UNIVERISTY OF GONDAR

COLLEGE OF BUSINESS AND ECONOMICS

SCHOOL OF ECONOMICS

DETERMINANTS OF AGRICULTURAL COMMODITY EXPORT IN

ETHIOPIA: TRENDS COMPOSITIONS AND THE ROLE OF ECX FOR
AGRCALTURAL COMMODITY EXPORT

BY
BAYELEGN ZERAY

ADVISOR: MESELE ARAYA (Ph.D.)

CO-ADVISOR: WONDU ABEBE (M.Sc.)

GONDAR, ETHIOPIA

JUNE 2018
Determinants of Agricultural Commodity Export in Ethiopia; Trends Compositions
and the Role of Ethiopia Commodity Exchange for Agricultural Commodity Export

By

Bayelegn Zeray1

A Thesis Submitted to the Department of Development Economics in Partial

Fulfillment of the Requirement for the Degree of Master of Science in
Development Economics

University of Gondar

June 2018

1
Bayelegn Zeray is expert at ECX since 2012
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 DECLARATION AND APROVAL

DECLARATION

This thesis is my original work and has not been presented in any other university for the award
of a degree and all the sources that I used have been acknowledged.

Bayelegn Zeray UOG/8523/2008

Signature: ........................................ Date: ...........................................

APPROVAL

This thesis has been submitted for examination with our approval as University supervisors.

Mesele Araya (Ph.D.) Department of Economics Addis Ababa University

Signature: .......................................... Date: ............................................

Wondu Abebe (M.Sc.) Department of Development Economics University of Gondar

Signature: ........................................ Date: ...........................................

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 COPYRIGHT

© 2018, Bayelegn Zeray

No part of this work may be reproduced, stored in any retrieval system or transmitted in any
form or by any means including electronic, recording, photocopying or otherwise without the
prior written permission of the author or University of Gondar on his behalf.

All rights reserved

iii
 GONDAR UNIVERSITY SCHOOL OF ECONOMICS

This is to certify that the thesis prepared by Bayelegn Zeray, entitled: Determinants of
Agricultural Commodity Export in Ethiopia; Trends Compositions and the role of ECX for
Agricultural Commodity Export and submitted in partial fulfillment of the requirements for the
Degree of Master of science in Development Economics complies with the regulations of the
University and meets the accepted standards with respect to originality and quality.

Signed by the Examining committee:

Examiner Daregot Berihun (Ph.D.) signature ___________ Date___________

Examiner Yemane Michael (Ph.D. candidate) signature ___________ Date ___________

Advisor_______________ signature ___________ Date___________

______________________________________
Chair of Department or Graduate Program Coordinator

iv
 DEDICATION
I dedicate this thesis to my mother Tena Dessie and my father Zeray Worasie who engraved me
in quest for wisdom in my childhood, before he passed away.

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 ACKNOWLEDGEMENTS

Above all honors& thanks go to Almighty God for his everlasting love, mercy and support
towards me. Without God help this thesis wouldn‟t have been possible. Next I would like to
express my gratitude to University of Gondar for allowing me to pursue Msc.in Development
Economics. My special appreciation goes to my advisors Mesele Araya (Ph.D.) for his
constructive& genuine comments and Wondu Abebe devotion as well as provision of relevant
materials all through my work. Moreover I would like to say thank you professor Alemayehu
Geda who provides me his applied time series econometrics book and Mesfin Wolderufael who
provide me WDI data. I would also like to extend my appreciation to institutions namely WB,
NBE, ERCA, ECX, CSA and ERA who provide me relevant data timely. I owe more than I can
say to my friends and families; ECX staffs who provide me the relevant data and comment,
Samuel Zeray who assisted me in data collection & Teshager Habtie (Ph.D. candidate) who
assisted me in my study. Last but not least my thanks go to my spouse Yeshwork and my sons
Kidus & Musie for their patience and love.

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 ACRONYMS
ACX Agriculture Commodity Exchanges
ADF Augmented-Dickey Fuller
ADLI Agricultural Development Led Industrialization
ARDL Auto Regressive Distributed Lag
CBOT Chicago Board of Trade
CSA Central Statistics Agency
ECM Error Correction Model
ECX Ethiopia Commodity Exchange
EPRDF Ethiopia People‟s Revolutionary Democratic Front
ERA Ethiopia Road Authority
ERCA Ethiopia Revenue and Custom Authority
FOB Freight on Board
FAO Food and Agriculture Organization
FDRGE Federal Democratic Republic Government of Ethiopia
GDP Gross Domestic Product
GTP Growth and Transformation Plan
IMF International Monetary Fund
MIT Ministry of Trade and Industry
MOT Ministry of Trade
MOFA Ministry of Foreign Affairs
NBE National Bank of Ethiopia
NEPAD New partnership for African Development
NPC National Planning Commission
OH Hecksher - Ohlin
SSA Sub Sahara Africa
UNCTAD United nation Conference for trade and development
USD US Dollar
VEC Vector Error Correction Model
WB World Bank
WDI World Development Indicator
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 TABELE OF CONTENTS

LIST OF FIGURES ...................................................................................................................................... x

LIST OF TABLES........................................................................................................................................xi
ABSTRACT ................................................................................................................................................ xii
CHAPTER ONE ........................................................................................................................................... 1
INTRODUCTION ........................................................................................................................................ 1
1.1 Background of the Study .................................................................................................................... 1
1.2 Statement of the Problem.................................................................................................................... 4
1.3 Objective of the Study ........................................................................................................................ 6
1.3.1 Specific Objectives ...................................................................................................................... 6
1.4 Significance of the Study .................................................................................................................... 6
1.5 Scope of the Study .............................................................................................................................. 7
1.6 Organization of the paper ................................................................................................................... 7
CHAPTER TWO .......................................................................................................................................... 8
LITERATURE REVIEW ............................................................................................................................. 8
2.1 Theoretical Review ............................................................................................................................. 8
2.1.1 Theoretical Overview of Foreign Trade ...................................................................................... 8
2.1.2 Agriculture Sector Performance and Its role in Ethiopia Economy ........................................... 11
2.1.3 How Commodity Exchanges come to exist ............................................................................... 13
2.1.4 The Establishment of Ethiopia Commodity Exchange .............................................................. 14
2.1.5 Ethiopia‟s External Trade Policy ............................................................................................... 15
2.2 Empirical Review on the Determinants of Agricultural Commodity Export ................................... 18
CHAPTER THREE .................................................................................................................................... 22
METHODOLOGY AND MODEL SPECIFICATION .............................................................................. 22
3.1 Data Sources ..................................................................................................................................... 22
3.2 Model Specification .......................................................................................................................... 22
3.3 Definition of variables ...................................................................................................................... 23
3.4 Method of Data Analysis .................................................................................................................. 25
3.4.1 Test for Stationary and non-Stationary ...................................................................................... 25

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 3.4.2 Test for Co-integration............................................................................................................... 27
3.4.2.1 Autoregressive Distributed Lag Modeling (ARDL) Approach to Co-integration .................. 28
3.4.3 Estimating the role of ECX for Agricultural commodity export ............................................... 30
CAPTER FOUR ......................................................................................................................................... 31
RESULTS AND DISCUSSIONS ............................................................................................................... 31
3.1 Merchandise Export Trends & Compositions .................................................................................. 31
3.1.1 Agricultural Commodities production and Export trends .......................................................... 31
3.1.2 Merchandise Export value & Direction of trade ........................................................................ 33
3.1.3 Balance of Trade ........................................................................................................................ 34
3.2 Econometric Analysis ....................................................................................................................... 35
3.2 .1 Unit root test and order of integration....................................................................................... 35
3.2.2. Test for ARDL Bound Co-integration ...................................................................................... 36
3.3 The Role of ECX for Agricultural Commodity Export .................................................................... 40
CHAPTER FIVE ........................................................................................................................................ 43
CONCLUSION AND POLICY RECOMMENDATIONS ........................................................................ 43
5.1 Conclusion ........................................................................................................................................ 43
5.2. Policy Recommendations ................................................................................................................ 44
REFERENCES ........................................................................................................................................... 47
APPENDICES ............................................................................................................................................ 51

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 LIST OF FIGURES

Figure 1: Real GDP and Agriculture growth rate trend (1982 - 2016) ...................................................... 12
Figure 2: Major agriculture commodities production& export potential .................................................... 31
Figure 3: Comparison of Coffee production, traded at ECX and export volume ....................................... 32
Figure 4: Agricultural commodity exports trend in metric ton .................................................................. 32
Figure 5: Trends of merchandize export in million USD ........................................................................... 33
Figure 6: Export and Import gap (1981 – 2015) ........................................................................................ 35
Figure 7: Balance of trade as ratio of GDP ................................................................................................. 35
Figure 8: Value of commodities traded at ECX platform ........................................................................... 41
Figure 9: Volume commodities traded at ECX platform ............................................................................ 41

x
 LIST OF TABLES

Table 1: Augmented Dickey-Fuller test for unit root at level I (0) ............................................................. 36
Table 2: Augmented Dickey-Fuller test for unit root after first difference I (1) ........................................ 36
Table 3: Results of lag order selection criteria ........................................................................................... 37
Table 4: Results of ARDL Bound Test ....................................................................................................... 37
Table 5: Result of Estimated long run ARDL regression .......................................................................... 38
Table 6: Result of Error Correction Model /ECM ..................................................................................... 39

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 ABSTRACT

Despite encouraging improvements in the past decade, currently Ethiopia’s export performance
lags behind GTP I& II targets. In the past two years export performance even went back to the
previous year’s performance. This is why increasing the country’s merchandise export revenue,
minimizing export earning instability to ensure the envisaged economic development has become
challenging which urges the government to look policy options to overcome foreign currency
crunch. In this way the paper aims at examining the major determinants of agricultural
commodity export in Ethiopia& evaluates the role of ECX for agricultural commodity export
applying time series econometric model for the period 1981-2015.The long run and short run
dynamics of agricultural export are estimated using ARDL Model. The estimates revealed that in
the long & short run agricultural commodity export performance has been influenced by the
underlying macro-economic variables. More specifically, 10% appreciation of real effective
exchange rate decreases agricultural commodity competitiveness by 13.6% in the international
agriculture commodity market and 10% GDP growth increase agriculture export by 4.8%.
Moreover real effective exchange rate and terms of trade influence agricultural export
significant and negatively which is evidence for Ethiopia’s terms of trade deterioration.
Furthermore, the finding revealed that ECX has been found to play positive and significant role
for agricultural commodity export in Ethiopia. Nonetheless, ECX to be more competent for
agriculture commodity export value chain, its business model should not be dependent only on
mandated commodity. It rather needs to works under a free market arena to be a market of
choice. This notion is the fundamental policy implication of the thesis.

Key words: agricultural commodity, export, Ethiopia, ECX and ARDL

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 CHAPTER ONE
INTRODUCTION

1.1 Background of the Study

Countries across the world vary in their resource endowment, level of technology and method of
production. This leads countries to trade each other to maximize at their own best interest in
areas where they have comparative advantage. This theory traces back to the time of Adam
Smith who advocates specialization and David Ricardo who shaped the theory of comparative
advantage to explain the gain from trade. Since then many economists pledged the importance of
trade for economic growth and development of a nation (Hilegiorgis, 2011). Furthermore exports
are said to have contributed to industrialization because it creates capacity to import capital
goods, technology knowhow and it allows poor countries with narrow domestic markets to
benefit from economies of scale through trade and economic growth (Helpman and Krugman,
1985).

In spite of the world wide fall in trade barriers that has occurred in the last two decades, export
performance has differed across countries and continents. World export increased by almost 220
percent in twenty years. The figure jumps to more than two hundred per cent for East Asian
countries and falls to 80 per cent for Sub-Saharan countries. The exports of best performers
named “Asian tigers”, such as the Republic of Korea, China, Singapore, Taiwan, Cambodia and
Vietnam, have grown by more than 15 per cent annually over the last two decades. On the
contrary poor performers, mostly African and Latin American countries have shown negative
annual rate of export growth for one decade (Fugazza, 2004).

Over the past two decades developing countries specifically Asian countries have shown
remarkable improvement in their global trade share. This change mostly comes from China,
which has been facilitated by diversification of export while developing Asia‟s share in total
world exports increased from 11.7% to 21.5% from the period 1985 – 2005. However Africa‟s
share decreased from 4.3% to 2.9% over the same period. Deep rooted structural problems, weak
policy frameworks, poor institution, protection at home and abroad and dependent on small
number of commodities were considered as the reasons for Africa‟s poor export performance
(Yishak, 2009; David et al., 2008).

1
The story of Ethiopia foreign trade problem is not different with other African countries. Most of
the problems are structural. For last thirty years Ethiopia‟s foreign trade was dominated by not
more than three commodities; such as coffee, oil seeds and hide and skin. The protectionist and
inward looking policy of Derg regime, poor infrastructure, less diversified and unprocessed
product export, poor contract enforcement and insecure property right exacerbates the poor trade
performance of the country (Abay& Zewudu, 1999). After the Derg regime change, with the
support of IMF and WB the EPRDF government adopted and implemented structural adjustment
programs since 1991/92. Though there is debatable issue on the effects of structural adjustment
program compared to Derg regime the post 1991/92 period has become more liberal and some
improvements on external trade performance have been exhibited (Alemayehu, 1999).

Over the past 15 years Ethiopia‟s merchandise export revenue grew at 13.3 percent on average.
This performance improvement stems from volume expansion (15.1 % annually), though prices
decreased by 2.3 % annually. However export growth remains highly volatile both in price and
volume, due to concentration on few agricultural commodities which are exposed to price and
weather shocks. Due this the foreign currency reserve of Ethiopia has declined in recent years
rather than showing progress (IMF, 2016).

The international trades of Sub-Saharan African countries are mainly based on exporting primary
agricultural commodities in which they have comparative advantages due to cheap labor and
tropical climate (Eyayu, 2011). Similarly Ethiopia‟s export sector depends on a small number of
agricultural products. As the same time the market for these products are largely unstable in
terms of volume, price and carry a high degree of risk and uncertainty as well as low income
elasticity. Such features are not conducive to the contribution of agricultural exports to the
economic growth of the country. It is customary that the exports of primary goods are less
competitive on the world market and weigh less against manufactured goods exported by
developed countries resulting in deteriorating terms of trade and widen gap of balance of
payment deficit which is worsened by high import bill.

In this regard Alemayehu (2011) argued that Ethiopia‟s external trade has major problems both
on the supply and demand side. In the supply side its dependency on few primary products,
characterized by large fluctuations in volume. On the demand side low income elasticity of
agricultural products, declining prices for its exports and limited destinations for Ethiopian
2
exports are perhaps the major problem of the sector. The relative export performance of
developing nation is highly driven by relative poor performance in the supply capacity, rather
than the deterioration of foreign market access. Yishak (2009) also suggested that it is the supply
side performance that has more impact on the Ethiopian export in general and the agricultural
export performance in particular.

According to the data from ERCA (2016), the increase in export receipts in the recent ten years
(2005-2014) was attributed to progresses in both prices and volumes of agricultural
commodities. The export receipt from seven agricultural commodities, namely coffee, oilseeds,
pulses, chat, follower, vegetables and live animals has accounted 78.2% of the total merchandize
export. Though there has been a decline in the share coffee in recent times, still it is the leading
export commodity in Ethiopia. Which means any effect on those dominant agricultural
commodities could adversely affect the entire external trade balance.

Among other policies and institutional measures designed and implemented to stimulate the
agricultural commodity export to affect the supply side constraints was establishing an efficient
orderly and unified marketing system for agricultural commodities through ECX is a recent
government initiative to promote the Ethiopian agriculture product marketing (Negarit Gazeta
2007; Gabre -Madhin & Ian 2005).

ECX can be seen as a major institutional change for agricultural commodity markets of Ethiopia
in the past ten years. Institutions affect the distribution of assets, incomes, and costs as well as
the incentives of market participants and efficiency of market transactions. Being the first of its
kind in Africa, there is little understanding of how such a major institutional change impacts
export markets in Ethiopia that so far was governed by other institutions and social arrangements
(Meijerink, 2014).

Improving price discovery, linking smallholder farmers to markets for their produces, reducing
transactions costs by adding value on contract enforcement, and increasing agricultural export
earnings by increasing the volume and value of exportable commodities are some of the popular
claims about benefits of Agricultural Commodity Exchanges (ACX) in developing countries,
though most of these popular discourse cannot be supported by empirical evidence (Rashid,
2015).

3
There are so many claims for the establishment of the Ethiopia Commodity Exchange among
them; enhancing the performance of agricultural commodity marketing is the leading objective,
however currently some exporters, popular international media and scholars criticize that ECX
did not contribute to the Ethiopian agricultural commodity export sector, rather ECX trading
model eroded coffee traceability and hence it is one among many other causes for the recent two
& three years export earning instability from agricultural commodity export (Leonard 2014;
Dawit & Meijerink, 2010 and the Economist, 2017).

The government of Ethiopia has designed and implemented various policy measures to enhance
gain from export revenue from agricultural commodities, however the result is unsatisfactory.
This tells us that the area needs further assessment on factors which matter to agricultural
commodity export. Hence the aim of this study was to identify the determinants of agricultural
commodity export in Ethiopia using a time series macro data applying Auto Regressive
Distributed Lag and Error Correction Model (ARDL/ECM).

1.2 Statement of the Problem

Ethiopia‟s economy is highly dependent on agriculture, similar to that of SSA countries, where
80% of its population is employed in this sector. It plays a key role both in the development of
the nation as well as in the wellbeing of its people. This is why agriculture is considered as the
backbone of Ethiopia Economy. Relative to SSA Ethiopia has great agricultural potential
because of its vast areas of fertile arable land, diverse climate, generally adequate rainfall,
abundant ground and surface water reserve and large labor pool. Despite this potential, however,
Ethiopia‟s agriculture has remained underdeveloped at various agriculture growth indicators and
still the sector is not transformed from subsistence method of production (Eyayu, 2011;
Hailgiorgis, 2011).

Currently the need to increase trade performance has been indispensable for a country to grow. A
country must import required raw materials and capital goods to increase and foster production
bases. To finance the above needs a nation should have good foreign exchange revenue.
Enhancing export capacity speeds up industrialization and overall economic activities because
the country can maintain good balance of payment, which in turn, can ensure economic growth.

4
Therefore, increased participation in world trade is considered as one means for economic
growth and development (Alemayehu, 2015).

However Ethiopia‟s share in total world exports is still at infancy and merchandise trade deficit
in 2015/16 stood at 13.9 billion USD. It is equivalent with 19.6% of GDP (NBE, 2016).This
implied that the country runs a severe balance of trade deficit, because the return from exports is
far less than the expense needed for the imports. This export and import unbalance leads the
nation to the unstable export and weaken macroeconomic management due the depletion of
foreign currency reserve, eventually the country is forced to look for additional finance to cover
its imports. Currently lack of own financial source has led to a significant surge of external debt
(Azemera, 2013).

Ethiopia‟s export has grown by 30.4%, 15.5%, 7.2%, -5.8% and 13% from 2008/09 - 2013/14
respectively. From the country‟s merchandise export history 3.2 billion USD was the highest. It
was experienced in 2013/14. Even though it was good performance in relative term, it is by far
below 6.5 billion USD target of GTP I (MoFED, 2010). This export performance covers only
26.8% of import bill (Seid, 2015). According to ERCA (2016) data, merchandise export declined
by 10.4% and 3% in 2015 and in 2016 respectively. This fact infers merchandise export is
declining owing lower export earnings from major agriculture commodity export (ERCA&NBE,
2016).

Increasing the country‟s merchandise export revenue, minimizing export earning instability and
ensuring the envisaged economic development of the country are the current challenges which
urges the government to devaluate birr against USD on October 2017 after seven years Ethiopia
last devaluated its currency claiming to stimulate export sector. The contribution of agricultural
commodity export was far behind GTP I&II targets. Its performance revealed that only 34.6 %
was achieved from the agriculture commodity export target of GTP I. This situation requires
identifying the real problem of agriculture commodity export poor performance and needs up-to-
date research works to design appropriate policy. Though research has done on Ethiopia‟s
foreign trade performance, there is still research gap in examining empirically the role of
agricultural commodities and agricultural commodity exchange for export of Ethiopia following
the new institutional change on agricultural commodity market through ECX.

5
Even though some researches have done on agricultural commodity export some of them were
methodologically inefficient. For instance Samuel (2012) conducted research on agricultural
commodity export applying VEC model for mixed level of integration. Applying VEC for mixed
level of integration is methodologically inefficient. Hence the objective of this study is by filling
the above research gaps to identify the determinants of agricultural commodity export in
Ethiopia and evaluate the role of ECX for agricultural commodity export. Moreover the study
aimed to provide recent information on agricultural commodity export trends & compositions.

1.3 Objective of the Study

The overall objective of this paper is to assess empirically the major determinants of agricultural
commodity export in Ethiopia. Identifying and examining the factors that significantly affect
Ethiopia‟s agricultural export helps to formulate appropriate polices which may improve the
current export performance of the country.

1.3.1 Specific Objectives

 To analyze agricultural commodity export compositions and trends.
 To identify determinants of agriculture commodity export in Ethiopia empirically.
 To estimate the role of Ethiopia Commodity Exchange for agricultural commodity
export.

1.4 Significance of the Study

The study is significant in identifying the major factors that affect the agricultural export of the
country by bringing empirical evidence using ARDL time serious data analysis technique.
Furthermore this research is significant to evaluate the contribution of ECX for agricultural
commodity export. The overall significance of this study is filling recent information gap on
agricultural commodity export by identifying the major determinants of agricultural commodity
export performance. Furthermore the paper indicates the impact of ECX for agricultural
commodity export. Owing this the study will help policy makers to understand and draw relevant
policies which enhance agricultural commodity export performance.

6
1.5 Scope of the Study
The demand and the supply side of determinants of merchandize export is not the scope of this
study. The study will focus only the supply side determinants of agricultural commodity export
of the country. The study will be confined to the period from 1981 to 2015, which gives thirty
five years of observation. The period selected due various reasons some of them are some
variables are missing before 1981 for instance GDPgr and TOT in WDI data set. Which creates
impediment to incorporate, another case is the period considers to regimes and believed it holds
enough time to policy changes across two regimes.

1.6 Organization of the paper

The paper is organized in five chapters. Chapter one deals with a brief introduction of the study
and statement of the problem. Chapter two covers the review of related literatures and empirical
findings of related works. Chapter three focused in model specification and method of data
analysis. Chapter four concerned with discussion of results and analysis of trends and
compositions of agricultural commodity export. The last chapter is chapter five; it is mainly
deals with conclusion and policy implications of the study.

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 CHAPTER TWO
LITERATURE REVIEW

2.1 Theoretical Review

2.1.1 Theoretical Overview of Foreign Trade

The question of why trade between countries and who gain form it, have a long history in the
international trade literature. The theoretical answers to these questions could give us an insight
in understanding about African trade with developed countries. The importance of international
trade for economic growth has been coined since era of mercantilists. They advocate
accumulation of precious metal like gold and silver resulted from surplus trade. To this end
mercantilist recommend the government has to control import and promote export as means of
nation to become wealthy and powerful. However Adam smith in his famous work „„the wealth
of Nations‟‟ criticized the idea of mercantilism that discourages import and encourages export.
Adam Smith emphasized that it is absolute advantage; either human or natural resource that
makes a nation beneficiary from trade. In his notion as far as a nation has an absolute advantage
over other country each country would be benefited either from import or export of a particular
good. In his view the wealth of a nation is not gauged by the accumulation of precious metals
and argued that the government should avoid control of free trade (Manner, 1996).

Adam Smith‟s original statement in Wealth of Nations (1776) was understood as trade in terms
of absolute cost differences between countries. Smith assumed that each country could produce
one or more commodities at a lower real cost than its trading partners. It then follows that each
country will benefit from specialization in those commodities in which it has an absolute
advantage (i.e. can produce at lower real cost than another country), exporting them and
importing other commodities that it produces at a higher real cost than does another country. For
Smith real cost meant the amount of labor time required to produce a commodity. His analysis
was based on the labor theory of value, which treats labor as the only factor of production and
holds that commodities exchange for one another in proportion to the number of hours required
for their production. This explanation based on absolute advantage certainly suits to account for
important segments of international trade. But what if a nation or an individual does not have an
absolute advantage in any line of production, Does trade then offer it no benefit, It was Ricardo

8
who developed the classical trade theory by going beyond the absolute advantage to the
comparative one (Robert et al., 2004).

David Ricardo clearly showed in his Principles of Political Economy (1817) that absolute cost
advantages are not a necessary condition for two nations to gain from trade with each other.
Instead trade will benefit both nations provided only that the ratios of their real costs in terms of
labor inputs are different for two or more commodities. Ricardo extended this insight to
demonstrate the basis for gains from trade is the existence of comparative advantage, not
absolute advantage. His analysis is based on the assumption of perfectly free commerce. A
country that is less productive in two goods still can gain from trade by exporting the good in
which its relative disadvantage is smaller, because its relative price of this good before trade will
be lower than abroad. A country that has an absolute advantage in both goods gains by
specializing in the production of the good in which its relative advantage is greater. It can gain
from trade by importing the product, in which its relative advantage is smaller, because the
foreign opportunity cost of producing it is lower. The major problem of this theory is it does not
explain why labor productivities differ across countries (Robert et al., 2004). The theory
necessitates less developed countries to specialize in primary commodities in which a nation‟s
comparative advantage exist is one of the major problem of developing countries in general and
Africa in particular. This question in the early 1920s and 1930s led to the development of the
factor endowment theory and hence implied recommendation to Latin America & Africa to
specialize and focus on in primary commodities (Alemayehu, 2011).

The nineteenth century free trade model primarily associated with David Ricardo and John Stuart
Mill was modified and refined in twentieth century by two Swedish economists. Eli Hecksher
and Bertil Ohlin, to takes into account differences in factor supplies mainly land, labor and
capital on international specialization. The Heckster-Ohlin neoclassical or variable proportions
factor endowment trade theory also enables us to describe analytically the impact of economic
growth on trade patterns and the impact of trade on the structure of national economies and on
the differential returns or payments to various factors of production. HO model argued trade
serves as a vehicle for a nation to capitalize on its abundant resources through more intensive
production and export of commodities that require large inputs of those resources while relieving
its factor shortage through the importation of commodities that use large amounts of its relatively
scarce resources. It should also be noted that as that of the Ricardian theory, the HO model
9
suggest specialization in primary commodity for Africa countries (Todaro & Smith, 2010).
However this model empirically tested and challenged by Leontief, in his empirical study
applying HO model America‟s participation in international division of labor should be based on
specialization on labor intensive means of production rather than capital intensive lines of
production which is out of the reality. The Leontief paradox combined with growth of intra-trade
requires the need for other theoretical explanations (Robert et al., 2004).

The apparent failure of all these theories in explaining the evolving trade patterns, especially
among developed countries led to the development of other theories that are based on imperfect
competition and scale of economics usually termed as new trade theories. According to Krugman
(1979) imperfect competition model, firms are aware that they can influence the prices of their
products and that they can sell more only by reducing their price. Imperfect competition is
characteristic both of industries in which there are only a few major producers and of industries
in which each producer's product is seen by consumers as strongly differentiated from those of
rival firms. Imperfect competition model also advocate trade need not be the result of
comparative advantage. Instead it can result from increasing returns or economies of scale that is
from a tendency of unit costs to be lower with larger output. By trading with each other and
therefore forming an integrated world market that is bigger than any individual national market.
Each country can specialize in producing a narrower range of products than it would in the
absence of trade; yet by buying goods that it does not make from other countries each nation can
simultaneously increase the variety of goods available to its consumers. As a result trade offers
an opportunity for mutual gain even when countries do not differ in their resource endowment or
technology (Krugman & Obstfeld, 2003).

In addition to the above mentioned developments in the international trade theories there is also
school which provide an alternative analysis about both the patterns of trade and the gain from it.
Analysts in this school primary focus on North-South trade where the south is mainly primary
commodity exporter and importer of manufactured goods. Since primary commodity is the most
component of South‟s trade these theories particularly emphasized the deterioration of the
South‟s terms of trade was the reason behind it. The main theory for the declining commodity
terms of trade is known as the Prebisch-Singer hypothesis, after two famous Latin America
development economists who explored its implications in the 1950s .They argued that there is
continues decline in terms of trade as far as less developing countries trade primary commodities

10
with industrialized countries due to a combination of low income and price elasticity of demand.
This decline would result in an ongoing transfer of income from poor to rich countries (David et
al., 2008; Todaro & Smith, 2010). This notion is similar with the pioneer Ethiopian Economist,
Negaderes Gebrhiwot Baykedagn (1924) who argued long-term decline in the terms of trade of
primary commodity due to trading non-value added products.

2.1.2 Agriculture Sector Performance and Its role in Ethiopia Economy

Agriculture is by far the single most important economic activity in SSA and it remains in key
position to achieve the poverty eradication targets of Africa. For most countries in SSA
agriculture contributes an average of 30-60% of GDP and about 30% of the values of exports. In
terms of agricultural commodity export SSA share in world has declined from 1960 to 2000 the
share declined from 8% to 2%. Due this SSA has fallen from a net food exporter to a net food
importer and become a major food aid recipient (Samuel, 2012).

Ethiopia‟s economy is highly dependent on agriculture; similar to that of SSA countries more
than 80% of population in Ethiopia employed in agriculture sector. Agriculture continued
playing a central role in the development endeavor of the country. Its contribution to the national
economy can be seen from different aspects. For instance its contribution as a source of food and
raw materials, its contribution for job creation, its contribution to GDP and also contribution for
export earnings. According to NBE (2015/16) report agriculture accounted for 36.7% of GDP,
78.2% export, and 80% of the labor force employment. In 2015/16 Ethiopia‟s agriculture value
added as percentage of GDP was 40.1% which was higher than the neighboring east African
countries Kenya 32.9 %, Uganda 25.8% and Tanzania 31% (WDI, 2016).

Due to agriculture based economy macroeconomic performance in Ethiopia is largely influenced

by agriculture sector performance. The performance can be seen across three distinctive periods.
During the imperial regime (before 1974) growth was satisfactory. On average the GDP at
constant factor cost has grown from 4.6% -1.9% which was a downward trend. This growth rate
further fallen in the subsequent period of the Derg regime (1974-1990) which was 1.9%, this
growth rate was far below the estimated 2.9 % population growth rate. There were various
reasons for this poor economic performance of the country among other things, the civil war, the
instability induced by the emerging new policy of Derg era as well as the war with Somalia
11
could explain for the poor performance of Ethiopia economy at that period. From 1979 - 1983
following relatively good weather and stable political condition the growth rate, again rose to
4.2%. In 1984-1985 growth plummeted to -5.3%. In the same period the agriculture sector
registered negative 16.7% rate of growth. This was a period of severe drought (Alemayehu,
2011). The periodic co-moment of GDP and agricultural growth in figure 1 shows there was a
direct result & extreme dependency of the economy on rain fed agriculture and the economy yet
not transformed to other sectors. Those years (1982, 1985, 1988, 1992, 1994, 2002, 2003 and
2016) shows negative and low agriculture growth accompanied with poor performance of the
economy were period of weather shocks in which the Ethiopian agriculture encountered.

Figure 1: Real GDP and Agriculture growth rate trend (1982 - 2016)
30
20
10
AG growth
0
GDP growth
-10
-20
-30

Source; MoFED and NBE various year data self-computed

Owing the above facts the Government of Ethiopia has designed and implemented Agricultural
Development Led-Industrialization (ADLI) strategy since 1991/92. The key concept underlying
ADLI policy document is an export-led development strategy aimed at promoting economic
growth in Ethiopia by coordinating agricultural and industrial development (Samuel, 2012). In
other words the policy document addresses; at the initial stage of development agriculture is the
engine for the country‟s economic growth, meaning the transformation of the agricultural sector
will contribute to the industry sector by accumulating capital to finance the manufacturing
industry, by supplying marketable surpluses for industry raw material and by creating large
number of people whose income is increased to be market for industrial products (MoFED,
2003).

Currently Ethiopia‟s farming system is largely characterized by peasant holders who grow food
mainly for family consumption leaving little for commercial purposes. The total land area
reported for the private peasant holdings was estimated more than 17.7 million hectares and

12
operated by more than 15.5 million agricultural households. Most of the agricultural land (73%)
was under temporary crops. In 2014/15 cropping season the country produced 27 million metric
ton of food of which 23,607,662 metric ton of cereals, 2,671,843 metric ton of pulses and
760,099 metric ton of oilseeds (CSA, 2015).

Though some progresses in agriculture sector were registered in the post – Derg regime, still the
sector is underdeveloped and the country yet not secured its food self-sufficiency. Among other
things the agriculture sector in Ethiopia faces the following problems and policy issues; those are
land degradation, vagaries of rainfall, land fragmentation, land tenure, under developed rural
infrastructure and backward technology are among others (Ayele, 2006 & Hile-giorgis, 2011).

2.1.3 How Commodity Exchanges come to exist

A commodity exchange is a centralized location or platform where buyers and sellers carry out
transactions, with or without physical commodities under a set of clearly defined rules and
regulations. In theory commodity exchange can play a major role for agricultural development as
an instrument to bring efficient agricultural market by providing lower transaction cost, efficient
and transparent market for price discovery, managing risks related with prices volatility, increase
efficiency for payment, delivery, contract enforcement and provide a forum for exchanging
information about supply and demand condition. Unlike spot market future market provide the
function of hedging and price discovery for promoting efficient production, storage for the
products, marketing and agro-processing operations for the purpose of improving the overall
agricultural marketing performance (Black, 1986; Garcia, 2004; UNCTAD, 2008).

In history the formal commodity trade by gathering group of merchants in agriculture trade fairs
trace back to twelfth century in Russia. The most well-known agricultural commodity exchange
was the Chicago Board of Trade (CBOT), which was established in 1848 as a voluntary
association. CBOT established by prominent Chicago grain merchants to solve their wheat&
corn marketing problem. After more than a century of trading exclusively in agricultural
products the CBOT broadened its transactions and evolved to include financial contracts in
1975, futures contracts in 1982, and futures-options contracts in 1997 (Britannica, 2014). In spite
of the potential benefits, organized commodity exchanges remained to exist in developed
countries for more than a century. In many countries exchanges failed to emerge as privately

13
profitable entity either because of underlying market failures or due to heavy government
interventions in commodity markets. In the case of Africa weak infrastructure, excessive
government intervention in grain markets, small tradable commodity volume, underdeveloped
financial sectors and lack of supportive legal & regulatory frame works are some of the problems
behind exchange‟s in Africa failed to emerge (UNCTAD, 2007;UNCTAD, 2008).

Until the inception of structural adjustment programs in the 1980s and 1990s with the exceptions
of Brazil, Malaysia and Argentina, commodity exchanges established and work only in
developed countries. Now a days different commodity exchanges operates at different ownership
arrangement, political and economic system. For instance Brazilian and China commodity
exchanges were government-owned exchanges whereas in Ethiopia, Malaysia &Thailand
established and work under the public-private partnership model. Regarding the exchanges
performance for those exchanges established following SAP, only few exchanges in emerging
economies namely China, India, Brazil and Thailand exchanges have been successful, whereas
most exchanges in Africa due to lack of enabling environment have either failed or continue to
exist with government or donor support. For instance exchanges in Kenya, Malawi, Nigeria,
Uganda, Zambia, and Zimbabwe are exist only in paper. The only exceptional exchange in
Africa is Ethiopian Commodity Exchange. ECX is operationally survived with direct
government policy support of trading mandated commodity (Rashid, 2015).

2.1.4 The Establishment of Ethiopia Commodity Exchange

Ethiopia has followed a policy of stimulating the agricultural sector in which the Ethiopia
Commodity Exchange has become an important element. ECX is modern market highway which
employees in house made IT infrastructure & business applications. The formal institutional
arrangement of ECX was modeled on the Chicago Board of Trade; an important difference is the
CBOT was established by the traders themselves to solve their grain marketing problem whereas
the ECX was established by the government initiative to enhance the country‟s agricultural
commodity marketing performance (Merijerink, 2014).

According to Gabre-Madhin & Goggin (2005) there were eight factors that explain the
establishment of commodity exchange in Ethiopia. Those were: (i) the government in ADLI
policy document have committed to create commercialized smallholder farmers who produce for

14
market by ensuring quality and quantity of products. (ii) The existence of a large but
unorganized domestic agricultural market in the country call for some change; (iii) Presences of
large central grain and non-grain market in Addis Ababa that connects physical commodity flow
from area of surplus to area of deficit; (iv) Availability of brokerage practice in the Addis Ababa
(v) Emergence of market-oriented agricultural cooperatives and unions to bulk up produce and
organize farmers‟ market participation at different regions of the country; (vi) Emergence of
larger-scale commercial farmers on traditional and nontraditional commodities (vii)
Establishment of a national warehouse finance system;(viii) Conducive policy environment for
the overall agricultural market development were the fundamental reasons &ground for the
establishment of ECX (Gabre-Madhin & Goggin , 2005).

Ethiopia Commodity Exchange became operational since 2008 (Gabre-Madhin, 2012). ECX is a
government-owned exchange, in which the management constitutes from public and private
individuals. Initially ECX focused to trade maize, wheat, and beans, on voluntary basis but it was
unable to attract a significant volume of these commodities. Since December 2008, the exchange
has turned its focus to trade export commodities such as coffee, white pea bean, mung bean and
sesame on a mandatory basis with direct government policy support (Rashid, 2010).

Currently the Ethiopian commodity Exchange operates spot trading. The method of trading also
advanced from open outcry auction system to electronic trading. And ECX delivery centers swell
to 21 branches across the country where commercial commodities produced (ECX, 2015).
According to ECX (2014) the number of members which was 100 when ECX was established,
currently surge and reached 346 members, 14,725 clients and 10 percent farmer cooperative
unions reaching out 2.7 million small holder farmers.

2.1.5 Ethiopia’s External Trade Policy

Nowadays the need to increase trade performance has been a requisite for a country to grow. A
country must import required raw materials, intermediate and capital goods to increase and speed
up its production base. In line with the classical trade theories Ethiopia can be benefited from
exporting agricultural commodities because of its comparative advantage due to cheap labor and
tropical climate. Like Ethiopia a country with a large and diverse resource base and potential,
greater participation in world trade would provide additional opportunities to transform its

15
resources to address the challenging issues of economic growth and poverty reduction (Berhanu
et al., 2004). Even though different trade policy measures undertaken since the imperial regime,
still the country‟s export is less diversified and remains dependent on few agricultural
commodities. There were many factors and policy gaps under different regimes which explain
poor export performance of Ethiopia.

2.1.5.1The Imperial Regime Trade Policy (Pre -1991/92 reform period)

The imperial regime (Before 1974) the foreign trade policy of the country was largely informed
by the free trade doctrine. The regime conducted three different five years development plans.
Though those development plans depicted the importance of export and export diversification for
the growth of the country, in practice due attention was given for import substituting industries
and exporting traditional agricultural products to fulfill the foreign exchange need of the country
(Debel, 2002). The imperial period characterized by establishment of chamber of commerce, the
establishment of various boards (Coffee board, Grain Marketing Board and Office of National
Standards) over valuation of birr against dollar, high tariff and heavy taxation on exportable
products, however the undertaken imperial regime policy measures did not bring the intended
result (Alemayehu, 2011).

2.15.2 The Derg Regime Trade policy (the period from 1974-1991)
The Derg era (the period from 1974-1991) was marked by centralized economic system where
the state controls all the production, distribution, price, export and import sector of the country
and which limited the participation of the private sector in the economy. Like the imperial
regime, the military Derg launches a ten years perspective plan (1985/86 - 1994/95), which aim
to diversify the country‟s export through orienting the counties export form traditional
agricultural product to manufacturing and mining sector. To affect the above objectives the
regime design strategies like promotion of exports through the provision of favorable tax &
tariff, participating in international trade fair, strengthen chamber of commerce, preferential
interest rate for exporters were some of the initiatives. However the Derg regime export
promotion target which aims diversifying the country‟s export failed and the country‟s export
remain dependent on few agricultural commodities and at the end of Derg regime the country‟s

16
merchandise export performance was 189 million USD, which implied the export performance
contributed only 2.4% for GDP (WB, 2016). The major reason perhaps overvalued of birr
against dollar & strong control of exchange rate, high rate of tariffs, restrictive commercial
policies and strong inward looking policies than export promotion (Debel, 2002).

2.15.3 The EPRDF Regime Trade Policy (the post-1991/92 reform period)
After the down fall of Derg regime (the post 1991/92) the EPRDF government adopted
liberalization and structural adjustment programs with the help of IMF and World Bank
(Weissleder, 2009). As part of the market-oriented reforms initiatives have been taken to
facilitate private sector participation in export trade. The major reform measures implemented to
achieve this objective were dismantling of government monopoly in coffee trade, devaluation
and de-regulation of the foreign exchange regimes and abolishing the mandatory approval
requirement for exports contracts may be the prominent policy shifts (Berhanu, et al. 2004).

According to the Ethiopian foreign affairs trade promotion manual (2007) Ethiopia's foreign
trade policy has three general objectives. One developing and ensuring broad international
market for agricultural commodities second generate sufficient foreign exchanges which can
cover the import bill of capital and intermediary goods and services which are essential for the
growth and development of the economy and third improving the efficiency and international
competitiveness of domestic producers (MOFA, 2007).

To realize these objectives the post-1991/92 government has designed and implemented various
policies and institutional measures. Those are devaluation of the Ethiopian currency against US
dollar by more than 140% to make export competitive and liberalization of the exchange rate
market using the intra bank auction system; simplifying export licensing; establishing export
promotion agency and different institutes to provide supportive services; the tariff regime was
continuously revised and was reduced from a maximum of 230 percent to currently 35 percent.
Duty drawback scheme; foreign currency retention scheme are among policy measures
undertaken to stimulate the external trade sector (Weissleder, 2009).

In general it is observed that compared to pre 1991/92 period there was a major policy shift in
the post 1991/92 period. Essentially the policy regime has shifted controlled regime toward

17
liberalized one. This change was chiefly related with the structural adjustment program in which
the country has adopted since 1991/992 (Alemayehu, 2011).

2.2 Empirical Review on the Determinants of Agricultural Commodity Export

When we look at the factors affecting export performance of Ethiopia different researchers have
put their effort towards identifying and addressing these constraints. According to Abay and
Zewdu (1999) the major constraints of the Ethiopian export sector could be seen from demand
and supply sides. The demand side constraints include low level of demand for agricultural
products due to very slow population growth in industrial countries, low income elasticity of
demand for primary exports, production of synthetic products, and restrictive trade policies
followed by importing countries. On the supply side type and composition of products,
concentration of export markets in few destinations, whether shocks on agricultural
commodities, poor communication& infrastructure facilities, the availability and degree of
domestic supply of inputs to exporting firms, high domestic demand for export commodities like
coffee were some of the determinants of export performance of the country.

Mouze (2005) also tried to show the agricultural exports of Ethiopia as a function of real
effective exchange rate, terms of trade, infrastructure variable measured by the percentage of
paved road to total road, net value of world trade and a dummy to capture the impact of
government change. Applying Error Correction Model (ECM) result showed that real effective
exchange rate, terms of trade and fertilizer consumption were the significant short-run and long-
run determinants of agricultural exports.

Yishak (2009) tried to analyze empirically the determinants of export performance of Ethiopia. A
gravity model was 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. The results suggest that supply side conditions are a major factor for Ethiopia's export
performance. Moreover 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. The results also indicated that import barriers imposed by
Ethiopia‟s trading partners do play an important role in determining the volume of Ethiopian

18
exports. Furthermore export performance was positively related to Ethiopia‟s trading partner
national income, and distance or transport cost affects the country‟s exports negatively.

Haile-giorgis (2011) examined export performance of oilseeds and its determinants in Ethiopia
using macroeconomic time series data over the period 1974 to 2009. He adopted Goldstein and
Khan (1985) imperfect substitution model .The results showed that the estimated coefficients of
real output and nominal exchange rate are statistically significant. The researcher discloses that
real output and nominal exchange rate have positive effect on the export performance of oilseeds
in Ethiopia. The findings of the study also revealed that the country needs to break away from its
heavily depends on few traditional export commodities.

Eyayu (2011) attempts to assess empirically the demand and the supply side factors affecting
agricultural export of Sub-Sahara Africa countries. The study focuses on analyzing the relative
importance of the two major factors in determining the countries agricultural export
performance. Panel data set with fixed effects estimation technique is used to address the
question. The data set covers 47 SSA countries over the periods 2000 – 2008. The estimation
result shows that on the supply side, factors such as real GDP, real GDP (lagged) of exporting
country and lagged agricultural input use positively and significantly affects agricultural export
of the SSA countries. The study also indicates that on the demand side the effect of per capita
GDP of US, the major trading partner of SSA countries was positive and significant.

Samuel (2012) using a 30 years‟ time series data from 1980 to 2010 by applying co-integrated
and Error Correction Model to identify determinants of agricultural exports in Ethiopia. The
result showed that terms of trade, gross domestic product, domestic price, world price,
percentage of paved road and fertilizer input significantly affected the agricultural export
performance in the long-run. In the short run gross domestic product was insignificant and
negative in sign. Domestic price was also insignificant & deviates from the expected sign
Samuel (2012). However Samuel's study was methodologically inefficient because; first he did
not properly test the existence of co-integration with appropriate co-integration technique, he
simple used outdated co-integration testing mechanism, namely Granger (1897) co-integration
test technique. He simples test the stationary of residuals after he done OLS regression. Second
applying VEC model for mixed level of integration is not advisable because during his stationary

19
test variables such as terms of trade and fertilizer were stationary at level I (0) and the rest
variables were stationary after first difference (1).

Niguse & Ashebir (2016) assessed the determinants of food export supply of Ethiopia using time
series data that spans about 32 years, data from world development indicator (WDI) of World
Bank report. The study was applied co-integration and error correction model to test the
determinants of food export supply. The finding of the study revealed that food export supply of
Ethiopia was affected by openness of the country for international trade in the long run whereas
the domestic national income, rural population, world oil price, urban population, agricultural
land, investment and domestic inflation affects the food export supply of Ethiopia both in the
short run and long run.

Currently it is a controversial issue whether the establishment of ECX is improving agricultural

commodity marketing and export supply performance of the country or not. Dawit & Meijerink
(2010) analyzed the impact of ECX whether reduce transaction costs or not. The researchers
employed before after and regression analysis. Their finding revealed that after the onset of ECX
the transaction costs have declined substantially by various indicators than before the launch of
ECX, this make export commodities competitive for export market.

Contrary to this finding recent research by Leonard (2014) argued that, though the presence of
ECX avoided contract default and collude trading, however ECX trading model creates artificial
information asymmetry and distorted the coffee export sector as a result the country is losing
rather than gain from foreign trade after coffee was mandated to be traded through ECX.
Leonard (2014) empirically analyzed the performance of ECX traded export coffee using MOT
data set. For analysis purpose coffee supply channel grouped in to two categories namely traders‟
coffee for coffee in which its source was from ECX and producers‟ coffee which was grown and
exported directly by farm owners out of ECX trade plat form or channel. His finding showed that
ECX trading model eroded coffee traceability, eroded traceability in turn suppresses the export
price of non-traceable (ECX-sourced coffee) relative to fully traceable coffee. The price
difference between the traceable and non-traceable coffee estimated 12%. The cumulative
monetary value was estimated to be 280 million USD in which the country loss per annum
because of loss of traceability.

20
To sum up even though different researches have been conducted to investigate the determinants
of merchandise export in Ethiopia, those works have shown some conflicting results. For
instance Mouze (2005) & Haile-giorgis (2011) works showed exchange rate was significant in
short & and long run however Yishak (2009) work showed contrary to them; meaning real
effective exchange rate did not explain export . Mouze (2005); Yishak (2009); Haile-giorgis
(2011); Eyayu (2011) and Niguse&Ashiber (2016) works showed the significance of GDP in
determining export however, Samuel(2012) work show GDP was insignificant and negative in
short-run which was against the existing theory. In addition Dawit & Meijerink (2010) showed
the importance of ECX in promoting export by reducing transaction cost, however Leonard
(2014) claim ECX trading model worsen the export performance of the country specifically due
to commoditizing coffee and loss of its traceability. This conflicting results call to examining
determinants of agricultural commodity export & the impact of ECX for agricultural commodity
export using recent data to know the current situation.

21
 CHAPTER THREE
METHODOLOGY AND MODEL SPECIFICATION

3.1 Data Sources

The study uses secondary data collected from different sources. Annual data for the period of
1981-2015 has been considered for the analysis. The main data sources were National Bank of
Ethiopia, Ethiopian Revenue and Custom Authority, Central Statistics Agency, Ethiopia
Commodity Exchange, World Bank World Development Indicator and United Nation
Conference for Trade & Development (Annex 1).

3.2 Model Specification

Measurement of export performance studies had always paid special attention to the model
specification and as a result of this general consensus had been achieved on empirical form of
demand and supply function for exports. The customary approach to measure the supply side
determinants of exports is the “imperfect substitute model” assuming that neither the imports nor
exports are perfect substitutes of domestic goods in a country (Goldstein and Khan, 1978). Based
on this assumption, imperfect substitute model shows that in the long run, supply of exports from
a country depends on the productive capacity, input prices and relative price of the exports, i.e.,
export price relative to domestic market prices. Thus this study benefited and adopted long-run
general form of export supply function;

Xs = f ( , VC, K)…………………………………………………………………… (1)

Where, shows the exports supply volume, (Px/Pd) relative price of exports (K) production
capacity and (VC) input prices (Goldstein and Khan, 1978, Bond, 1985).

Several researchers have adopted and extended the standard export supply model in different
dimensions like Aleena et al., 2014; Tadesse, 2015; John, 2014; and Haile-georgis, 2011 had
adopted the model and extended including other variables that explain the export supply specific
to their country of study. Therefore the model used to estimate& capture the determinants of
agricultural export performance in Ethiopia further extended as follows;
AGX = f (GDPgr, OP, TOT, REER, and ECXD).................................. (2)

22
Where AGX refers to value of agricultural commodity export performance in Ethiopia for the
last 35 years, TOT terms of trade, OP openness to trade, GDPgr annual gross domestic product
growth rate, REER real effective exchange rate and ECXD Ethiopia Commodity Exchange
Dummy. At estimation stage taking logarithm to smooth out the scale of the underlying variables
in equation (2) and differentiating with respect to time gives the trend of agricultural commodity
export equation as form:

.. (3)

Where, β‟s are unknown parameters to be estimated, t is time in years (1981-2015) and is
random terms that are independently and identically distributed with mean zero and variance.

3.3 Definition of variables

Agricultural Commodity Export (AGX): In this study the monetary value of agricultural
commodities sold abroad to generate foreign currency termed as agricultural commodity export.
The main commodities were coffee, oil seeds, pulses, fruit &vegetables, chat, flower, hide and
skin and live animals.

Terms of Trade (TOT): The ratio of an index of a country‟s export prices to the prices of its
imported goods defines the net barter terms of trade; it explains the number of units of exports
that can be substituted for a unit of imports. When a term of trade of country improves, the
country is benefited since it can import more products for a given level of export. TOT is an
index in which national accounts of exports price index divided by the imports price index. The
terms of trade has economic significance to a country. Terms of trade considered as favorable for
a given country only when the export prices are high relatively to import prices because gaining
more from international trade ensured otherwise the reverse would be true, meaning the country
would continue to loss from international trade. It is termed as unfavorable terms of trade.
Therefore, coefficient of terms of trade was expected to be positive.

Trade Openness (OP): The simple measure for trade policy reform is the ratio of export plus
import to GDP, often referred to as measure of openness or trade dependence index but more
appropriately considered as a trade volume measure. A country with less restrictive trade policy
is more open to international trade. The trade openness of a nation shows how much the country
23
is participating in the international trade. A country recognized as open for trade could be
expected to have a larger trade volume relative to countries with restrictive trade policies. Value
of import and export as percentage of GDP is proxy for OP. There for the more open a country to
the international market is, the country will have better export promotion policies, vast export
destinations, and will have competent exporting firm. Those export enabling conditions led to
better foreign exchange earnings from agricultural commodity export. Therefore the coefficient
OP expected to be positive.

Gross Domestic Product growth rate (GDPgr): is a macroeconomic measure of the value of
economic output. The size of the exporting country which is represented by GDP and its annual
change represented by annual GDP rate of growth is basic determinant in explaining exports.
The GDP growth rate of the domestic economy is believed to reflect the capacity to supply
exporting goods. A high level of GDP rate of growth indicates a high level of production in
exporting country and can be interpreted as a proxy for production capacity, which increases the
availability of exportable commodities in quality and quantity, therefore coefficient of GDP
growth rate to be positive.

Real Effective Exchange Rate (REER): the exchange rate between two countries is the price at
which residents of those countries trade with each other. The real exchange rate is the rate at
which people trade the goods produced by the two countries. The real exchange rate equals the
nominal exchange rate multiplied by the ratio of the price levels in the two countries. REER = e.
P*/ P. Where e is the nominal exchange rate, P* is the consumer price index of the foreign
country and P is the domestic consumer price index. REER considers the effects of multilateral
exchange rate. Depreciation (undervalued) in the real effective exchange rate makes the
Ethiopia‟s exports cheaper and competitive in the international market thereby increasing the
volume of exports. The converse is also true. An appreciation (overvalued) of in the real
effective exchange rate makes Ethiopia‟s exports relatively expensive and less competitive on
the world market. A negative relationship between overvalued of real effective exchange rate and
net exports are expected.

ECX 2008 Dummy (ECXD): Ethiopia has pursued active policy of stimulating the agricultural
sector, of which the establishment of Ethiopia Commodity Exchange has become an important
element since 2008. The essence of ECX dummy variable is to capture the impact of ECX for
24
agricultural commodity export. The dummy variable takes the value of 0 for the time before
2008 and value of 1 since 2008. ECX can be seen as a major institutional change in agricultural
commodity markets of Ethiopia since 2008. Institutions affect the distribution of assets, incomes,
and costs as well as the incentives of doing business and efficiency of market transactions. The
argument behind this variable is that efficient commodity exchange enables to increase export
competitiveness by reducing transaction cost and by increasing the volume and value of
exportable commodities. Hence ECX 2008 dummy is expected to be positive.

3.4 Method of Data Analysis

Objective one

To support the empirical work regarding the agricultural commodity export compositions and
trends descriptive analysis was done using figures. The purpose of descriptive analysis was to
provide basic information about the underlying variables in this study and to assess relations
between export variables.

Objective Two

Analyzing the determinants of agricultural commodity exports in Ethiopia applying

Autoregressive Distributed Lag (ARDL) bound co-integration test and error correction model
.This model was used because the underlying variables have mixed level of integration. Before
the analysis, the stationery of time series data was tested though ARDL model does not need
pretest of stationarity, however it is useful to avoid I (2) variable which may crash ARDL
technique. Augmented Dickey-Fuller test was used to test the stationarity of the variables. Then
ARDL bound co-integration analysis was done to check whether long-run relationship and short
term dynamics existed. After the above requirements fulfilled long-run and short run values of
the variables estimated. The detailed methodologies for each step put as follow;

3.4.1 Test for Stationary and non-Stationary

The classical regression model assumes that both the dependent and independent variables are
stationary over time. However, most economic variables exhibit long-run trend movement and
only become stationary after they are differenced. Applying the classical regression techniques to
the levels of variables leads to a spurious regression, particularly when the underlying variables

25
exhibit consistent trend, either upward or downwards over time. The empirical literature for unit
root shows that most of macro variables are non-stationary in level while their difference is
stationary. A non-stationary time series has a different mean at different points in time and its
variance increases with the sample size. Non-stationary data as a rule are unpredictable and
cannot be modeled or forecasted. The results obtained by using non-stationary time series may
be spurious. In order to achieve consistent and reliable results, the non-stationary data needs to
be transformed into stationary data. On the other hand a series is said to be stationary if its mean
and variance are constant over time and the value of the covariance between the two time periods
depends only on the distance or gap or lag between the two time periods and not the actual time
at which the covariance is computed, therefore the first thing in an econometric work is to check
whether a series is stationary or not (Guajarati, 2004).

A non-stationary time series that becomes stationary after differencing d times is said to be
integrated of order d. This would be written as I (d). To establish the order of integration of a
series a unit root test was performed. There are many tests for examining the existence of unit
root problem. Dickey and Fuller (1979, 1981) constructed a method for formal testing of non-
stationary.

……………………………………………. (4)

Where difference operator t is the time or trend variable and 𝛽0, 𝛽1𝑡 shows there is drift and

trend stationary. In each case the null hypothesis is: 𝐻0= δ = 0; that is, there is a unit root (the
time series is non-stationary), and 𝐻1= < 0; that is the time series is stationary. But in case 𝑡 is

correlated, Dickey and Fuller have developed test known as the Augmented Dickey-Fuller
(ADF) test. This test is conducted by augmenting the preceding three equations by adding the
lagged values of the dependent variable 𝑡. The ADF test allows three possibilities namely no
constant no trend (5a), with constant no trend (5b), with constant & trend (5c).

∑ …………………………………………. (5a)
∑ …………………………………… (5b)
∑ …………………………… (5c)

26
Where, and are the constant and the time trend, respectively. The ADF test assumes that
the errors are statistically independent and have a constant variance. Thus an error term should
be uncorrelated with the others and has a constant variance. The test is first carried out with a
constant and trend on the variable in level form. Secondly, it is carried out with a constant only
and finally without constant & trend on the differenced variable depending on which was
significant in the level form. The decision criterion is, if the ADF test statistic is greater than the
critical value, then the series is stationary and if the ADF statistic is less than the critical value,
the series is non-stationary. The Implication of the unit root test result on the estimation
procedures is that if all variables in the equation are found to be non-stationary at level form I (0)
their liner combination will be stationary.

3.4.2 Test for Co-integration

Granger (1981) introduced the concept of co-integration. Co-integration is the statistical
implication of the existence of long run relationship between the variables which are individually
non-stationary at their level form but stationary after first difference (Gujarati, 2004). The theory
of co-integration can therefore be used to study series that are non-stationary but a linear
combination of which is stationary. The Engle and Granger test is a two-step test for testing the
existence of a long-run relationship, this test is using assumption ( , )′ is a vector of I (1)
variables and OLS regression for the model in levels:

………………………………………………… (6)

And then test whether the residuals ̂ 𝑡 ̂ ̂ are stationary and then estimate
𝑡
error correction model EC with lagged residuals

̂ ∑ ∑ 𝑡 … (7)

And test whether - . If the test result show stationary, it is concluded co-integration
exist. However the Engle and Granger (1987) has its own disadvantages due to; the order of
integration of the underlying variables needs to be determined and the general pretesting problem
which is related with classifying the variables wrongly I (0) or I (1), second the OLS estimation
of the static levels model may create bias in finite sample due to omitted short-run dynamics and
27
the OLS estimator for the long run estimate is not normal and cause invalid inference. On the
other hand the Johansen (1988) co- integration test also not efficient for mixed level of
integration I (0) & I (1).

Having the above reasons Pesaran& Shin (1999) and Pesaran et al. (2001) argued ARDL bound
test has the following advantages over the above two co-integration tests; first ARDL co-
integration technique is adopted irrespective of whether the underlying variables are I (0), I (1) or
a combination of both, second ARDL test is relatively more efficient in the case of small and
finite sample size. Third advantage is by applying ARDL technique we can obtain unbiased
estimates of long run model. There for the Error Correction Model (ECM) can be derived from
ARDL model through a simple linear transformation, which integrates short run adjustments
with long run equilibrium without losing long run information.

3.4.2.1 Autoregressive Distributed Lag Modeling (ARDL) Approach to Co-integration

This paper benefited from the Pesaran &Shin (1999) and Pesaran et al. (2001) ARDL bound co-
integration test. ARDL co-integration technique is adopted irrespective of whether the
underlying variables are I (0), I (1) or a combination of both, and cannot be applied when the
underlying variables are integrated of order I (2). There for to avoid crashing of the ARDL
technique it is advisable to tests for unit roots (Pesaran, 1999). The ARD/EC model specified as
follows:

ARDL (p, q…..q)

𝛽 ∑ 𝛽 ∑ ……………. (8)

Where

o ∑ 𝛽 ∑ is short run model and 𝛽 , are short-run coefficients

o is long run model and are long- run coefficients
o disturbance (white noise) term

ECM: 𝛽 ∑ 𝛽 ∑ ………………………. (9)

……………………………………………………………… (10)

Where is lagged residuals derived from long run model

28
Test decision is do not reject the null hypothesis of F- statics & t- statistic respectively, if the
test statistic is closer to zero than the lower bound of the critical values. Reject the null of F-
statics & t- statistic respectively, if the test statistic is more than the upper bound of the critical
values. More F-value above the upper bound is evidence for co-integration.

The ARDL Bound Co-integration test modeling using agricultural commodity export variables:

∑ ∑ ∑

∑ ∑ ∑

………………………………………............................................................(11)

Where constant term, long run coefficients and short run coefficients & difference
operator

Log of agricultural commodity export in million birr

= Growth rate of Gross Domestic product

= Log of terms of trade index

= Log of trade openness index

= Log of real effective exchange rate

= ECX dummy 1 since 2008 either wise 0

P = Optimal lag length

= Error term

29
Objective Three

3.4.3 Estimating the role of ECX for Agricultural commodity export

The third objective of this study was to estimate empirically the role of ECX on agricultural
commodity export, to capture the impact of ECX on agricultural commodity export, 2008
dummy was used. In addition to empirical result, descriptive method using figures used to
support the empirical finding with the existing trends.

30
 CAPTER FOUR
RESULTS AND DISCUSSIONS
This chapter presents results and discussions on the determinants of agricultural commodity
exports and the role of ECX for agricultural commodities export in Ethiopia from the period
1981 to 2015. It has three main sections. Section one gives trends& compositions of agricultural
commodity export to provide background information & support the empirical results. Section
two presents brief interpretation of statistical & comprehensive econometric analysis. Section
three presents econometric result and descriptive analysis of ECX's role for agricultural
commodity export. STATA 14 soft wear used for empirical data estimation.

3.1 Merchandise Export Trends & Compositions

3.1.1 Agricultural Commodities production and Export trends

As figure 2 below shows over the last ten years the volume of exportable agriculture
commodities production has shown some progress, during the review period on average coffee
harvest has grown by 10.2%, oilseeds by 5.2% and pulses by 24.9%. However, export volume
was lagging behind production volume, especially coffee production and export volume trend
support this observation.

Figure 2: Major agriculture commodities production& export potential

6000000
5000000
Pulses export
4000000
Oil seeds export
3000000
coffee export
2000000
pulse production
1000000
Oil seeds production
0
Coffee production

Source: CSA & ERCA (2016), Self- computed

As figure 4 below also indicated over the past one decade except coffee, the volume of
agricultural merchandise exports have shown good progress, average export volume growth rate
of coffee, oilseeds and pulses were 0.39%, 10% and 17% respectively. As figure 2 & 3indicated
in 2015/16 the volume of coffee production was doubled and stood at 416,596.5 metric tons
31
compared 273,400.1 metric ton in 2007/8 production year. However from the total 2015/16
coffee harvest only 47.9 percent was exported, the rest 52.1% are either locally consumed or
smuggled (Annex 2.2).Moreover as figure 3 revealed only in 2009/10 where coffee produced and
traded at ECX were matched, however the following years commodity traded at ECX were far
less than the volume of production.

Figure 3: Comparison of Coffee production, traded at ECX and export volume

450000
400000
Volume in metric ton

350000
300000
250000
Coffee production
200000
150000 Coffee traded at ECX
100000 Coffe export
50000
0

Source CSA, ECX &ERCA (2015/16) and self - computed

On the other hand pulses are the second agriculture product of Ethiopia next to cereals; as figure
2 above showed however from total pulse output only 13.6% was exported. Relatively in terms
of production & export volume oils seed sectors showed good progress. In 2015/16 from the total
harvest 55.6% percent of oil seeds were exported of which 86% share comes from sesame seed.
The above facts revealed the major exportable commodity sectors still lack institutional support
to exploit the listed above export commodities potential.

Figure 4: Agricultural commodity exports trend in metric ton

500000
coffee
400000
Oil seeds
300000
Pulses export
200000
Fruit& Vegetables
100000
Live Animals
0
Chat
Flower

Source, (NBE, 2016) Self- computed

32
3.1.2 Merchandise Export value & Direction of trade
As figure 5 below showed, over the past one decade (2004/5-2015/16) most of agricultural
commodities has shown progress in foreign exchange earnings, for instance under the review
period coffee has earn 722.7 million USD from 365.6 million USD (102.5%), oil seeds earn
477.2 million USD from175.8million USD (171%), pulses earn 232.4million USD from 32.05
million USD(625%), fruit and vegetables earn 53.7 million USD from 8.3million USD (547%),
chat earn 262.4 million USD from 68.16million USD (284.9%), live animals earn 147.8 million
USD from 22.7million USD (551%) flower earn 203.1million USD from 12.48 million USD
(1705%) increment.

The progress registered in merchandise export was due to volume & price increment in
agricultural commodity export. However, onwards 2014/15 merchandize export has declined
following world price fall in major agricultural commodities. Total merchandise export earnings
dropped by 3 % over the same period of 2015/16. The decline in foreign exchange earnings of
coffee and oil seeds by 7.4% & 6.4% was because of international price fall by 14.3% & 31.1%
respectively. earnings from Chat export decreased by 3.7 % as export volume dropped by 4%
despite 0.9 % rise in international price (NBE, 2016).

Figure 5: Trends of merchandize export in million USD

900
800
700 Coffee
600 Oil seeds
500
Pulses
400
300 Fruit& Vegtables
200 Live Animals
100
Chat
0
Flower

Source; ERCA, Self-computed

From the total 2015/16 merchandise export revenue, the above seven agricultural commodities
accounted 78.2%. In 2015/16 the merchandise export share of coffee declined and stood at
25.5%. The rest agriculture commodities shares have showed improvement. The non-traditional
agricultural commodity, flower export performance was remarkable. In 2015/16 the merchandise

33
export share of oil seeds, pulses, chat, flower, live animals and fruit & vegetables accounted
10.8%, 8.2%, 9.2%, 7.9%, 5.2% and 1.9% respectively. Although their performance looks good,
however the achievement were lag behind GTP II export revenue targets (67%) annex 4.2. GTP
II export performance seems good compared with GTP I performance (34.6%), though no
significant progress in agricultural commodity export. The change is observed because of
agricultural commodity export target reduced by more than fifty percent in GTP II plan.
Therefore comparing GTP I export performance against GTP I target, coffee earned 38.3%,
oilseeds 45.5%, pulses 24.9%, flower 37.9%, vegetable & fruit 5 % & live animal 14.8% (Annex
4.1).

Examining the direction of trade according to NBE (2016) data, Ethiopia‟s major trade
destinations were: Asia accounted for 37.2% from the total merchandise export, Europe 34.1%,
Africa 20.8% and America 7%. From Asia; China accounted for, 17.6 % , Saudi Arabia, 8.4%
United Arab Emirates 6.7 % , Israel 6.6 % India 5.6 % Japan 6.6% and Pakistan 5.3% .
Altogether these countries accounted for 82.4% of Ethiopia‟s total exports to Asia. Ethiopia‟s
total exports to Europe were; Switzerland constituted 29 %, the Netherlands 19.4%, Germany
17.5 %, and Belgium 6%, Italy 5.1 %, United Kingdom 4.4 % and France 3.9%. These countries
together accounted for 85.6% of Ethiopian export to Europe. Ethiopia‟s main destination in
Africa were; Somalia 55.8 %, Djibouti 21.5 %, Sudan 12 %, Kenya 4.9 % and Egypt 3.6 %,
which altogether accounted for 97.8 % of the total exports to Africa (NBE, 2016). This fact
explains Ethiopia‟s trade was still concentrated in few trading partners and a need for widening
merchandise export destination.

3.1.3 Balance of Trade

According to the World Bank (2016) data export and import as percentage of GDP gap still
continue widening. Figure 6 below showed for the past three decades the export performance of
the country is below 10 percent of GDP, however the import performance revealed an increment
year by year and stood at 27.4 percent of GDP in 2015/16.

34
Figure 6: Export and Import gap (1981 – 2015)
40

30

20 Export (% of GDP)

10 Import (% of GDP)

Source; (WB/WDI, 2016) Self-computed

As figure 7 below showed, compared to the pre reform period (1991/92) the post reform period
marked with high merchandise trade deficit. Merchandise trade deficit in 2015/16 stood at 13.9
billion USD. Merchandise export as percentage of GDP still not far from 6.2%, whereas
merchandise import swelled to 27.5% in 2015 owing growth in total import bills in the face of
falling merchandise export earnings, due this the country‟s trade deficit as percentage of
GDP surges to 21 % (WB, 2016).

Figure 7: Balance of trade as ratio of GDP

40

20
Export
%GDP

0 Import
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Trade balance
-20

-40

Source, (WB/WDI, 2016) & Self-computed

3.2 Econometric Analysis

3.2 .1 Unit root test and order of integration

In order to achieve a meaningful regression with time series data, it is necessary to test the
existence of unit roots in the variables. The variables used in the analysis need to be stationary.
The unit root test provides the order of integration at which the variables can be stationary. The
tests were performed on five variables (agriculture commodity export, gross domestic product
growth, trade openness, real effective exchange rate and terms of trade) by using Augmented
Dickey-Fuller (1978) test. The results of Augmented Dickey fuller test show log of AGX and log
35
of OP are non-stationary at level and GDPgr, log REER & logTOT are stationary at level form I
(0) Annex 6

Table 1: Augmented Dickey-Fuller test for unit root at level I (0)

Variables Lag Model
Result
ADF Statistics
T-statistics 5% Critical P-Value
value
lnAGX 1 with trend -2.299 -3.568 0.4347 Non stationary
lnGDPgr 1 with drift -3.902 -1.697 0.0002 Stationary
lnOP 1 with drift -1.013 -1.697 0.1595 Non stationary
lnTOT 1 with drift -2.408 -1.697 0.0112 Stationary
lnREER 1 with drift -1.891 -1.697 0.0342 Stationary
ECXD

Table 2: Augmented Dickey-Fuller test for unit root after first difference I (1)
Variables Lag Model
Integration
ADF Statistics
T-statistics 5% Critical P-Value
value
DlnAGX 1 with trend -3.970 -3.572 0.0097 I(1)
DGDPgr 1 with drift -9.026 -3.572 0.0000 I(0)
DlnOP 1 with drift -3.592 -1.699 0.0006 I(1)
DlnTOT 1 with drift -6.015 -1.699 0.0000 I(0)
DlnREER 1 with drift -4.447 -1.699 0.0001 I(0)
ECXD

3.2.2. Test for ARDL Bound Co-integration

The order of integration which infers the specified agricultural commodity export model is
already specified for each variable. Three variables are integrated of order one I (1) and two
variables are stationary at level I(0) due this the appropriate model for test for co-integration is
ARDL bound co-integration technique. ARDL bound co-integration test is sensitive for lag
order. For the selection of the lag order, there are different types of lag order selection criteria;
those are sequential modified likelihood ratio (LR), Akaike information criteria (AIC), Final
prediction error (FPE), Schwarz-Bayesian information criterion (SBIC) and Hannan-Quinn
information criterion (HQIC). The prior information indicates that AIC and SBIC are the
commonly used information criterion in ARDL co-integration bound test technique. The lag

36
length criteria LR, FPE, AIC, HQIC& SBIC, indicate maximum lag length to be four. The
following table shows the lag length chosen by different information criteria.

Table 3: Results of lag order selection criteria

Lag LR P-Value FPE AIC HQIC SBIC
0 .000092 7.82189 7.82189 8.00896
1 209.01 0.000 1.2e-06 3.31159 3.9449 5.25441
2 103.05 0.000 5.6e-07 2.3099 3.48605 5.918
3 94.459 0.000 6.6e-07 1.58542 3.30441 6.8588
4 303.87* 0.000 4.6e-09* -5.89414* -3.63231* 1.04451*

Then ARDL bounds test was conducted. The results were presented in Table 4. The results of
bounds test indicated that F statistics 7.579 was higher than upper bound critical values 6.826 in
1% significance level. So we rejected the null hypothesis there was no co-integration relationship
among the variables and we concluded that there was co-integrating relationship among the
variables meaning the bound test confirms the existence of long-run relationships. Moreover, the
diagnostic test indicates there was no auto correlation, heteroscedasticity problems and model
misspecification.

Table 4: Results of ARDL Bound Test

Estimated equation: AGX = f(GDPgr, lnREER, lnOP, lnTOT, ECXD)
Optimal lag length
Significance level Critical values
Lower bound Upper bound
1% 4.804 6.826
5% 3.298 4.836
10% 2.686 4.022
F-Statistics 7.579
Diagnostic Test
Breusch-Godfrey for autocorrelation LM Test 0.1272
White's test for Heteroscedasticity 0.4154
Ramsey RESET test for model specification 0.8598

37
3.2.3 Estimating long run ARDL Model

After long-run relationship confirmed the next step was evaluating the long run relationship
between the target variable, agricultural commodity export and its explanatory variables.
Therefore, the long run parameters were determined by applying long run ARDL/EC model
stated in equation eight.

Table 5: Result of Estimated long run ARDL regression

Variable Coefficient Std. error t-Stat P-value

GDPgr 0.194222 0.828181 2.35 0.039**

lnOP -0.622616 1.144581 -0.54 0.597
lnREER -2.28785 .8772052 -2.61 0.024**
lnTOT 2.53441 1.052846 2.41 0.035**
ECXD 0.0000 0.00000 0.00
*** is significant at 1% ** is significant at 5%

The results of various diagnostic tests such as Breush-Pagan-Godfrey test for heteroskedasticity
(Annex 10.1), Breush-Godfrey LM test for serial correlation (Annex 10.2), Ramsey‟s RESET
test of model misspecification (Annex 10.3), variance inflation factor for collinarity (Annex10.4)
skewness/kurtosis test for normality(Annex10.5) and Chew test for structural break (Annex 10.6)
were reported and all tests did not detect any problem of, hetroskedasticity, serial correlation,
model misspecification, multi-collinarity, structural break& the error term distributed normally.

In the above estimated long-run model explanatory variables namely, gross domestic product
growth, terms of trade and real effective exchange were significant at 5% significant level and
have got the expected sign as anticipated, however trade openness was not significant in the long
run and deviate from the expected sign. In addition the ARDL model indicted that ECX dummy
does not have long run relationship with agricultural commodity export.

38
3.2.4 Result of the Error Correction Model (ECM)

Table 6: Result of Error Correction Model /ECM

Variable Coefficient Std. error t-Statistics P-value

GDPgr .0479362 .0141015 3.40 0.006***

lnREER -1.359995 .3927714 -3.46 0.005***
lnTOT -1.296791 .528952 -2.45 0.032**
lnOP 1.564589 .4607501 3.40 0.006***
ECXD .9570088 .2650047 3.61 0.004***
ECt -.515297 .1465555 -3.52 0.005***
Cons 4.135181 3.829972 1.08 0.303
*** is significant at 1% ** is significant at 5%
Number of observation =31
Adj R-squared = 0.75987
DW statics = 2.31
Results in table 6 above the estimation results of the short run error correction model showed that
the coefficient of the error correction term is significant with expected negative sign which was
(- 0.515). Its magnitude indicated that 51.5 % deviation from the long run equilibrium removed
each period and adjusted towards long-run equilibrium path each year. The results of adjusted R
square (0.7598) which was high. This implied that 76 percent of agricultural commodity export
at the supply side was explained by explanatory variables namely gross domestic product growth
, terms of trade, trade openness, real effective exchange rate and Ethiopia commodity exchange
dummy, while 24% of agricultural commodity export explained by variables which were not
included in the model.

The short run coefficient of gross domestic product growth rate was significant at 1% significant
level and has got positive sign as expected; which implied that the variables significantly affect
the agricultural commodity export performance of the country in the short run. This finding is
consistent with (Yishak, 2009) and Haile - Giorgies (2011) whose finding revealed the growth of
domestic product positively affect export in the short run. The estimated result showed that 10%
increase in economic growth led to 4.8% increment in agricultural commodity export because;
significant portion of Ethiopia‟s GDP growth is derived from the agriculture sector. Hence
efforts made for GDP growth as the same time improves the agriculture sector performance in
39
the case of Ethiopia. There for improvement in agricultural sector performance in turn improves
agriculture commodity export supply capacity of the country.

Trade openness is significant and positive at 1% significant level in the short run. This result was
also consistent with (Niguse & Ashebir, 2016). The ECM result revealed that 1% increment on
Ethiopia‟s participation in the international trade brought 1.5% growth for agricultural
commodity export. Hence widening the country‟s participation international trade improves gain
from agricultural commodity export.

Real effective exchange rate was significant at 1% significant level and has got negative sign as
expected, this implied that overvalued of real exchange rate negatively affect competitiveness of
agricultural commodity export of Ethiopia and this finding is consistent with the existing theory
of real exchange rate. The result showed that a 10% increase (over valued) in real effective
exchange rate will led to 13.6 % slowdown in agricultural commodity export because; Ethiopian
agricultural commodities become less competitive in the international market. This in turn led
imported goods from abroad cheap and exacerbates balance of payment problem. This result is
consistent with World Bank group (2014) report on Ethiopia‟s external sector competitiveness.

Result of terms of trade in the long run revealed significant and positive, however in the short
run terms of trade result showed significant and has got negative sign at 5% significant level, this
may be due to deterioration of terms of trade because of Ethiopia trading of agricultural
commodities with industrialized countries. This finding was in line with the Perpish-Singer
hypothesis David, I. et al. (2008) and Negaderes Gebrhiwot Baykedagn (1924) who argued that
there was continue to be long-term decline in the terms of trade of primary commodity due to
combination of low income and price inelasticity of demand for agricultural or non-value added
products. Hence the government should foster value addition and support for those exporters
engaged in agro processing sector to boost gain from agricultural products.

3.3 The Role of ECX for Agricultural Commodity Export

Among several benefits derived from ECX relation with agricultural commodity export in the
past nine years ECX has contributed for the export sector by ensuring the stabilization of
domestic supply chains on major exportable agricultural commodities and diminishing contract

40
default concern. As figure 8 & 9 below showed from 2008/9 – 2015/16 ECX totally transacted 4
million metric tons commodities valued Birr 148.8 billion with insignificant contract default.

Figure 8: Value of commodities traded at ECX platform

Trading Value in Billion Birr
30
25
20
15
10
5
0
2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16

Source: ECX (2016) Self-computed

Export revenue trend figure 5 above indicated an export performance was improved in 2015/16
relative to 2007/8 where ECX was not operational. For instance coffee exports increased to
$722.2 million from $424.2 million, oil seed export increased to $ 477.2 million from $ 218.8
million and pulses increased to $ 225.3 million from $143.6 million in 2008. According to IMF
(2016) report the export performance of merchandise export of Ethiopia derived from volume
increment during the review period. This view is consistence with stabilization of commodity
supply chain through ECX .As figure 9 indicates the commodity traded at ECX trading platform
increased to 669,859 metric ton in 2015/16 from 170,694 metric ton in 2008/9. Accordingly in
2015/16 the trading volume of coffee increased to 253,025 tons from 170,359 (48.5%) sesame
increased to 378,758 metric ton from 64,641 metric tons (>100%), and pea bean increased to
33,801 metric ton from 18,178 metric ton (85.9%).

Figure 9: Volume commodities traded at ECX platform

Voulme of commodity traded in metric ton
400000

300000
Coffee
200000
sesame
100000 pea bean

0
2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16

Source: ECX (2016) Self-computed

41
In this study the third objective was examining the long and short run impact of ECX on
agricultural commodity export in Ethiopia using ECX dummy 2008. The short run estimated
result in table 6 above revealed that ECX dummy was positive & significantly affect agricultural
commodity export at 1% significant level. This fact implied that ECX has significant
contribution for agricultural commodity export and it support the argument behind, efficient
commodity exchange able to increase export competitiveness by reducing transaction cost and
increasing the volume and value of exportable commodities. This finding is consistent with
Dawit & Meijerink (2010), but this result was contrary to Leonard (2014) finding that claim
ECX trading model worsen the export performance of the country owing commoditizing and
lack of coffee traceability.

Before after ECX analysis indicate that the supply of agricultural commodities such as coffee,
and oil seeds has increased by 12.6% and 85.8 % respectively after ECX become operational.
However compared to its production or exportable potential before ECX (in 2007/8) out of the
total production of coffee, oil seed and pulses 73%, 47.2% and 10% were exported
respectively(Annex 2.1). However after ECX established; in 2015/16 out of the total production
or exportable potential only 47.9% of coffee, 55.62% oilseeds and 13.55% pulses were exported.
This data implied that from export potential coffee export was decreased by 25% and oilseed and
pulses increased by 8.4% and 3.5% respectively (Annex 2.2). The official data from ECX also
confirms this, even though all coffee produced are mandated to be traded through ECX. In
2015/16 only 253,025 metric tons (61%) of coffee was traded at ECX trading platform. There is
no clear evidence where the remaining 39% coffee was transacted (Annex 3). Even though the
performance of oil seeds and pulses showed some progress, the issue of how to maximize the
foreign exchange earnings from coffee by increasing the existing product volume needs special
attention. In my opinion among other factors for disincentive of coffee through formal export
market channel some of the factors may be; high domestic consumption of coffee, relatively
attractive local coffee price owing to high demand, and there may be something disincentive for
exporters, traders and farmers on the existing coffee trading arrangement through ECX.

42
 CHAPTER FIVE
CONCLUSION AND POLICY RECOMMENDATIONS

5.1 Conclusion
Like less industrialized countries, Ethiopia is dependent on few primary commodities to meet its
foreign exchange need. However, foreign exchange earnings attained from these traditional
products which are mainly agricultural commodities could not be aligned with the highly
increasing import demand of the country, which results in huge balance of payment deficit. In
the past two years the foreign exchange earning of the country goes declined. Due this fact the
government of Ethiopia forced to take policy measures like devaluation of birr against dollar and
changing coffee trading model inside and outside ECX in such a way that ensure tractability
aimed at to boost the competitiveness of Ethiopia‟s coffee in the international market.

This study has made an attempt to identify the factors that determine agricultural commodity
export of Ethiopia and evaluate the role of ECX for agricultural commodity export. In other
words the objective of this paper was to identify whether or not agricultural export was
significantly affected by the major selected explanatory variables such as gross domestic product
growth rate, terms of trade, real effective exchange rate, trade openness and ECX 2008 dummy.
To address this question, time serious data ranging from the year 1981 up to 2015 was utilized.
The study used secondary data collected from different sources. In this study agricultural
commodity export was used as dependent variable and the above mentioned variables expected
to affect agricultural export performance of the country are used as explanatory variables.

Consequently, the first task was conducting pre-estimation tests of the statistical behavior of the
macro variables using Augmented Dickey Fuller test to check whether unit root exist or not
aiming to identify the appropriate time series regression model. The ADF test result showed that
only agricultural commodity export and openness of trade were non-stationary at level and
stationary after first difference. The rest variables such as gross domestic annual growth rate, real
effective exchange rate and terms of trade were stationary at level. Thus the variable found
mixed level of integration I (0) and I(1). Due to mixed level of integration Auto Regressive
Distributed lag model were found appropriate to conduct bound co-integration test. There for the
next step was co-integration test which helps us to know the presence of long run relationship
between the dependent and the explanatory variables. After co-integration test was conducted
43
using ARDL/bound co-integration procedure, bound co-integration test confirmed the existence
of co-integrating equation or long-run relationship between variables, since the error correction
term is significant and has got negative sign as expected, the long run equation was estimated.
The long run estimation result revealed that except openness to trade the rest variables such as
gross domestic product growth rate , terms of trade and & real effective exchange rate was
significantly affect the agricultural commodity export performance of the country in the long-run
as expected.

Next the Error Correction Model (ARDL/ECM) was estimated to show the short run dynamics
and relationship between the dependent and explanatory variables. Accordingly, the regression
result showed that gross domestic product growth rate, openness of trade and real effective
exchange rate was significant in the short run and carry the expected sign. Moreover ECX 2008
dummy found positively significant which implied ECX has positive impact on agricultural
commodity export in the short run. Furthermore in the short run terms of trade also found
significant and has got negative sign and it is an evidence for the country‟s terms of trade
deterioration, owing trading primary commodities with industrialized countries for the last three
decades. The trends & composition analysis also indicted that the country is still trading few &
less value added traditional commodities in few destination.

5.2. Policy Recommendations

The newly emerging markets specifically the Asians experience revealed that there was strong
relationship between export performance and economic growth. To affect the development
agenda of Ethiopia in meaningful way the government should give proper attention for the
agricultural commodity export sector.

The findings of this study point out that government policy should give proper attention for
foreign exchange management to minimize the negative impact of overvalued exchange rate for
agricultural commodity export.

Enhancing and diversifying the agricultural commodities sub sector to exploit the untapped
potential, minimizing import bill to narrow the ever increasing import export gap, enhancing the
country‟s participation in the international market by diversifying value added commodities and

44
its destinations. Beyond and above words attention should be given to agricultural commodity
value addition to come out of terms of trade deterioration and foreign exchange crunch.

At last to maximize benefit from agricultural export earnings through efficient commodity
exchange; ECX should be agricultural commodity market that can add value for the export
commodities by reducing transactions cost, ensuring traceability, strengthening contract
enforcement, create enabling environment which increase the supply of exportable commodities
not only the existing four commodities but also trading other potential crops. However to be
competent and market friendly as to attract potential clients in agriculture commodity export
value chain, ECX's business model should not be dependent on trading only mandated
commodity, It rather should work hard and attract potential clients being a market of choice.

How ECX can be a market of choice

o ECX to be a market of choice, it should be committed to withdraw gradually from trading

mandated export commodities. It would rather better trading the existing & additional
commodities by creating competent business model in such a way that attracts clients
whose benefits are optimized trading with ECX. To this effect ECX should have clear
road map.

o ECX should bring services that exercise market fundamental‟s to enhance the current
spot trading to the next higher level, for instance trading future/forward contacts to
manage risk related with price volatility.

o ECX can be a market of choice by diversifying its service product type.by attracting
potential agricultural commodities

o ECX can be a market of choice by improving its service quality, efficiency, product
traceability & lowering transaction costs. By doing these ECX can attract those actors on
agricultural commodities who are not willing to trade with ECX. (for instance 39% coffee
transacted outside ECX, though it is mandated to be traded at ECX, from its huge
potential insignificant volume of pulses are traded at ECX )

45
o ECX can be a market of choice by widening its market area even outside Ethiopia
boarder, because having significant volume of tradable commodities can lower
transaction cost and increase agricultural commodity export competitiveness. This
circumstance in turn maximizes the benefit of farmers, traders, exporters and the entire
economy at large.

46
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50
 APPENDICES
Annex 1: Data sources

Data
Variable Symbol source Remark
Agricultural commodity export in million birr AGX ERCA computed
Gross domestic product annual rate of growth GDPgr WB/WDI
Trade Openness (M+X/GDP)% OP WB/WDI computed
Terms of trade TOT UNCTAD
Real Effective Exchange Rate REER NBE
ECX dummy ECXD ECX

Annex 2: Before & after ECX supply volume analysis

Annex 2.1: Variation of export commodity supply comparing the two periods (Before and after
2007/8)

Volume in metric tons

Commodity Export in two periods Commodity Supply

performance after ECX

Before ECX in After ECX in Difference

2007/8 2015/16
Coffee 176,438 198,658.1 22,220.1 12.59%
Oil seeds 234,976.1 436,573.5 201,597.4 85.79%
Pulses 158,751.8 375,425.1 216,673.3 133.48
Source: CSA and ERCA

Annex 2.2: Variation from the current potential (output)

Volume in metric tons

Commodity Before ECX in 2007/8 After ECX in 2015/16 %

Production Export Export Production Export Export Variation
Coffee 241,482.3 176,438 73% 414,596.45 198,658.1 47.9% -25.1
Oil seeds 497,080 234,976.1 47.2% 784,810 436,573.5 55.62% 8.42
Pulses 1,578,622 158,751.8 10% 2,769,270 375,425.1 13.55% 3.55
Source: CSA and ERCA
51
Annex 3: Volume and weighted average price of ECX traded commodities (2009 - 2017)

Note; Coffee price is birr in Fresula (17kg). Sesame & pea bens price is birr/Qt.

Volume in metric tons

Coffee Pea Beans Sesame

Price Volume Price Volume Price Volume

2008 436 170,359 1,489 335

2010 630 268,926 770 18,179 1,981 64,641
2011 1,227 175,930 841 42,999 1,934 246,985
2012 1,001 257,362 832 81,866 2,140 322,792
2013 826 215,234 1,208 77,053 3,663 203,779
2014 1,079 241,588 1,701 51,293 3,746 288,907
2015 964 252,886 844 41,435 2,402 333,216
2016 1,035 253,025 1,046 38,073 2,134 378,758
2017 1,153 320,420 1591 33801 2,654 322,674
Source: ECX market data unit 2017

Annex 4.1: GTP I Export performance against Target

GTP I Target GTP I

(2014/15) Performance (2014/15)
Commodity Volume/ton USD Volume/ton USD %
Coffee 600970 2037 198658.1 780.5 38.32
Oil seeds 724216 1120 436573.5 510.1 45.54
Pulses 1120981 882 375425.1 219.9 24.93
Fruit & vegetables 964600 948 167076.4 47.6 5.02
Flower 535 50629.1 203.1 37.96
Live animals 1000 77779 148.5 14.85
Chat 272.4
Others 73.9
sum 6,522 2,256 34.59
Source Mo FED (2010) & ERCA policy matrix, self-computed

52
 Annex 4.2: GTP II Export performance against Target

GTP II Target GTP II

(2015/16) Performance (2015/16)
Commodity Volume/ton USD Volume/ton USD %
Coffee 503980 1022.4 198658.1 722.7 70.67
Pulses & oil seeds 904.5 811998.6 709.6 78.45
Chat 324.7 47000.1 262.4 80.81
Fruit & vegetables 1600550 69 167076.4 53.7 77.83
Flower 260 50629.1 225.3 86.65
Live animals 267.3 77779 147.8 55.29
Food grain 318.8
Others 110.7
sum 3,166.7 2,121.5 66.99
NPC, (2016) &ERCA

Annex 5: Stationary tests at level and first difference respectively

lnAGX DlnAGX
1.5
11
10

1
.5
9

D.lnAGX
lnAGX

0
-.5
7

-1
6

1980 1990 2000 2010 2020 1980 1990 2000 2010 2020
year in year year

GDPgr DGDPgr
15

20
10

10
5

GDPgr, D
GDPgr

0
-5

-10
-10

1980 1990 2000 2010 2020 1980 1990 2000 2010 2020
year year

53
 lnOP DlnOP

1
3.5

.5
3

D.lnOP
lnop

0
2.5

-.5
2
1.5

-1
1980 1990 2000 2010 2020 1980 1990 2000 2010 2020
year year

lnTOT DlnTOT
5

.4
4.9

.2
4.8
lnTOT

D.lnTOT

0
4.7

-.2
4.6
4.5

-.4

1980 1990 2000 2010 2020 1980 1990 2000 2010 2020
year year

lnREER DlnREER
.4
5.6

.2
5.4
5.2

0
D.lnREER
lnreer

-.2
4.8

-.4
4.6

-.6

1980 1990 2000 2010 2020 1980 1990 2000 2010 2020
year year

54
Annex 6: Augmented Dickey-Fuller tests for unit root

. dfuller lnAGX,trend lags(1)

Augmented Dickey-Fuller test for unit root Number of obs = 33

Interpolated Dickey-Fuller
Test 1% Critical 5% Critical 10% Critical
Statistic Value Value Value

Z(t) -2.299 -4.306 -3.568 -3.221

MacKinnon approximate p-value for Z(t) = 0.4347

. dfuller D.lnAGX,trend lags(1)

Augmented Dickey-Fuller test for unit root Number of obs = 32

Interpolated Dickey-Fuller
Test 1% Critical 5% Critical 10% Critical
Statistic Value Value Value

Z(t) -3.970 -4.316 -3.572 -3.223

MacKinnon approximate p-value for Z(t) = 0.0097

. dfuller GDPgr, drift lag(1)

Augmented Dickey-Fuller test for unit root Number of obs = 33

Z(t) has t-distribution

Test 1% Critical 5% Critical 10% Critical
Statistic Value Value Value

Z(t) -3.902 -2.457 -1.697 -1.310

p-value for Z(t) = 0.0002

55
. dfuller D.GDPgr, drift lag(1)

Augmented Dickey-Fuller test for unit root Number of obs = 32

Z(t) has t-distribution

Test 1% Critical 5% Critical 10% Critical
Statistic Value Value Value

Z(t) -9.026 -2.462 -1.699 -1.311

p-value for Z(t) = 0.0000

. dfuller lnOP,drift lag(1)

Augmented Dickey-Fuller test for unit root Number of obs = 33

Z(t) has t-distribution

Test 1% Critical 5% Critical 10% Critical
Statistic Value Value Value

Z(t) -1.013 -2.457 -1.697 -1.310

p-value for Z(t) = 0.1595

. dfuller D.lnOP,drift lag(1)

Augmented Dickey-Fuller test for unit root Number of obs = 32

Z(t) has t-distribution

Test 1% Critical 5% Critical 10% Critical
Statistic Value Value Value

Z(t) -3.592 -2.462 -1.699 -1.311

p-value for Z(t) = 0.0006

. dfuller lnTOT,drift lag(1)

Augmented Dickey-Fuller test for unit root Number of obs = 33

Z(t) has t-distribution

Test 1% Critical 5% Critical 10% Critical
Statistic Value Value Value

Z(t) -2.349 -2.457 -1.697 -1.310

p-value for Z(t) = 0.0128

56
. dfuller lnREER, drift lag(1)

Augmented Dickey-Fuller test for unit root Number of obs = 33

Z(t) has t-distribution

Test 1% Critical 5% Critical 10% Critical
Statistic Value Value Value

Z(t) -1.891 -2.457 -1.697 -1.310

p-value for Z(t) = 0.0342

Annex 7: Maximum lag order & optimal lag orders for individual variables

. varsoc lnAGX GDPgr lnREER lnTOT lnOP ECXD

Selection-order criteria
Sample: 1985 - 2015 Number of obs = 31

lag LL LR df p FPE AIC HQIC SBIC

0 -113.837 .000092 7.73142 7.82189 8.00896

1 -9.32959 209.01 36 0.000 1.2e-06 3.31159 3.9449 5.25441
2 42.1966 103.05 36 0.000 5.6e-07 2.3099 3.48605 5.918
3 89.4259 94.459 36 0.000 6.6e-07 1.58542 3.30441 6.8588
4 241.359 303.87* 36 0.000 4.6e-09* -5.89414* -3.63231* 1.04451*

Endogenous: lnAGX GDPgr lnREER lnTOT lnOP ECXD

Exogenous: _cons

57
. ardl lnAGX GDPgr lnREER lnTOT lnOP,exog(ECXD) maxlags(4)

ARDL(2,2,4,2,4) regression

Sample: 1985 - 2015 Number of obs = 31

F( 19, 11) = 87.10
Prob > F = 0.0000
R-squared = 0.9934
Adj R-squared = 0.9820
Log likelihood = 21.802422 Root MSE = 0.2011

lnAGX Coef. Std. Err. t P>|t| [95% Conf. Interval]

lnAGX
L1. .0900744 .1884037 0.48 0.642 -.3245992 .5047481
L2. .3946279 .147306 2.68 0.021 .0704097 .7188461

GDPgr
--. .0479362 .0141015 3.40 0.006 .0168991 .0789733
L1. .0195962 .0109692 1.79 0.102 -.0045469 .0437392
L2. .0325501 .0141374 2.30 0.042 .0014339 .0636663

lnREER
--. -1.359995 .3927714 -3.46 0.005 -2.224479 -.4955108
L1. 2.560638 .5444011 4.70 0.001 1.362419 3.758857
L2. -1.501538 .7226787 -2.08 0.062 -3.092143 .089067
L3. -.0166559 .6988095 -0.02 0.981 -1.554725 1.521413
L4. -.8613756 .5328109 -1.62 0.134 -2.034084 .3113333

lnTOT
--. 1.109931 .5964946 1.86 0.090 -.2029444 2.422807
L1. -1.100747 .6141669 -1.79 0.101 -2.452519 .2510255
L2. 1.296791 .528952 2.45 0.032 .1325756 2.461006

lnOP
--. .1919355 .2938765 0.65 0.527 -.4548824 .8387533
L1. 1.051821 .3012891 3.49 0.005 .3886881 1.714954
L2. -1.082912 .324931 -3.33 0.007 -1.79808 -.3677439
L3. -1.163216 .407474 -2.85 0.016 -2.06006 -.2663715
L4. .6815388 .2720817 2.50 0.029 .082691 1.280387

ECXD .9570088 .2650047 3.61 0.004 .3737374 1.54028

_cons 4.135181 3.829972 1.08 0.303 -4.294529 12.56489

58
Annex 8: ARDL Bound Co-integration Test

Pesaran/Shin/Smith (2001) ARDL Bounds Test

H0: no levels relationship F = 7.579
t = -3.516

Critical Values (0.1-0.01), F-statistic, Case 3

[I_0] [I_1] [I_0] [I_1] [I_0] [I_1] [I_0] [I_1]

L_1 L_1 L_05 L_05 L_025 L_025 L_01 L_01

k_4 2.45 3.52 2.86 4.01 3.25 4.49 3.74 5.06

accept if F < critical value for I(0) regressors
reject if F > critical value for I(1) regressors

Critical Values (0.1-0.01), t-statistic, Case 3

[I_0] [I_1] [I_0] [I_1] [I_0] [I_1] [I_0] [I_1]

L_1 L_1 L_05 L_05 L_025 L_025 L_01 L_01

k_4 -2.57 -3.66 -2.86 -3.99 -3.13 -4.26 -3.43 -4.60

accept if t > critical value for I(0) regressors
reject if t < critical value for I(1) regressors

k: # of non-deterministic regressors in long-run relationship

Critical values from Pesaran/Shin/Smith (2001)

. dfuller resid, drift lag(1)

Augmented Dickey-Fuller test for unit root Number of obs = 33

Z(t) has t-distribution

Test 1% Critical 5% Critical 10% Critical
Statistic Value Value Value

Z(t) -2.142 -2.457 -1.697 -1.310

p-value for Z(t) = 0.0202

59
Annex 9: ARDL/EC Regression Result
. ardl lnAGX GDPgr lnREER lnTOT lnOP,exog(ECXD) ec1 lags(2,2,4,2,4)

ARDL(2,2,4,2,4) regression

Sample: 1985 - 2015 Number of obs = 31

R-squared = 0.9119
Adj R-squared = 0.7598
Log likelihood = 21.802422 Root MSE = 0.2011

D.lnAGX Coef. Std. Err. t P>|t| [95% Conf. Interval]

ADJ
lnAGX
L1. -.5152977 .1465555 -3.52 0.005 -.8378642 -.1927311

LR
GDPgr
L1. .1942228 .0828181 2.35 0.039 .0119414 .3765042

lnREER
L1. -2.287856 .8772052 -2.61 0.024 -4.218571 -.3571401

lnTOT
L1. 2.53441 1.052846 2.41 0.035 .2171119 4.851709

lnOP
L1. -.622616 1.144581 -0.54 0.597 -3.141823 1.896591

SR
lnAGX
LD. -.3946279 .147306 -2.68 0.021 -.7188461 -.0704097

GDPgr
D1. .0479362 .0141015 3.40 0.006 .0168991 .0789733
LD. -.0325501 .0141374 -2.30 0.042 -.0636663 -.0014339

lnREER
D1. -1.359995 .3927714 -3.46 0.005 -2.224479 -.4955108
LD. 2.37957 .6080776 3.91 0.002 1.0412 3.717939
L2D. .8780315 .5466352 1.61 0.137 -.3251045 2.081168
L3D. .8613756 .5328109 1.62 0.134 -.3113333 2.034084

lnTOT
D1. 1.109931 .5964946 1.86 0.090 -.2029444 2.422807
LD. -1.296791 .528952 -2.45 0.032 -2.461006 -.1325756

lnOP
D1. .1919355 .2938765 0.65 0.527 -.4548824 .8387533
LD. 1.564589 .4607501 3.40 0.006 .5504849 2.578693
L2D. .4816769 .3781254 1.27 0.229 -.3505713 1.313925
L3D. -.6815388 .2720817 -2.50 0.029 -1.280387 -.082691

ECXD .9570088 .2650047 3.61 0.004 .3737374 1.54028

_cons 4.135181 3.829972 1.08 0.303 -4.294529 12.56489

60
Annex 10: Post estimation results

10.1 Heteroskedasticity Test

White's test for Ho: homoskedasticity
against Ha: unrestricted heteroskedasticity

chi2(30) = 31.00
Prob > chi2 = 0.4154

Cameron & Trivedi's decomposition of IM-test

Source chi2 df p

Heteroskedasticity 31.00 30 0.4154

Skewness 14.28 19 0.7670
Kurtosis 1.09 1 0.2966

Total 46.37 50 0.6198

. estat hettest

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of lnAGX

chi2(1) = 0.27
Prob > chi2 = 0.6049

. estat archlm,lag(1,2,3,4)
LM test for autoregressive conditional heteroskedasticity (ARCH)

lags(p) chi2 df Prob > chi2

1 0.615 1 0.4330
2 0.599 2 0.7412
3 0.715 3 0.8696
4 0.964 4 0.9152

H0: no ARCH effects vs. H1: ARCH(p) disturbance

61
10.2 Serial correlation test (auto correlation)

. estat dwatson

Durbin-Watson d-statistic( 20, 31) = 2.21156

. estat bgodfrey, lag(1,2,3,4)

Breusch-Godfrey LM test for autocorrelation

lags(p) chi2 df Prob > chi2

1 1.247 1 0.2641
2 1.513 2 0.4693
3 2.282 3 0.5159
4 7.169 4 0.1272

H0: no serial correlation

10.3 Ramsey RESET Test for model misspecification

. estat ovtest

Ramsey RESET test using powers of the fitted values of lnAGX

Ho: model has no omitted variables
F(3, 8) = 0.25
Prob > F = 0.8598

10.4 Variance inflation factor VIF for multi collinarity

. estat vif

Variable VIF 1/VIF

lnOP 3.15 0.317806

REER 2.48 0.402600
ECXD 2.42 0.413684
GDPgr 1.62 0.617605
lnTOT 1.40 0.713206

Mean VIF 2.21

62
 10.5 Normality Test

1.5
1
Density

.5
0

-1 -.5 0 .5 1
Residuals

. sktest resid

Skewness/Kurtosis tests for Normality

joint
Variable Obs Pr(Skewness) Pr(Kurtosis) adj chi2(2) Prob>chi2

resid 31 0.7731 0.7351 0.20 0.9059

10.6 Testing for Structural stability (Chow test)

𝐻 : F Statistics less than F-critical value (no structural break)

F- Statistics = 1.7572
F-Critical at (0.05, 6, 23) = 2.5277

Decision: accept 𝐻 since F- Statistics is less than F-critical value according to Chow
test it is evidence for no significant structural break

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