Contribution Of Export Diversification For Economic Growth In Ethiopia

Abstract

The role of export diversification as a developmental tool to enhance economic growth for developing economies like Ethiopia has received substantial concern during the recent times. This paper has investigated to examine the contribution of export diversification for economic growth in Ethiopia. The problem is in most developing countries like Ethiopia, there is an imbalance in the composition of domestic production and domestic demand and the shortage of exports proceed to finance imports make the country rely on other source of finance such as loan. Aid etc. which results debt burden. It is obvious that the bulk of Ethiopia export trade consists of agricultural products depends of on a few agricultural products for export has heavily undermined the export growth in particular and the economic growth in general. The sources of the data were from Ministry of Finance and Economic Development (MoFED), National Bank of Ethiopia (NBE), Ethiopian Economic Association /EEA/, Central Statistical Authority/CSA/Organization for Economic Corporation and Development (OECD)(from OECD. stat database), International Monetary Fund/IMF/ world outlook database, World Bank WDI (world development indicator). Ethiopia is one of the developing countries that mainly focused on export of agricultural (primary products) of commodities. The data were collected from secondary data source and the paper analyzed by using ARDL model estimation technique and time series data from period 1990/91 to 2020/21. Before analyzing long run relationship of the series unit root test, Diagnostic test and bound test was conducted. The estimated long run model revels that export diversification, inflation, gross capital formation and trade openness have statistically significant effect on economic growth whereas; real effective exchange rate has negative effect on economic growth. In the error correction model, the coefficient of error correction term is -0.184(this represents the error correction term represents the long run relationship. A negative and significant coefficient of the error correction term indicates the presence of long run causal relationship) and suggesting about 18.4 percent annual adjustment towards long run equilibrium. The estimated coefficients of the short-run model indicate that export diversification and inflation have positive impact on economic growth of Ethiopia whereas real effective exchange rate and trade openness have negative impact on Ethiopian economic growth. Thus, as policy implication the government should promote export diversification through expanding export sectors (commodities), reducing of export taxes on commodities, and creating conducive environment for investors. And as the study indicates the Ethiopian exports are mainly dominated by agricultural (primary) commodities. So the government should extend its export commodities to other sectors by giving subsidies and other incentives which encourage industrial and service product exporters.