (WB, 2008). Ethiopia export base is very narrow. That
means, this export composed of few product especially primary product. The share of manufacturing
export is very less as compared with agriculture exports. This is because there are many determinants
which can affect the exports of manufacturing goods in Ethiopia. Production capacity, exchange rate,
trade liberation and other are among the determinants of manufacturing exports in Ethiopia.

Therefore, this paper tried to address these determinants which can influence export of manufacturing
goods in Ethiopia.

1.2. Statement of the problem

The structure of industrialized economies reveals strong and balanced internal linkages between the
manufacturing and the rest of the sectors including; agriculture, mining, construction, transport and
communication. This shows the capacity of manufacturing sector to produce and supply capital,
intermediate and consumption goods demanded by all other sectors of the economy. But non
industrialized economies are characterized by internally looses as well as unbalanced forward and
backward linkages between economic sectors. This leads to structural dependency on external
economy. The least industrialized Ethiopian economy is a manifestation of this problem. The Ethiopian
economy is one of the least industrialized and its manufacturing sector is least developed in many
respects; in terms of volume and quality products, technology status, labor skills and export
capabilities. Primarily, this is because manufacturing is not only least developed but also structurally
distorted. Though Ethiopian real manufacturing export has been growing at an average rate of 4%,
Ethiopia export sector is still small where manufacturing reached only 92.3. Million USD in 2008(WB,
2008). Ethiopian export is still highly dependent on non manufacturing exports. Manufacturing exports
share declined from that of 20.5 Percent in 1981 to 8 percent in 2008 (WB, 2008).

High dependence on exports of primary exports has many draw backs for the country. First,
traditional exports have been dominated by declining terms of trade which made export earning not to
increase well enough despite increased export volumes and the recent spikes in value of traditional
exports. Secondly, export of traditional exports do not have much linkage effects in the economy
because mostly they are sent raw. There are many determinants that affect the export of manufacturing
goods in Ethiopia. The government of the countries does not pay much attention on those determinants.
This can be concluded from the fact that, the counter’s exports are mainly dependent on non
manufacturing exports. Therefore, this paper is to investigate those factors which could impede the
promotion of exports of manufacturing goods in Ethiopia.

1.3. Objectives of the study

1.3.1 General objectives

The general objectives of the study are mainly to address the performance and trade of exports of
manufacturing goods during the period 1981-2008. It also analyses the determinant factors that affect
the export performance of manufacturing goods during this period.

1.3.2. Specific objective

The specific objectives are:

 To investigate the determinants of manufacturing exports

  To address the trends of manufacturing exports

 To observe the performance of manufacturing exports in Ethiopia.

1.3. Scope of the study

The focus of this study is to analyze the determinants of export performance, real
manufacturing values during the period of 1981-2008. The study tried to analyze what has
determined export supply of manufacturing items during the study period. The topic has been
chosen due to the availability of data for manufacturing and determinant variables. The period
has been chosen due to lack of data for some variables for the country before 1981 and
organized data after 2008 on some variables.

1.4. Importance of the study

The importance of this paper is to:

 To indicate the factors affecting manufacturing export

 Broaden the understanding on the subject matter

 Initiate further dialogues and research on the sector

 To give clue for policy makers.

1.6 Limitation of the study

The study faces the following limitations. First, the impact of tariffs on the export of manufacturing
goods was not analyzed due to lack of data for the whole sample period. Second the paper take into
account only the sample period from 1981 to 2008 due to the lack of organized data of the variables
before and after this sample period. Thirdly lack of enough financial and time were also their own
impact on the quality of the paper.

1.7 Paper Organization

The paper has five units as content: unit one which involved the background, statement of the problem
and other related topics, unit two presents the theoretical and empirical reviews insight regarding the
sector. Unit three focuses on source and model specification, Unit four and five reveal the discussions
and empirical findings as well as the conclusions and some policy implications, respectively.

Unit Two
2. Review of Related Literature

2.1. Theoretical Literature Review

It has been suggested that sub- Saharan Africa will not be a significant export of manufacturing goods,
because of lacks the necessary skills. Wood (1994) argues that Africa can only exported unskilled labor
intensive manufactures, as an unskilled labor is relatively abundant. Elsewhere it had been argued that
African exports will be dominated by natural interview goods, and that manufacturing exports therefore
will be marginal, even in the labour intensive sectors (wood and Mayer, 1998). In contrast to this line
of though, which is based on comparative advantage theory, is the view that firm level factors are more
important determinates of exports than factors related to industry (krugman, 1989).

In particular emphasizing that entry into export is associated with significant fixed costs, this theory
predicts that only relatively productivity firms with relatively high returns to exporting with choose to
incur the costs and enter the international market.

According to World Bank report (2000), Zimbabwean manufacturing exports has been subjects to large
policy changes. Under urban development institute (UDI), foreign exchange controls and trade
restrictions created large import substituting manufacturing sector while exports where restricted to
those few countries that defined the united nation sanctions (Hans Haogeveen and Takawira, 1998).

In 1991 Zimbabwean embarked up on trade and exchange rate liberalization. The easing of biases
against exporting, the opening up of the country for imports and the realignment of the exchange rate
was expected to lead to important changes in the way trade takes place in Zimbabwe. However, trade
liberalization was partly reversed in the late 1990sThe justification for the trade and exchange rate
liberalization reflects the expected efficiency gains that from the important functioning of markets and
is based on traditional trade theory.

Traditional trade theory and its modern versions emphasize relative factor endowments (Ohlin, 1933),
skills development, learning and technological competence (Nurrkse, 1953; Hirscman, 1958;
Vernon,1966), sunk costs, scale economics and agglomeration advantages (krugman, 1992; Dixit and
Norman, 1980 ),transport costs and concentration advantages can be exploited more efficiently only if
market distortion are eliminated.The theories normally assume that trading relationships are
anonymous, i.e. that agents trade indiscriminately with any other agent. In fact agents often do not
engage themselves in anonymous relationships and networks may actually from another comparative
advantage determining the firm’s decision to export. This net work factor captures the relationships an
exporting firm has with its local and international customers, suppliers, competitors, distributors,
industry organizations and government.

Net works enhance reciprocity, trust and reputation building (Nadvi, 1998: louEgan and Mody, 1990):
encourages learning and create conditions conductive for product quality improvement, technological
upgrading and organizational capability building (Grabher, 1988); reduce entry costs and minimize exit
costs (DeBression etal, 1991).In short, up to a certain level belonging to international export networks,
reduces transaction costs and enhances export competitiveness. Asia’s extraordinary record of rapid
economic growth and development, including its outward orientation and trade strategy, has been
called into question by the Asian financial crisis. At minimum, the crisis should make us pause and
reflect on the process of globalization, and perhaps reassess both the potential gains and the possible
hazards of integrating with global markets.

Hill (1994) and Falvey and Gemmel (1990) are exceptions in that they take a broader view of export fa-
cilities.To what extent was the crisis the result of Asia’s development strategy, in particular the focus
on openness to trade and the development of manufactured exports? It is hard to make a strong direct
link between openness to trade and the crisis. Several Asian economies with a long history of success
in manufactured exports were not victims of the crisis, including Singapore, Taiwan, Hong Kong, and
China. Openness to trade was not the key characteristic separating the crisis and non-crisis countries
(Radelet and Sachs, 1998a). The recent financial crises in emerging markets are surely cautionary tales
in the process of liberalization and globalization of financial markets, suggesting the need for a slower
liberalization and opening process that allows the necessary supporting institutions to develop. Al-
though trade and finance cannot be completely separated, these crises do not seem to undermine the ba-
sic case for manufactured exports. As Jagdish Bhagwati has pointed out, trade in widgets and trade in
dollars is not the same (Bhagwati, 1998). With this caution in mind, we proceed to examine the rela-
tionships between manufactured exports, export Platforms and economic growth.

2.1.1 Manufactured Exports and Economic Growth

For at least a decade, there has been growing recognition of the links between success in manufactured
exports and rapid economic growth. At the most basic level, this recognition comes from the fact that
almost all developing countries that have recorded rapid growth in manufactured exports have also
experienced rapid economic growth, and vice-versa.

At a more sophisticated level, a large and growing body of empirical research has consistently found
strong positive linkages between more open trade policies, manufactured exports, and economic growth
(Frankel and Roemer, 1999; Sachs and Warner, 1995; Radelet, Sachs, and Lee, 1997; World Bank,
1993, Dollar, 1992). The main points of debate are the magnitude of the relationships, the
measurement of trade openness policies, the precise channels through which the relationship operates,
and the direction of causality between exports and growth, rather than whether the basic relationship
between exports and growth is positive or negative. Most economists have concluded that openness to
international trade and strong export growth has been significant contributors to rapid economic
growth. It is probably true that the causality to some extent runs both ways in a virtuous circle: rapid
export growth facilitates the acquisition of capital goods and technology transfer that drives economic
growth, and rapid growth provides the means to finance investment in physical and human capital that
supports more rapid export growth.

What are the channels through which manufactured export growth contributes to sustained economic
growth? One obvious answer is that exports provide the foreign exchange by taking the growth rate
weighted by the share of non-primary exports in GDP in the previous year, we avoid the statistical
problem that countries with small amounts of manufactured exports can record very high growth rates,
and those with larger manufactured exports tend to record smaller growth rates. For a skeptical view on
the trade/growth literature, see Rodriguez and Rodrik (1999) and Harrison and Hanson (1999).This
section draws from Radelet, Sachs, and Lee (1997). Necessary to pay for imported raw materials and
investment capital goods. One of the great ironies of import substitution is that even though the strategy
is designed to save on imports, the vast majority of countries that followed this strategy eventually ran
into balance of payments problems because they could not generate the foreign exchange earnings
necessary to pay for the raw materials and capital goods they so desperately needed. By contrast,
exporters are better able to pay for a range of imported goods, including capital goods.

Second, exporters of manufactured products can specialize their production to a far greater degree than
is possible under import substitution. Developing country exporters can join in global production and
distribution systems, even for very sophisticated products, based on their comparative advantage in
labor-intensive operations. Malaysia provides a good example. Malaysia was able to build and develop
its electronics sector starting in the early 1970s, even though it had no particular skill in electronic
production at the outset. U.S. manufacturers moved the most labor-intensive parts of their production
process there. Even though Malaysia could not design or produce computer chips, it was able to
assemble and, later, test them, both labor-intensive operations. When Intel invested in Malaysia in
1972, the country was quickly brought into a world-class production system that drew on its
comparative advantage.

Third, manufactured exports allow firms to sell to a much larger market than under import substitution,
were market size is limited to the size of the domestic economy. A typical pattern under import
substitution is that an initial period of rapid growth is followed by much slower expansion. One reason
for this pattern is the simple limits of the domestic market. This is a particular concern for smaller
emerging markets.

Fourth, a strategy of manufactured exports fosters technological progress. Rapid growth in

manufacturing exports requires close links with multinational firms that provide intermediate inputs,
technology, capital goods, and export markets. These linkages provide a powerful means through
which firms can “learn by doing.” There is no realistic chance of this occurring if a country is cut off
from world markets through severe restrictions on trade and capital flows.

No country can generate all the sophisticated capital goods and technology needed for high-quality
investment projects by itself. Again, consider Malaysia. It now produces much more sophisticated
electronics products than it did in the early 1970s, because Malaysian workers and managers have
become more skilled at various aspects of the production chain and because Malaysian firms have
access to the latest technology available on world markets. As a result, wages for workers in the
manufacturing sector have grown rapidly over several decades.

From an early stage, East and Southeast Asian firms gained access to new technology by importing
most of their machinery and equipment abroad. For example, in 1970, capital goods imports accounted
for about 50 percent of total investment in East and South East Asia, compared to 17 percent in South
Asia, and about 35 percent in Latin America and sub-Saharan Africa. These imports of capital goods
were an important conduit for bringing new technologies into the region. The key to facilitating
imported capital goods and the accompanying technology was to ensure that they could be imported
quickly and easily without the extra costs incurred by tariff and quota protection.

Although several East Asian countries went through a moderate phase of import substitution for
consumer goods, they did not attempt to provide protection for domestic producers of capital goods.
Tariff and quota protection on imported capital goods was essentially zero in Korea, Taiwan, and Hong
Kong in the early 1960s and in Singapore by the late 1960s. The same is true for the non-Asian
countries that have been successful manufactured exporters, such as Mauritius and Tunisia -- there are
few restrictions on imported capital goods for exporters. These policies play at least two important
roles: they reduce production costs, and they facilitate the acquisition of new technologies. Even today
in Korea - which produces more capital-intensive exports than any other Asian country except Japan -
these exports are chemicals, ships, and automobiles, not machinery. For example, between 1991 and
1994, imported capital goods accounted for 73 percent of all equipment investment in Korea
(IMF,1994). This indicates the country’s continued heavy reliance on imported foreign technology in
the production process. The key feature of “openness” for these and other successful exporters, then,
has not been universally low tariffs or quotas on all imports, or even low variability of tariff rates.
Rather, the key has been low (usually zero) tariff and quota protection on capital goods and raw
materials used for exports (Radelet, Sachs, and Lee, 1997). Some of these countries also lowered tariff
barriers for consumer goods, and although this is important for consumer welfare, it is far less relevant
to success in manufactured exports.

Manufacturing export growth confers a range of other benefits on an economy. In particular, success in
exporting has important spillover and demonstration effects on other sectors of the economy. Exporters
compete with other firms for resources, especially labor. Indeed, wages and labor practices in
internationally competitive export firms often serve as a model for others to follow. Exporters are also
more likely to demand high standards of service from their suppliers and to exert pressure for improved
infrastructure provision, maintenance, and management. In addition, export markets allow labor and
capital to move rapidly from low-to high-productivity sectors without encountering diminishing returns
(Pack, 1989).

The critical element in manufactured exports is the linkages between domestic firms, their foreign
affiliates, and global markets. In the successful manufacturing exporters, these linkages take different
forms. Foreign direct investment (FDI) is the most obvious kind of link, and was the primary
connection for Hong Kong, Singapore, and several other successful exporters. However, FDI initially
played a limited role in Korea and Taiwan. In fact, both countries actively discouraged and even
prohibited some types of foreign investments until the 1980s. Southeast Asian countries, especially
Indonesia and Thailand, also limited foreign investment in manufacturing (although they were more
welcoming in minerals) until the 1980s or even the 1990s.For many firms, the link to foreign firms
comes through licensing agreements or as part of original equipment manufacturing (OEM)
arrangements. Many finished consumer goods exports are produced to precise specifications from
overseas buyers’ orders. In many cases, the buyers are either importer-wholesalers, or overseas
manufacturers subcontracting to local firms.

In order to establish relationships with reliable, stable suppliers, these overseas buyers often provide
instruction and advice to exporting firms on virtually all aspects of business (Kessing, 1983). The
successful firms learn quickly, and develop the flexibility and acumen to manufacture a variety of
constantly changing designs. Some firms gain specialized knowledge of particular markets, others
become skilled at quickly producing “knock-off” copies of samples and still others specialize in
producing higher-quality niche products. Successful exporting firms also often take the initiative to
travel to major developed country markets and visit actual and potential buyers, thus enriching their
knowledge of business practices in industrialized countries.In each of these ways, exporting firms
enhance their skills, adapt new technologies, and expand their production.

2.1.3 Policies to Support Manufactured Exports

The basic set of macroeconomic and trade related policies that are needed to support manufactured
exporters is well known, World Bank (1993), or Roemer and Radelet (1991)

What have generally been left out of these analyses are the institutional mechanisms that governments
have used to support exporters, which we discuss in detail in the next section? Since many of the basic
policies have been discussed in detail elsewhere, we only briefly summarize them here. They generally
include the following:

 Adjusting and managing the exchange rate to establish and then maintain the profitability of
export industries;

 Keeping domestic inflation (and therefore production costs) under control through prudent
fiscal and monetary policies;

 Reducing import tariffs and removing import quotas for exporters on capital and intermediate
goods;
  Building appropriate infrastructure to support exporters (and business more generally),

especially ports, roads, power, and telecommunication facilities;

 Strengthening bureaucratic systems, especially customs, in order to remove unnecessary

regulations, reduce waiting times, and moderate corruption;

 Developing appropriate education and training institutions to provide the workforce with basic
skills.

These basic policies are widely understood as being critical to export success, and are the workhorses
of many World Bank structural adjustment programs. They are designed to move economies more
towards market prices and to make markets work more efficiently. However, few developing countries
(including the most successful exporters) have been able to fully introduce all of these policies. Even
where a developing country government might wish to introduce these changes, full implementation of
some of them (e.g., improved infrastructure, bureaucratic systems, and education) would take many
years. Most of the successful manufactured exporters are far from being completely free and open
economies. Tariffs and quotas remain high in many of these countries, at least for consumer goods and
for imports used by non-exporting firms. Wages and interest rates are often distorted and
administratively controlled, and bank credit is often channeled to favored sectors and enterprises.
Infrastructure remains weak in many countries, and government bureaucracies can be a nightmare.

The basic challenge for developing countries is to somehow overcome these obstacles and create an
environment that will foster links between domestic and foreign firms in order to gain access to new
technologies and dynamic production processes. In purely theoretical terms, the ideal solution is to deal
with these problems head-on: remove tariffs and quotas, streamline bureaucracies, reduce red tape, and
try to eliminate corruption (Hill, 1994). For most countries, however, this is a daunting set of tasks. For
a variety of reasons, most countries -- even the successful ones -- either cannot or will not easily
remove all of these distortions directly. In some countries, this reluctance stems from apprehensions
about an export-led strategy; in others, it is driven by the desire to protect vested economic and political
interests.

2.2. Empirical literature review

Aggrawal (2007) in his study of the impact of multinational enterprises (MNE) on Indians export
performance used panel data from 1996-2000 over 916 firms classified into 30 industries. The study
tested two hypotheses:

1. MNE affiliates perform better than their local counterparts in export market in liberalized
market.
 2. MNE affiliates have greater comparative advantage in high- technology than in low and
medium technology industries.

The results from the first regression designed to show the determinants of inter-firm variations in
export performance showed that MNE affiliates perform better than their local counter parts hence
validating the first hypothesis. The results also suggest that firm size, import of raw materials and
capital goods and Research and Development (R&D) to have positive and significant impact on export
performance, while workers skill and purchase technology were found to have a negative and
insignificant impact.

The results from the second regression intended to analyze industry group. Wise determinants of export
performance reject the second hypothesis made in the study. The variables showing MNE impact, i.e.
foreign equity share and emerged insignificant for the high- technology industry group, but being
weakly significant for medium- technology industries. In low –technology industries the impact of
foreign equity was found to be positive and significant similar to the first result in the industry group
wise analysis impact of capital goods and raw materials turned significant to all firms, though the latter
turned insignificant in low technology industries.

R&D variable were found to be positive and significant in medium-high technology industries, but
insignificant in others. Though skill was found to be insignificant in the sample for all firms, it was
found to have a positive and significant impact for firms in high- technology industry group.

On a study done on analyzing the impacts of trade liberalization on sub-Saharan African export
performance Babatundee (2009) used panel data set from 1980-2005. The results from the model are
given in the next table.

Table 2.1. Fixed effects and random effects regression on variables which affects export
Performance.
Variable Fixed Effects Regression Random Effects Regression

Country productive capacity Positive but insignificant Positive but insignificant

REER overvaluation Positive & significant Positive & significant

Real Effective Exchange Negative & insignificant Negative & significant

Rate(REER)

Tariff Negative & insignificant Negative & insignificant

Import of raw materials Positive & statistically Positive & statistically

Source: Babatunde (2009)

Babatunede (2009) summarized the results; the panel evidence supports the view that the real effective
exchange rate is an important factor affecting export performance in SSA (sub-Saharan Africa). Trade
liberalization can be said to affect export performance indirectly through the increased access to
imported raw materials.

In a study designed to analyze the impact of independent exchange rate of policies of the WAMZ
(West African Monetary Zone) participating counties on export supply, Balogun(2007) used a panel
data set from 1990:1 to 2004:4 for 5 members of WAMZ.The model used nominal export as dependent
variable while nominal exchange rate, real domestic income, real foreign income and domestic and for-
eign price levels as explanatory variables.
The results from the total export function of WAMZ countries shows that export performance is posi-
tively influenced by domestic output, export prices and exchange rates while foreign income is found to
affect export performances negatively. Though nominal exchange rate was found to be positive and
significant, it was found to be inelastic (coefficient =0.15) indicting that export performances of the re-
gion is limitedly responsive to exchange rate changes.

The study also made individual regressions for WAMZ member countries in order to see the validity of
the aggregate results on individual basis. Similar to the aggregate pooled results, for Nigeria and Gam-
bia, exchange rates was found to have a positive and significant impact on Export performances, but it
was also found to be elastic in the case of Gambia. Export performance of Gambia was found to be
negatively influenced by income (domestic and foreign), while it was positive for Nigeria.
Contrary to the panel result, export performance of Ghana and Guinea was found to be unaffected by
exchange rate changes. Ghana’s export performances were found to be positively influenced by domes-
tic output while Guinea’s export performance was found to be positively influenced by export price.
Results from Sierra Leone regression were contrary to the theory, export price and exchange rate deval-
uations were found to have a negative and significant impact while import prices a positive and signifi-
cant impact.

Alan Harding, Mans Soderblom and Francis Teal [2004]

Recent reforms in most African economies of their trading and exchange rate regimes have eliminated
much of the protection which previously limited competition. Despite these reforms, in the authors’
views, African manufacturing firms remained unsuccessful, particularly in international export mar-
kets. In their study, the roles of learning, competition and market imperfections in determining three as-
pects of firm performance, namely firm exit, firm growth and productivity growth. They used a pooled
panel data set of firms in Ghana, Kenya and Tanzania that spans a period of five years. They found that
the main determinant of exit was firm size, with small firms having much higher exit rates than large
ones. They concluded that both Ghana and Tanzania have had introduced substantial reforms since the
1980s. Both had undertaken a number of policy and regulatory changes to liberalize a previously highly
protected and public sector dominated economy. Measures which had particularly impacted upon the
industrial sector included the introduction of a market-based foreign exchange system, liberalization of
trade policy, privatization of state-owned enterprises and fiscal policy reform.
In general, however, they found a negative and highly significant interaction term between size and
productivity, indicating that selection on efficiency occurs among the relatively large firms. They also
found no evidence that larger firms grow faster and neither size nor firm age affect underlying effi-
ciency. The most significant and potentially interesting relationship for them was that from competitive
pressure to productivity growth. Given the objectives of the reform programmes implemented in all
three countries was to stimulate higher efficiency levels and the eventual achievement of international
competitiveness among African manufacturing firms, the finding that competitive pressure was posi-
tively associated with productivity growth showed that one aspect of the reform programme had been
successful, according to these researchers.

Edwards and Alves (2005) in their analysis of determinants of manufacturing export supply in South
Africa used a panel data set of 28 manufacturing sectors using import substitution model. The
researchers used dynamic fixed effect (DFE) and generalized method of moments (GMM). The results
from the export demand equation estimated to check whether the small country assumption holds for
South Africa shows that South Africa is a price taker. The results from the equation estimated on export
supply determinants reveal that south Africa total manufacturing ring export volume is positively and
significantly influenced by relative price (i.e real effective exchange rate), real foreign income, skilled
to unskilled labour ratio import penetration and rail capacity. On the other hand out put deviation from
the trend was found to have a negative significant impact, supporting the vent for surplus hypothesis
for South Africa. Unit labour costs and output trend were found to have insignificant influence on
manufacturing export performance.

Mulualem (2004) on his study of determinants of manufacturing performance in Ethiopia used

Ordinary Least Squares (OLS) estimation method using annual data from 1970-2004). The results from
the model reveal that Ethiopian manufacturing exports are positively and significantly influenced by
investment to GDP ratio, total factor productivity and foreign income while real effective exchange rate
was found to have insignificant influence on exports.

2.2.1 Manufacturing Competitiveness, FDI and Investment Climate

Probing further into the more sectoral aspects of manufacturing sector competitiveness in Ethiopia,
recent studies suggest four major findings. First, Ethiopia’s manufactured products are not competitive
enough even vis-à-vis products from countries at the same level of development and those from the
same region. Second, major reforms in reducing the rates and number of bands in tariff structures have
been taken, but the effective rates of protection in Ethiopia are still high. Third, the evidence also
suggests that the high protection rates in Ethiopia seem to be associated with the high transport costs
and the overall adverse investment climate in Ethiopia, not just relative to global potential competitors
but also compared with several other African countries. Fourth, Ethiopia lags behind most African
countries in terms of foreign direct investment (FDI); however, compared with other regions, Africa
attracted only a miniscule share of global FDI. The low FDI in Ethiopia, even by African standards, is
inextricably linked to its poor investment climate, as suggested by the international evidence.

Effective Rates of Protection: According to a COMESA Free Trade Area study, subsequent
tariff reforms since 1993 have lowered the maximum tariff rate down to 40 percent, and the number of
bands to 6. Prior to the first tariff reform of 1993, the maximum customs duty rate was 230 percent, and
the total number of tariff bands was 25. Despite such improvements, however, the “effective rates of
protection” are still quite larger than the “nominal rates of protection” for manufacturing (table 1.3),
which suggests that an evaluation of the protective structure based only on nominal rate understates the
extent of protection accorded many activities. The evidence also suggests that there is a clear incentive
bias toward protecting manufacturing and against agriculture and mining.

Table 2.2 Nominal and Effective Rates of Protection: 1995 and 2001
Input-Output I-O Sector Nominal tariff rate %(ERP) Effective rate of protection

1995 2001 1995 2001

(A) Agriculture, forestry and 29.0 9.3 36.6 8.5

fishing

(B) Mining 5.1 6.7 0.8 -2.6

(C) Manufacturing 22.7 14.9 39.1 26.6

Weighted average 22.2 14.7 36.2 26.0

Simple average 27.5 15.5 48.7 26.3

CV 67.1 71.2 110.0 114.9

Sources: World Bank estimates

Notes: The ERP is estimated using the formula,

ERPj = [t j -∑ (a ij *ti ))/ (1- ∑aij )]

where, tj and ti are the nominal (scheduled) tariff rates on given industry and input-supply industry
respectively, and a ij is the input coefficient indicating the share of industry i’s production used as
inputs in industry j’s output.

Nominal tariff rates are from official Ethiopian sources. Input-output coefficients are from the Sub-
Saharan Africa regional input-output table (based on data for the early 1990) in Global Trade Analysis
Project (GTAP) database. Adapted from “Ethiopia: Trade and Transformation Challenges, Diagnostic
Trade Integration Study.” 2003.
Ethiopia’s Export Competitiveness vis-à-vis other COMESA member countries.
The COMESA study mentioned above demonstrates that Ethiopian manufactures are not competitive
even by Sub-Saharan Africa standards. The analysis considered 71 line items from various sectors to
investigate their price Competitiveness vis-à-vis other COMESA member countries. Accordingly, the
study found that on an ex- factory cost versus cost- in- freight (CIF) price comparison basis, only 25
percent of products were found to be competitive, whereas 75 percent were found to be uncompetitive.
Similarly, on an ex- factory price versus import wholesale price comparison basis, 49 percent were
found competitive and 48 percent were uncompetitive.

According to this study, major factors for the uncompetitiveness of Ethiopian manufacturing sector
include: capacity underutilization, under invoicing of imports, low efficiency as a result of obsolete
technology, contraband/illicit trade that supplies the market at lower prices, dependency on imported
raw materials and intermediate goods, and lack of standardization and control on imported goods.

Low competitiveness of Ethiopian producers and larger potential benefits from integrating the country
into a multilateral trade system has also been cited by other studies. The Diagnostic Trade Integration
Study (DTIS) also suggested a program to enhance competitiveness to enable Ethiopia to derive larger
benefits from international trade. The report also mentions that Ethiopia is not currently competitive in
terms of transport costs compared with its neighbors (even though the country has managed to
substantially reduce these costs over the years). Recent estimates suggest that on average external
transport costs amount to over 11 percent of trade value, which is among the highest in the world.
Clearly, any comparative advantage Ethiopia has due to its low wages are easily offset by the high
transport costs of the products, especially when the domestic value added is low as is typical in export-
led labor- intensive manufacturing. Exports, therefore, would have to have a high domestic value
added and linkages to be competitive (for example, local cotton for garments production and local skins
for shoes exports). However, with the fall of a command economy, rural-urban linkages have collapsed,
and given the short episode of post-socialist economic reforms, market linkages have not yet
reemerged. Figure 1.4 below shows Ethiopia’s average nominal transport rate for merchandise goods
(for 1999) vis-à-vis other countries. The firms surveyed have problems with competing both in
domestic and export markets on price/cost competitiveness, quality of products, and timeliness/costs of
product delivery. Non exporting firms specifically mentioned the following issues as among the top
three reasons for not exporting:

UNIT THREE
 3. Data and Methodology

3.1. Data Type and Source

It is a descriptive research and secondary data were used. The study employed the secondary time
series data of manufacturing export of Ethiopia over the period of 1981-2008. The data used were
collected from secondary source, extracted from publications of Ethiopian export promotion agency
(EEPA), trade and industry minister, Ethiopian custom authority, national Bank of Ethiopia (NBE),
book, journals, magnizes and other relevant source like websites.

3.2. Methods of Data Analysis

The qualitative method of data analysis was used to analysis the theoretical part while, the quantitative
methods is to analyze time series secondary data.The numerical data on the other hand is raw data and
need to be processed to change them into the form that is suitable to fit in econometric model. This
processing of data includes first changing the nominal variables in to real variables so as to consider the
effects of explanatory variables on the export of manufacturing goods. Following these explanatory
variables were tested to fulfill the assumption of ordinary least square (OLS) method of econometrics
analysis.

3.3. Model specification

Imperfect substitute’s model used by many researchers to analyze export determinants will be used in
this study. According to the model export function is estimated by simultaneously estimating export
demand and supply equations.

In the study export demand and supply equations will be simultaneously estimated assuming Ethiopia
is price taker. Export demand is positively influenced by nominal exchange rate of the export, real
income and foreign price level while it is negatively influenced by export price. Thus export demand
of equations is given below.

Xd = bo - b1p + b2e + b3pf + b4yf-------- ----1(demand equation)

Where xd- export demand, px is domestic price of export, e is nominal exchange rate, p f is foreign price
level, yf is real foreign income and b’s are coefficients.

Export supply on the other hand positively influenced by domestic export prices and negatively by
domestic price level. it can be also affected by other variables i.e. production capacity, trade
liberalization etc. Thus export supply of equation is depicted below.

Xs = a0+a1px-a2 pd+a3Z ……………..2 (supply equation)

Where xs is export supply, px is domestic price of exports, pd is domestic price levels, Z is a set of
other variables and a’s are coefficients

Taking market equilibrium X d = xs and taking the price taker assumption finally results in to the
following model.

Xm = βo + β1 gcf + β2 rer +β3 agdpf +β4tsh +ei

Where:

Xm- is real export of manufacturing items

Gcf- is real gross capital formation

rer- is real exchange rate

Agdpf- is average gross domestic product of Ethiopia’s major manufactured export partners

Tshare- is trade share of GDP in the country, used as proxy for export liberalization.

ei- is other variables which can affect export of manufactured(error term) and β’s are coefficient of
independents
 3.4 Hypothesis to be tested
From economic point of view, the Gross capital formation which was used as a proxy for pro-
duction capacity of the country would affect the manufacturing export positively. This is because
the increase in the production capacity will encourage the export of manufacturing. The average
gross domestic product of the Ethiopian major manufacturing export importer partners will affect
the manufacturing export positively due to the increase in their GDP will increase the import
which in turn increases the export of manufacturing. Real exchange rate between Ethiopia and
other foreign countries especially the importer of manufacturing will affect the dependent vari-
able positively. Trade share of total gross domestic product which is used as the proxy for export
liberalization will also affect the manufacturing export positively. Generally the expected sign
between dependent and explanatory variable can be given in 3.1 table below.
Table 3.1 The expected sign of variables on the dependent variable (manufacturing Exports)

Variables in Abbreviation Correct name of variables Their Expected sign

Gcf Gross capital formation Positively

Average GDP of importer Positively

AGDP
Real exchange rate Positively
RER
Tshare Trade share of GDP Negatively
 UNIT FOUR
Empirical results and discussions

This chapter analyses the Determinants of Manufacturing Export in Ethiopia, using the annual
data from 1981 to 2008.
4.1. Test for Unit Roots
It is argued that most macroeconomic time series variables are non-stationary in the sense that
their mean and variance are function of time. The applications of unit root testes have proved this
fact. On the other hand, the standard classical estimation models are based on the assumption
that the mean and variance of time series data are constant and independent of time. Therefore,
this assumption is violated as far as the time series are stationary. Because of this, the classical
estimation methods to estimate the relationship between variables with stationary data give mis-
leading inference which is inferred to as ‘Spurious Regression Problem’. Therefore, estimating
an economic model using time series data should start by examining the stationary of the vari-
ables included in the model by assessing their order of integration, [Hendry, D., 1986].
The problem with non stationary or trended data is that the standard OLS regression procedures
can easily lead to incorrect conclusion (spurious regression).it can beshown that in this case the
norm is to get very high value of R2 and very high value of t-ratio while the variable used in the
analysis have no interrelationship (Asteriou and Hall,2007).
In order to avoid the problem of spurious regression and in order to induce stationary,we need to
transform the raw data through a process of differencing (Asteriou and Hall,2007). If the series
become stationary after differencing once, the series is called integrated of order one I(1). If the
series become stationary after differencing two wise, the series is said to be integrated of order
two, I(2) and so on. The series is integrated of order zero if it is stationary without any
differencing it (Gujarati, 2003)

Empirical studies usually use the Augmented Dickey Fuller (ADF) and Phillips Person (PP) test
to check for stationary in data series. For this study, it employed ADF test and applied the test
top each variable that will be used in the analysis. ADF test can be applied on the variables in
level to check for stationary or unit roots. A desirable feature of ADF test is that it allows auto
correction and hetroskedasticity in the error term, thus ADF compensate for the misspecification
of dynamic structure of time series data (Asteriou and Hall,2007)

The output of ADF test is reported in table below

Table 4.1 stationary result

variables Test 1%critical 5%critical value 10%critical value p-value for

Statistic value Z(t)
-4.247 -4.362 -3.592 -3.235

manexpo 0.0038

-13.234 -4.362 -3.592 -3.235

agdpt 0.0000
Z(t)
-5.944 -4.362 -3.592 -3.235
gcfort
0.0000
rert -9.004 -4.362 -3.592 -3.235 0.0000

-7.694 -4.362 -3.592 -3.235 0.0000

tshare

If the estimated ADF statistic is larger in absolute term than its ADF critical value the null hy-
pothesis is rejected suggesting that the series are stationary (Asterious and Hall, 2007). The re-
sult indicated that all variables is greater than (in absolute term) than the critical value. This
means that these variable need not difference to render its stationary (Asterious and Hall, 2007)
Table 4.1 presents the results of Augmented Dickey-Fuller (ADF) tests for a unit root. The re-
sults indicate that all data series appear to have one unit root after a deterministic trend, together
with augmentation of Zero lag lengths.
That is, they have an integrated order of zero. Thus, it has been proved that these data are station-
ary at a critical values of 1,5 and 10 percents. For example the estimated ADF statistic of manu-
facturing export (manexpo) is -4.247 which is greater (in absolute) than critical -4.362,
-3.592, -3.235 of percents 1%, 5% and 10% respectively. The estimated ADF statistic of gross
capital formation (gcfor) is -5.944 which is greater (In absolute) than critical values
-4.362, -3.592, -3.235 of 1, 5 and 10 percents respectively.
4.2 Estimation and interpretation of Econometric Results
In any Economic analysis, the first step is to specify the relationship between variables. Once
this is so, the estimation and interpretation of the result follows soon. To this regard, the
manufacturing export in the long run is presented below

Manexpo =7417517 + 311404.2gdp +.108386gcfor + 2.09e+07rer – 7536399tshare +ei

t (o.40) t(1.67) t(2.96) t(0.68) t(-1.76)

Number of obs = 28
F( 4, 23) = 6.70
Prob > F = 0.0010
R-squared = 0.5380
Adj R-squared = 0.4576
Root MSE = 7.6e+07
DW (6, 28) = 1.708769

The figure in parenthesis as shown above is the estimated t-values. One advantage of reporting
the regression results in the preceding format is that it could be possible to see at once whether
each estimate coefficient is individually statistically significant, that is significantly different
from zero. As it can be seen from the regression result, all the coefficient of the variables has
attained their predicted signs.

The R2(multiple coefficient of determination) values of 0.53 means that about 53 percent of the
variation in the manufacturing export was explained by the explanatory variables.
Autocorrelation: The Durbin-Watson d-statistics shows us that there is no problem of
autocorrelation because the Calculated d-value is sufficiently close to 2, in addition Breusch-
Godfrey LM test for autocorrelation also indicate that the calculated value is less than the critical
shows no serial correlation. So, we can accept the null hypothesis which says there is no
Autocorrelation. So, there is no interdependence among the error terms of our model.

The DW( Durbin Wastson stat) on the other hand, notifies that the closer the DW value is to two,
the more the evidence is infavour of no auto correction, here, the DW test was found to be
1.789553 which show that there exist no auto correction problem.

Durbin-Watson d-statistic (5, 28) = 1.789553

Breusch-Godfrey LM test for autocorrelation
---------------------------------------------------------------------------
lags (p) | chi2 df Prob > chi2
-------------+-------------------------------------------------------------
1 | 0.122 1 0.7271
---------------------------------------------------------------------------
H0: no serial correlation

Breusch-Pagan / Cook-Weisberg Test for Heteroskedasticity.

The Breusch-Pagan test is designed to detect any linear form of heteroscedasticity. Breusch-
Pagan / Cook-Weisberg test the null hypothesis that the error variances are all equal versus the
alternative that the error variances are a multiplicative function of one or more variables. For
example, in the default form of the hettest command shown below, the alternative hypothesis
states that the error variances increase (or decrease) as the predicted values of Y increase, e.g. the
bigger the predicted value of Y, the bigger the error variance is. A large chi-square would
indicate that heteroscedasticity was present.

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance

Variables: fitted values of D.ei

chi2(1) = 0.03

Prob > chi2 = 0.8582. In this example, the chi-square value was small, indicating
heteroskedasticity was probably not a problem (or at least that if it was a problem, it wasn’t a
multiplicative function of the t predicted values).

Co-integration test

Economically, speaking two variables will be co-integrated if they have a long term or
equilibrium relationship between them. Economic theory is often expressed in equilibrium terms
such as the velocity of money circulation and the Modigliani’s permanent income hypothesis just
to say a few (Ibid, p.822).

In short, the valuable contribution of the concepts of unit root and co-integration is to force us to
find out if regression residual are stationary. As Granger notes, “a test for co-integration can be
thought as a pre test to avoid spurious regression” situations. A number of methods have been
proposed in the literature to test co-integration. Here, the DF or ADF unit root test on the
residuals estimated from the co-integration is used. Now, the regression equation is estimated,
the residuals are obtained and then the DF or ADF test are performed, in this particular context,
the DF and ADF tests reformed to be Engle-granger(EG) and Augmented Engle Granger(AEG)
tests,(Ibid,p.823)

The regression result of the short run model reported that the variables are co-integrated since the
residual obtained was found to be stationary at 1%, 5% and 10% level of specification. i.e. the
estimated ADF statistics of residual is -5.642 which is greater( in absolute term) than critical at
1%, 5% and 10% of values-4.362,-3.592 and -3.235 respectively.
 Therefore, provided a consistent estimation of the long run relationship. However, the result
estimated model indicated that, some variables are found to be insignificant.

Error correction Method (ECM)

The set of co-integration indicated that the variable under the consideration has a long run
relationship. Since every co-integrated non-stationary variable do have (ECM), the difference of
dependent variable regressed on the first difference of the explanatory variables and the first lag
of residual obtained from the level of regression. The pattern of the lagged residual( residual-1)
shows that the manufacturing export gets out of if long run equilibrium in the short run and the
co-efficient indicate how fast the manufacturing export (manexpo) resulting trom the estimated
residual (ECM)

The short run equation:-

Dependent variables: D(manexp) =β0 + β1 D(gdp) + β 2D(gcfor) +β3 D(rer)+ β4 D(tshare)

Method: least square

Table 4.2 Error correction result

Variable Coefficient Standard error . T- T-prob

test

_cons -5.45e+07 4.70e+07 -1.16 0.259

gdptt1 214930.2 193968.8 1.11 0.280

 gcfortt1 0.1071216 0.0358337 2.99 0.007

rertt1 843349.4 3.31e+07 0.03 0.980

tratt1 -5853272 4342174 -1.35 0.191

residual-1 -0.520098 1.761458 1.43 0.167

In short run equation all explanatory variables have no impact on manufacturing export, except
the gross capital formation capacity of the country since they are insignificant as shown on the
table above. Finally the error correction term (residual-1) showed the expected negative sign
implying that short run disequilibrium adjusts to its long run equilibrium and it is found to be
significantly different from zero at 1, 5 and 10% level. The coefficient -0.52 entails that the short
run disequilibrium adjusts quickly to its long run equilibrium by removing about 52% of the
disequilibrium.

UNIT FIVE
5. Conclusion and Recommendation
5.1Conclusion
This paper identifies some of the determinants of export, in case of manufacturing export in
Ethiopia for the annual year 1981 to 2008. It is visible that export of manufacturing items plays
important role to have sustainable economic growth both for developed and developing
countries. Ethiopia being one of the developing countries needs a high amount of investment
especially in manufacturing sector to achieve economic growth.

It is also clear that the country is endowed with wide ranging agro-ecological zones and
diversified resources nearly all types of cereals, Tiber, crops, oil seeds, coffee, tea, fruits and
vegetables are grown. It has also large live stock resource, fishery and forestry. Although the
countries resource abundant in amount, their export concentrated largely on agricultural. Thus
mainly concerned on export of primary product, i.e. agricultural has its own effect on economic
growth of the countries. To expand the area of export other than primary products was the most
important factor which could increase the economic growth. But there are many variables that
determine the manufacturing export in our country. Gross capital formation which used as the
proxy for productive capacity of the country, average GDP of the foreign country who imports
manufacturing good from Ethiopia, real exchange and trade share of GDP of the country, which
used as the proxy for trade liberalization are some variables which can determine the export of
manufacturing in Ethiopia.

In order to raise the level of investment in manufacturing export, there should be sustainable
capital formation. Sustainable capital formation can be achieved by introducing those factors,
which play a crucial role in the process of capital formation, such as institutions that mobilized
savings so as to channel them into investment. It should be noted that the output of agricultural
product and manufactured can summer goods trend to rise with an increase in the rate of capital
formation, in addition leads to a fuller utilization of available resources in this respect, capital
formation plays a key role in manufacturing export, which in turn in the process of economic
development. The impact of foreign income was also other determinant of manufacturing export.
The increase in foreign income (Ethiopian manufacturing imports nation’s income) leads the
nations to import the manufacturing in large amount. This increase the foreign earning in
manufacturing sector which in turn would increase the manufacturing export in the country.
Real exchange rate, a representative for relative price and trade share of GDP are also other
determinants of the manufacturing export in our country. Generally the paper analysis the
determinant of manufacturing export during the period 1981 to 2008 in Ethiopia.
5.2 Policy Recommendation
The study comes up with the following recommendation to address the problem and constructs
reframe

 Government must give incentives on the provision of loan, imported inputs, acquired
technologies research and development, subsidies and reduction of taxes tariffs.

 Encouraging the participation of private sector, as far as the economic policy of the
government is concerned. The private sector was expected to platy a leading role in the
management of the economy. In a nutshell private sector incentive would be the basis of
industrial development in the future. There is the need for creating a vibrant private sector
that can be shoulder the cadencies of industrial development.

 Effective industrial policy, in the process of having effective policy government plays a
key role. The industrial policy must focus on encouraging domestic investors and foreign
direct investment (FDI) need to be encouraged and directed.

 Public investment on road, health, education, power supply and other sectors must
increase in order to develop the capacity of economy to absorb the product of
manufacturing sector.

 Encouraging agricultural productivity, since the Ethiopian economy is an agrarian in

nature, the policy forwarded in terms of enhancing agriculture should also have to be
formulated to expand the manufacturing sector providing inputs such as machinery,
fertilizer, extensions and training programs leads to efficient forms of production in
agriculture. As a result, huge quantity of output emanate from the agricultural sector
enhance the production of output large and medium manufacturing industries. This is
because, it is impossible for agriculture sector to provide gainful employment and
sufficient income for the majority of rural population.

 Encouraging capital good based industries, in Ethiopia, both large and medium scale
industries concentrated on the production of consumer goods. Government should
formulate policy to encourage investment in capital goods industries. It was impossible for
one country to attain high rate of industrialization and advanced economy. The
 institutional capability must be developed for monitoring and coordinating the industry
linkages with other sectors.

. tsset year, yearly

time variable: year, 1981 to 2008

delta: 1 year

reg manuexpo gdpaverage gcfor rer

source SS df MS

Model 1.5634e+17 4 3.9086e+16

Residual 1.3426e+17 23 5.8376e+15 Number of obs = 28

F( 4, 23) = 6.70

Prob > F = 0.0010

Total 2.9061e+17 27 1.0763e+16
R-squared = 0.5380

Adj R-squared = 0.4576

Root MSE = 7.6e+07

manuexpo Coef. Std. Err. t P>t [95% Conf. Interval]

 gdptt1 311404.2 185963.3 1.67 0.108 -73290.27 696098.7

gcfortt1 .108386 .036629 2.96 0.007 .0326131 . 184159

r tratt1 2.09e+07 3.07e+07 0.68 0.503 -4.26e+07 8.44e+07

ertt1 -7536399 4273832 -1.76 0.091 -1.64e+07 1304696

_cons 7417517 1.87e+07 0.40 0.696 -3.14e+07 4.62e+07

. dfuller manExport, trend lags(0)

Dickey-Fuller test for unit root Number of obs = 27

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

------------------------------------------------------------------------------

Z(t) -4.247 -4.362 -3.592 -3.235

------------------------------------------------------------------------------

MacKinnon approximate p-value for Z(t) = 0.0038

. dfuller gdptt1, trend lags(0)

Dickey-Fuller test for unit root Number of obs = 27

 ---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

------------------------------------------------------------------------------

Z(t) -13.234 -4.362 -3.592 -3.235

------------------------------------------------------------------------------

MacKinnon approximate p-value for Z(t) = 0.0000

. dfuller gcfortt1, trend lags(0)

Dickey-Fuller test for unit root Number of obs = 27

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

------------------------------------------------------------------------------

Z(t) -5.944 -4.362 -3.592 -3.235

------------------------------------------------------------------------------

MacKinnon approximate p-value for Z(t) = 0.0000

. dfuller rertt1, trend lags(0)

Dickey-Fuller test for unit root Number of obs = 27

 ---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

------------------------------------------------------------------------------

Z(t) -9.004 -4.362 -3.592 -3.235

------------------------------------------------------------------------------

MacKinnon approximate p-value for Z(t) = 0.0000

. dfuller tratt1, trend lags(0)

Dickey-Fuller test for unit root Number of obs = 27

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

------------------------------------------------------------------------------

Z(t) -7.694 -4.362 -3.592 -3.235

------------------------------------------------------------------------------

MacKinnon approximate p-value for Z(t) = 0.0000

. predict ei, stdp

. reg manutt1 gdptt1 gcfortt1 rertt1 tratt1 ei

 Source | SS df MS Number of obs = 28

-------------+------------------------------ F( 5, 22) = 6.01

Model | 1.6777e+17 5 3.3554e+16 Prob > F = 0.0012

Residual | 1.2284e+17 22 5.5834e+15 R-squared = 0.5773

-------------+------------------------------ Adj R-squared = 0.4812

Total | 2.9061e+17 27 1.0763e+16 Root MSE = 7.5e+07

------------------------------------------------------------------------------

manutt1 | Coef. Std. Err. t P>|t| [95% Conf. Interval]

-------------+----------------------------------------------------------------

gdptt1 | 214930.2 193968.8 1.11 0.280 -187336.4 617196.8

gcfortt1 | .1071216 .0358337 2.99 0.007 .032807 .1814363

rertt1 | 843349.4 3.31e+07 0.03 0.980 -6.79e+07 6.95e+07

tratt1 | -5853272 4342174 -1.35 0.191 -1.49e+07 3151845

ei | -0 .520098 1.761458 1.43 0.167 -1.132942 6.173138

_cons | -5.45e+07 4.70e+07 -1.16 0.259 -1.52e+08 4.30e+07

------------------------------------------------------------------------------

. dfuller ei, trend lags(0)

Dickey-Fuller test for unit root Number of obs = 27

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

------------------------------------------------------------------------------
Z(t) -5.642 -4.362 -3.592 -3.235

------------------------------------------------------------------------------

MacKinnon approximate p-value for Z(t) = 0.0000

. estat dwatson

Durbin-Watson d-statistic( 5, 28) = 1.789553

. estat bgodfrey

Breusch-Godfrey LM test for autocorrelation

---------------------------------------------------------------------------

lags(p) | chi2 df Prob > chi2

-------------+-------------------------------------------------------------

1 | 0.122 1 0.7271

---------------------------------------------------------------------------

H0: no serial correlation

. estat hettest

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance

Variables: fitted values of manutt1

chi2(1) = 0.46

Prob > chi2 = 0.4994

References
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Kumar, N. 1987. “Performance of Foreign and Domestic Firms in Export Processing Zones.”

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Economies, 25-1 (March), pp. 30-55.

Warr, Peter G. 1989. “Export Processing Zones: The Economics of Enclave Manufacturing.”

World Bank Research Observer, 4-1 (January), pp. 65-88.

Wooldridge, Jeffrey M.: Introductory Econometrics, South-Western College
Publishing, 2000.

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New York, 1999.

Katz, David A.: Econometric Theory and Applications, Prentice Hall, Englewood
Cliffs, N.J., 1982.
Klein, Lawrence R.: An Introduction to Econometrics, Prentice Hall, Englewood
Cliffs, N.J., 1962.
Durbin, J. and Watson, G. (1950), Testing for Serial Correlation in Least Squares Regression – I,
Biometrika, 37, 409–428.

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G. S. Maddala, C. R. Rao and H. D. Vinod, eds., Handbook of Statistics, Volume XI, Elsevier
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Adama Science and Technology University

School of Business and Economics

Department of Economics
Research Paper on the Challenge of Food Security and
the Role of Government in Ethiopia

A Senior Essay Submitted to the Department of Eco-

nomics in Partial fulfillment of the requirements for the
degree of Bachelor of Arts (BA) in Economics

Prepared by: ARARSO JOHAR I.D: 02024321

ADIVSOR: DR.S.V. RAO

JUNE, 2012

ADAMA ,ETHIOPIA

Acknowledgements
First, it is no exaggeration to state that without insisting the Almighty God, ALLAH, would not
have been in a position to finalize successfully accomplished of this Research paper. So, glory to
him. Without him noting can possible for me in doing this paper.
Second, my Appreciation and gratitude are extended to all who have assisted me during the
course and in doing this paper. My special thanks go to my advisor DR.S.V. RAO for his unre-
served help and intensive advice in shaping the organization and content of the paper.
Thirdly, I owe more than I can say to my parents and all my relatives for their unreserved help,
care, and encouragement throughout my school life.
Finally, my heartfelt thanks go to all my friends for their material and moral support.

LIST OF TABLES
Table 2.1 indicators of household’s food insecurity ………………………………………………
Table 4.1. Traditional Agro climatic Zones and their physical characteristics……………………
Table 4.2 land use pattern of Ethiopia.
Table 4.3 Population estimate, Food requirement, and cultivated area in hectare and Food
production in tone
…………………………………………………………………………………………………..
Table 4.4. Crop area and production (Smallholder farms, Maher season), 2004/05-
2007/08……………
Table 4.5 total production of 5 major crops from cereals
categories……………………………………..
Table 4.6 total production, area cultivated and yields of cereals, pulses, and oil
seeds…………………..
Table 4.7 Describe the total smallholders livestock
production………………………………………….
Table 4.8 Ethiopia statistics for livestock numbers, meat and milk production and livestock
exports and milk imports for the period 1996-
2005………………………………………………………………..
Table4 .9 Estimated crop production, food aid requirements and needy population in Ethiopia,
1995-
2000………………………………………………………………………………………………………….
.

ABBREVIATIONS AND ACRONYMS

MEDAC: Ministry of Economic Development and Cooperation
EEA: Ethiopian Economics Association.
DPPC: Disaster Prevention and Preparedness Commission
EGS: Employment Generation Scheme
FAO: Food and Agriculture Organization
FDRE: Federal Democratic Republic of Ethiopia
FNU: Food and Nutrition Unit
GDP: Gross Domestic Product
gm :gram
ha :Hectare
HFS: Household Food Security
IFAD: International Fund for Agricultural Development
kcal :Kilocalorie
kg :Kilogram
m.a.s.l: Meter above sea level
mm: millimeter
MOFED: Ministry of Finance and Economic Development
MOPED: Ministry of Planning and Economic Development
Mt: Metric ton
TLU: Tropical Livestock Unit
UNDP: United Nations Development Program
USAID: United States Aid for International Development

III

Abstract

Ethiopia has been experiencing food shortage being the country is highly dependent on
agriculture that involve both crop production and livestock rearing that mainly characterize by
traditional methods of farming. Of the poor performance the Ethiopian agriculture consequently
is widespread food insecurity that came across of drought and resources degradation. This paper
conducted to identify the challenge against food security and the role of government in the
Ethiopia. In addition the studies incorporate secondary data in case for analysis, finding and
presentation of the paper. The data are collected from MOA, EEA, CSA AND MOFED during
collection of data needed discuss with department expert is applied. In case of data analysis,
summarize and percentage calculation were done. Finally conclusions on the finding are
identified and recommendation on the challenges of finding and analysis are forwarded.

IV

TABLEE OF CONTENTS PAGE

CHAPTER ONE …......................................................................................
1. Introduction...........................................................................................................
1.1 background of study …...................................................................................
1.2 Statement of the problem................................................................................
1.3 objectives of the study..................................................................................................
1.3.1 General objective …......................................................................................
1.3.2 Specific objective............................................................................................
1.4 significance of the study …...............................................................................
1.5 scopes of the study and limitations of the study………………………
CHAPTER TWO..........................................................................
2. Literature review …................................................................
2.1 theoretical literature review …...........................................
2.1.1 Definition and term of food security …..........................................
2.1.1.1 Sufficiency: what is “enough”? ...................................................
2.1.1.2 Access and entitlements……………………………………………………
2.1.1.3 Security…………………………………………………………………….
2.1.1.4 Time……………………………………………………………………….
2.1.2 Measures of food security …...............................................................................
2.1.3 Types of food insecurity............................................................................................
2.1.4 Indicator of food insecurity......................................................................................
2.1.5 Source of food security in Ethiopia …............................................................
2.1.6 Food Security Situation in the World………………………………….
2.1.7 Cause of food insecurity in Ethiopia………………………………………………………
2.2 Empirical literature review………………………………………………….
CHAPTER THREE …………………………………………………………………..
3. DATA AND METHODOLOGY OF STUDY…………………………………
3.1 General Overview methodology ………………………………………………………..
3.2 Data Type and Source of Data……………………………………………..
3.3 Methods of data collection………………………………………………………………
3.4 Methods of data analysis………………………………………………………………….
CHAPTER FOUR……………………………………………………
4. DATA ANALYSIS AND INTERPRETATION…………………..
4.1 Socioeconomic and climate condition of Ethiopia………………………………….
4.1.1 Climate condition and total area ……………………………………………………
4.1.2 Ethiopia soils…………………………………………………………………….
4.1.3 Socioeconomic situation of Ethiopia………………………………………………………
4.1.3.1 Land use and land holding pattern…………………………………………………….
4.2 Situation of food security in Ethiopia…………………………………………..
4.3 Root cause of the problem………………………………………..
4.3.1 Land degradation and conservation methods…………………………
4.4 Extent of food insecurity in Ethiopia…………………………
4.5 Contribution of crop and animal production for food security in Ethiopia……….
4.5.1. Importance of crop categories……………………………………………..
4.5.2 Livestock production ………………………………………………….
4. 6 Hindering factors on agricultural production…………………………….
4.6.1 Population pressure……………………………………………………………………….
4.6.2 Traditional methods of production……………………………………………………..
4.6.3 Physical factors ……………………………………………………………………………..
4.7 Socioeconomic consequence of
problems………………………………………………………
4.8 The role of government in mitigation of food crisis……………………………………….
CHAPTER FIVE……………………………………………
5. CONCLUSIONS AND RECOMMENDATIONS………………………..
5.1 SUMMARY AND CONCLUSIONS…………………………………………………
5.2 RECOMMENDATIONS……………………………………………..
REFERENCE………………………………………………………………………………………
Declaration letters ……………………………………………………………………..
 CHAPTER ONE

1. INTRODUCTION

1.1 Background of Study

The seriousness of the challenge of food security in Africa is underlined by the fact that at
present 44 of the 88 low-income food deficit countries found in Africa. (FAO, 2004). Ethiopia
lies within one of the most food insecure regions in the world, with a large number of population
and dependent on farm production highly vulnerable to severe drought.(Gezahegn, 1995). The
food insecurity problem of Ethiopia, with adverse impact of climate changes, combined with in
long term factors led to a decline of land holding, soil degradation and a decline in yield (EEA,
2005). Food insecurity is commonly conceptualized as chronic & transitory (long term & short
term phenomenon respectively). The study defines food insecurity as a condition in which people
lack the food intake & it focus on transitory In Ethiopia there is serious food shortage problem,
depending on the state of natural resource and the extent of development of food shortage. In the
study area the cause of escalating food prices including high inflation level & stagnation in food
production & supply in relation to increase in demand due to population growth. The challenge
of inadequate food production & high population growth rate had made achieving food security
harder. Households become vulnerable to food insecurity not simply because they do not
produce enough, but either they hold little reserve or scant saving. Therefore the study will carry
out to provide insight to the people of the area, the causes of food insecurity and the responses to
it among the households. Food insecurity which it shows the current prevalent among urban
poor.

Ethiopia has had an experience of food shortage in the past three decades. The food related crisis
has occurred under different period and different economic system. That means Ethiopia has
been involved feudalism, capitalist and socialist economic system. However, all economic
system have been failed for the growth of economic as whole and agriculture in particular as
cited by (bi shaw, 2000). the Ethiopia is highly depend on agriculture which contribute more
than 85 percent of the labor force employment, provide more than 90 percent of total earning and
about 50 percent of GDP supplies of row material for agro- processing industries as quoted by
( Eyob, 1996:1 )

The population of Ethiopia for mid-year 2005 was estimated at 73.o44 million comprising
63.369 million rural 84 percent and 11.675 million urban 16 percent respectively. These
estimates are based on the 1994 population and housing census of Ethiopia conducted by CSA
under the auspices of the office the population and housing census commission in 1994 and
related 1998 the overall annual population growth rate were estimated at 2.78 percent. According
to CSA report, cogently the population of Ethiopia is around 77 million.

The main form of agricultural production in Ethiopian is an integrated crop livestock or mixed
farming system. It has largest livestock in Africa: more than 35 million cattle and 40 million
ruminants, one million camels and 80 million equines. Livestock ownership currently support
and subsistence the livelihood of estimated 80 percent of rural poor. In the extensive, most
drought prone arid and semi-arid grazing areas in the eastern, western and south lowland: cattle,
sheep, goat and camels are managed in migratory pastoral production system as cited by (FAO,
2004). While sectors agriculture is dominated in the highlands (E dental, 2009).

Peasants households cultivated fragmented micro holding, produce lion share of agricultural
output in Ethiopia. The 1994/1995 agricultural sample survey should that 78 % of the total small
holder farmers of the country were engaged an mixed farming, 20 % mainly in crop production
and remaining 2 % in livestock rearing (CSA). Therefore the failure or success of the
agricultural sectors can influence the extent of economic growth and living condition of the
people in Ethiopia. The sectors are highly depending on the rainfall with minimum percent total
arable land irrigated.

In addition, low fertilizer use, susceptibility to pest and disease out breaks and extensive
highland soil erosion has meant to high variability in year to year agriculture production which is
predominantly in the peasant holding as cited by (FAO/WFP, 2004). Concerning food production
in the country of the 11.4 million hectares of the land farmed to all crops, only some 190,000 to
year depending on the quality and quantity of the annual rains. The crops grown in the country
are diverse and reflect the complicated agro economic problems that are derived from soil types
ranging one to another and cropping attitudes ranges from more than 3000 meters to less than
6000 meters above sea level as cited by (FAO/WFP, 2004).

Besides all these potential for food production, millions of people in the country are chronically
food insecure and even in good harvest year partly rely on food aid to meet their minimum food
requirements. Their food insecure has resulted from the presses of increasing destination. It is
increasing difficulty for the population to cope-up with even slight variation on the climate and
accessibility to market, including those food grain, livestock and labor.

Food security which is mainly defined as “secured access to all times sufficient food for healthy
life “(Maxwell and frank-en Berger 1992:2) has no single worldwide accepted definition for it
rather different category of people ( for example ,researcher, development parishioners and
politicians ) defined in the way it suits their intention and desire.

Through there are many definition and concept of food security at household level, the following
are cited by authors. accordingly food security is: “The ability of household members to assure
themselves sustained access to sufficient quantity and quality of food to live archive and healthy
lives”(UN,1990) “Ensuring that all people at all people at all times have both physical and
economic access to the basic food they need .” “Access by all people at all times to be enough
food for an active and healthy life (World Bank, 1999). in the summary the definition of food
security contain 3 major concept ability, access and stability.

There are also indicators which are useful to understate the condition of food security at
household level. For instance, Degenew Esheto (1999) summarized. These indicators under three
major ground ,namely, food supply indicators, food access indicators and outcome indicators
food security depends on access and entitlements to food that region be produced (J.N.PRETTY
AND .THOMPSON,1996). Nevertheless, the government involves a conjunction with
international community for making towards development of program for meeting and even
ultimate alleviating the recurring needs for insecure population. However, the government alone
cannot do so and hence needs the society and the public at large.

1.2 Statement of the problem

One of the basic needs of human being is food. Thus “food security is the access by all times the
dietary needs for productive and healthy life. But the food security adequacy of food supply at
global level never guarantee for food security at national level and food security at national level
does not guarantee food security at household level as quoted by (WB,1986). of the performance
(poor), the Ethiopia agriculture consequently is widespread food insecure an estimated 50 % to
60 % of country population is food insecure or lives below the poverty lines as cited
by(WB,1999/2000:176). T he major cause of Food insecurity in Ethiopia is highly correlated
with divine in food production and hence ,the rate change per capita food production is very slow
compare to the rate of growth in population (IBID). Food insecurity covers a large area and
significant numbers of people. According to the available evidence, the size of food insecure
people has varied between 40% and 50% over the last decades as cited by (MEDAC, 1999,:197).
IN OUR Country food insecurity in which a number of people have got problem of challenges to
get enough food for themselves. This for the fact a combination of factors has resulted in food
insecure poor form of management combine with alarming growth rate of additional growth rate
of population resulted in food security in the area (Ibid)

The agricultural sectors in Ethiopia are affected by erosion unpredictable weather condition and
backward technology and land fragmentations. Crop output fluctuation due to diseases. In
general, the agricultural sector is subject to risks that are creating both by technical causes and
special hazards and low level of agriculture productivity as the key problems.

Though of the raise problem there were some research questions to be address in the statement of
the problems. The major questions to be in this paper include the following.

a) Is there any gap between food supply vis-vis food requirement and what its trend
through time?

b) What are the major cause and dimension of food insecurity in Ethiopia?

c) What are the socioeconomic consequences of food shortage?

d) Is there any hindering factor that may lead to failure in fulfilling the objective of food
security?

e) What are the role of government and contribution to the alleviation of food insecurity in
Ethiopia?
1.3 OBJECTIVES OF THE STUDY
1.3.1 General objective

The general objective of the study is to assess the food insecurity situation of the Ethiopia and
also investigate any factors hindering the agricultural production.

1.3.2 Specific objective

The specific objectives of the paper have incorporation of the following:

 To identify major cause of food shortage.

 To describe the economic and ecological features.

 To describe the extent of food insecurity.

 To assesses the situation of food security in Ethiopia.

 To exploring the contribution of agricultural production in food security.

 To assess the role of government fund to formulate conclusion and recommendation to

mitigation the challenge of food shortage.

1.4 SIGNIFICANCE OF THE STUDY

A study of is on challenge of food security and the role of government in Ethiopia
Vital because it provides with information that will enable effective measures to be
undertaken so as to improve food security status and bring the success of food
security development programs. It will also enable development practitioners and
policy makers to have better knowledge as to where and how to intervene in rural
areas to bring food security or minimize the severity of food insecurity. Moreover
the empirical analysis carried out in this study was also expected to contribute
towards better food gap estimation. Hence such studies are important in that they
could help in designing food security development programs and food security
related policies. Furthermore, little work has been done about rural livelihood
strategies in the study area. Hence, this study besides its narrowing potential of the
wide gap of knowledge about livelihood strategies, it was also expected to equip
the different organizations and policy makers with the more pertinent information
of livelihood strategies adopted by the rural households of the Ethiopia.
1.5 scopes of the study and limitations of the study

The study was conducted to identify the challenge of food security and the role of government in
Ethiopia. The study covers nine region and two city administration in the Ethiopia. Moreover,
the study deals with focused on the challenge of food security and role of government. The scope
of this study was limited by time, budget and other resource limitation. Even if the study was re-
stricted in terms of its coverage its outputs can be used as a spring board for more detailed and
area general studies. The geographical coverage of this paper in Ethiopia. The scope of data that
has been with the span limitation from 1990/91 to 2010/11 will be assessing in paper. Agricul -
ture is the foundation of the country food production and hence the major contributing sector to
food security. But assessing the extent to which this sectors plays in food security is very broad
and unmanageable. This study will concentrated on only assessing the extent of contribution of
agriculture production in food security. There are some problems in under taking this
study ;shortage of time to conduct vast topic, financial constraints in, ability to conduct large
field of study , lack of availability of some relevant data and accurate record for the analysis of
some issues, problems concerning with arrangement of data. Even though, these and other re-
lated problem are there. Maximum effort is made to get relevant information and come with re-
gard to the challenge of food security condition of Ethiopia.
 CHAPTER TWO

2. Literature review

2.1Theoretical literature review

The concept of food security has dramatically of changed since first wide spread use at the world
food conference in 1974. This change reflects the growing awareness of the complexity of the
issue. The 1974 conference was covers with adequacy of global food supply and the risk to them
and to stable food price posed by the major harvesting failures. A parallel concern was the need
to secure adequate on food self sufficiency strategies pursued by many developing countries.
Since then the concern of food security was shifted away from aggregate food supplies at global
and national levels towards the entitlements of individual or household to food (UNCTED,
1997).
2.1.1 Definition and term of food security

The WB defines “food security as the access by all people at all time to enough food for active
and healthy life “(WB, 1986) following this definition lack of access to enough food is denoted
as food insecurity. In mulat’al (1995) secure to access at all time to sufficient food has been as
the core concept of the above definition as quoted by (Kass Assefe). This definition explicitly
focuses on four concepts.

2.1.1.1 Sufficiency: what is “enough”?

The concept of “enough food” is presented in different ways in the literature: as a “minimal
Level of food consumption”; as “the food adequate to meet nutritional needs”. In more
Descriptive formulations, it refers to “enough (food) for life, health and growth of the young And
for productive effort, “enough food for an active, healthy life” and “ enough food to supply the
energy needed for all family members to live healthy, active and productive lives.“From these
definitions, four aspects of the question can be distinguished (Maxwell and Frankenberger,
1992).

Availability refers to the need to produce sufficient food in a way that generates income for
small-scale producers while not depleting the natural resource base and to the need to get this
food into the market for sale at prices that consumers can afford (Haddad, 1997). According to
Kifle and Yoseph (1999) availability is basically the households’ capacity to produce the food it
needs.

2.1.1.2 Access and entitlements

The second core concepts are “access,” the question of whether individuals and household (and
nations) are able to acquire sufficient food. An individual’s entitlement is rooted in his/her
endowment, which is transformed via production and trade into food. As Sen. himself agrees,
food availability remains a key issue in food security (Maxwell and Frankenberger, 1992).

Access to food is necessary but not a sufficient condition for a healthy life. A number of other
factors such as health and sanitation and household and public capacity to care for vulnerable
members of society also come in to play (Von Broun et al., 1992). Access to food plays a critical
role in securing food, which in turn is determined by production or exchange (Debebe
Habtewold, 1995). The usual food availability approach neither fully captures the plural causes
of famine nor adequately explains its asymmetric impacts. An insufficient entitlement might be
caused by a decreased endowment bundle or by an unfavorable shift in the exchange-
entitlement-mapping (Sen., 1981)

2.1.1.3 Security.

The third main concept is that of “security”. Secure access to enough food. This builds on the
idea of vulnerability to entitlement failure, focusing more clearly on risk (Maxwell and
Frankenberg, 1992).

Risks to food entitlement could originate from a number of sources such as: weather variability,
food production and supply variability, variability in price and market, health hazard and
morbidity causing risks, employment and wage variability. In general, it could be environmental,
natural, political, social, cultural and economic risks (Sen., 19981).

The most food secure households are those which achieve adequate access to food while using
only a small proportion of available resources; the most food insecure, those most at risk, fail to
achieve adequate access even by devoting a large proportion of available resources to food
(Maxwell and Frankenberg, 1992). The foods insecure have lost, or are at risk of losing,
availability of and access to food or the ability to utilize it (Chung et al., 1997).

2.1.1.4 Time

Finally, we come to “time”, secure access to enough food at all times. The topic is not much
discussed in the literature. However, following the lead of the World Bank (1986), it has become
conventional to draw distinction between chronic and transitory food insecurity.

The above definition was modified in November 1996: of the world food summit held in Rome
describe as follows. “Food security exists when every person has physical and economic access
at all time to healthy, nutrition food in sufficient quantity to cover their needs of daily ratio and
performance in order to live a healthy active life” quoted by (sijm, 1999:1). The concept of
access was developed and improved through times as result increasing development in modern
economic relationship which has caused significant changes and new paths in the system of food
entitlements than to food availability which refers to the bundle of goods and services a person
can make his own as (Rest and Haar, 1996:174) quoted.

2.1.2 Measures of food security

Measuring the required food for an active and healthy life and the degree of food security
attained is a question to be addressed in a food security study. Given the multiple dimensions of
food insecurity, there can be no single indicator for measuring it. For this purpose different
indicators are needed to capture the various dimensions at the country, household and individual
levels. At the national or regional level, food security can be measured in terms of food demand
(requirement) and supply indicators. The supply of food at this stage may be from current
production and stocks from previous production where as the need has to be determined on the
bases of biological or nutritional requirement of a given society for a certain period of time
usually a year or a day. Nutritional intake is also determined by physical exercises. The most
widely available and used variable for estimating food security is the daily per capita food supply
or dietary energy supply (DES ) which is measured as calories per day for average per capita.
DES for most countries of the world. Unfortunately, DES is computed from national food
production and trade statistics, the reliability of which doubtful in many less developed
countries (Bernstein, 1999 cited in UNIAO, 1993). A measure aimed at directly capturing the
extent and magnitude and of food deficiency is food in adequately index (FII) developed by
FAO. The FII incorporates estimates of population that undernourished together with the gaps
between average daily calorie requirements. Both DES and FII utilize energy supply data
although these may not fully capture the adequacy of nutritional intake, which depend on the
quality of diet. For example much protein and how many vitamins are consumed as well as on
quantity of calories (UNCIAD, 1997).Accordingly, food balance sheet (i.e., sum of domestic
food production, net import and stocks to the total population and considering nutritive value),
rainfall and marketing data and anthropometrics measurements (revealing the state of
underweight, stunting and wasting) are also used to measure food security. On the other hand,
food access indicators are relatively effective because they show various strategies used by the
household to get food from diversified sources, i.e., from own farm production, non-farm
income, remittance/gift etc. (Debebe, 1995; Frankenberger, 1992)

2.1.3 Types of food insecurity

In the literature, there are two types of insecurity. There are chronic food insecurity and
temporary food insecurity. Chronic food insecurity means that a household runs a continually
high risk of inability to meet the food needs of household members. In contrast, transitory food
insecurity occurs when a household faces a temporary decline in the security of its entitlement
and the risk of failure to meet food needs is of short duration. Transitory food insecurity focuses
on intra-and inter-annual variations in household food access. This category can be further
divided in to cyclical and temporary food insecurity. Temporary food insecurity occurs for a
limited time because of unforeseen and unpredictable circumstances. Cyclical or seasonal food
insecurity occurs when there is a regular pattern in the periodicity of inadequate access to food.
This may be due to logistical difficulties or prohibitive costs in storing food or borrowing
(Maxwell and Frankenberger, 1992).

Individual is chronically food insecurity if he or she own food need or those of the family. Her
/she constantly hovers on the border of famine. On the other hand temporary food insecurity is
often cyclical and consequently appears at regular intervals often because of logistical, technical
and financial related limitation to shortage of food. Temporary food insecurity often scale up to
chronic food insecurity the degree of probability of this transition depend on the sensitivity or
elasticity the individual food security system as quoted by (Eric toll ens, 1998).

2.1.4 Indicator of food insecurity

Food security indicators are classified into two main categories: process and outcome indicators.
The process indicators provide estimates of food supply and food access situations. The outcome
indicators serve as a proxy for food consumption (Frankenberger, 1992). Process indicators are
used to measure the changing status of food security. They can also offer the type of information
necessary to plan and adjust development efforts. Process indicators are further disaggregated
into two groups: supply indicators and access indicators. Process indicators include indicators
that reflect food supply. The most commonly used indicators of household food security are
supply, food access and outcome indicators. These indicators embrace metrological data,
information on natural resources, agricultural production data, marketing information, food
balance sheet, sales of productive assets, diversification of income sources and household budget
expenditure security (Frankenberger, 1992).
Food insecurity requires a multi dimensional consideration since it influence by different
interrelated socioeconomic, political factors. There are different types of indicators of food
insecurity classified into two main categories. This is “process “and “outcome “indicators (Fran
ken, Berger, 1992, cited in Mullet et 'al, 1995). Process indicators -provides an estimate of food
supply and food access situation. Outcome s indicators- serve as proxies for food consumption.
'Food access ' indicators are relatively quite effective to monitor food security situation at
household level than supply indicators which in most cases are aggregated and hardly serve to
monitor food stress at household level. On the other hand ,outcome indicators such as the level
and changes in food consumption and the amount of food in store serve as proxy estimates for
measuring house hold food situation .They can be disaggregated at lower level as opposed to
food supply indicators like the thermometric results may not exactly indicate the level of food
crises since nutritional initiate is affected by number of factors like healthy and care.

Table 2.1 indicators of household’s food insecurity

A Food supply indicators
 Information on access to resource.

 Metro logical data

 Agricultural production data

 Market information

 Information on pest damages

 Institutional and market infrastructure

 Regional conflicts.

B Food access indicator s

 land use practice

 Dietary change

 Change of food source

 Diversification of income source

 Diversification of livestock

 Livestock sales

 access to loan or credit seasonal migration

 Distress migration

C. Outcome indicators
 Households budget and expenditure

 Food consumption frequency

 Subsistence potentials

 Nutritional status

 Househo1lds perception of food insecurity

 Storage estimates.
Source: Fran ken Berger, 1992, cited in Mullet ET’al1995.

2.1.5 Source of food security in Ethiopia

As Rest and Haar (1990) point out and world vision Ethiopia (2000) also stated specific source
of households’ food security in Ethiopia include:

 Food production (mainly based on crop and livestock, husbandry production).

 Cash income from different source (mainly market based).

 Institutional assistance program (including credit), financial support, food aid or

relief, employment generation scheme (EGS), food for work (FFW) and related
support program.

 Sales of family labor (was employment)

 rental income

 domestic trade(including petty trading )

 reserve of food (stocks)or other asset

 Remittance and gift, wild food (wild plants and animals including fish) (world vision
2000).

2.1.6 Food Security Situation in the World

Overall the world some 800 million people are chronically malnourished. Fully 2 billion lack
access to the sufficient, safe and nutritious food needed for a healthy life. More than half the
world’s population lives in low-income, food-deficit countries that are unable to produce or
import enough food to feed their people. In 64 of 105 developing countries, food productivity
increased at a slower rate than population growth during the 1985-1995 periods. Soil
degradation, chronic water shortages, inappropriate agricultural policies and rapid population
growth threaten food production in many poor countries. The world grain harvest increased
about 1 percent annually between 1990 and 1997, less than the average population growth rate of
1.6 percent. The ocean’s fisheries, a major source of protein, are also threatened. Nearly seventy
percent of commercial fish stocks are fully exploited, over fished, or depleted. Food production
often has a high environmental cost. The amount of topsoil lost to erosion in the 20th century
equaled the total lost in the previous 1,000 years (UNPF, 2001).

At the UN Millennium Summit in 2000, world leaders agreed to halve by 2015 the proportion of
people who suffer from hunger. This will require unprecedented cooperation within and among
countries. The transfer of modern agricultural technologies and knowledge can help to protect
soils. Research and development will have to continue on new high-yield crops.

Distribution of existing supplies of food will have to be improved. Women, responsible in most
countries for family health and for raising children, must be empowered to better manage food
resources. Women, who gather the water and wood for cooking, grow household crops and tend
to livestock, are among the most affected by environmental change. Deforestation and depletion
of water supplies from inefficient irrigation cause women to journey further and further in search
of these basic requirements. When women are provided with the rights they deserve and the
education and economic opportunities they need, they can contribute to conservation, efficient
production of goods and the fostering of healthy families (UNPF, 2001).

Sub-Saharan Africa (SSA) is the most important development challenge of the 21st century.

World development indicators show that in 1998 the total production (gross domestic product) of
the region amounted to only US$ 201 billion, less than one percent of the world’s total
production (World Bank, 2002). Furthermore, poverty is higher in most African countries than
elsewhere in the developing world, with about 40% of the population of SSA living on less than
one dollar a day. Those most vulnerable to poverty live in rural areas and large households that
are often headed by women; education is low and they are also most likely to live in countries
with real growth rates of less than 5% (World Bank, 2000). It is estimated that out of the world’s
800 million people that are food insecure, about 180 million (or 23%) of them live in SSA
(Pinstrup-Anderson et al., 1999)

Between 1975 and 1995, per capita consumption of cereals stagnated in most SSA. Per capita
consumption of cereals increased only slightly from 109 kg in 1975 to 114 kg in 1995 for the
entire SSA, with central and western SSA recording the lowest per capita consumption. With
respect to livestock products, although the average per capita consumption of meat, milk and
eggs in the world increased significantly, those in SSA either stagnated or declined or increased
only slightly. Per capita consumptions of meat, milk and eggs in SSA in 1995 were only 9.5,
23.9 and 1.4 kg, respectively, which were about 27, 31 and 20% of the respective world averages
(Ehui et al., 2002).

However, given that no one-size-fits-all strategy will achieve food security everywhere in the
region; specific policy and investment strategies should build upon and improve the various
development pathways that exist in different agro ecological zones (Ehui et al., 2002)

2.1.7 Cause of food insecurity in Ethiopia

Combination of factor such as adverse change in climate ,poor technology ,soil degradation and
policy induced as well as growing of problems of food insecurity in Ethiopia .The extent of food
insecurity in Ethiopia recent years has became alarming as cited by (FAO,2003).

This condition leads to shift between chronic and acute food insecurity expressed by broad and
deep crises , which often is the characteristics of drought prone areas low and variable rain
fall ,high population density and low natural resource endowment. Since the country is
depending on agriculture, a crop failure usually leads to households’ food deficit. The absence or
insignificant of off-farm income opportunity and delayed food assistance, leads to assets
depletion and increasing level of distortion at households level. Thus the major causes for
temporary and chronic food insecurity in Ethiopia are outlined below quoted by (FAO, 2003).
According to the new coalition for food security program proposal of Ethiopia, the major causes
and factors for transitory and chronic food insecurity in Ethiopia are discussed below (FDRE,
2003).

Recurrent drought: agricultural development in Ethiopia heavily depends on rainfall where the
pattern is of erratic and unpredictable nature. For most small holder farming and pastoral system,
rainfall is the major source of moisture for crop and livestock production. However, the
frequency of drought has sharply increased its occurrence, i.e. every three to five years.

Moreover, utilization of water resources is ill developed. Irrigation and water diversion schemes
are less practiced and food production has seriously been affected.

Limited source of alternative incomes: Limited sources of alternative income options have left
the majority of Ethiopian households susceptible to ill-developed coping mechanism.

Population pressure: uncontrolled growth rate of rural population and productivity has not
increased significantly to cope up with increased population resulting in the average aggregate
household consumption level does not exceed six months.

Limitation in technology: Agricultural intervention had followed the same pattern of service
development in the areas of fertilizer, improved seed and pesticides provision, lacking
comprehensive package of interventions at household level orientation. Previsions of new
technologies are at rudimentary stage; moreover, the capacity of technology multiplication is
limited to disseminate the existing technologies.

Lack of product diversification & market integration: Diversification in the production

pattern is limited mainly focusing on food crops. Less attention has been given to cash crops,
livestock and livestock products. Markets are not integrated, and as a result, price differentials
between farm gate and terminal markets vary significantly in favor of the later. Consequently,
sustainable adoption of technology could not be observed. The agricultural output marketing
indicates that production is challenged by low market prices including inadequate market
information system and inadequate rural road network.

Limited capacity in planning and implementation: Implementation capacity is limited by the

virtue of lack of skilled manpower and appropriate incentive mechanisms. Also, the provision of
extension services has not been adequate in terms of coverage and quality of service. A
development agent (DAs) to farmers’ ratio to deploy appropriate service and monitoring is far
from adequate. Moreover, resource constraints and lack of appropriate incentive mechanisms
aggravate the problem.

Environmental degradation: Natural resources are the basis for accelerated agricultural
development and for meeting the food security and other basic necessities of its people.
Cultivation of steep lands in the absence of conservation practice, poor farming practices and
continuous cropping without nutrient recycling, overgrazing and improper land use practices are
among the causes for accelerated soil erosion. In addition, crop residue and dung are increasingly
being used to meet rural household energy needs, rather than being used for ameliorating soil
fertility that can then increase agricultural productivity.

Limited access to credit: Credit stimulates supports and accelerates the use of technological
innovations, which will increase production and productivity. Furthermore, improvement of
marketing system and promotion of micro-enterprises and other income generating activities can
be facilitated efficiently only if they are backed up with sound credit system. Currently, the
development of micro-finance institution is at an infant stage as some of them lack strong capital
base, experience and capacity in credit management. In addition to the lack of resources for an
advance payment, most of the food insecure group cannot manage to repay the credit at
unrealistic preset timing.

2.2. Empirical literature review

The situation in Ethiopia is not much different from the conditions in other developing regions.
Mesfin (1991) studied food security in north central Ethiopia and found out that most farmers
could not produce enough food to meet the annual requirements, from both the farmers’ annual
requirement perceptions (ENI, 1990). Seasonal food insecurity exists even in surplus producing
area (Degefa, 1996). The result shows ‘variations between households practicing double
cropping system (during meher and belg seasons) and those relying on a single harvest (meher)
were the proportion of farmers practicing double cropping who reported to have faced seasonal
food deficit was smaller than those engaged in single harvest.

Some of the general factors that cause household food-insecurity in rural area are poor
agricultural growth, unequal distribution of productive resources and income, and rapid
population growth. They result in chronic food-insecurity and poverty, whereas, seasonal rainfall
variations, lack of draught oxen, inadequate farm size, and shortage of farm inputs are factors
responsible for seasonal shortfall of food. Moreover, additional causal factors for transitory food
insecurity in the rural area are outbreaks of human and animal diseases, outbreaks of crop pests,
hailstorm and flood hazards leading to serious harvest failure, drought, sharp grain price
increases coupled with sharp decrease in livestock prices, food availability, decline and lack of
labor demand during crises situations (Dagnew, 1995).
Food security document of Ethiopia also recognizes a combination of short-term and long- term
causal factors explaining the trend of the increasing food insecurity at household level (FDRE,
2002). Long-term factors, such as the interaction between environments, high population growth,
diminishing land-holdings, and a lack of on-farm technological innovation have led to a
significant decline in land productivity per household. Ayalneh (2002) describes the food
insecure groups of households as those who live on the edge of subsistence often located in
remote areas far from markets. They usually work in an insecure and low productivity
occupation. Another determinant of food insecurity is gender orientation. Subordination of
women in society, their over-burdening and the greater difficulties faced by female-headed
households contribute to food insecurity (Haddad, 1997).

Endowed with considerable potentials, Ethiopia has self sufficient in staple food and was
classified a net exporter of food grain till the late 1950's .However ,since the 1960 domestic food
supply fail to the food requirements of the people. Even though ,self sufficient amount of food
has been produced in most of the good years the average food production during those
decades remains stagnant as quoted by (Alemayew ,19888:61)

Ethiopia lays one among the most food insecure region in the world and hence the domestic
food supply has failed to meet the basic food requirement of the nations. Based on the
recommended food in take of 2100 kilo calorie per person per annum (equivalent to 225 kg per
head of cereal per year ).The annual deficit increased from 0.7 million tons in 1978 /80 to cover
5 million tons in 1993/94 more than six fold increase in 14 years .(Befikadu
&Birhanu,1999/2000)

Total grain production in Ethiopia has improved in recent year’s .However; the increase is so
small that it could not affect the level of per capita production and consumptions. The country
produces for instance 162kg and 148kg of grain in 2000/01 and 2001 /02 .Maher season,
respectively on per capita basis .Even though 2003 and 2004 record level of production 117.5
million quantals of grain is only a modest improvement when looked in terms of per capita
production (165kg per person) which together with the level of per capita income indicate the
progress or the lack toward realizing the objective of food security. In generally, average per
capita grain production fluctuates, which average indicates deficit of 60 to 100kg of grain per
person as cited by (Samuel Grebe-Selassie, 2004:4).
According to Samuel (2004) the proportion of people who are absolutely poor(unable to meet
their basic needs) during the year 1999/2000 was 44.2 %(about 30 million people ).In urban
areas , a proportion of people as defined on national poverty line was 47% while it was 33%in
rural area cited by (MOFED,20002). In addition to this ,the progress so far achieved in reducing
poverty level is only marginal .Again GDP and population growth of poverty level are affected
by the gap in income inequality or the distribution of newly created with among citizen.

CHAPTER THREE

3. DATA AND METHODOLOGY OF STUDY

3.1 Introduction

Food security is experiencing a widespread sign both rural and urban areas of Ethiopia. The
magnitude is much greater than in drought prone rural areas than in urban areas. The challenges
against food security in recent year expanded throughout the country the major reason for food
insecurity included land degradation, recurrent drought, population growth and substantial
agricultural practice characterized by low input and low output.

In Ethiopia the challenge of food security frequently occur due to the above stated reason in
literature review and others such as lack of awareness to use scarce resource economically and
wisely, declined productivity of land, deforestation and others. Through such and other related
problems the inhabitant of Ethiopia exposed to seasonal permanent food insecurity and declining
assets of the community, even some of them reach stage unable to meet their daily requirements.

In Ethiopia, agricultural sector is found action for food production and hence the major
contributing sector to food security. Since the country is endowed with diverse agro-ecological
climate, a variety of crops can be grown (both cash and food crops). Accordingly this chapter
dedicated to assessing the contribution of these crops to the situation of food security in the study
of the country.

3.2 Data Type and Source of Data

This study uses secondary data. Secondary data were extracted from publications, seasonal and
annual reports of Ministry of Agriculture, Disaster, Preparedness and Prevention Commission
(DPPC), Cooperative Organization, Plan and Economic Development and microfinance
institutions. In this paper secondary data was employed. This data cover from period 1990/91 up
to 2007/08. In this respect, different information on conceptual frame work as well as theoretical
and empirical evidences are review from different publication, from Ethiopia economic
association and MOFED.

3.3 Methods of data collection

The secondary data will be collected from different published and unpublished works, previously
done literatures and different websites. The method of data collection employ in the paper
involves the acquisition of secondary data from different source such as: publication, reports,
referring book relates with subject matters and information from Internet.

3.2 methods of data analysis

The collected data will be analyzed by using simple descriptive statistics and expressed in
frequency, percentage and tables. On this basis descriptive statistics such as mean, percentage,
situation analysis of the Ethiopia and to investigate and access to household food security. The
data will analyze using descriptive statistics based on time series data. For simplicity and
comparison data will be presented in tabular and graphical forms and analysis both in absolute
figure and in percentage, ratio and average.
CHAPTER FOUR
4. DATA ANALYSIS AND INTERPRETATION
4.1 Socioeconomic and climate condition of Ethiopia.
4.1.1 Climate condition and total area
The total area of Ethiopia is about 112 million hectares of land, from this 66% is known to have
potential suitable for agricultural purposes, some of 27.9 million hectares of it or 22.8% of the
land is cultivated either intensively or moderately under the current land use pattern,3.6% is
covered with forest and bushes.

The classifications of land in to two agro-ecological zones give as hints to the use of land in
Ethiopia. These are highlands and lowlands. The highland covers 35%-40% of total land area.
The lowland covers the remaining 65%-60% of total land area. The highland is located over
1500 meter above sea level. The Ethiopian highlands are the center of the economic activity of
the country with over 85 percent of the country’s population and 75 percent of livestock and they
are the source of many of the country’s major rivers (including the Blue Nile). These highlands
occupy approximately 45 percent of the total land area of which 50 percent is significantly
eroded, 25 percent seriously eroded and ca. 5 percent has lost the ability to produce food. Only
20 percent of the highlands are estimated to have a minor problem of erosion. The loss of soil
depth is estimated around 4 mm per year, outstripping the rate of soil formation estimated at no
more than 0.25 mm per year in Africa. The effective soil depth in Ethiopia is estimated anywhere
between 20 to 59 cm (depending on the area), and if such a loss of soil depth continues unabated,
Ethiopia could lose nearly all of its top soil in about 100 to 150 years. This long-term affect of
soil loss (unless effectively controlled) on the ecological balance and survival of a society is
often not captured by cost estimates of soil erosion based only on production value for certain
years. The lowland on the other hand is located below 1500 meter above sea level (m.a.s.l).

Ethiopia has diverse agro climatic zones. The traditional and major agro climatic zones of
Ethiopia are divided in to (5) categories such as Wurch, Degas, Wayne Degas, Kola,
Berha(desert) zones. Shown in

Table 4.1. Traditional Agro climatic Zones and their physical characteristics
Zone Altitude Rainfall Length of Growing Average Main crop grown
(meters) (mm/year) Period (days) Annual
temperature
o
( C)

Wurch 3200 plus 900 - 2200 211 - 365 >11.5 Barley

(cold and moist)

Dega 2300 - 3200 900 - 1200 121 - 210 17.5/16.0 - Barley and wheat
(cool and humid) 11.5

Weyna Dega 1500 - 800 - 1200 91 - 120 20.0 - Teff,wheat,maize,

(cool sub-humid) 2300/2400 17.5/16.0 enset and coffee

Kola 500 - 200 - 800 46 - 90 27.5 - 20 Few drought

(warm semi-arid) 1500/1800 resistance crop
such as special
varieties of
sorghum
Berha under 500 under 200 0 - 45 >27.5 Crop cannot be
(hot arid) produced using
rain fed
agriculture due to
scanty nature of
rainfall
Source: MOA

This agro-ecological zone gives us hints as to the use of land in Ethiopia.

a) wurch zones

This is an area which is categorized as highland of extremely high attitude usually greater than
3200 meters above sea level. This area with cold and moist climate. It has adequate amount of
rain fall above 2200 mm per year and suitable for barely production. It also good for cattle and
sheep husbandry. These zones are mostly confined to the highland of Wello, Gondar, go jam,
Arssi, bale zones.

b) Degas zone
This is an area which is also categorized as highland with an attitude between 2300 m and 32oo
m above sea level. The amount of rain fall is estimated between 1200 and 2200 mm per year. the

o
mean annual temperature is 16 C. This is cool and humid area, which is good for settlements
due to the hospitable weather conditions and the amount of rain fall. It is free from disease such
as malaria and trypanosomosis (a certain type of animal disease). This is a zone that has been
intensively cultivated with substantial loss of soil. This area that is suitable for a variety of
cereals such as barley and wheat. Overgrazing and deforestation worse the problem of soil
erosion. The intensive land degradation affected soil fertility thereby increasing dependency on
food aid.

c) Wayne degas

This is a zone comprising most of the country's agricultural land. This is considered as mid-
Highlands’s area between 1500-2300 m above sea level. The amount of rainfall in these area
ranges between 800-1400 mm of rain fall. This is zone characterized by relatively warm
temperature ranging 16 and 29 oC. Most of the country cereal such as teff, maize, wheat, pulses,
enset as well as coffee is produced in zone. Enset is staple food for southern region. This zone is
located in most part of shoa, arsis go jam, some part of gander, sidamo, wellaga, and Illibabour.
There are two growing per year under rain fed agriculture. Extensive land, high degree of
erosion-prone, low grass and forest cover characterized the zone. A good part of Tigray, wello,
gondar are classified as dry Wayne degas with mean annual rainfall between 800 – 1200 mm.
The main crop grown is sorghum and oilseeds.

d) Kola zone

This is lowland area located between 500-1500 m above sea level. The temperature is hot usually

o o
between 20 C and 27 C . This characterized by very short growing period and supports few
drought resistance crops such as special varieties of sorghum. It hot and dry weather with less
than 450 mm of annual rain fall. This an area inhabited by pastoralists. The agro-ecological zone
is mainly concentrated in afar, and somali,and borena zone of oromia region.

e) bereha (desert) zone

This is lowland area below 500 m above sea level. It is scarcely populated with nomadic herders.
It is very hot and arid areas with mean annual rainfall of less than 200 mm. Temperature is above

o
27 C . Crop cannot produce using rain fed agriculture due to scanty nature of rainfall. These
areas also concentrated in afar, Somali, and borena zone of oromia region.

These agro-ecological classifications have important implications for strategies in development

of appropriate technologies for agricultural and rural development, natural resources
management (NRM) and migration, which will be expounded later.

4.1.2 Ethiopia soils

Ethiopian soils are fertile, but are undergoing severe mining of nutrients due to intensive
pressure on arable land in past decades. A recent study, on the two important plant growth-
limiting nutrients - Nitrogen (N) and Phosphorus (P) - shows that acid soils dominate most of
the southern and southwestern parts of the country and generally have low P content. Cambisols
are more fertile than acid and Vertisols and are fairly distributed in the highlands and used in
cereal production. Vertisols are the dark clay soil found in the highlands and some parts of the
lowland, and suffer from water logging and poor drainage and have very low N content. The
erosion-prone central and northern highlands of (Shewa, Wollo, Tigraye and Gonder) have low
N content and relatively high phosphorus content. Low Nitrogen content in these areas is largely
due to low organic content while in the Vertisols area it is mainly due to water logging. Soils in
the south and southwestern part (Sidamo, Ilubabor and Keffa) have high N content and low P
content. Because of erosion-prone and infertile it less productivity.

4.1.3 Socioeconomic situation of Ethiopia

4.1.3.1 Land use and land holding pattern
Ethiopia has an advantage of frequent rainfall and highly potential ground and surface water if
used. But the inhabitant of the Ethiopia fails to achieve a sufficient food production which is
because of limited access of fertile land, a decline yield in per hectares and the dependency on
traditional farming. Because of these and other related challenges, inhabitant of the Ethiopia had
not benefit from such advantage rather they exposed to high level of chronic poverty, high level
of deforestation, exposed to children to participate on income generating activity rather than
going to school and high level of unemployment. The available data from EEA. The sizes of
household determine primarily the distribution of land in the country. Due to the population
pressure the size of land owned by easily observes, the problems seems seriousness in degas and
Wayne degas agro-ecological zones. These are mainly because of high population pressure
(density) and the highly irregular topography highland areas than kola agro-ecological zone.
Thus, the land holds is larger in kola compared to that of woinadega and degas areas. Again
population pressure determines landholding pattern of individual household in our country.

Ethiopia has a vast water resource potential and the Ethiopian highlands are the source of many
of the international rivers (such as the Blue Nile and Wabe Shebeli) draining into the
neighboring countries. Yet only 1 percent of the estimated annual surface water of 110 billion
cubic meters is used for irrigation and hydro power. It also has groundwater resources estimated
at 2.6 billion cubic meters and many springs and small streams that can be used for water
harvesting during the rainy seasons. The country’s irrigation potential is estimated at 3-4 million
hectares (excluding water harvesting and underground water) but only 160 000 hectares are
currently under irrigation. Due Limitation in technology.

Table 3.2 land use pattern of Ethiopia.

Total Grazing land Forest and bush Arable land Others

land in Cultivated land land
hectare

112 % hectare % hectare % Hectare % hectare % hectare

million
22.8 27.9 51 57.63 3.6 4.07 13.95 15.68 8.65 9.77
million million million million million
Source: World Bank report, published in 2010

The Agricultural land (% of land area) in Ethiopia was 34.99 in 2009, according to a World Bank
report, published in 2010. Agricultural land refers to the share of land area that is arable, under
permanent crops, and under permanent pastures. The Arable land (% of land area) in Ethiopia
was 13.95ma, according to a World Bank report, published in 2010. Arable land includes land
defined by the FAO as land under temporary crops (double-cropped areas are counted once),
temporary meadows for mowing or for pasture, land under market or kitchen gardens, and land
temporarily fallow. Land abandoned as a result of shifting cultivation is excluded. Land under
permanent crops is land cultivated with crops that occupy the land for long periods and need not
be replanted after each harvest, such as cocoa, coffee, and rubber. This category includes land
under flowering shrubs, fruit trees, nut trees, and vines, but excludes land under trees grown for
wood or timber. Permanent pasture is land used for five or more years for forage, including
natural and cultivated crops. Ethiopia has been one of the fastest growing non oil dependent
countries in Africa. Ethiopia's economy is based on agriculture, which accounts for more than
43% of GDP, 80% of exports, and 80% of total employment. The biggest sources of foreign
trade are coffee, flowers and oilseeds. Yet, in spite of high rates of growth most Ethiopians live
in poverty. Periodic droughts, soil degradation, high population density, high levels of taxation
and poor infrastructure are main obstacles to sustainable growth and food security.

Ethiopia’s remaining forest reserves are estimated at fewer than 3 percent. Woodlands estimated
at 5 million ha and bush lands totaling 20 million ha are found in the moist western part of
Ethiopia and in the pastoral and the agro pastoral zones of the lowlands. Large parts of these
woodlands are increasingly threatened by shifting cultivation, growth of livestock, expansion of
agriculture, and an increasing demand for fuel wood and construction by the urban sector.
Approximately 150 000 to 200 000 hectares of forest are lost each year mainly for the expansion
of rain fed agriculture and also for fuel wood and through overgrazing. If these trends continue
there will be little natural forest left except for minor stands in the remote parts of the country.

4.2 Situation of food security in Ethiopia

One of the consequences of the poor performance of agriculture is widespread food insecurity. In
the country level around 50% to 60% of the country population is food insecure or live below
poverty line.

As describe in literature part food insecurity is often classified in two types. Chronic and
transitory food insecurity. Chronic food insecurity in rural areas refers to land scarcity which
consist of more than 1/3 of the householder who farm less than 0.5 hectares which under rainfall
agriculture is inadequate to meet subsistence requirements. Where the land is marginal and
fertilizer may also be added to the group landless, elderly, disabled, female headed, poor
pastoral, on-farming and newly established households also suffer from chronic food insecurity.

Currently, there both chronically insecure household (who are suffering from shortage of draft
animal and cash to buy seeds and fertilizer) and transitory food insecure households (as a result
of erratic rainfall) in our country.

Our country, Ethiopian is greatly vulnerable to food insecurity problem. As described in the
literature part there is different indicator of food security like supply, access, and outcome
indicators. According to these indicators, the country has get a great problem of lack of capital,
land fragmentations, absence of institutional and market infrastructure, erratic rainfall, pest
damage and soon.

We classify them as natural and man-made problem and constraints. Man-made problem are
associated with among other things, lack of institution arrangement, lack of conducive
agricultural land policy, land fragmentations, uncontrolled population growth, lack of
agricultural input and backward technology, inadequate rural market for agricultural input and
output and lack of rural infrastructure. Natural problem include erosion with land degradation
and unpredictable weather conditions. Constraints in the development of livestock sub sector
include poor animal feeds and nutrition, animal disease and poor institutional factors which
impeded growth in the production and market supply.

4.3 Root cause of the problem

4.3.1 Land degradation and conservation methods
As population pressure increase particularly in the highland areas, farmers intensively exercised
deforestation. This will lead farm land and grazing land exposed to erosion followed by massive
land degradation. Accordingly the main reasons identified for the environmental degradation are:

 Population pressure- the steepness slope have been put to crop farming. The increasing in
population is seriously threatening even protected areas.

 Grazing – over grazing of the land is one of the factor of erosion.

 Minimum conservation and difficulties to practice it.

 Climate factors – highly rain fall in short period of time on rugged mountain is a means
for high incidence for gully erosion.

Ethiopia is suffering from several environment degradation and perpetual deforestation in search
for farm land, for fuel and conservation materials. In the Ethiopia due to the growth of human
population and from time to time and hence leads to overgrazing of the land that brings erosion
of the land.

4.4 Extent of food insecurity in Ethiopia

The food balance is situational analysis of food in the country. Since, the focus of this paper is to
examine the challenges of food security or the asses the food gap or the extent of food insecurity.
The food requirement is the amount of adequate food that needed to feed the total populations.
The standard recommended food intake 2100 calories per person per day or 225 KG /head of
cereals per annum. Based on the recommended food intake the requirement of food is
determined by the product of recommended in take with total population. In Ethiopia the food
insecure population of about 34 million people does not constitute a homogeneous group. The
basic information system (HICE and WB survey from 1999/2000) provides only a rough
desegregation of poor or food insecure households. On the one hand, there are disaggregation at
regional and woreda level, and on the other hand, at urban and rural level.

Table 4.3 Population estimate, Food requirement, and cultivated area in hectare and Food
production in tone

Year Population Food requirement at Cultivated area in Food production in

estimate in 225 KG (mi) hectare (mi) tone(mi)
million

1994 53500,000 12037500 3094600 127744431

1998 60400,000 13590000 3580300 127744431

2000 63499,000 14287275 3170400 12588300

2005 73044,000 16434900 3127100 15970950

2007 73,918,505 16631663625 3617200 117344231

2010 82,101,998 18472949550 3819200 128844431

Source: EEA

As stated above the analysis presented these amounts are assumed equally applicable to Ethiopia.
The level of production is less than the required amount until 2010 of the study year. But also,
there is high irregularity of production, good harvest due to good weather conditions 128844431
tons in 2010 and 117344231 tons in 2007 0f the cropping year. The erratic climate conditions
and low level of production in 2005 has declined to contribute to decline in per capita
production.

In Ethiopia, the proportion of stunted and wasted children in household is highly related to the
degree of poverty. Thus, poverty affects household reflect significantly the problem of food
insecure households.

Main categories of food insecure house hold are:

I. Drought affect farmers: one of most important factors of food insecurity in Ethiopia is
the vulnerability of farming systems to natural anomalies, such as poor rainfall, low
income and poor stock keeping do not allow an adequate balance for the food production
deficit.

II. Landless and cattle less households: at household’s level, access to land and ox en
ownership are the essential facets for the agricultural production and the food security
status of rural families.

III. Female headed households: in rural areas there is 9% higher probability of being poor
and therefore food and nutrition insecure when the household is lead by a women in
urban areas this probability is 44% higher (integration of food and nutrition security in
South Africa, 2002).the widow w-headed household is especially precarious.

IV. Elderly households and household heads: there are households often lack members
able to more in agricultural sectors.

V. Families and households with many children: the main source of households’ income
plays a significant role in deeming the poverty and food security.

VI. Pastoral : the poverty and food insecure status of pastorals in Ethiopia' is known but
critical valued, currently greater attention is being accorded to the special situation of
Ethiopia pastoral in relation to poverty and food insecurity analysis.

The government and parts of donor community have begun by distinguishing 3 general farmer
group in Ethiopia with regard to self help development capacities (EU, 2000).

(a) The 4 to 6 million chronically malnourished and “help less”, who are dependent on safety
net of food aid systems.

(b) A further 4 to 6 million people classified under acute vulnerable who particularly in bad
years are obliged to small their assets (investment cut back).

(c) Poor middle group and a group which can be modernize their farming, if given adequate
 support.

4.5 Contribution of crop and animal production for food security in Ethiopia

The agricultural sector of Ethiopia is composed of crop production, livestock, forestry, fishing
sub sectors. The crop production contributes almost 60% of agricultural GDP and animal
husbandry contributes 27%. The remaining 13% is generated from forestry, fishing and other
activity. Agricultural proper can be broadly classified in two. Crop production and animal
husbandry or livestock rearing. Crop production is mainly exercised in the highland areas. These
is because the climate in the areas. Again is suitable for sedentary agricultural and livestock
production. This is known as mixed farming or agriculture.

The dominate activity in the lowland is animal husbandry. Pastoral move from one place to other
in search of water for their livestock. The lowland are not suitable for crop production due to the
small amount of rainfall.

While about 51% of Ethiopia land is used for grazing, only about 14.8% of it cultivation. This
means that assuming most of the grass land is suitable for cultivation, land devoted to crop
production is relatively low. The major crop produced in the peasant sectors are food and non
food (cash crops). The food crops included cereals, pulses, and oilseeds. The principal cereal
crops this are Teff, Barley, Maize, Sorghum, millet and oats.

4.5.1. Importance of crop categories

Cultivated crop area (113 million hectares in 2007/08) accounts for a relatively small
share of the total area of Ethiopia as most land is not suited for cultivation. Cereals dominate
Ethiopian crop production. Cereals were grown on 73.4 percent of the total area cultivated, by a
total of 11.2 million farmers. Together, these holders produce a yearly average of 12 million ton
of cereals, which is 68 percent of total agricultural production. The five major cereals are teff,
wheat, maize, sorghum and barley. Teff accounts for 28 percent of total cereal area, while maize
stands for 27 percent of total annual cereal production.

Table 3.4. Crop area and production (Smallholder farms, Meher season), 2004/05-2007/08

Average – 2004/2005 – 2007/08

Crop Grain Number of Area Share in total Production in Production in
holders Cultivated in area quintals Level quintals
hectares
Level production Share total in
production
Cultivated
(%) (%)

Grain 11,519,148 10,382,365 92.7 140,902,733 79.8

Cereals 11,156,837 8,230,211 73.4 120,629,724 68.3

Teff 5,462,782 2,337,850 20.9 24,079,480 13.6

Barley 3,842,462 1,024,390 9.1 13,264,217 7.5

Maize 7,287,931 1,595,238 14.2 33,142,865 18.8

Sorghum 4,253,534 1,429,886 12.8 22,161,808 12.5

Pulses 6,377,027 1,384,49 9 12.4 14,955,466 8.5

Oilseeds 3,127,131 767,655 6.9 5,317,543 3.0

Vegetables 4,936,741 106,585 1.0 4,248,25 2 2.4

Root crops 4,757,733 174,826 1.6 14,732,919 8.3

Fruit crops 2,658,415 51,078 0.5 4,034,590 2.3

Chat 2,068,262 141,881 1.3 1,264,269 0.7

Coffee 3,049,120 305,940 2.7 2,106,71 1 1.2

Hops 1,685,422 23,457 0.2 263,111 0.1

Source: CSA data

After cereals, the second most important crop group (in terms of acreage) is pulses. In 2004/05-
2007/08 6.4 million holders grew pulses on 12.4 percent of total area cultivated. Total pulse
production averaged 1.5 million tons per year, which is 8.5 percent of total crop production.
Oilseeds form the third most important crop group. It is cultivated on 6.9 percent of total area
cultivated, by 3.1 million holders. They produce an average of 0.5 million ton of oilseeds yearly,
i.e. 3 percent of total annual production. Coffee is a major cash crop, accounting for 3.8 percent
of GDP (and 19 and 35 percent of the quantity and value of exports respectively in that period),
but occupying only 2.7 percent of total area cultivated (i.e. 306 thousand hectares). Chat, another
stimulant crop, is cultivated by 2 million farmers on 1.3 percent of total area cultivated, and
 accounts for 5 percent of total export earnings. Vegetables and root crops together are cultivated
on 281 thousand hectares, 2.6 percent of total area cultivated. For instance, total production of 5
major crops from cereals categories of crops are shown in table

Table 3.5 total production of 5 major crops from cereals categories

Year Teff Barely Wheat maize Sorghum

Quin Are Yiel Qui Are Yie Quin Are Yie Quin Are Yie Quin Are Yie
ta a ds nta a lds ta a lds ta a lds ta a lds
ls(00 (ooo (qt/h ls(0 (ooo (qt/ ls(00 (ooo (qt/ ls(00 (ooo (qt/ ls(00 (ooo (qt/
0) ha) a) 00) ha) ha) 0) ha) ha) 0) ha) ha) 0) ha) ha)
1990 1333 138 9.6 981 743. 13. 6884 561. 12. 1455 788. 18. 8423 607. 13.
/91 7. 0 5 0.5 2 2 .1 3 2 0.7 8 4 .5 5 8
1994 9057 133 6.7 809 612. 13. 8860 556. 15. 1437 775. 18. 6459 435. 14.
/5 .1 9.8 0.5 9 1 .3 2 9 4.7 8 5 .8 1 8
1998 1208 136 8.8 742 697. 10. 1015 772. 12. 2532 131 19. 2073 139 14.
/99 7.4 7.6 3.8 6 6 .9 2 9 0 6.8 2 .4 9 0
2002 1419 193 7.4 107 920. 11. 2176 139 15. 2394 139 17. 1715 125 13.
/03 6.10 1.09 9.86 13 7 6.03 8.22 5 1.62 2.92 1 9.54 3.62 6
2006 2175 224 9.6 127 997. 12. 2219 145 15. 3336 152 21. 2173 146 14.
/07 5.97 6..0 06.7 86 7 0.75 9.54 2 7.95 6.12 8 5.98 3.07 8
2 9
2007 2437 240 10.1 132 101 13. 2463 147 16. 3776 169 22. 2316 146 15.
/08 7.00 5.00 21 9.00 3 0.00 4.00 7 4.00 4.00 2 0.00 4.00 8
2008 2992 256 11.6 135 985. 13. 2314 142 16. 3749 176 21. 2659 153 17.
/09 9.0 5.00 48.0 00 7 5 5 2 7.00 7.00 2 1.00 4.00 3
0
2009 3028 248 2405 152 978. 15. 2537 145 17. 3932 176 22. 2804 161 17.
/10 .00 1.00 .00 94.0 00 5 6.00 4 5 5.00 8.00 2 4.00 5.00 4
0
Aver 1597 196 8.1 113 869. 12. 1673 113 15. 2826 137 20. 1670 122 15.
age 0.95 5.51 98.9 2 97 3.5 7.6 3 7.6 8.7 1 5.5 2.04 2
of
1990
/91-
2009
/10
Source: EEA

a) Teff: the average annual production of teff between 1990/91and 2009/10 with average
growth rate of 1.9% per annum. Teff production account for 23% of the total cereal
 production output making it the 2nd most important crop next to maize. However, the price
of teff is often 2 to 3 times higher than maize making most valuable cereals. The total
area under teff production during same period was about 1.5 million hectares or 31 % of
the total areas under food crops. The areas under teff production increasing at an average
growth rate of 1% per annum between 1990/91and 2009/10. as compared to other cereals,
teff output per hectares is the lowest. The average for the period was 8.1 per hectares. Its
staple food in the centeral and northern part of Ethiopia and urban areas.

b) Wheat: the average annual production of Wheat was1673300 Quinta ls with an average
areas of cultivation of 1137600 hectares between the year 1990/91and 2009/10. The
average yield was estimated at 15.3% Quinta ls per hectares during same period. Wheat
production and area cultivated under wheat have increased on the average by 1.6% and
0.7 % per annum respectively during same period.

c) Barely: the average annual production of barely was estimated at 11398900 and account
for 15% of the total cereal production between the year 1990/91and 2009/10. The annual
average yield of barely was 12.97 million quintals per hectares during the period. The
corresponding of areas under crop during same period. This is the only cereals whose
annual production declined on the average by 0.4% per annum.

d) Maize: the mean annual maize output amounted 28267600 million tone between the year
1990/91and 2009/10 representing the largest shares 28% of cereal production. The
corresponding of areas under maize crop was 1378700 million hectares during the period.
The mean annual yield was 20.1 quintals per hectares representing the largest output per
hectares from all cereals.

e) Sorghum: is the 3rd most important crop which accounts for 18% of total cereals
production and 15% of the total area under crops on the production of Sorghum has
increased in recent years due to increased in areas cultivated. The mean annual
production was 1.67 million tons between the year 1990/91and 2009/10. The
corresponding average of areas under sorghum was 1222040 hectare between the same
periods. In general, two set of data used for from FAO and CSA for the analyzing.
Table 3.6 total production, area cultivated and yields of cereals, pulses and oil seeds.

Year Cereals Pulses Oil seeds

Quinta Area Yields Quinta Area Yields Quinta Area Yields

ls(000) (ooo ha) (qt/ha) ls(000 (ooo ha) (qt/ha) ls(000) (ooo (qt/ha)
ha)

1990 56118.610 4711.85 11.910 8150.00 925.00 8.859 560.00 144.00 3.889

1994 72760.00 5023.00 14.485 9550.00 1078.00 8.859 560.00 144.00 3.889

1998 110600.00 8771.00 12.61 11380.00 1276.00 8.9 580.00 146.00 3.973

2002 63440.23 6323.57 10.0 8115.08 1026.28 7.9 2082.12 499.77 4.1

2004 90007.28 6993.69 12.86 10248.58 1082.4 9.46 3253.15 587.92 5.5

2006 100297.71 7633.81 13.14 13379.98 1332.8 10.0 5379.76 840.80 6.4

2007 116242.71 8081.30 14.4 12637.62 1280.33 9.87 4863.53 796.47 6.1

2008 128658.00 8462.00 15.2 15618.00 1355 11.7 5128.00 759.00 6.7

2009 136456.00 8706.00 15.67 17534.00 1479.00 11.9 6664.00 745 8.9

2010 144964.00 8770.00 16.5 19270.00 1557.00 12.4 6557.00 855.00 7.6

Average 1274443.1 7344.6 13.67 12588.3 1239.2 9.98 3562.8 551.7 5.7
of 1990 -
2010
Source: central statistical authority (CSA)

Cereal accounts for almost more than 88% of total crops produced and almost 83.2% of total
areas under cultivation. Its staple food for over 10 million people in southern and oromia regions.
The next most important categories of food crops is pulses, which almost 10.75% of the total
production of food grain and 14.5% of the total area under food crops. Oil seeds constitute the
3rd categories of food crops with area of 0.75 % of the total food grain production and 2.3% of
total area under crops.

The overall performance of food crops remained very low especially when it compared to the
rapid population growth rate. the performance of food crops somehow improved due to changes
in government policy increased availability of inputs like fertilizer and improved seeds.

The period after the severe drought in 2002/2003 was particularly favorable to cereals production
in-terms of total output due to increase area under cultivation and due to good weather
conditions.

Graphical representation of the 5 major cereal crops in terms of total annual production, from
(1990/91-2009/10) years.

35000
30000
25000
20000
15000
10000 teff
wheat
5000 maize
barely
0
sorghum
ar /9
1
4/
5
/9
9
/0
3
/0
7
/0
8
/0
9
/1
0
/1
0
ye 0 9 8 2 6 7 8 9 9
1 99 19 1 99 2 00 2 00 2 00 2 00 2 00 00
-2
91
0/
1 99
e of
g
ra
A ve
4.5.2 Livestock production

When we came to livestock sub sectors of the economy Ethiopia's sands 1 st and 9th in Africa and
world respectively. Livestock is source of food, draft, power, fuels and cash income for peasant
households and commercial livestock farms. It also takes insurance in times of drought economic
hardship.

The output of livestock sub-sectors can be divided in to 2 parts. Food output meat and meat
products, milk and milk products, eggs honey and this among other things. Nonfood output
includes draft of power, wool, hides, skins, bee-wax, and manure and transport service.

In smallholders peasants mixed system 26% of livestock output is used as food. In pastoral
system this proportion increasing to 61%. In general, the sub sector has an important contribution
to the economy. However quality and productivity in the livestock conditions, this has
tremendous impact on the livestock output. The sub sectors contribute as high as 30-35% to the
value added of agriculture and allied activities and 12-15% of total GDP. Livestock is security,
investment and additional income for farmers in Ethiopia. This is also the 2nd largest source of
foreign exchange to the country through the exportation of live animals, meat, hides and skins.

Table 3.7 Describe the total smallholders livestock production.

years 1990/91 1994/95 1998/99 2002/03 2004/05 2006/07 2007/08 Averag

e
growth
rate

Meat (tons) 339,072. 404568. 340437. 3538396. 385367. 397363. 414506. 0.9
8 7 0 0 1 0 0

Hides(000 1890.0 2272.0 2023.0 2092.6 2164.6 2238.9 2330.5 1.0

pcs)

skins(000pcs 12878.0 15213.0 12870.0 13492.0 14144.6 14814.8 15510.6 0.8

)

Milk (millet 998.9 1039.4 1054.1 1091.8 1131.1 1171.7 1219.0 0.2
re)

Eggs 624.0 530.4 636.0 648.0 660.3 673.2 668.4 0.9

(million pcs)
years 1990/91 1994/95 1998/99 2002/03 2004/05 2006/07 2007/08 Averag
e
growth
rate

bee- 15600.0 5600.0 6720.0 6720. 6720.0 6720.0 6720.0 1.5

wax(tons)

Honey(tons) 14000.0 14000.0 16800. 16820.0 16800.0 16800.0 16800.0 1.5

Wool (tons) 1161.0 1212.0 1200.0 1267.7 1339.2 1412.1 1488.0 1.4

Source: MEDAC

Meat production which consists of beef, muttons, chicken food and camel meat was estimated at
339,072.8 tones in1990/91 has increased to 4114,560 tons in 2007/08. It shown an average
annual growth rate of 0.9% over the same period. Beef from cattle, muttons and goat meat
account for 61.3%, 20.5%, and 17.4% respectively of overall meat production in 1990/91. The
meat production was 7.5 Kgs per head per annum in 2006/07.

Hides and skins production in the country has increased over the years. Hides production was
1.89 million pieces in 1990/91 and reached 2.33 million by 2006/07 with an average annual
growth rate of 1%. Skins production has also shown an increase from12.87 million in 1990/91 to
15.55 million pieces in 2007/08 with an average annual growth rate of 0.8 % over the same
period.

The total milk production from all type of livestock has increased from 999 million liters in
1990/91 to 1219 million liters in 2007/08 with an average annual growth rate of 1.2% per annum.
Milk from cows accounts for about 68.1% and from goat and camels with percentage share of
16.5% and 15.4% respectively in 1990/91. per capita milk production stood at 22 liters per head
in 2007/08.

Egg production has increased over the years and reached 688 million pieces in 2007/08. its
production has shown an average annual growth rate of 0.9% between 1990/91 and 2007/08. per
capita production of eggs has decreased over the years and reached 12 pieces per head in
2007/08. bee-wax constituting another type of output from the livestock sub sectors, with an
output reaching 6720 tons in the year 2007/08.

Honey production has shown a steady increase from 14000 tons in 1990/91 to 16800 tons in
2007/08 with 1.5 % growth rate. Per capita production of honey was 0.3 KGS in 2007/08. Wool
production has shown relatively stable output throughout the period under review with an
average growth rate of 1.4% per annum between 1990/91 and 2007/08. it is observed that per
capita production of all the livestock products have decreased over the period under
consideration mainly due to high population growth.

Ethiopia’s livestock population (2002) is the largest in Africa, with 30,000,000 cattle;
24,000,000 sheep; 18,000,000 goats; 7,000,000 equines; 1,000,000 camels and 53,000,000
poultry. About 70% of the cattle and sheep and 30% of the goats are in the highlands above
1,500 meters. All camels are in the lowlands.

The livestock sub-sector accounts for 15% of the total GDP and 33% of agricultural output
(without including draft power and manure). Livestock is also an integral part of the farming
system and has major economic and social functions in the rural sector. The livestock sector,
however, faces very low productivity. The major constraints are the serious shortage of feed and
widespread diseases.

The increasing livestock density and the associated overgrazing on both arable and grazing lands
have serious impact on the land and vegetative cover. Over 80 percent of the livestock are in the
highly degraded and vulnerable Ethiopian highlands resulting with stocking rate of 160 TLU per
square kilometer significantly higher than the recommended TLU level for both humid and semi-
arid areas resulting in widespread overgrazing and land degradation. Policy issues and strategies
to reduce livestock impact on natural resources degradation and enhance its role in broadening
the livelihood base of the rural people will be investigated further.

Table 4.8 Ethiopia statistics for livestock numbers, meat and milk production and livestock
exports and milk imports for the period 1996-2005

  1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Cattle 31.2 32.6 35.4 35.1 33.1 35.4 40.6 39.0 38.1 38.5
no.
(,000,00
0)
Sheep 12.0 12.5 13.4 12.2 11.0 11.4 14.3 15.0 16.6 n.r
no.
(,000,00
0)
Goats 8.4 8.4 10.5 9.5 8.6 9.6 9.6 9.6 9.6 9.6
no.
(,000,00
0)
Horse 1.20 1.22 1.23 1.21 1.14 1.25 1.48 1.45 1.45 1.5
no.
(,000,00
0)
Asses 3.20 3.15 3.17 3.10 3.06 3.41 3.90 3.80 3.77 3.80
no.
(,000,00
0)
Camel 370 410 479 527 262 327 475 470 468 470
no.
(,000)
Beef and 267 270 274 290 294 304 352 338 331 336
veal
prod.
(,000
mt.)
Sheep 36.1 36.1 36.1 36.2 36.0 37.8 47.7 49.9 55.1 56.6
meats
prod.
(,000 mt)
Goat 25.0 25.0 28.0 27.1 25.6 28.6 28.7 28.7 28.7 28.7
meat
prod.
(,000
mt.)
Total 996.0 1007. 1019. 1030. 1365. 1518. 1676. 1578. 1582. 1583.
milk 4 1 4 5 1 4 2 3 3
prod.
(,000
mt.)
Cattle 0 800 1218 549 326 44 544 2217 2000 n.r.
exports
(head)
Sheep 4.0 4.0 15.5 30.7 40.0 15.0 1.1 11.7 0.053 n.r.
exports
(,000
head)
Goat & 0.5 1.8 2.5 1.9 1.2 0.2 1.1 3.6 2.1 n.r.
mutton
meat
exports
(,000 mt)
Milk 11.8 11.8 14.0 12.9 8.3 3.8 12.7 21.4 5.6 n.r.
equiv.
imports
(,000 mt)
Source: FAO 2006; n.r.=no record

Production from cattle has been estimated to be 620,000 tons of meat; 244,000 tons of milk;
24,000,000 tons of manure; and 2,400,000 hides annually. Per capita consumption of milk is
estimated at 19 liters per year, while meat consumption is about 13.9 kilos a year of which beef
and veal contribute 64 percent; and sheep, goats, chicken and camels provide the remainder. Skin
and hides are known contributors to local industries and 12-16 percent of the total export market.

Official exports averaged 500,000 sheep and goats mainly to the Middle East especially Saudi
Arabia. There are unrecorded cross-border exports to Djibouti, Somalia and Kenya. Domestic
demand has outstripped supply, resulting in local prices for cattle which are higher than world
prices, constituting a major bottleneck to exports.

The poor performance of agriculture is reflected in the national annual food deficit. The sector
has been beset by natural disasters, in particular periodic severe droughts, so the substantial
natural potential of the highlands, their fertile soil and good rainfall and irrigation have not been
realized. Lack of modern inputs for the subsistence sector, especially fertilizer; inadequate
availability of credit, poor credit recovery and widespread disorder and civil war are the main
constraints. These situations have drawn resources from productive use in the agricultural sector.

Since food production and population statistics in Ethiopia are notoriously unreliable, all estimates of national
food availability and consumption requirements are ‘guesstimates’ at best. During the late 1990s, 52% of
Ethiopia’s population consumed less than the recommended daily allowance of 2,100 kcal, but in the record
harvest year of 1995/96 this proportion fell only to 43%. This figure approximates the 40% of rural households
who farm less than 0.5 hectares which is inadequate to meet subsistence food needs even in good rainfall
years. Ethiopia suffers from structural as well as transitory food deficits, requiring substantial commercial and
concessional imports in non-drought years and extremely high levels of food aid in drought years. Table 1
show that the population estimated as needing assistance in the past five years alone has risen from 2.7 million
in 1996 (a Bumper harvest) to 7.7 million in 2000 (a drought year).
Table4 .9 Estimated crop production, food aid requirements and needy population in Ethiopia, 1995-2000
year Estimated crop Estimate of Needy Estimated Food Aid
 production(mt) Population Requirement (MT)

1995 - 4.0 million 492,000

1996 11,800,000 2.7 262,000

1997 8,800,000 3.4 329,000

1998 1,300,000 5.3 602,000

1999 10,700,000 6.6 460,000

2000 - 7.7 896,936

4. 6 Hindering factors on agricultural production

The major problems have their roots in poor sect oral policies including controls over input and
output prices and insecurity of land tenure. In the lowlands the low rainfall produces inadequate,
poor quality pastures; pastorals mostly keep cattle for prestige so low livestock production is
further aggravated by low off-take. Recently, government structural adjustments and trade
liberalization policies are being considered; and these could include guidelines for changes in
pricing and marketing of several farm products, including livestock. The intention to give
incentives to farmers to target their crop/livestock production to market demands and to practice
natural resource conservation could sustain the farming sector. Major constraints to the
agricultural sectors, in production are population pressure, traditional methods nature of
production and effects of physical hindering factors and food insecurity in our country.

4.6.1 Population pressure

It is important to make two considerations when one raise the issue of population pressuring in
rural Ethiopia. First, the size of cultivable land is finite while production is increasing through
time the size of farm land per households will get smaller and smaller but farmers are expected
to make expansion in the whatever remaining lands and other lands under pasture and forest
including in marginal lands to make sustain their holdings. So, that amount theory produce will
not be compatible with the increasing numbers of population. Secondary ,the increasing of
population through time, give rise to a host of related problems, continuous parceling and
holding, decreasing or no fallow period, expansion of farming in to marginal lands, steps slope
and forested land, problem of landlessness, shortage of grazing land, shortage of fire wood and
other construction materials.

4.6.2 Traditional methods of production

In Ethiopia agriculture basically traditional and subsistence in nature characterized and limited
with the use of primitive implements, primitive production practices and heavy dependency on
rainfall, production is completed using simple hand tools and the countries old ox-drawn would
plough on small and fragmented land holding. The traditional nature of agriculture is manifested
by limited usage of modern inputs, such as fertilizers, improved seeds, herbicide, pesticides,
irrigation and modern farm implementation, even, there is no tractors and combiners harvester.
Though there is access for modern farm implementation, the farmers do not have entitlements
because of lack of capital afford.

4.6.3 Physical factors

Among the most important factors affecting the life of farmers are:
i. Topography and soil: the topography of country of country has great effect on the
productivity of the cultivable land. Because of the nature of the topography, the fold will
take victims of seasonal flooding which in turn erode the soil deeply, since the fertilizer
soil, the yields of land will decreases. Even the farmers cannot afford to buy modern farm
inputs, so as increase fertility of the eroded land.

ii. Climate: even though climate together with fertile land is considered the countries
greater resource for no production. In climate, rainfall is critical to agriculture, since
farms follow rain fed agricultural system, the amount duration, and distribution of rain
has great effects on the amount of production. Depending on the climate conditions the
amount of production very greatly. The problem of food shortage may result through
time, which may in turn caused brought, which has negative impact on the productivity of
farmers. Therefore, the government needs to fulfill this.
In summary, the main problems of constraining the production of agriculture are:

 Environmental constraints: this like inadequate and unreliable rainfall for intensive
crop production, soil fertility loss due to continuous use, soil erosion, and land
degradation.

 Technological constraints: include dependence of traditional hand tools and practice,

shortage of oxen is another important production problem.

 Infrastructure constraints: this include like roads and transportation systems, irrigation
facilities and education and health in situations.

4.7 Socioeconomic consequence of problems

The disaster related problem of food shortage should have socioeconomic effects on the peasant
households, the main consequences identified as follows.
a) Sale of productive assets: to cop up with problem of food shortage house hold dispose
their productive assets such as cattle, donkey, sheep, ox sell and its purchase food from
market. This intern has partly contributed to the shortage of plough animal in the country.

b) Sale of fuel Wood: food challenges have forced individual to clear bushes and forest for
sell to get money to purchase food. This has also its own contribution for the decline of
forest coverage of the country.

c) Begging: household (mainly vulnerable group elderly, disabled, children, and women)
who suffers food shortage moves from rural to urban areas to survive by begging.

d) Migration and family separation: even though this is the last food insecurity
households members leaves their areas in a seasonal or distress migration. The family
breaks up and each member take action, which is best fit for survival.

e) Hunger and human disease: particular disease associated with malnutrition of children.

f) Shortage of farm input: disaster induced food shortage has made many households
unable to purchase inputs like fertilizer and results in shortage of seed because they use it
for consumption.
Currently, safety net program is playing a great role to minimize intensity of the problem by
providing food and other materials, the program enable the farmers to engage in different types
of development workers, which in turn benefit farmers as on other source of income. To mention
some of the activities: Water shed development, Soil and water conservation, Seedling
preparation, Water harvesting technology, Family package program.

By engaging in those activities, the farmer can get both direct and indirect benefit. Directly, they
can beneficiary form the income will earn, this income will be spent to buy modern farm input
such as fertilizers, and improved seeds, which inform enable thermo to increase productivity of
the agriculture sectors. The program made significant contribution by providing the necessary
materials for victim groups. but, currently the farmers are highly dependent of this programmed
as a source of income (50%) and also food aid (50%) rather than using their own effort to solve
the problem at hand. so, the program may is important to make two consideration have great
contribution increasing the dependency ratio. To reverse the situation the program implementers
must take measures.

4.8 The role of government in mitigation of food crisis

In Ethiopia, food security is crucial problem which should have been mitigate priority but but did
not give proper and due attention by the last successive government. Considering this fact, the
federal government of Ethiopia has set it economic policy with the core problem of attainment
sustained growth of agricultural led industrialization with the major target being household’s
level self-sufficiency. Before looking at the role of government in the country area, it is better to
describe the policies and strategies because it will help the reader to judge the role of government
in achieving agricultural development. The policies and strategies persuaded to achieve
agricultural development objectives, which are in line with, and applicable to drought prone
areas are described below.

1) Crop farming in low rainfall and drought prone areas agricultural objectives were
expected to materialized.

 Improving supply of fertilizers

  Improving supply of drought resistant seed varies shortage of farm input

 Improving access to credit service

 Improving agricultural irrigation ( in the long term)

 Reducing the pre and post harvest loss

 Enhancing agricultural extension based on water harvesting techniques

2) Reforestation: deforestation is treating very part of region. To reverse this situation the
regional government has adapted strategies such as:

 Encourage individual plantation around homestead and backward plantation (by

subsidizing seedlings)

 maintain existing government and natural forest areas

 Encouraging community seed species.

Note: As already, describe in this chapter Ethiopia has been incorporated natural resource
management program under extension package program.

3) Conservation: the regional government has adapted a regional conservation strategy. This
strategy gives at most importance to soil and water conservation effort.

4) Livestock: the livestock development plan concentrates on solving the 3 inter related problem
of animal husbandry. These are feed constraint, the health constraint, Genetic problems.

The available data in Ethiopia minister of agriculture (MOA) shows amount of improved seeds
applied is on limited cereals. Even though, the application shows an increasing trend. This is due
to testes. As depicted, already veterinary professional provide vaccination to protect animal from
disease and improved animal distribution accomplish by the government in the country as part of
MOA extension package strategy to achieve agricultural development objectives. In addition to
this country agricultural and rural development department (ARDD) has been programmed to
improved the participation of female in the development objectives under gender ministering
extension package program.
CHAPTER FIVE
5. CONCLUSIONS AND RECOMMENDATIONS
5.1 SUMMARY AND CONCLUSIONS
Food security has been defined as “access by all people at all times to enough food for an active
and healthy life.” Food insecurity is the most crucial problem facing rural households in
Ethiopia. Even though the region has considerable agricultural potential, more than half of its
rural households are unable to feed themselves throughout the year. As it can be from data ther
are five agro ecological zones in Ethiopia. Namely: wurch, woinadega, kolla, and berha (desert).
The available data shows that in the Ethiopia land use pattern is low compared to potential arable
land.
Agriculture is the dominate source of income of people living in our country. In case crop
production is highly contribute from total farming when compared to the livestock rearing.

Ethiopia with its extremely variable agro-climatic conditions has several major ecological
systems that support large and very diverse genetic resources. One of the consequences of the
poor performance of agriculture is widespread food insecurity. In the country level around 50%
to 60% of the country population is food insecure or live below poverty line.

Ethiopia has been structurally food deficit since at least 1980. The food gap rose from 0.75 million
tons in 1979/80 to 5 million tons in 1993/94, falling to 2.6 million tons in 1995/96 despite a record
harvest (Befekadu and Berhanu 2000:176). Even in that year, 240,000 tons of food aids were deliv -
ered, suggesting that chronic food insecurity afflicts millions of Ethiopians in the absence of transi-
tory production shocks. The poor performance of agriculture is reflected in the national annual
food deficit. The sector has been beset by natural disasters, in particular periodic severe
droughts, so the substantial natural potential of the highlands, their fertile soil and good rainfall
and irrigation have not been realized. Lack of modern inputs for the subsistence sector, espe-
cially fertilizer; inadequate availability of credit, poor credit recovery and Deforestation also one
problem in our country.
Abs sense of government on market pricing policy has created opportunities to be exploited by
market in term depilatories poor development of infrastructure has limited the income generating
capacity of people and decreasing productivity of food production. Generally, socioeconomic
disaster are revealed related with food crisis,hunger,human disease, cattle loss, migration, family
Sale of productive assets ,Sale of fuel Wood ,Begging, Migration and family separation, Hunger
and human disease, shortage of farm input and dependence syndrome.

Ethiopia is highly vulnerable to food insecurity problems since the farmers are dependent on
rainfall, Topography and soil, Climate, environmental constraints, technological constraints,
infrastructure constraints, limited with the use of primitive implements, primitive production
practices and heavy dependency on rainfall, limited usage of modern inputs, such as fertilizers,
improved seeds, herbicide ,pesticides, irrigation and modern farm implementation, even, there is
no tractors and combines harvester and Population pressure is important to make two
consideration. the size of cultivable land and ,the increasing of population through time.
Currently, safety net program is playing a great role to minimize intensity of the problem by
providing food and other materials, the program enable the farmers to engage in different types
of development workers, which in turn benefit farmers as on other source of income.

Finally, this paper tried to look at measure taken by the government to mitigate the problem of
food insecurity in Ethiopia. This are Crop farming in low rainfall and drought prone areas
agricultural objectives were expected to materialized, Reforestation, Conservation, improved
Livestock production.

5.2 RECOMMENDATIONS

Hence, after summarizing the findings of this study, the possible recommendations that can be
made from this study are as follows:

1. As family size and food insecurity are positively related serious attention has to be given to
limit the increasing population in the Ethiopia. This can be achieved by creating sufficient
awareness to effect family planning in the rural households. So, along with creation of effective
family planning through effective extension services some methods of incentives, such as
material reward for those households accepting a given number of children by the end of
reproductive age, to limit the family size should be considered.

2. Productive resources especially land is very limiting and highly binding resource in the
Ethiopia. So a medium and longer-term food insecurity strategy through increased food
production must be introduced. The possible measures that can be undertaken to achieve this
strategy include crop diversity, runoff and flood harvesting, timely and low cost supply of inputs
like fertilizer, improved seed, agrochemicals, further development of micro-irrigation.

3. Sustainable food security intervention must not exclude the improvement of production and
productivity of agricultural sector through use of irrigation. Therefore, farmers who have
irrigable farmland should be encouraged to use inputs such as fertilizer, improved seed, and
pesticides through effective extension services and credit facilities.

4. Sticking to the findings of this study, livestock sub sector plays a great role in the struggle to
eliminate food insecurity. Its contribution to the household food energy requirement and total
income is significant. Hence, necessary effort should be made to improve the production and
productivity of the sector. This can be done through the provision of adequate veterinary
services, improved water supply points, introduction of timely and effective artificial
insemination services to up-grade the already existing breeds, launching sustainable and effective
forage development program, provision of training for the livestock holders on how to improve
their production and productivity, improving the marketing conditions, etc.

5. Rural households in the study area have very limited room for generation of income. Hence,
for these households to enhance their welfare in general and food security in particular, they
must have diversified access to income alternatives.

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Declaration letter

I ARARSO JOHAR with ID. No 02024321 have did the research entitled

THE Challenge of Food Security and the Role of Government in

Ethiopia on my own. The research has been done under the advisor
ship of DR.S.V. RAO. The research is done as requirement for partial for
fulfillments of the degree of Bachelor of art in Economics, department
Economics, School of Business and Economics, Adama Science and
Technology University.

Student Name: Ararso Johar

ID.No: 02024321 Signature _____________
Advisor Name: DR.S.V. RAO signature______________