Determinants of Ethiopia's Export Performance: A Gravity Model Analysis

The purpose of this paper is to identify and empirically analyze determinants of export performance of Ethiopia. It begins with a novel decomposition of the growth in countries’ exports into the contribution from internal supply-side and external market access conditions. Building on the results of this decomposition, it moves on to an econometric analysis of the determinants of export performance. A gravity model is employed with panel data using 30 Ethiopia’s trading partners for the period 1995–2007. The model is estimated with the Generalized Two Stages Least Squares (G2SLS) method. Endogeneity of FDI and GDP to exports, heteroskedasticity and serial correlation for AR (1) are controlled.

The results suggest that supply side conditions are a major factor for Ethiopia's export performance. The results show that good institutional quality and internal transport infrastructure appear to be major determinants, whereas the real exchange rate and FDI have no statistically significant effect on Ethiopia's export performance. Furthermore, the growth of domestic national income affects Ethiopian exports positively.

Foreign market access conditions also play a significant role. The results indicate that import barriers imposed by Ethiopia’s trading partners do play an important role in determining the volume of Ethiopian exports. Moreover, export performance is positively related to Ethiopia’s trading partners’ national income, and distance, which is a proxy for transport costs, affects Ethiopian exports negatively.

Trade and development discussion paper no. 01/2009, June 2009

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