The Effect of Export Diversification on Economic Growth in Ethiopia.

Abstract

The main objective of this study is to examine the impact of export diversification on economic growth in Ethiopia. Annual time series data on real GDP per capita, export diversification index, gross fixed capital formation (for domestic investment), broad money (money supply) and trade openness or openness of the economy were the variables collected for the analysis for the period 1990-2022. To estimate the data, Autoregressive Distributed lag model, applying bounds test was adopted. The empirical results show that export diversification has negative but insignificant impact on economic growth in Ethiopia in the long run. Similarly, domestic investment has negative impact on economic growth both in long run and short run. However, its impact is significant only in the short run. Broad money (M2) has positive impact on economic growth in the long run; showing that an expansion in the money supply or M2 positively impacted economic growth measured by real GDP per capita in the long term. Openness of the economy has negative impact on economic growth both in the short run and long run. However, its impact is significant only in the long run. This result is due to the nature of Ethiopia’s primary products with the attendant deteriorating terms of trade associated with them and the high import and low export in the country. Based on the result the study recommended that due to the long-run nature of the relationships found in the study, it is crucial for policy makers to adopt a long-term planning and policy framework. This includes developing comprehensive strategies and policies that address the identified constraints and promote sustainable economic growth over time.