CONTRIBUTION OF FOREIGN TRADE TO
THE ECONOMIC GRWOTH OF ETHIOPIA
A SENIOR ESSAY PREPARED FOR PATIAL
REQUIREMENT OF BACHELOR OF ART DEGREE IN
ECONOMICS
BY:
REDWAN KEDIR
ADVISOR:
BADASSA WOLTEJI (MA)
DEPARTMENT OF ECONOMICS
COLLEGE OF BUSINESS AND ECONOMICS
JIMMA UNIVERSIT
MAY. 2011
1
JIMMA UNIVERSITY
ABSTRACT
It is known that Ethiopians were engaged in import and export of different commodities
during the time in which the axumit kingdom was in height of its power. It was carried out
traditionally until after the Italian invention it was organized under the ministry of trade. This is
continued until 1974 with out government intervention in the trade sector when the degree
regime took power all of the economy activity become centralized including foreign trade. After
the fall of the degree the transitional government of Ethiopia took certain measures to be
liberalized trade and get in the international market of full swing. Ethiopian foreign trade
caricaturized by exporting primary commodity, fluctuation involve and volume of export,
importing capital item, few destination for its export. There for this study aimed at assessing the
contribution of the sector in the countries economy and with regard or the source of data,
secondary data is entirely used and this data was covers the period 1981/82- 2008/09.
Descriptive analysis was used to analysis the data. Tables were used to show the trends of
contribution of the sector to the material well being and the trend volume value of export and
import for the period under consideration.
I
2
ACKNOWLEDGEMENT
First and for most, especial acknowledgement is attributed to Ato Bndassa Woltaji, My
senior essay advisor. Whose valuable comments, constrictive critiques and produce a great deal
of effort in my study.
Secondly my help felt gratitude goes to my family and friends to there support on the
entire activities of this paper.
I also want to tank w/ro Almaz for typing the paper. Above all I want to tank AllAh for.
II
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Table of Contents
Contents
Page
Abstract ……………………………………………………………………………….I
Acknowledgement........................................................................................................II
Table of Contents ………………………………………….…………………………III
List of Tables ………………………………………………..……………………….IV
Chapter One
1.Introduction.................................................................................................................1
1.1 Back ground of the Study ...................................................................................1
1.2 Statement of the Problem ...................................................................................3
1.3 Objective of the Study .......................................................................................5
1.4 Significance of the Study ...................................................................................5
1.5 Scope of the Study .............................................................................................5
1.6 Methodology ……………………………………………………….……..…..5
1.7 Limitation of the Study ……………………………………………..…….…..6
1.8 Organization of the Paper .................................................................................6
Chapter Two
2. Literature Review ...................................................................................................7
2.1.1. Historical Development of the Modern Trade Theory.................................7
2.1.2 The New Trade Theories …….....................................................................11
2.1.3. The Base and Gains of Trade …………………………………..……..….12
2.1.4 Trade Strategies and Development …………………………..……………14
III
I. Import Substitution Strategy……………………………………..…....15
4
II. Export Promotion Strategy ……………………………………..…....16
2.2. Empirical Literature …………………………………………………..…….16
2.2.2 Level of International Integration ………………………………….……18
Chapter Three
3. Data Analysis ………………………………………………………….………21
3.1 The Performance and Structure of Export ………………………….……...21
3.1.1. The Rule and Performance of Export In the Pre Reform
Period …. ………………………………………………………..…….21
3.1.2. The Trend Involve of Export Pre reform………………………..…..…21
3.1.3 Trend in Volume of Export Pre reform …………………………….….23
3.1.4 Structure of Export Pre reform ………………………………………..25
3.2 The Role and Performance Of Export In The Post Reform Period….…...25
3.2.1 Trends in the Value of Export Post Reform Period …………….……..26
3.2.2 Trend in Volume of Export Post Reform…………………….………..27
3.2.3 Structure of Export …………………………………………..………..29
3.2.4 Direction of Export ………………………………………..………….29
3.3. Performance and Structure of Import …………………….….…….……..31
3.3.1 Trend in Value of Imports per Reform ………………….….……….…31
3.3.2 Trend in Value of Import Post Reform…………………….….……….33
3.3.3 Trend in Volume of Import Post reform…………………..….………..34
3.3.4 Trend in Volume of Import Post Reform…………………..………….35
3.3.5 Structure of Import ……………………………………….….………..36
IV
3.3.6 Source of Import ……………………………………….………………….37
5
3.4 Major Constraints of Foreign Trade In Ethiopia………………………………37
3.4.1 Commodity Export Dependency ………………………………………….37
3.4.2 Falling Prices Fluctuations and Variability ………………………………38
Chapter Four
4. Conclusion and Recommendations …………………………………….……….39
4.1 Conclusion ………………………………………………………….………39
4.2 Recommendations ……………………………………………….….….…..41
Reference………………………………………………………….….…….…42
Annex
V
List of Tables
6
Table No
Topic
1: Average Percentage Shore of Export And Import ……………………….…...21
2: Value of Major Export Commodity in Million Birr (Pre Reform)…………...23
3: The Value of Export by Major Export Commodity Group (In Million birr)
Post Reform ……………………………………………………………….….27
4: Direction of Export ……………………………………………………………30
5: Value of Major Import by End Use (In Million birr)………………………….32
6: Percentage Shore of Value of Major Import ………………………………….33
7: Percentage Shore Volume of Import (Pre Reform)……………………………34
8. Percentage Share Volume of import (Post Reform)…………………….….….36
VI
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CHAPTER ONE
1.Introduction
1.1. Background
International trade has been going for thousands of years different thinkers have been writing
lots about the courses of international trade. Including the mercantilist idea, which missed the
main point of what trade is all about and there by failed to recoginize that its conclusion were
valid only in certain cases rather than in general (William Son, 1983), lots have been said on the
issues.
It is clear that every nation is operating in international trading system. An international trading
system takes place because some one in one country has some thing that some one on other
country wants to buy. Nature has also endowed different countries with different resources. The
differences among countries in terms of natural resources obtains. Countries to involve in
international transaction of goods and services. Though Ethiopia is a country endowed with
favourable environment and enormous natural resources, the countries involvement in
international trade in inevitable and very important forms development. According the contract
has been involving in the system.
Like any other least developed country, Ethiopia’s foreign trade has major structural problems
on the supply side. It extremely depends on few primary agricultural commodities for export.
Exports are characterized by huge fluctuations on volume and also avery high degree of
concentration of export on few commodities such as coffee on the demand side, apart from a
well – known low income elasticity for the type of commodities that Ethiopia exports it also
faces a declining price of export and rising price for its import in international market. In import
side the import are largely found to be capital goods and including machinery. (Birhanu and
Befekadu 1999, 2000).
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After the fall of the derg regime in 1991. Current government under took trade liberalization.
Even though it is and undeniable fact trade liberalizations contributes positively to the
industrialization process of an economy, liberalization alone is not the ansewer to the problem.
The new government, Ethiopian peoples revolutionory democratic front (EPRD), Made a’U’ turn
in economic policy relative to its predecessor, The government signed on structural adjustment
program sponsors by the Breton Woods institutions, which encompassed a more liberal and
market Directed economic polices. Among and table policy changes that have been undertaken
include devastation of
domestic currency, removing price controls, liberalizing trade,
privatization of public enterprises and opening up the economy for foreign investment. As a
result of government measures to promote free market competition in foreign trade export value
increased about 34% between 1991/92- 1995/96, while import value increased by about 12%
during the same period, However also remains to be done so that export earnings can effectively
cover the import expenditure of the country. (Kinfe, 2001).
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1.2 Statement of The Problem
Every nation strives after development while economic progress is an essential component, it is
not the only component. Development is not purely an economic phenomenon. In an ultimate
sense it must encompass more than the material and financial side of peoples lives.
Development, there for be perceived
as multidimensional
process
involving
the
reorganization and reorientation of entire economic and social system In addition to
improvements in income and output. It typical involves radical changes in institutional social,
and administrative structures as well as in popular attitudes and in many cases, even customes
and beliefs. Finally, although development is usually defined in analional context, its wide
spread realization may necessitate fundamental modification of the international economic and
social system as we. (Micheal P to daro 1994 P62)
The ultimate objective of any less developed country is to ensure sustained socio economic
development. The development effert requires huge amount of resources even more than what
the economy can generate. The Ethiopian economy is characterized by low level of productivity,
high rates of populate in growth low level of saving, high current account defict, import of
capital good. Foreign exchange constraints and large external debt. Hence the primary objective
of the government’s policy would be to over come these problems and rapid sustained economic
growth (Zelalem, 2005).
The evolution of Ethiopian economy and its growth performance can be considered as tanking
place in three passes following the political swing of the country. The growth rate of the nations
economy. Which performs un satisfactory both in real GDP and real percapita GDP terms over
the last 42 years. Especially in the period from 1974-1991. This was the period when the dergee
over through monarcity government system. This government experienced a decimal macro
economic performance. This governments experiences a decimal macro economic performance.
This had ended up in the increasing degree of macro economic distortion and misallocation of
scarce resources how ever, After over through the military government the transitional
government of Ethiopia to adopt a market oriented economic policy (EEA 2005).
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The liberalization measures undertaken since the early 1990’s range from privatization of various
previously government owned enter prises to deregulation of both the foreign trade regime and
domestic prices. A lot of public enterprises hove been either sold the privet sector or transformed
to the employees with government initial support. The rationale of reversing the ownership
structure of the public institutions to privet hands is to encourage the privet sector to play a
significant role in the economy in line with the usual argument that a market economy is more
efficient in contrast to the public sector.
Despite the fact that Ethiopian international trade interaction increased its significance in
improving the performance of the economy doesn’t seem remarkable. Thus in this paper I tried
to show what foreign trade contribute to the economic growth of Ethiopia
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1.3 Objective of the Study
The main objective of this study is to look the extent to which foreign trade contributed in the
growth of Ethiopian economy. In addition to this study specifically focuses on the following
specific objectives.

To review its volume and trends

To analize the structure and direction of export and import of the country.

To propose possible ways as to how maker trade more effective in economic growth.
1.4 Significance of the Study
Despite the fact that the attainment of economic growth in any country requires trade interaction
among countries this study expected to provide baseline information concerning the problem
faced foreign trade to contribute to economic growth of Ethiopia.
1.5 Scope of the Study
This study focus on foreign trade contribution on different consiquestive regimes of Ethiopia.
1.6 Methodology
The data for this study obtained by
reviewing different secondary data like national bank of
Ethiopia (NBE) annual reports: ministry of finance and economic development central static
authority (CSA). Other secondary data gathered from magazines and journal books.
The methodology for analyzing the data I used descriptive analysis and aided by different
statically tools like percentages, charts and tables.
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1.7 Limitation of the Study
Some of the major limitations of the study are stored below:

Time constraint: the lime given for this study is not enough for analyzing and interpreting the
data.

Unavailability of data: Since the secondary data obtained from different organization it is
difficult to organize.

Financial constraints: the money we get from the faculties is not enough to facilitate this
research activity.
1.8 Organization of the Paper
Following this introductory part, review of literature flow, in this port of the paper the orotical
and empirical literatures are discussed. The third chapter focuses on the descriptive analysis on
Ethiopian foreign trade and economic growth, the last chapter win have conclusion and
recommendation part.
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CHAPTER TWO
2. Literature Review
2.1 Historical Development of the Modern Trade Theory.
Modern trade theory is the product of an evolution of ideas in economic thought. In particular.
The writings of Mercantilists, Adam smith and David Record have been instrumental in
providing the from work of modern trade theory.
The economic doctrine that prevailed during the first of two centuries of the developments of
nation sate – the seventeenth and eighteenth centuries – was mercantilism. According to
mercantilists to lists, the central question was how a nation could regulate its domestic and
international appears so as to promote its own interests.
The doctrine of mercantilism has many modernfetures: it was highly nationalistic, viewing the
well being of the home nation as of prime importance; it favours the regulation and planning of
economic activity as an efficient means of fostering the goals of the nation; and it generally
viewed foreign trade with suspicion.
The most important way in which nation could growth rich according to mercantilism was by
acquiring precious meatless, especially gold. Exports were viewed favourably as long as they
brought in gold imports were viewed with apprehension. Briefly, the mercantilists maintained
that the way for a nation to become reich and powerful was to expert more than it imported. The
resulting export surplus would then be set by an inflow of precious metals, particularly gold and
silver. The more gold and silver a nation had the richer and more powerful it was. Thus
government had to do on its power to more powerful it was. Thus government had to do on its
power to stimulate the nations export and discoursed or restrict imports particularly the imports
luxury consumption (D. Solvatore 1990 P. 20).
14
For mercantilists, if a country could achieve a favourable trade balance it could enjoy payments
received from the rest of the world in the form of gold and sliver. Such revenues would
contribute to increase spending and rise domestic out put (GDP) and employment.
Mercantilists believed that one nation could gain only at the expense of another nation and
advocated strict government control of all economic activity and trade. However different writers
challenge there views. According to David Hume specie-flow doctrine, favourable trade balance
was possible only in the short run. Over time it would automatically be eliminated. They were
also attacked for their static view of world economy.
To mercantilists, the worlds economic pie is of constant size. This means that on nations gain
from trade come at the expense of its trading partners; not all nations could simultaneously enjoy
the benefits of international trade. This view was strongly challenged by Adam Smith with the
publication of his book the wealth of nations in 1776.
The next stage in development of modern trade theory is found in the writings of classical
economist Adam Smith. Smith was a leading advocate of free trade (open market ) on the ground
that it promoted the international division of labour. (R.J. Carbaugh, 1992).
Adam smiths theory of absolute advantage states that when a nation is more efficient than the
other nation in production of one commodity but is less efficient than another nation in
producing a second commodity, then each nation can gain by specializing in the production the
commodity of absolute advantage and exchange parts of out put with the other nation for the
commodity of its absolute disadvantage (D. Salvalore 1990. P. 22).
Adam Smith rejected the mercantilist’s
view that countrys benefit at expense of others.
According to Smith, the worlds economic pie is not fixed quantity. Internationally trade permits
nation to take advantage of specialization and the division of labour which increase the general
level of productivity with in the country and thus increase world out put. His dynamic view of
trade suggested that both trashing partners could simultaneously enjoy higher level of production
and consumption with free trade. (R.J. Carbaugh. 1992).
Unlike mercantilist, Adam Smith belived that all nations would gain from trade and strongly
advocated a policy of laissez- faire as little government interference with the economic systems
15
possible. Then according to Adam Smith, free trade would cause world resource to be utilized
most efficiently and would maximize world welfare.
Smith assumes with out argument that international trade requires producer of exports to have
an absolute advantage, that is, an exporting country must be able to produce with a given amount
of capital and labour a larger out put than any rival. But, this base of trade is not realistic because
there are many under developed countries which do not possess absolute advantage in the
production of any commodity. And yet they have trade relations with other countries. Thus
smith’s analysis is weak and unrealistic. (M.L. Jhingan 1992. P.3).
Dissatisfied with the looseness in smith’s theory David Ricardo (1772-1823) developed a trade
theory to show that mutually beneficiary trade could occur when one a nation was absolutely
more efficient than the other in the production of all goods. Like Smith Ricordo emphasized the
supply of the market.
According to this theory, the immediate basis for trade stemmed from cost difference between
nations, which are under laid by national and squired advantage. Acountry tends to specialize in
production of those commodities in which it possess a comparative advantage by virtue of its
climate, natural resources, skill of its people and capital equipment. Etc (R.J. Carbaugh 1992).
Ricardo emphasis comparative (relative) cost differences According to his comparative
advantage principle even if a nation has an absolute advantage in the production of goods abase
for mutually beneficial trade may still exists. The less efficient nation should specialize in export
of goods in which its absolute disadvantage is less. But the model is criticized for many
assumptions used. The most severe criticism of comparative advantage doctrine is that it is based
on the labour theory of valve. This theory says the value or price of a commodity depends
exclusively on the amount of labour going in to production of commodity. In calculating
production costs, it takes only labour cost and neglect non-labour involved in the production of
commodities. This implies either labour is the only factor of production or labour used is homo
generous. (D. Salvator, 1990).
Sethi (1985) noted that the modern trade theory economists have made three important
improvements on the theory of comparative advantage these are expressing production cost in
terms of money, inclusion of the law of returns in the theory and influence elasticity demand.
16
Ricardian trade theory argues that the basis for trade stems from differences in international
production caracterstics and facter productvitles. Owning domestic differences in natural
advantages acquire advantages however the recardian model sheds less light on important trade
issues such as the influence the resource supplies on international specialization and influence of
trade on distribution of income.
In 19 20’s Eliltecksher and Bertil ohlin formulated a model to study these issues and there theory
is considered as a modern trade theory (neo classical factor endowment theory).
The theory postulates that trade arise from differences in costs that in turn arises from inter
country differences in relative factor endowments. The immediate commodity price arise on a
count of the diference in the factor supplies in the two countries. That is differences in relative
factor endownments are the most important causes of international differences in price structure.
(Mannur 1997 P.117).
Thus according toHeksher Ohlin, medal international difference in factor supply conditions
explain much of international trade. Supply conditions includes factor productivities as well as
factor endowment. Unlike Recordation trade theory, which places primer reliance on factor
productiveness as the main determinant of trade, Heksher – Ohlin model delegates primary
importance to factor endowments nations enjoy (R.J. Carbaugh 1992. P.62).
This theory is based on many assumptions as the base of the theory first commodities
defer in their factor requirements i.e commodities require different proportions of factor
production. Secondly, World resources are evenly distributed among nations. Based on the
assumptions and propositions. The theory is stated as “ a nation will export a commodity whose
production requires the intensive use of a nations relatively abundant and cheap factor and
import a commodity whose production requires the intensive use of anationes relatively abundant
and cheap factor and import a commodity whose production requires the nations scarce creep
factor. In short the relatively labour rich nation exports relatively labour intensive commodity
and imports capital intensive commodity. (D. Salvator 1990. P.112).
17
Not all recent empirical tests support the predication of Hecksher – Ohlin theory. Contrary to the
prediction of H.O mode. The empirical tests of Wasily Leontiff domenestred that for the united
states exports are labour intensive (R.J. Car baugh 1992 P. 93).
2.1.2. The New Trade Theories
Some of the international trade especially trade between dissimilar nations can not be explained
by the He ckseher Ohiln theory. However, this theory failed to explain some portion of
international trade trade based on economics of scale. Trade based on technological gap model,
trade based on product cycle model.
The Heckscher ohlin model assumes product homogeneity but trade with differenceiated product
can take the intra – industry form in which countrys export and import the same but
differentiated product. Differentiated product implies close (not perfect) substitutes. This is
explained by lindert’s imperfect in for motion and risk on the global market that force producers
first to produce to home market and to export to country with the same level of economic
development and income level (Mannur 1975).
Differentiation can take two types Horizonantal differentiation and vertical .Differentiation
Horizoantal differenctation is based on characteristics or attiribution such as color taste and the
like vertical differentiation is based on quality this may in turn depends on income. Thus trade
between similar (not identical) products is possible.
Unlike theory of comparative advantage intra rade has enabled countrys to practice two way
trade in similar commodited (car baugh 1992, P 74).
The other point which the H-O trade theory failed to expolain is trade based on Economics of
scale. Economics of scale is two types; real economics and pecuniary economics. The former
incoudes seling and marketing economics, production economics, transport and storage
economics and managerial economics, The later is cost reduction as a result of transaction in
greater volumes.
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Large scale of production results in increasing returnes to scale because of greater division of
lobor and then specialization. This specilazation raises the productivity of labour. Further more,
alarge scale of operation may allow the introduction of specialization in produdctive machines.
All this increase the production of goods and services which might be used to trade. Thuse with
the existence of economics of scale, identical nations can engage on muturally benefical trade
(D. Salvator, 1990).
The last dynamic factor for trade is trade based on product cycle and gap in technology. The
model states that more of the world trade is dominated by product cycles which anew product or
production process is first introduced in advanced countrys where there is demand which results
from higher income and scarce labour given high Information transformation and resulted
effective enter prise with high potential for research and development activities, and where price
elasticity of demand is low and technological problem can be solved easily (in relative terms).
Given high in put, freedom and effective communication. This gives the monopoly power to
innovating country in the international trade; but it then mature and standardize, other will
imitate and produce it more economically using abondent factor and finally able to export to the
original country; which is introducing other product and/ or process (D. Salvator, 1990).
The ability and scope of limitation depends inversely on level of product differentiation and
excess capacity of the innovator; and directly with the size of the market. (posner 1961).
In the product cycle, a given product will shift from skill and research and development of un
skilled labour in tensives; so too does the comparative advantage of counties in producing that
good. (Meier 1989).
2.1.3 The Basis and Gains of Trade
Almost all economies engage in the international trade since international trade is essentially an
mechanism, which links the countrys of the world through commodities, service flows and factor
movements (mannur, 1996).
Trade is exchange of goods and services, out which gains from trade come in the form of
economic utilities satisfaction to customers. International trade is concerned with the business
transaction that takes place between citizens of different nations with consideration of
19
commercial diplomacy. That emanate from such transactions antions trade with each other for
fundamentally the same reasons that individuals or regions engage in exchange of goods and
services to obtain the benefits of specialization.
countries differ interims of natural resource endowments, climate conditions, mineral resources
and mines labour and capital resources, technological capitalises, enterprinal and managerial
skills and a while host of other variables with determine the capabilites of countries to produce
gods and services in the most efficient manner i.e at possible lowest cost of production. Thus,
since nations like individuals, are not equal suited to produce all goods, either because they are
different endowed or for other reasons, all would benefit if each specialized in what it could do
best and obtained its other needs thorough exchange.
One of the immediate cause of international trade is the existence of the differences in the
process of goods and services between countries. But price are areflaction placation of the cost of
production, production cost in turn cost intranet reflection of wages paid to labour, the cost of
capital, the valve of land the cost of rate material. And, specially the degree of effiency of
productive process. The cost of production are comprise all these elements although any one
element may be powerful enough to be the determining factors in particular international cost –
price relationship the factors of production are not the only influences on cost and prices. The
efficiency with which they a rued i.e. productivity is also of importance.
The classical and neoclassical economists attached so much importance to international trade in a
country development that thus regarded it as an engine of growth. The benefits from trade are
specialize in the production of a few goods due to international trade and division of labour, it
exports those commodities which it produces cheaper in exchange for what others can produce of
at a lower cost. It gains from trade and the increases in national income which in turn, raises the
level of out put and the growth rate of economy. Thus, the higher the level of out put through
trade tends to Break the vicious circle of productivity and promotes economic development (Ml
Jhinqan P. 274).
Arise in export leads to an increase in national out put. This an example of what rostow calls” A
leading sector’ In a full employment economy. A favourable change in demand abroad or an
innovation reducing cost at home, may expand exports, improve the term of trade on large the
20
gains from trade. This will increase and in turn leads to still higher incomes through higher
savings; more trade means more growth .
Resources may be un employed or under employed. If export is the modern efficient sector it
leds to expanding more resources to be drawn from under employed and low productivity sector
to occupations where they are more productive. This is another gain from trade.
The introduction of foreign trade open the possibility of 1 “vent for surplus” (potential surplus)
in the primary producing lest developed countrys. Since labour and land are under utilized in the
trade local substance sector in a such a country. Its opening up to foreign trade provides large
opportunities to produce more primary products for expert. It can produce a surplus of primary
products in exchange for imports of manufacture products which it can not itself produce.
Moreover, many under developed countrys specialized in the production of one or two stable
commodities. If efforts are mode to export them, they tend to widen the market. The existing
resources are employed more productively and the resources allocation becomes more efficient
with given production function. As a result unemployment and under employment are reduce;
domestic saving and investment increases: there is large inflow of factor inputs in to the
expanding export sector and greaser back ward and forward linkages with other sector of the
economy.
2.1.4 . Trade Strategies and Development
Traditionally trade strategies are considered to fall in either of the two categories. i.e import
substitution (IS) and export promotion. This brod categorization is based on the type of support
that either import sector is or export sector revenue. If more support (incentive) are provided to
is that the EP activities, the strategy is registered as one or in word oriented other wise it is an
out word oriented.
21
I. Import Substitution Trade Strategy
In the early stages of development during the 1950s and early 1960s. following the perbish
singer hypothesis, many developing countrys adopted in word looking import substitution
industrialization rother than export promotion policies.
The case for IS rests on the ground that trade had operated historically as a mechanism
international in equality to the disadvantage of backward countries. These are there fore justified
in adapting the strategy of industrialization by IS for the purpose of achieving self sufficiency in
the long run and to save foreign exchange by substitution import home production (R.J carbaugh
1992 P 120).
One of the principal argument for the policy of import substitution is that it avoids the
uncertainties and risk involving in finding markets for import substitution in industries because
when the import are shut off an already established market is secured for the new industries.
Another argument is based on contention that the demand of developing countries for industrial
import increases much more rapidly than the foreign demand for its export. Such countries
export primary products which have a sluggish foreign demand and are therefore unable to
import industrial products sufficiently in exchange for exports. Thus, the need arises for
producing industrial goods at home to meet the domestic demand (I bid).
The employment argument in support of industrialization by import substitution contented that
import substitution is necessary to provide gainful employment to the existing unemployment to
absorb surplus man power arising from increase in agricultural tariffs productivity through the
use of modern labour saving techniques and to engage the growing labour force of population
increases.
The ultimate aim of industrialization via import substitution is to achieve self sufficiency in the
production of finished consumer goods, intermediate goods and machinery; and to export them
to developmenting and developed countries. That it was belived that industrialization would be
facilitated through a protectionist regime.
22
II. Export Promotion Strategy
Export promotion strategy is purposeful government effort to expand the volume of a country’s
export through export incentives and other means in order to generate more foreign exchange
and improve the current account of its balance of payment. (Todaro P. 68).
By mid 1960s many developing counties abandoned the import substitution industrialization
strategy as the strategy could not provide what had been thought it would. The consensus was
that the import substitution industrializaton strategy encouraged rent seeking and inefficient use
of resourses that left the protected industry totaliy unfit for the perceived completion at a later
stage. Since the mid 1960s. there fore the export promotion stratagem has be come the favoured
strategy. Countries one after
the other adopted this export promotion strategy especially
following the impressive growth performance of east Asian countries that had used export
promotion strategy dominantly. (Getinet A 1999).
The arguments in favour of the export promotion strategy are numerous and include the
following the first is the dual gap argument is which the strategy would make possible the avi
liability of critical imported inputs that would boost domestic capacity utilization and hence total
factor productivity. The other arguments is that export promotion strategy leads to increasing
market size of developing country and render all the benefits that are associated with large scale
operation i.e economics of scale related arguments (I bid).
2.2. Empirical Literature
As many as 43 developing countries depend on a single commodity fore more than 20% of there
total revenues from merchandise exports. Most of these countrys are in sub- shoran Africa, Latin
America and Caribia and depend on export of sugor coffee cotton, lint or bananas most of these
countries suffer from widespread poverty. More than three quarters of these 43 countrys are
classified as LDCs. Where percapita GDP is less than $ 900 per year (FAO. 2004).
Further more, recent data shows that few of these contryes concerned are reducing there
commodity dependency. In 14 of these countries dependency in single commodity actually
23
increase between 1986-88 and 1997-99, and only seven countries succeeded in reducing there
relevance on a single commodity over the post 20 years, real prices for many of the commodity’s
these countries depend up on have fluctuated widely and fallen significantly overall (I bid).
An overview of the Ethiopian Economy
The Ethiopian economy has experienced three growth episodes during the period 1960-2003.
These three different growth episodes are characterized by the three regimes past and current in
the country. The Ethiopian economy reduced a sustainable and promising growth performance
from 19 60/61 – 1974/75. This is during the imperial regime when the three five years
development plans were designed and implemented. Many researchers in variably noted that the
1960’s vibrant economic growth performance was some what short lived mainly because of the
out break of the rebrvory 1973 revolution which is said to have seeded political unrest and
economic stagnation in the country (EEA p. 163).
How ever the above stated promising economic growth performance was aborted soon after the
mead 1970s. such up pleasant over all economic performance dwelled through out the beginning
of the 1960s. that means economic declaration ended with demise of the dengue administration
in 1991 (may). There after, the poor economic performance has been reversed. If there has been
any erratic macro economic growth path. It is attributed to both policy and non policy related
internet and external shocks in the pre Dergue Ethiopia.
The evolution of Ethiopian economy and its growth performance can be considered as taking
place in three phases following the political swing of the country. The growth role of the
countries economy which performed unsatisfactory both in real GDP and real percaptia GDP
terms over the last 42 years. Especially in the periods from 1974 0 1991. This was the period
when the dergue over throw the monarchy government system. Thus the centralized economic
administration of the military government that lasted seventeen years experiences adesimal
macro economic performance. This had ended up in the increasing degree of macro economic
distortion and misallocation of scarce resources.
After devasling the nations private sector undertaking and steasily growing economy, the
Ethiopian peoples democratic revolutionary front (EPRDF) forces over throw the minatory
government. In may 1991. The down fall of the Dergue government proved way for the EPRDF
24
les transitional government of Ethiopia (TGE) to adopt a market oriented economic policy and to
implement the WB and IMF backed structural adjustment programs (SAP) that were expected to
put the economy on its right track by eliminating distortions and resources miss allocation at
large. However the countrys economy changed dramatically with the introduction of command
economy in 1975 for the period 1974/75 – 1990/91 even though the economy was characterized
by up and downs wings in the growth process. The overall performance was extremely
disappointing and poor. This implies that percaptia income decelerating during the military
administration. Large declaration on the percapita GDP was observed during 1984/85 and
1990/91 the former was due to drought and famine where as the latter is due to the civil war and
political instability (I bid).
2.2.2 Level of International Integration
The level of international trade and foreign direct investment in a country reflects the degree of
global integration, hence it is competitive states internationally. In this regard Ethiopian export
over the three years period (2002-2005_) was on average less than half a billion dollar yearly,
which is about 7% of GDP. Imports how were, wee on average 3.5 times more than export
values. As a result, export earnings couerd only 28% of imported demand leaving a huge trade
deficit to be covered by aid and loans.
Another aspect of international integration is foreign direct investment (FDI) over three years
period total FDI in Ethiopia was only 35 million dollar, impaling annual investment of only 10
million dollars on average this about 8% of total investment (growth fixed capital formation) or
0.1 % of GDP (EEA 2005).
An international compilation of the level of international integration reveals that both in trade
and foreign direct investment is still largely an isolated or lest integrated economy globally (I
bid).
25
Growth Potential
The level and rate of investment reflects through partially. The potential for growth,
Annual investment approved over three years was on average only 1.2 billion dollar. As portion
of GDP it is only 5% Actual investment realized, how ever is extremely low 400 million dollars
total for the three years or 130 million dollars annually only 15% of approved capital. As
apportion of GDP (1.4%) it is insignificant, more over. Both approved and actual investment
declined over the three years period (2002 – 2005) it is in significant, more over both approved
and actual investment declined over the three years period (2002-2005). This level of investment,
There fore hardly deliver any applicable growth over the medium term, hence the store of
competitiveness over medium term could be expected to be better than what is now (EEA 2005).
FAO (2000) report states that the participation of LDCs in international agricultural trade is
insignificant and has been developing. There share in a agricultural export has dropped steadily
from 3.3% in 1970-79 to 1.9% in 1980-89 and amere 1.5% in 1990 – 98. The report argues that
the major constraint for this poor performance are the slow growth of their agricultural sector as
well as their overall economy. One rison for this is the in herent structural and technological
constraints flowing there counties as well as the pursuit of inappropriate policies, along with
various domestic sociological factors. Slow growth and the low level of participation in world
markets also reflect the external economic environment they face.
F. Bonaglia and K. Fukasaku on their working paper ‘export diversification in low income
countries’ showed that developing countries are having dependent on commodity export and are
there fore valunorable to external shocks in order to establish export earnings and faster
economic growth, these countries are seeking to increase variety of their export basks. According
to this study, the results so for are mixed export diversification cantinous to pose a major
challenge for many low income counties and especially the poorest.
On the other hand, Francias (2000) showed that LDCs as a whole are no longer losing share in
world markets but increases in market share and strong growth are confirmed to a few counties
and product sectors, most remain exports of primary commodity exports. The study argue that
while there are major changes posed by world market trends, is possible to improve performance
26
by following strategies to exploit opportunities and overcome constraints. It highlights that even
markets characterized by declining price and over supply, such as coffee, after opportunities for
increasing the value of export.
M. Cook (2000) argues that the experience of the practice of the newly industrialized countries
(NICs) of Asia as model for economic development is unjustified since the factors with in
facilitated
there development are not present in the current global economy. Systematic
constraints such as north protectionism, the debt crisis and lack of demand negate the possibility
of duplicating the economic development process of countries such as Taiwan and South Korea.
Look further argues that export oriented policy is dependent on two major aspects of the world
economy. These are the availability of credit to shift from import substitution industrialization to
export oriented industrialization or the adaptation off and also a demand from external markets
for those exports.
27
CHAPTER THREE
Data Analysis
Foreign Trade In Ethiopia
3.1 The performance and structure of export
3.1.1 The Role And Performance of Export In The Pre reform Period
Foreign trade is one of the major economic sectors which should play a significant role in the
Ethiopian economy. Thus, there is a need to analyse the role of foreign trade closely.
As can be seen from Table 1 the average share of export to GDP in the period between 1974/75
and 1990/91 was 9.3%. The highest share of export to GDP in those periods was resisted in
1974/75 which was about 12% while the minimum registered in 1990/91 which was 7.7. Thus
the figure was fluctuating between 12% and 7.7% (see table 1).
Similarly the growth rate of export in the Derg regime were 5% on average per year. This
indicates stagnant growth of the export sector in this period.
Table 1. Average share and percentage of export and Import (on million Birr)
Year
GDP
Export
Import
X/GDP
M/GDP X rate
M rate X/M
1974/75-1990/91
1103.435
1028.035
1700.69
0.0934
0.15456
0.0503
0.086
0.6044
1990/91-2009/10
90583.63
11461.18
2623.255
0.126
0.2896
0.268
0.2608
0.4368
Source: MOFED and Own calculation
3.1.1 The Tend in Value of Exports (1990/81-90/91)
On average the total value of export in the period under consideration was about 806.8 million
birr. In those periods the total value of export was stagnant and fluctuated widely. This will be
clear when we look at the value difference between the highest and the lowest in those periods.
For inctance the maximum total value of export was recorded in 1985/86 which is about 927.32
28
million birr, and after two years i.e in 1978/79, this value diminished to 773.63 million birr. The
difference between the maximum and the minimum also reveals the high fluctuation of the total
export earnings in those periods, (see table 2).
Coffee, which is a single major export commodity of Ethiopia, has a lion’s share in the total
value of export by accounting for about 61.8% in the period between 1980/81 and 1990/91.
Similar to the total value of export, the value of coffee in these periods fluctuated widely. The
value of coffee was about 664.79 million birr which was recorded in 1985/86 and was about
71.7% of the total value of export earnings. On the other hand the minimum value of coffee was
268.45 minion birr (about 43.72% of the total earnings) recorded in 1990/91 (see table 2)
The second major export commodity in terms of value in those periods has been hides and skins.
on average it accounted for about 13.16% of the total value /which is about 106.19 million birr).
As can clearly be seen from table (2) the value of this commodity showed an increment in some
given year and un expected reduction in the next year. The only successive increment was
recorded in the period between 1983/04 and 1985/86. The maximum of value of this commodity
in the total export was known to be in 1989/90 which is 134.05 million birr (labour 18.19% of
the total value) and the smallest registered in 1982/83 which 77.3 million birr or about 9.32% of
the total value of exports.
One other important area that the performance of export can be observed is that the growth rate
of the value of each of these commodities. As can easily be seen from table 2 the growth rate of
the value of coffee in the derge regime was disappointing. On average its growth was about 2%
per year. In more than half of these periods it registered negative growth rate.
However, the growth rate of the value of some commodities showed a relation recover. The
value of chat, for instance showed an average increase of 26% per year. In the same moner the
growth rate or the totals value of hides and skins exhibited increment by about 1.7% per year.
29
Table 2 value of major export commodity in million Birr (pre reform)
Commodity
Average Value
Average % share
Average Growth rate
Coffee
498.683
61.8%
-4.1%
Oil seeds
15.39
1.9%
5.6%
Pulses
20.5
2.5%
4%
Live animal
15.89
1.9%
71.7%
Chat
21.23
2.63%
113%
Hide and Skin
106.19
13.16%
Source: NBE and own calculation
3.1.2 Trends in Volume of Export (Pre Reform Period)
The second major factor that needs to be discounted to analyze the performance of export in pre
reform periods is the trend in the volume of export.
The average total volume in the period between 1980/81-1990/91 was about 371.86 million kgs.
The maximum volume was exhibited in 1983/84 which is about 475.30 million kgs. The trend of
total volume however, has been fluctuating and diminishing in the last four years of the period
under reference. Since 1978/79, the total volume decreased consequently to reach the smallest
total volume registered in these periods which is about 269.99 millions kgs in 1990/91 (Anex 1).
The major single commodity of export of Ethiopia, coffee, amounted an average of 75 million
kgs in the period similar to the value of coffee, the volume of coffee was stagnant in those
periods its fluctuating trend. The highest volume coffee was exported in 1988/89 which is 92.14
million followed by the 1983/84 91.18 million kgs.
As can be seen in the percentage shore of each commodity (Anex 1) there was a wide change in
the shore of total volume. The minimum amount of coffee exported was 17.83 million kgs which
30
was in 1984 /85. The volume of other export commodities is not as such satisfactory. Their
volumes showed fluctuating over time and has been stagnant in those periods. The volume of
hides and skins, for instance did not show any increment in the period under reference. It share
remained about 2.5% of the total volume exported in the period.
Interns of volume the shore of petroleum product was so great that it accounted for about 50% of
the total volume exported in the period.
31
3.1.3 Structure of Export (PRE Reform)
In the period between 1980/81 and 1990/91 the Ethiopians export product profile clearly
indicates that they comprise predominantly traditional raw agricultural
products the
international price of which has conterminally deteriorating.
One clear indication for such a trend was that the invariably high share of export in the total
value of exports. Secondly, only four major commodities share about 79.42% of the total exports
earnings per year. These are coffee, oil seeds pulses and hides and skins. The share has increased
to 86% in 1985/86, which is the maximum of their share in those years. The minimum of the
shred of these commodities was about 61.89% registered in 1990/91. (see table 2).
Thus, in the period between 1980/81 and 1990/91 a high commodity concentration was seen in
the export sectors as it is a major problem of in many LDC,
3.2 The Role and Performance of Export In The Post Reform Period.
In the post reform period the contribution of export to GDP showed increment from 9.3% of the
dirges period to 12.6% also from 1991/92 to 1994/95 the share of the export sector to GDP
registered accountings rise. In 2004/05 the highest shore of export to GDP which is 15% of GDP
has been registered. The lowest percentage contribution was seen in 1991/92 which is lowest of
an the other periods both the periods of pre and post reform (see table 1)
With regard to the growth rate of export, the post refor periods can be considered as a period
when the highest average growth rate of export was registered. The average growth rate of
export in this period was 26% per year which is greatly incomparable with the derge period
growth rate of export which is 5% per year. In more of the years of the post reform period the
growth rate was post men.
32
3.2.1 Trends In The Value of Export Post Reform Period
The total average value of export increased from 806.34 million Birr in the derge period to
5330.87 million birr in the post reform period i.e from 1991/92 to 2008/09 this figure showed
about 661% increment in the post reform period. How ever the structure of export in terms of
value is the same as before.
The total value in those periods has been increasing over time except ups and downs in some
selected years. It starts from total value of export 319.13 miuion Birr in 1991/92 and ends up the
periods maximum value which is 15217.3 million Birr in 2008/09. In general the trend in total
value of export has showed increasing tendency after the coming to power of EPRDF (see table
3).
The major five commodities in terms of value covered about 75.5% of the total earnings in the
period under reference. The highest share of those commodities was regist in 1997/98 which is
about 94.8% of the total export vale and the lowest share of these commodities was in 2002/03
which is 69.6%.
Coffee, which has been a single major commodity in the pre reform period., continued to be
dominant in the post reform period. It took the lion’s share of the total export earnings.
However, the share of coffee in terms of value to the total value of export showed diminishing
trend in the post reform period (table 3). Especially after 1997/98, the trend was decreasing. This
is one of the major changes observed in the post reform period.
The average value of coffee in the post reform period is about 40.7 of the total value of export.
This is much lower than the average share of this commodity registered in the period between
1980/81-1990/91 which was about 61.8% this shows that the share of coffee decreased by about
21.1% in the period between 1991/92-2008/09.
As can clearly be seen from the table growth rate of total value of major five commodities was
positive for instance the growth rate of value of oil seeds has been an average of 254.5%
followed by pulses and chat which 178.66% and 83.6% respectively on the other hand coffee
which had the largest shore in terms of value have smallest growth rate which is about 8.3%.
33
Reform period next to coffee and oil seed on the other hand the total average share of hides and
skin decreased from 13.16 to 8.3 in the post reform eriod.
Table 3 The value of export by major export commodity groups (in million Birr) after
reform period 1991/92-2008/09.
Commodity
Average Value
Average % share
Average Growth rate
Coffee
2174.1
40.7%
8.3%
Oil seeds
716.35
13.4%
254.5%
Pulses
442.63
8.3%
20.76%
Live animal
225.46
9.8%
178.66%
Chat
460.33
8.6%
83.6%
Total five
4018.87
75.7%
-
Total export earning
5330.78
100%
-
Source: NBE and own calculation
3.2.2. The Tread in Volume of Export
In the post reform period the total volume show an improvement. In this period the average total
volume increases from 371.9 minion kgs in the period between 1980/81-1990/91 1040.087
million kgs in post reform.
In this period the volume of some important commodities increased sharply. The volume of
coffee for instance increased pre reform average of 75.08 million kgs to an average of 122.582
million kgs in the post reform period. This implies that it was growing by an a average of 63%
on average per year.
The second major export commodity that showed tremendous increment in volume in the post
reform period was oil seed. The volume of this commodity increased from an average of 12.07
million kgs in the pre reform period to 90.795 million kgs in the post reform period which
implies that it is increased by about 750% (Anex 2).
34
Pulses which is one of major export commodity of the country increased from 19.85 million kgs
in the perform period to 68.66 million kgs in the post reform period which is about 345%
increment. The other major export commodity which is characterized by an increase in volume
over time has been chat. It’s volume showed over 514% increment from 2.12 million kgs in the
period 1980/81-1990/91 to 10.897 million kgs in the post reform period. (Anex 2).
Thus, the trend of volume of export in the post reform period is characterized by stagnant in the
total volume, while the volume of some major commodities showed relative increases as
described above.
35
3.2.2 The Structure of Export
In the post reform period the structure of export remained the same except the change in value
and voume of export similar to pre reform eriod, the dominant commodities have been coffee, oil
seeds, hide and skin, pulse, chat etc the first five major export commodites alone accounted for
about 75.7% of the total export earnings in the post reform perod. These commodities are
dominant in terms of value as well as volume both in the pre reform and post reform period
indicating that the Ethiopian export sector is highly undiversified in the period under
investigation.
The country’s major export commodity, coffee can also be observed in the value of export in the
post reform period which is about 40.7% per year on average (Table 3).
3.2.3 Direction of Export
The Ethiopian export sector is not only characterized by commodity cementation which are
mostly agricultural products, but they also are known for their geographical cementation to few
industrialized counties.
The country developed trade relations with few counties of world most of which are non African
countries. As can be seen from table 6 the major importers of Ethiopian’s exports in the period
under consideration were Germany USA, Japan. Saudi Arabia, Djibuti, France, UK and
Netherland.
These countries mentioned above accounted for about 72.8% the total importers of Ethiopian
export commodities. Among these countries Germandy was then become to be the main major
importer of the countries commodity both in the pre reform and post reform period by averaging
for about 29.7% and 12.7% respectively . The second and third major importer of Ethiopian
export commodities were USA and Japan by having the share of 16.6% and 9.8% in the pre
reform period respectively.
In the post reform periods the direction of trade remained the same except the change in amount
of the countries imported. Germany has been continued to be the first major importer by
36
accounting for about 12.78% followed by Saudi Arabia and Chaina amounting for about 7.17%
and 6.8% respectively.
One of the major changes registered in the post reform period with respect to the direction of
export is that the share of some countries in importing Ethiopian exports reduced significantly
while other s showed the opposite trend. For instance the average value of commodities that
chain imported from Ethiopia in the periods between 1980/81-1990/91 was about 1179 thousand
birr. In the post reform periods this value increased to 470482.4 thousand Birr (from an average
of 0.1% to 6.8%). The trend of importation for some other counties such as Saudi Arabia also
followed similar situation.
On the other hand, the role of USA as second mod or importer of Ethiopian export commodity
in the pre reform periods was not seen in the post reform period. The value of USA import of
Ethiopian exports highly reduced form 16.6% to 5.02%. But this does not mean the average
value has reduced as when rather, the value it imported increased from 13,269 Birr to 342125.7
Birr in the post reform periods (table 4).
Djibouti, a single major importer of Ethiopian Export commodity in Africa has increased its
import from Ethiopia by about 600% in the post reform period on average (from 55,957
thousand birr to 372367.7 Birr) In general the trend in the direction of export in period under
reference followed the same pattern except change in the total share and un expectedly high
reduction or exit from importation of Ethiopia export commodities like USSR (Russia) due to
political factors in the post reform period and some others in opposite direction.
Table 4 Direction of Export (in 000%% Birr)
Country
1980/81-90/91
1991/92-2008/09
%age per
% age post
Djibouti
55957
372367.7
7.1%
5.46
Kenya
1549
22658.7
0.2%
0.33
Sudan
1633
213016.6
0.2%
3.12
France
38655
149198.2
4.9%
2.19
Germany
164096
871354
29.7%
12.78
Italy
57292
391789.7
7.2%
5.73
37
Netherlands
29091
377263.9
3.7%
5.53
UK
22262
213636.7
2.8%
3.13
Russia
37901
15627.8
4.8%
0.23
Yugoslavia
6325
504.1
0.9%
0
USA
131269
342128.7
16.8%
5.02
Chain
1179
470482.4
0.1%
6.8
Japan
77643
443627.2
9.8%
6.5
Saudi Arabia
53053
489399.6
6.7%
7.175
Rest of the world
111349
2447540
14.1%
35.8%
Total Average
7901754
6820595.3
Source NBE
3.3. The Performance and Structure of Imports
Most LDCs are dependent on importation of strategies goods for the performance of their
economy. Ethiopia is one of such countries where its economy is highly dependent on the
performance of the import sector. Thus, there is a need to analyze the performance of the sector.
In the degree period the ratio of import to GDP has almost double of that of the imperial period
which was 15.4% and wide fluctuation was observed for instance the maximum ratio of import
GDP was about 20.7% in 1983/84 and the lowest was about 8.9% in 1977/78. The trend
observed in the period between 1977/78 and 1983/84 was a relatively continuous increase in
such rations. And the same trend showed reversal in the last six years of the degree period.
3.3.1 Trends in Value of Imparts (1980-90/91)
With regard to the value of imports in the pre reform period the following trends have been
observed. The value of total import in the periods between 1980/81 and 1990/91 has stabilized
between 1.38 and 2.27 billion birr because of the policy structure followed by the degree regime
the imports were made stagnant but with fluctuations.
38
The total average value of import was about 1895.84 million birr (table 5). The maximum was
about 2274.6 million birr registered in 1987/88 and smaller total value was recoded in 1980/81
which was 1384.2 million birr.
In the case of value of commodities by end use there are five major import commodities which
the country depended highly in the degree period. These were raw materials, semi finished good ,
fule, capital goods, consumer good and miscellaneous. Among these import items capital goods
has been the major imported item that Ethiopia was importing by average value of 706.85
million birr in the per reform periods under reference. This item took a shore of 36.6 percent per
year in the reference period followed by consumer goods and fuel accounting for about 28.9%
and 15.8% respectively.
The maximum value of capital goods was 1071.5 million birr in 1987/88 i.e about 47.1% of total
import. The second major import item in the period between 1979/80 and 1990/91 was consumer
goods in terms of value which were 553.83 million birr i.e about 28.1% of total import (table 5).
Table 5: Value of major imports by end use (in million birr)
Year
Yaw
Sem
material
finished
Fuel
Capital
Consumer
Miscellane
good
good
-ous
Total
1/7
2/7
3/7
4/7
5/7
good
1
2
3
4
5
6
7
%
%
%
%
%
1979/80
53.7
286.1
321.6
440.3
321.1
10.1
1432.9
307
21
22.4
30.7
22.9
1980/81
52.5
187.7
345.3
452.5
344.1
2.1
1384.2
3.8
13.6
24.9
32.7
24.9
81/82
56.5
22.9
361.5
550.2
448.7
1.9
1641.7
3.9
13.6
22
33.7
27.3
82/83
60.2
252.1
397
576.9
463.4
3.3
1752.9
3.4
14.4
22.6
32.9
26.4
83/84
72.9
242.1
378.5
930.2
433.7
9.6
2067
3.5
11.7
18.3
45
21
84/85
49.7
240.7
317.9
516.1
695.1
1.9
1770.4
2.8
11.6
18
29.1
36.4
85/86
83.3
258.4
252.5
732.6
869.8
4.7
2201.3
3.8
11.7
11.5
33.3
39.5
86/87
49.4
267.8
225.8
957.5
729.5
6.7
2236.7
2.2
12.8
10.1
42.8
32.6
87/88
53.9
327.6
216.5
1071.5
599.3
5.8
2274.6
2.4
14.4
9.5
47.1
26.3
88/89
54.5
356.8
212.9
822.1
648.8
14.7
2110.4
2.6
16.9
10.1
39
30.7
89/90
58.7
322
225.1
707.4
515.4
3.7
1832.3
3.2
17.6
12.3
36.6
28.1
90/91
56.9
237.2
210.4
964.3
642.5
1.9
2130.3
2.7
1.1
9.9
45.3
30.2
91/91
28.7
159.1
294.3
467.9
538.7
367.5
1811.2
1.6
8.8
13.8
25.8
29.7
Average
56.223
258.5
285.72
706.85
553.853
34.692
1895.87
3
13.8
15.8
36
28.9
Source NBE and own calculation
39
3.3.2 Trends In The value of Import )(post reform)
The total value of import in the post reform period is characterized by a continuous rise with out
fluctuation in some years. In its respect is differs from the trend in total value registered in the
pre reform period which showed some fluctuation in some years.
The share of each commodity by end use is another method to compare the vale of import in both
period in these respect we can observe a lot of changes comparing the pre and post reform
periods. The share of some commodity shoed increment in total value while others oriented in
opposite direction.
Table 6: The percentage share of value of major import
Year
Raw Material
Semi
Finished Fuel
Capital good
goods
Consumer
good
1992/93
2.6
9
22.7
35
31.3
93/94
1.8
16.3
15.3
29.2
35
94/95
2
17
15.2
31.9
32.5
95/96
2
17
12.6
35
31
96/97
2
19.1
18.4
38.8
20.6
97/98
2
16/4
24.4
29.8
14.7
98/99
1.7
16.8
11.4
33.7
28.1
99/2000
1.4
14.6
17.8
33.5
30.3
00/01
1.6
16
17.7
30.1
31.7
01/02
1.8
17
15.8
28.3
34.6
02/03
1.2
14.8
15.5
29.6
35.2
03/04
1.2
20.3
14.5
90.4
22.1
04/05
1.4
18.29
18.4
33
27.1
05/06
1.7
17.4
18.7
31.6
27.9
06/07
2.9
15.6
17.1
36.8
28.7
07/08
3.8
18.5
23.8
26.1
22.3
40
08/09
4.6
19.8
16.3
32
30.3
Average
2.96
16.6
16.54
31.84
21.12
Source: NBE
The share of semi finished good fuel showed slight increase in the post reform period. However
the share of raw materials and capital good showed some decline trend.
3.3.4 Trends in Volume of Import (Pre reform)
Unlike the export sector of Ethiopia, which is known for its commodity concentration, a wide
range of commodities have been imported from 1980 up to now. The major commodities that the
country has imported in the period under reference are petroleum crude food, grain, meat and
meat meat manufacturing, textile, petroleum products fertilizers and chemicals.
The average total volume of imports in the pre reform period was about 1747,496 metric tones.
In this period the maximum volume of a single commodity, petroleum crude, accounted for
about 40.5% of the total imports. The second and the third higher volume of imports were
accounted by food and grain which 20.7% and 17.6% (389.572 and 332361 metric tones)
respectively.
As can clearly be seen from table 9, eight major commodities on average accounted for about
94.2% of the total volume in the pre reform period. Among these commodities petroleum crude,
food and live animals and grain took from first to third in terms of volume in the pre reform
period by accounting for about 40.5 20.8 and 17.6% of the total average volume of import
respectively.
Table 7: Percentage volume of imports (pre reform)
Year
Petroleum
Food and
Crude
Live
Gratn
Metal
and
Textiles
Fertilizer
Metal manfc.
Chemica
Partem
Grand
l
Product
Total
animal
1979/80
51.1
9.8
8.1
4.3
1.4
9.6
2.5
7.2
94.1
1980/81
61.4
11.1
5.7
4.9
1.3
0.6
3.1
5
93.1
81/82
57.2
14.3
12.4
3.1
1.8
2.4
0.3
1.5
92.9
82/83
49.7
16.6
15.4
5.4
1.2
2.7
2.6
1.3
94.8
83/84
46.5
17.1
15.7
4.8
1.5
2.1
2.8
3.3
93.9
41
84/85
29
24.3
21.7
3.4
12.7
2.9
1.5
0.8
96.4
85/86
27
31.8
26.4
2.7
0.8
4.1
1.6
0.6
95.4
86/87
35.5
26.2
24.1
3.8
0.6
1.7
2
0.9
94.8
87/88
4.8
9
29.3
5.1
1.3
10
2.7
1.2
91.5
88/89
36.5
25.9
20.1
3.7
1.8
5.4
1.9
1
96.4
89/90
59.7
20.8
8.4
5.8
0.7
9.3
3.3
2.4
93.7
90/91
31.9
2.3
24.2
3
0.4
5.4
1.8
0.8
94
Average
40.5
20.8
17.6
4.1
2.1
4.7
2.2
2.2
94.2
3.3.5 Trends in Volume of Import (Post Reform)
In the post reform period the total average volume of imports increased to 3654337 metric tones.
The trend of the total volume in the period between 1990/91-2008/09 was increasing.
The volume of petroleum crude in the post reform period showed significant change. Its average
volume decreased from pre reforms average of 667665 metric tones of the pre reform period to
145233.9 metric tone in post reform period. The volume trend of some other commodities also
followed similar pattern.
The volume of petroleum products on the other hand increased sharply in the post reform
period. Its volume increased from pre reform average of 32394 metric tone turns to 1007434
metric tones which is about 31 times higher than the pre previous average volume. In other world
its percentage share increased from 2.2.% in the pre reform period to 28.83% in the post reform
period. Similarly the average volume of metal and metal manufacturing’s increased from the pre
reform average volume of 69814 metric tones (4.1%) to 4182023 metric tone (10.5) in the post
reform period. (table 7).
In general in the post reform period the volume share of some commodities showed increment
and other were stagnant and some other decreased.
42
Table 8: Percentage Value of imports (post reform)
Year
Petroleum
Food and
Crude
Live
Gratn
Metal
and
Textiles
Fertilizer
Chemical
Metal manfc.
Partem
Grand
Product
Total
animal
199/92
55.4
2.3
0.4
3.1
1.4
0.0
1.6
26.8
91.1
92/93
34.8
20.7
19.8
2.1
0.8
0.5
1.1
15.7
95.5
93/94
32.6
19.4
18.1
5.4
0.6
4.8
1.6
13.1
95.5
94/95
23.2
21.4
20.3
4
0.6
7.5
0.8
16.2
93.8
95/96
22.9
17.7
17.2
6.6
0.9
6.3
1.9
18.3
91.7
96/97
2.3
0.9
0.3
12.8
2.8
6.6
1
59.9
86.5
97/98
6.5
1.3
0.9
6.7
1.1
1.5
0.7
75.9
94.5
98/99
0.1
9.3
9
9
1.6
7.2
5
43.8
84.9
99/00
0
12.9
11.9
6
2.3
7.7
1.1
36.2
78.7
00/01
0
15.3
13.1
9
0.8
2.9
1.1
34.5
77.2
01/02
0
23
1
8
0.8
9.4
0.6
29.4
93.4
02/03
0
18.4
17.7
7.3
1
7.2
0.6
41.7
93.9
03/04
0
17.2
21.6
7.3
1
9.5
0.6
25.6
82.8
04/05
0
16.98
15.7
15.8
2.66
10.37
0.7
5.37
67.7
05/06
0
15
13.14
10.63
0.99
7.28
0.85
22.56
70.48
06/07
0
14.1
12
18.87
0.92
6.46
1.
34.48
87.86
07/08
0
11.6
9.9
16.87
0.94
11
1
37.28
88.62
08/09
0
27.1
25.5
9.48
0.537
7.8
0.78
20.7
92
Average
13.7
15.4
14.2
10.5
1.2
7
1.13
28.83
85.2
Source NBE
3.3.6 The Structure of Imports
The structure of imports can be explained using the volume of imports by end use and by major
commodity groups. With respect to the first, it has largely been constituted by raw material sem
finished goods, capital goods and fuel totally in the pre and post reform periods of the period
under consideration. There only observed a slight difference in the structure of imports in the two
periods with respect to the share of each commodity one clearly seen that some import
commodities increased while others followed the opposite trend in value, Thus, respect to the
structure of exports, Ethiopia has been import a wider range of import items.
43
3.3.7 Source of Imports
The origin of Ethiopian imports like the destination of exports followed the same pattern that it
in followed the direction to developed countries of Asia, Europe and America . In the period
under consideration on average Italy has been the main exporter to Ethiopia In 2008/09 It share
about 24.5 out of 24.8 that imported from Europe out of the total import from Asia in 2008/09
about 71 percent reigned from four countries out of this chain a shore 26.2% and Saudi Arabia
25%. In 2008/09 76.8% of import from African countries origin from three countries Egypt
29.2% Sudan 28.1% South Africa 19.5%. Import from America accounted for about 6.5% of the
total imports in 2008/09 out of this 97.5% was from three counties USA, Brazil and Canada.
(NBE 2008/09 Annual Report).
3.4 Major Constraints of Foreign Trade In Ethiopian
3.4.1 Commodity Export Dependency
As estimates 2.5 billion people in developing world depend on agriculture for the livelihood. For
many of them the sale of agricultural employment in producing and processing commodities for
export represent their only source of income. More than fifty developing countries including a
majority of LDCs dependent on the exports of three or fewer agricultural commodities typically
tropical products for between 20 and 90 percent of their foreign exchange earnings (FAO; 2004).
How ever many LDCs are also net food importers, spending more than half their export earnings.
Amongst the LDCs incidence of extreme poverty is highest in those dependent on primary
commodity export for their economic survival and development. Using a new set of poverty
estimate is show that the percentage of people living on less than $ 1 a day in non oil commodity
exporting LDc has risen from 63% in 1981-8310 69% in 1977-1999 (UNCTAD; 2002). Ethiopia
is atypical of these countries which its major exports come from agricultural sector and the bulk
of countries foreign exchange earnings come from agriculture. For instance only five major
export agriculture commodities of Ethiopia alone accounted for about 80% of total export
earnings. Among this coffee, still remains to be the dominant export commodities for the last
decades.
44
3.4.2 Falling Prices, Fluctuations and Volatility
There has been along term downward trend in real non –food commodity prices since 1960’s
with particularly marked set up in prices in the first part of the 1980s comparative research
shows that the commodity prices recession of the 1980s has been more severe and considerable
prolonged. (UNCTAD 2002).
In Ethiopia, export earning growth in primary products market can be accomplished either
through increased prices or through expanding the volume of traditionally exported commodities.
However, the primary agricultural commodity on which Ethiopia depend, coffee, have
experienced sluggish world demand and the down ward trend in real prices.
FAO’S studies (2005) also show several striking features of primary agricultural exports. It
argues that real prices of agricultural commodities. Relative to process all manufactured goods,
have declined significantly even as nominal prices have rise, Further, these real prices have
fluctuated considerably around the long term down ward trend.
According to UNCTAD 2002 report real price for all agricultural commodities has declined over
the past 40 years, but the rate of decline was varied from commodity to commodity. This
imprecise that the long term trend in real price for agricultural commodities has been down ward
but prices have also shown marked variability around that trend.
The Ethiopians foreign trade poor performance can also be explained using some internal
problems. The sector of domestic trade has encountered many problem mainly arising from in
appropriate policy measure in the last four decades investment of domestic exporters (Inadequate
skills in the international skills) and high rate of tax and overvalued exchange rate in the degree
period are mentioned as internal problems.
Economic mismanagement mass another major internal problem. State monopoly over the
whole sale and retain. Trade corporation led to resource misallocate of both human and material
exhibiting inefficiencies at all levels. This inefficient management processed to be bottleneck for
the proper distribution or goods and services to the people concerned.
45
CHAPTER FOUR
4. Conclusion and Recommendations
4.1 Summary and Conclusions
Foreign trade in any LDCs like Ethiopia is assumed to play an important role in the growth and
development process. Many economists consider international trade as device to achieve
productive efficiency but also as an engine of growth. The opposing view on the other hand
argues that developing countries would be better off if they direct their own development to
wards an expansion of output for their own domestic demand.
Many empirical studies show that many LDCs have been marginalized from world economy and
from international market because of the structure, composition, and performance of their trade
(Particularity of their export sector). Ethiopia is atypical of such countries where the majority of
the export earnings come from agricultural sector in the form of rae materials and semi processed
commodities.
The findings of the study shows that the composition of Ethiopian exports remained the same in
the both the dreg and in the post reform period although relative share of the various agricultural
exports had changed. Coffee has been a major commodity for about 51.2% of the total average
export earnings in the period between 1980/81 and 2008/09.
However both the value and the volume of export have asignificant increment in the post reform
period. For instance the total average value of export in the period between 1980/81 and 1990/91
was about 1028 million Birr per year . In the reform period this value increased to 11461 million
birr per year in the post reform.
With regard to imports. The study revealed that the country has importing many items and the
trend showed that Ethiopia is highly import dependent and has been importing strategic goods
and other like finished and semi finished good the price of which are high in international
market. Moreover the country’s import did not show any declining trend in the post reform
46
period. This is mainly because most of these goods are very important for the country’s
economic growth. The other reason for continuous increasing trend of import is because of the
people reliability and reputation foreign produced goods than the domestically produced goods.
The study has also tried to show the trend in the country’s commodity and geographic
concentration. In the period under reference the study showed that the country was highly
dependent on free primary agricultural commodities i.e high commodity concentration and such
trend remained the same even in the post reform period. More over, the Ethiopian Export sector
in those periods can also be characterized by geographical concentration. A major portion of the
exports, which are mostly agricultural commodities
go to Europe, USA and some Asian
countries such as Japan and Saud Arabia. Thus, the country’s export has confined to a few
industrial counties that are price maker in the international market. Specifically trade with
African countries is very much limited.
In analyzing the role of export and import the study has identified that the contribution of
export to GDP was less significant and showed only a slight increment in the pos reform period .
Fro instance the ratio of export to GDP were 9.3% in the pre reform period and 12.6% in the post
reform period with regard to the ration of import to GDP the study revealed the country’s import
dependency increasing. For instance the ration of import to GDP was 15% and 2.8% in the Derge
and post reform period respectively.
On the other hand the study showed that the country’s export have shown an increasing trend
following the trade reform program by the current government. However, the assumed benefit of
the country from the export sector has constrained by both internal and external problems such as
the long term decline in price level in the international market and the short term volatility of the
export in LDCs structural problem over supply, unfavourable demand for such primary products,
trade policies in both developed and developing countries.
Coffee being the country’s major export item, any fall in the international price of such
commodity gives areal shock to the national economy since the bulk of the country’s foreign
exchange come from it other problems that constrained the export sector includes undiversified
export structure, law domestic saving low access to credit, poor physical structure, ustable and
unpredictable weather conditions etc.
47
4.2 Recommendations
The immediate policy recommend actions and measures form this study are summarized
as follows.
 Export diversification towards high potential are as since Ethiopia has various advantages
for the development of its export sector, these include the abundant and capable labour
force; low wage level; a wide range of weather and soil conditions; preferential access to
European market and proximity to the middle East markets. More over, the preferential
access to African countries specially to the common market for eastern and souther
African states (COMESA) with a total population of more than 260 million also offers
substantial market opportunities for several export items for the country.
 Apply both horizontal and vertical export diversifications i.e horizontal export
diversification in to compictely new export sector may general positive externalitles on
the rest of the economy as export sector gain prom dynamic learning actitites due to
contacts to foreign purchases and exporure to international competitiveness. Vertical
diversification but of primary export in to manufactured export is also associated with
growth since primary export sector prevalent do not exhibit strong spill over. Thus, it is
expected both horizontal and vertical export diversification are positively correlated with
economic growth.
 Openness is found to play a significant role in the growth of GDP or the country. Thus,
the government should make the economy more open than what is prevailing now.
 Wide in detail research on international markets to deal with information problem for
export especially for agricultural exports where such commodity price fluctuates widely.
Thus, it can help exporters so that they can adjust in such away that they can reduce the
impact of price factor.
 Improve the quality of export products.
 Create a wariness among the people to change there attitude, which is highly in favour of
foreign produced goods since it has been a major problem on import sector of the
country.
48
REFERENCES
Berhanu Nega and Befekadu Degene (2000) Annual Report on Ethiopian Economy. Addis
Ababa.
Carbough R.G (1992). International Economics, Macmillan Publishing Com. New York.
Dominick Salvatore (1990). International Economics: Macmillan Publishing Company. 3rd ed.
Ethiopian Economic Association (2005) Annual Report on Ethiopian Economy, Vol III. Addis
Ababa.
FAO Agricultural prices Decline, Devastating Countries that Export Single Product VIV Report.
www fao. Org.
Getninet Astatkie (1999) ‘‘ Promoting the Export Sector in Ethiopian’’ in Economic Focus.
H.G Mannur (1996). International Economics, Vikas Publishing House DVt. Ltd.
Kindleberge. Charles P(1961). Foreign Trade and Economic Growth. Lessons From Britain and
France 1550 to 1913. ‘‘The Economic it Story Review, Second Series. Vol1.
Kinfe.A (2001) The Dynamics of Economic Development: Longman Group Ltd. New Yourk and
London 5th ed.
Mier G(1995). Leading Issues in Economic Development Longman Group Ltd. New York and
London 5th ed.
M.L Jhingan (1986). International Economics: Konak Publication.
Zelalem. A (2005), the Contribution of Foreign HID to Economic Development. A.AU.
49
Annex : Volume of Exports by major commodity Groups (in millions of KGS)
No
Commodity
1980/81
1981/82
1982/83
1983/84
1984/85
1985/86
1986/87
1987/88
1988/89
1989/90
1990/91
Average
1
Coffee
88.4
80.18
87.6
91.18
17.83
70
80.22
71.16
92.14
88.92
59.23
75.0782
2
Oil seeds
16.43
12.17
11.55
33.61
12.47
5.63
8.22
17.82
5.39
6.91
2.56
12.0691
3
Aides and skins
8.9
10.19
7.73
9.75
10.15
12
10.25
8.62
9.67
8.59
5.66
9.22818
4
Pulses
24.52
35.54
36.24
27.55
18.95
7.55
4.43
12.5
11.94
23.35
14.76
19.8482
5
Meat products
2.29
0.43
3.12
2.83
9.88
1.15
1.46
1.73
0.58
0.23
0.27
1.36727
6
Fruitfves
5.11
7.81
6.4
7.04
93.07
9.23
12.07
10.89
10.19
8.64
12.96
9.11091
7
Sugar
29.14
15.8
56.5
38.97
6.63
45.5
43
28.07
25.12
43.74
30.69
36.3273
8
Live animal
3.55
2.78
5.33
9.69
1.38
7.35
5.01
14.06
13.56
4.26
2.19
6.31
9
Chat
2.22
2.37
3.34
2.56
194.18
0.71
2.93
3.63
0.54
1.82
1.82
2.12
10
Petroprodts
203.19
16.19
216.92
207.2
4.18
182.9
192.34
216.15
162.96
140.87
140.45
186.086
11
Others
21.58
18.17
29.51
99.88
4.18
9.94
6.55
13.85
1.65
1.75
0.4
14.345
12
Total
405.93
354.63
469.24
475.3
320.67
351.96
366.48
398.98
353.74
329.08
269.99
371.862
13
1/12
0.22
0.23
0.19
0.19
0.06
0.2
0.22
0.18
0.26
0.27
0.22
0.2
14
2/12
0.04
0.03
0.02
0.07
0.04
0.02
0.02
0.04
0.02
0.02
0.01
0.03
15
3/12
0.02
0.03
0.02
0.02
0.03
0.03
0.03
0.02
0.03
0.03
0.02
0.02
16
4/12
0.06
0.1
0.08
0.06
0.06
0.02
0.01
0.03
0.03
0.07
0.05
0.05
17
5/12
0.01
0
0.01
0.01
0
0
0
0
0
0
0
0
18
6/12
0.01
0.02
0.01
0.01
0.03
0.03
0.03
0.03
0.03
0.03
0.055
0.02
19
7/12
0.07
0.04
0.12
0.08
0.13
0.13
0.13
0.07
0.07
0.13
0.11
0.1
20
8/12
0.01
0.01
0.01
0.01
0.02
0.02
0.02
0.04
0.04
0.01
0.01
0.02
21
9/12
0.01
0.01
0.01
0.0.1
0
0
0
0.01
0
0.01
0.01
0.01
22
10/12
0.5
0.48
0.47
0.44
0.61
0.52
0.52
0.54
0.52
0.93
0.52
0.5
23
11/12
0.05
0.05
0.06
0.1
0.01
0.03
0.03
0.03
0
0.01
0
0.04
50
Annex Volume of Export
Commodity
91/92
92/93
93/94
94/95
95/96
96/97
97/98
98/99
99/00
00/01
01/02
02/03
03/04
04/05
05/06
06/07
97/98
98/99
Aver.
Coffee(1)
32250
67375
69160
82198
97579
1213166
120058
101232
116558
99134
110347
126178
156409
161061
147725
176938
170741
133998
1225584.7
Oil
seeds
3680
392
10189
7832
7832
14369
58554
51366
43131
55851
76684
82801
105945
170798
265699
239976
152091
286987
90795.9
Hidest and
3680
5574
7807
7547
7547
8643
7852
5824
8504
12409
10334
10545
9401
18699
15396
15774
12299
7293
9773.2
Pulses (4)
1400
1527
9849
28963
28969
30468
30943
29833
23527
26861
109227
77000
73280
121653
110438
158752
23302
137969
68553
Suqare(5)
2500
13123
15208
10
0
13150
0
6643
17209
57005
58021
6106
16016
1800
0
0
63392
97646
22495.7
Chat (6)
250
1936
2308
4073
3698
5335
5933
9782
15684
11928
9377
368784
7625
19390
22259
22667
22406
25900
10897.1
43760
89921
114521
358583
145625
195131
223340
204680
224613
213188
373990
396551
368676
509552
561467
608607
444231
639293
325159.7
128653
205259
340733
542328
280686
337796
273183
227341
249410
280318
404844
31.8%
413301
542737
6440l4
713065
553248
722198
403087.3
1/8
24.8%
32.8%
20.3%
15.2%
34.6%
36.5%
43.8%
44.5%
46.7%
35.3%
27.3%
20.8%
37.8%
29.6%
22.9%
24.7%
30.86%
18.5
304%
2/8
2.8%
0.2%
3.6%
2.2%
2.85%
4.2%
24.4%
22.6%
17.3%
19.5%
18.9%
2.7%
25.6%
31.4%
41.2%
32.9%
27.9%
39.7%
22.5%
3/8
2.8%
2.7%
2.3%
1.5%
2.7%
26%
2.9%
2.6%
3.4%
4.4%
2.6%
16.7%
2.3%
3.4%
2.4%
2.2%
2.2%
1%
242%
4/8
1.1%
0.7%
2.9%
47%
10.3%
9.0%
11.3%
13.3%
9.4%
2.6%
27%
16.7%
17.7%
22.4%
17%
2.2%
4.2%
19%
1703%
5/8
1.9%
6.4%
4.5%
0.0%
0.0%
3.9%
0.0%
2.5%
6.9%
20.3%
14.3%
3.9%
3.9%
3.3%
0%
0%
11.4%
6.5%
5.58%
6/8
0.2%
0.9%
0.8%
0.8%
1.3%
1.5%
2.2%
4.3%
6.3%
4.2%
2.3%
1.3%
1.3%
3.5%
3.4%
3.1%
4%
3.5%
2.7%
(2)
skins (3)
Total
of
major (7)
Total
export (8)
51
52