“Factors Determining Ethiopia’s Foreign Trade Efficiency: Using A Dynamic Gravity Approach”

Abstract

The implication of factors determining trade efficiency ranges from the need for country specific export promotion and bilateral integration activities to the anticipation of major distributional changes caused by the expansion of trade in the near future. The study aims to investigate factors determining Ethiopia’s foreign trade efficiency using a dynamic gravity approach and examine the trend of Ethiopia’s foreign trade. A time series secondary data covering 2000 -2022 periods with a source from World Bank and world database was utilized. Dynamic gravity approach was employed to investigate factors determining Ethiopia’s foreign trade efficiency. From the descriptive analyses, the dynamic gravity model provides a comprehensive framework for understanding the factors determining Ethiopia's foreign trade efficiency. The significance of lagged trade highlights the importance of historical trade relationships, while economic size emphasizes the benefits of engaging with large economies. Geographical distance, though a challenge, can be mitigated through infrastructure development and regional integration. From the econometrics analyses, Firstly, the positive and statistically significant coefficient of lagged trade indicates a strong autoregressive nature of bilateral trade flows, implying that past trade levels significantly influence current trade volumes. This suggests the persistence of trade relationships over time, highlighting the importance of considering dynamic effects in analyzing Ethiopia's trade dynamics. Moreover, the positive coefficients of economic size of trading pairs underscore the importance of trading with larger economies, as larger economies tend to have stronger trade relationships with Ethiopia. For Ethiopia, the suggested measures include diversifying exports to realize foreign trade efficiency. Ethiopia should explore diversifying export destinations beyond the studied countries, as untapped potential may exist in partnerships not currently emphasized.