International Economics

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Analysis of Causality and Export-Led Growth Hypothesis (ELGH) in Ethiopia
(A.A.U, 2005-07) Adem, Mohammed; Yoseph, Getachew ( Ato)
It is generally believed that for a developing country export performance plays a pivotal role in providing the much-needed impetus for economic growth. Export-led growth has been put forward as the efficient alternative to inward- orientation strategies of development. This is because it is believed to lead to higher total-factor-productivity growth and encourage foreign direct investment. In spite of the presence of numerous studies on the relationship between exports and economic growth, empirical investigations to-date have produced mixed or contradictory results; while most cross-section studies have found a positive association between export and growth, a considerable number of time series methodologies found mixed results, either supporting or rejecting the export-led growth hypothesis. This paper examines the Export-led growth hypothesis (ELGH) for Ethiopia for the period 1960-2004. It builds up on Feder's (1983) model to investigate empirically the relationship between exports and economic (GDP) growth using recent data from the National Bank of Ethiopia. The study finds that the ELGH is valid in this particular case but, only in the long run. Although the results of the study suggest that exports have a positive effect on the overall rate of economic growth and could be considered an "engine of growth" as the ELGH advocates, their impact was not, however, statistically supported in the short-run. , Moreover, causality was found running from GDP to Export confirming uni-directional causality.
An Analysis of Foreign Direct Investment: The Case of Ethiopia: Co-Integrated VAR Approach
(2015-06) Berhane, Asmelash; Estiphanos, Girma (PhD)
paper gives analysis on Foreign Direct Investment (FDI) in Ethiopia based on study using Co-integrated VAR approach over the period 1974/75 to 2013/14. It in particular examines the trend of FDI inflow on regional, sectoral and by country of origin bases. The study also discusses why Ethiopia is conducive for Foreign Direct Investment, the area of opportunity, the problems faced by foreign investors and the institutional and regulatory framework. In order to point out the main factors that can highly affect the inflow of FDI in Ethiopia and to know how much these factors affect FDI leading to an oscillating trend, the study took the determinant of FDI in Ethiopia such as infrastructure development, the domestic market size and growth potential, macroeconomic stability, human capital development, openness, and external debt and evaluate as to how they affect the inflow of FDI. In the analysis there are findings. Firstly, I found that in the long run explanatory variable such as infrastructure development, the domestic market size, Human Capital, openness, and external debt are found positively related and statistically significant while inflation rate is negatively related and statistically significant. Secondly, in the short run Gross Fixed Capital Formation and inflation become negatively related and they are statistically significant while Gross Domestic Product is positively related and statistically significant that supports the hypothesis that the growing economy attracts more FDI. While the remaining variables of debt servicing, openness, and human capital has a positive coefficient but is insignificant in the short run. Thirdly, there is bi directional causality between Gross Fixed Capital Formation and FDI and the variables of inflation, Gross Domestic Product, Debt Servicing, Openness and Human Capital does Granger- causes foreign direct investment but not the other way around. Overall, the major policy implication of this study is that, foreign direct investment is more determined by infrastructural activities, market size, macroeconomic stability, and openness in long run case. Hence, in order to increase the inflow of FDI first it is very crucial to concentrate on the above economic activities. On the other hand, I found that economic growth has positive and significant effect on FDI. These suggest the decisive role of growth in stimulating investment by foreign as well as domestic investors. Hence, the current fast economic growth of the country signals a country’s economic prospects and encourages foreign investors
Analyzing Economy Wide-Impact of Technological Shock on Agricultural Sector in Ethiopia Using DCGE Model: Evidence from Panel Data Analysis
(Addis Ababa University, 2018-06) Dagmawe, Menelek; Fantu, Guta (PhD)
This study tries to address the economy wide impact of technological shock on agricultural sector. In doing so, we employ a Sequential Dynamic Computable General Equilibrium Model. We also used econometric model i.e. panel data analysis to estimate the value of agricultural TFP of Ethiopia. For these purpose, we utilized the data of 2009/10 SAM of EDRI (Ethiopian Development Research Institute), different years of agricultural sample surveys of CSA, ministry of agriculture, WB, IMF and UNCTAD data. The estimation results panel data of this study shows that fertilizer usage, research & development, farmer training & extension have positive impact on agricultural TFP. But pesticide, irrigation and trade openness have negative impact on agricultural TFP. Despite the fact, in order to investigate the economy wide impact of agricultural TFP (technology) shock, three simulations were made turn by turn, which is induced agricultural TFP by 2.8%( simulation-1), 4.7%( simulation-2) and 5.7%( simulation-3). The results of all simulations were shows a considerable improvement on over all macroeconomics variables, sectorial performance, households income& expenditure, factor income and finally on the welfare of the households. At the end of the day to achieve the above results the paper were recommended the government and policy maker:- first the government gives more emphasis to enhancing agricultural total factor productivity; second, government give a special attention for determinants that driving agricultural total factor productivity (i.e. fertilizer usage, research & development, farmer training & extension) and finally, increasing the productivity of agricultural sector through improving TFP (technology) were prime and better mechanism rather than capital accumulation or land expansion.
The Behaviors and Dynamics of the Real Exchange Rate of the’ Birr’ After the Economic Reform
(A.A.U, 2005-06) Demeke, Tamiru; Admassie, Assefa (Dr.)
The paper adopts a single equation approach to examine the real exchange rate behavior and exchange rate misalignment after devaluation and foreign exchange I' ate liberalization. The paper finds that real exchange rate and the macroeconomic fundamentals affecting real exchange rate are co integrated. It also shows that devaluation, foreign exchange market liberalization and some of the policy measures taken by government such as reducing government consumption and deficit, new investment policy and other measures that increase the capital il'iflow narrow the gap between the parallel market foreign exchange rate and the official market foreign exchange rate, make the behavior of the real exchange rate fairly variable. In other words, the misalignment of the real exchange rate declines and the exchange rate movement becomes more stable. These are the desired goals that could be achieved by the devaluation of the exchange rate and through foreign exchange rate liberalization.
Causal Nexus Between Export, External Debt and Economic Growth: The Case of Ethiopia
(Addis Ababa University, 2018-11) Medina, Menur; Wassie, Berhanu (PhD)
This study aimed to investigate the causal nexus between Export, External debt and Growth using the annual data from 1985-2016 in the case of Ethiopia. The study applied the Auto Regressive Distributed Lag (ARDL) Approach to investigate the short run and long run dynamics of the variables whereas the Granger causality approach is used to study the nature and direction of causality between the variables. The bounds F–test for cointegration test yields evidence of a long-run relationship among the variables. The Granger Causality test result revealed that there is no evidence of Granger causal relationship between export and growth implying neither export led growth nor growth driven export is valid in the context of Ethiopia. On the other result, the study found that there is a uni directional Granger causality from external debt service to growth while there is no Granger causality between external debt stock and economic growth in both directions. Finally, our result showed that there is a bi directional Granger causality relation between investment and export implying that export and capital formation Granger cause to each other.
Detenninants of Capital Flight in Common Market for Eastern and Southern Africa Member Countries: Dynamic Panel Data Analysis
(A.A.U, 2012-06) Haregewoin, Yoseph; Admasse, Assefa (Dr)
Numerous of studies in recent years have focused attention on the determinants of capital flight in the developing countries. This paper contributed to this body of knowledge by filling a noticeable gap. Principally, this paper examines the determinant of capital flight from 13 member countries of COMESA for the period 1990-2009. The paper employed first difference General Method of Momentum (GMM) and system GMM to find out the determinant of capital flight from COMES A member countries. The study found that capital flight has a tendency to persist over time, which may reflect that habit-formation effect or contagion effect. The study also found that Foreign Direct Investment (FDI) has a positive and significant effect which may reflect existence of discriminatory-treatment for domestic investors. Capital flight from COMESA member countries is also fueled by the increase of Gross Domestic Product of the country which may reflect money laundering and a high return for investment in the foreign country particularly in advanced countries. Furthermore the study found that budget deficit has a negative impact on capital flight which may reflect that con-tilted government officials are the main actors of capital flight from COMESA member countries. The study suggested the need for the policy makers to adopt an investment policy which doesn't discriminate fore ign investor from the domestic investors, adjusting the domestic interest rate in accordance with the international market and apply tight control on corrupted government officials to repatriate capital flight from COMESA member countries.
The Determinants and Dynamics of Aggregate Merchandise Imports in Ethiopia
(A.A.U, 2005-06) Leggesse, Dejene; Aredo, Dejene (Dr.)
Ethiopia imports goods and service s under serious foreign exchange constraint. Export ",earnings finance less than fifty percent of imports . For this reason there was excess demand for foreign exchange in the past four decades . The purpose of this study is therefore, to characterize the behavior of demand and determinants of imports in Ethiopia . The study used error correction and co integration as well as descriptive analysis. In the short run, one of the most important determinants of aggregate merchandise imports in Ethiopia is found to be foreign exchange availability in the form of international foreign exchange reserves. Economic activity (real GDP) , the relative prices (in this study the real exchange rate) have no significant influence in the short run. However, all together with international reserves have significant influence in the long run . The other important determinant of imports both in the short and long run is trade policy regime. Openness of the economy had given rise to magnified and accelerated growth in imports. One important implication drawn from the analysis is that the need for export promotion and diversification measures in order to fill the fast growing trade deficit.
Determinants of Agricultural Exports in Ethiopia
(A.A.U, 2005-06) Mulugeta, Mouze; Mekonen, Alemu(Dr)
In addressing the dismal performance of the export sector in Ethiopia, it is important to look at the percentage contribution of each sector and also the factors that affect the growth of the respective sector. Analysis of sectoral contribution to international trade confirms that in Ethiopia agriculture is found to be the single most important sector in terms of revenue generation contributing over 80% of foreign exchange earnings. Thus, in trying to disentangle the effect of each policy instrument, we have used secondary time series data for 30 years where analysis of factors behind growth of the sectoral contribution suggests that output has been responsive both to price and structural factors emphasizing the importance of both factors as a tempo for growth in the agricultural sector. Results from the study indicate that price policy instruments such as real exchange rate devaluation and institutional factors such as fertilizer consumption do have a significant and positive impact on aggregate agricultural exports. Results from individual export product (chat) are also in conformity with the above result suggesting that policy makers should use both to expand export from the sector.
The Determinants of Current Account in Ethiopia: Empirical Investigation
(A.A.U, 2006-07) Alazar, Mehret; Rao, J. Manohar (Dr)
This study analyzes the role of fundamental macroeconomic variables in explaining the movements of the current account balance in Ethiopia. The descriptive analysis on the developments of current account balance using the three relationships: external trade, income-absorption and saving-investment in the period 1960/61 - 2002/03 indicates that: (i) Poor export performance due to dependence on primary commodities with unmatched rate of growth with imports is the main reason for the persistence current account deficit; (ii) The increase in budget deficit in addition to the low level of saving is the reason indicated for persistence of current account deficit by saving - investment balance; (iii) Huge military expenditure during the degree régime and 1998 20000 and increase in government expenditure as a result of increase government involvement in the derge regime are implicated for the persistence current account deficit in the income - absorption balance. The estimated model using Johannes’s likelihood ratio test for cointegration indicates that young dependency ratio, openness, financial deepening, terms of trade and real exchange rare affect current account both in the long run and short run; budget balance, parallel marker premium and ODA affect current account only in the long run and domestic output growth rate affect current account in the short run. The policy implication of the findings is that diversifying exports, reducing budget deficit and controlling distortionary policies of exchange rate.
Determinants of Ethiopia's Bilateral and Potential Exports in the Emerging Countries: A Gravity Model Approach
(A.A.U, 2012-06) Ayalew, Zeleke; Guta, Fantu (Dr)
Exports are the drivers of economic growth in Ethiopia. Given their importance in the economy, it is necessary to analyze factors that are determining export flows between Ethiopia and its trading partners. A gravity model is very important in the analysis of bilateral trade flows, and has proven to be a useful 1001 in determining trade or export potential of a country. The purpose oj this study is to investigate factors that determine exports of Ethiopia using a gravity model approach. The analysis indicates that increases in importer's GDP and Ethiopian's GDP cause exports to increase, while distance is associated with a decrease in exports. Real exchange rates do not have an impact on export. Ethiopia doesn't export more to countries where it shares a common border. The study shows that there is unexploited export potential to among others, China, India and Brazil. These results are important for trade policy formulation in order ensure that Ethiopia's export potential is exploited in order to enhance economic growth.
Determinants of Export Diversification: The Case of Ethiopia
(A.A.U, 2021-09) Gebru, Kuma; Guta, Fantu (PhD)
This thesis focus on examining the determinants of export diversification in Ethiopia for the period ranges from 1985-2019. This paper used time series econometrics model which was estimated by Autoregressive Distribute Lag (ARDL) to analysis the presence of both long-run and short-run determinants of export diversification in Ethiopia. The determinants of export diversification proxies used in this study is number of cooperatives, productive aged 15-64 population, real Gross Domestic Product (GDP), real exchange rate, trade openness, top five exported commodities and top ten exported commodities as control variable. The empirical investigation shows that among the variable used in this study number of cooperatives, productive aged 15-64 population, real GDP and trade openness positively and significantly determine the export diversification. Finally, this study recommends that the Ethiopia government must search opportunity in and surrounding the number of cooperatives and productive age 15-64 population. Keywords: Ethiopia, export diversification, cooperatives, productive aged, Autoregressive Distributed Lag.
The Determinants of Export of Primary Commodities in Sub Saharan Africa: A Panel Co - Integration Approach
(A.A.U, 2010-05) Melcaw, Beshir; Estiphanos, Girma(Dr.)
SSA is generally characterized by a heavy dependence on export of primary commodities. Export income is the largest resource inflows in the region. However, the performance of the exports of primary commodities is devastating. And this is a source of shock to the economy due to the volatility & continuous decline of the prices of their exports. Both internal and external factors are responsible for the poor performance of the sector. The study employed panel data to empirically analyze these determinants in SSA for the period 1990-2008 using a panel co- integration approach. A sample of 25, 15, 19 and 15 countries from the region were taken to analyze the determinants of exports of food, agricultural raw material s, minerals and energy (as defined under the SITC) respectively. For the first three commodity groups the real value of exports is specified in a semi-log linear form as a function of the relative export price (unit export price of a commodity per its world price), the international value of a commodity relative to its domestic value, the weighted average income of importers, real effective exchange rates, world interest rate, gross domestic investment and foreign direct investment. On the other hand, the real value of export of energy is specified in a log linear form as a function of world export price of energy relative to world prices and gross world income (with the assumption of constant supplies). The long run relationships were estimated using OOLS which accounts for serial correlations and problem of endogeneity. The results demonstrated the inastic nature of the elastic ties of exports of the three commodity groups while elastic price (relative) and income elastic ties were found for energy exports. Moreover, the supply side factors and the macroeconomic policies pursued by importers are found to be among the important determinants of exports of primary commodities in SSA.
Determinants of Export Performance and Employment of Labor in Large and Medium Scale Manufacturing Industry of Ethiopia an ARDL Cointegration Approach
(Addis Ababa University, 2015-11) Girma, Andualem; Ferede, Tadele (PhD)
The objective of this study is to investigate the determinants of export performance and employment of labor in large and medium scale manufacturing industry of Ethiopia using a time series data from 1978/79 to 2012/13. In this study, effort has been made to identify the long run and short run determinants of export performance and labor employment in large and medium scale manufacturing industry of Ethiopia using an ARDL bounds testing approach and ECM to capture both long run and short run relationships. The estimated results for the determinants of export performance revealed that the market size of the home economy, Europe and domestic infrastructure are positive and statistically significant determinants of export, while the market size of Africa (excluding Ethiopia) and real effective exchange rates (REER) have a negative impact on export of large and medium scale manufacturing industry of Ethiopia. But the market size of the United States of America and the Far East are found statistically insignificant. However, in the short run, the market size of the United States of America found statistically significant which goes with the African Growth opportunity act though the market size of Far East still insignificant. The market size of the home economy and domestic infrastructure are positively significant not only in the long run, but also in the short run and the market size of Africa and REER are also statistically insignificant in the short run. The speed of adjustment has the value 0.7959 with a negative sign, which showed the convergence of the export model towards its long run equilibrium. As for the, determinants of labor employment, the result shows that the skills of employee’s, export and real lending interest rate are both statistically significant in the short and long run, while the real wage rate has a significant effect only in the short run. Furthermore, both the value added per person engaged, a measure of labor productivity, and efficiency are statistically insignificant both in the long run and short run. The speed of adjustment in the employment model is 0.4554. Finally, the major policy implication of this study is, prioritizing investments to words capital goods and enhancing skill capacity of workers through short and long term trainings by the manufacturers for the employee and empowers the managers
The Determinants of Export Performance in East African Countries: A Panel Data Approach
(2016-05) Aman, Denekew; Estiphanos, Girma (PhD)
The paper examines the effect of demand and supply side factors on East Africa countries total, agricultural raw materials, service and manufacture export performance. Thus, both internal and external aspects are responsible for poor export performance in the region. The study employed a penal data to empirically analysis these determinants in East Africa for the periods 2005 to 2014. A Sample of 7 countries from the region was selected for analyze the determinants of the exports of total, agricultural raw materials, service and manufacture based on the standard international trade classification. Based on the Hausmanestimate the total and agricultural export fixed effect model is appropriate whereas for service and manufacture export random effect model is fitted. Using the first model (fixed effect) we found that the police related to FDI and trade openness have impact on the total export performance in the region. And for model two (fixed effect) the agricultural raw materials export performance in this region is not influenced as the expected theoretical. Using random effect in the model of service sector human capital and foreign direct investment net inflow are the major factors to improve the service and manufacture sector export performance in the region. Moreover, except the agriculture raw material export the supply and demand sides’factors are found the major determinants of the total, service and manufacture export performance in the region.
Determinants of Foreign Direct investment in Ethiopia: An Autoregressive Distributed Lag Approach
(A.A.U., 2019-11) Amanuel, Tesfaye; Lakew, Alemu (PhD)
This paper attempts to study the determinant of FDI in Ethiopia for the time period from 1980-2015. To this end, the study has reviewed theoretical explanations relating to the determinants of foreign direct investment and the study has also reviewed relevant empirical literatures focusing on the determinants of FDI in the context of developing countries. Using Data on foreign direct investment and number of telephone users that is obtained from United Nations Conference on Trade and Development (UNCTAD). Real effective exchange rate, inflation rate, export and import data were obtained from National Bank of Ethiopia (NBE), and Ethiopia Real GDP from Ministry of Finance and Economic Development (MoFED). By adopting model that was used by Erdal Demirhan etal (2008) this paper examine prominent determinants of FDI and finds that economic growth, macroeconomic stability, openness to trade are important determinants of foreign direct investment. The results suggest policy makers should give due attention to promoting liberalization and implementing sound economic policies that can ensure macroeconomic stability in the country.
Devaluation, Balance of Payment and Output Dynamics in Developing Countries: (The Case of Ethiopia)
(Addis Ababa University, 2018-06) Yigermal, Maru; Fantu, Guta (PhD)
The objective of the study is to investigate the theoretical and empirical relationship between currency devaluation, balance of payment and output in Ethiopia. The study employed Johnson co-integration analysis, and Granger causality tests. The analysis was made using impulse response function and variance decomposition by adopting Structural Vector autoregressive (SVAR) and Vector Error correction model (VECM). The models were estimated using quarterly data for the period ranging between 2000/2001Q1 to 2016/17Q4. The study found that devaluation has negative impact on the balance of payment. A great variation in real GDP emanates from the balance of payment variation and the variation in exchange rate comes from real GDP. This designates, in the long run, the balance of payment affects exchange rate through real output. Therefore, there is a linkage between exchange rate, the balance of payment and output. The contractionary effect of devaluation on output comes in different ways. First, devaluation increases money supply, a rise in the money supply has inflationary pressure on market prices and this intern forces output to decline. Second, devaluation increases interest rate, an increase in interest rate forces output to decline. Third, devaluation reduces foreign asset reserve, a reduction in foreign asset reserve leads to a fall in the balance of payment. A reduction in the balance of payment led to a decrease in output. Finally, devaluation increases external debt burden. The study recommends that before devaluating its currency the government should consider a policy that encourages productivity, diversification of the export sectors and expansion of import substituting industries which are alternative policies for devaluation.
Distributional Consequence of Trade Exposure in Rural Ethiopia: A Household Level Analysis
(Addis Ababa University, 2008-06) Hussein, Edris; Geda, Alemayehu (PhD)
The paper attempts to examine the determinants of income inequality, and the interrelationship between cultivation of cash crops and the existing income inequity in the rural Ethiopia from 1994-2000 applying the regression-based decomposition with Shapley value Decomposition of Shorrocks(1999) using the ERHS of Department of Economics, AAU. The result indicates that household size, dependency ratio and age of the head of the household in the family affect the per-capita consumption/income negatively. Producing exportable items contribute positively to the household’s per-capita income. Per-capita land holding, credit facility, and proportion of working adults (both male and female) impact consumption expenditure/income positively. Male headed households have higher income compared to female headed. The decomposition result reveals that none of the included variables in the model are found to be equalizing, meaning that each of the variables exacerbates income inequality. Per-capita land holding, household size and location are the major contributor to the overall inequality.
Does the Exchange Rate Regime Matter for East African Countries?
(Addis Ababa University, 2018-10) Mohammed, Hassen; Atnafu, Gebremeskel (PhD)
This study aimed at identifying whether the choice of exchange rate regime (ERR) matter for the inflation and economic growth of East African countries and identifying which regimes do best for the region. To do so it used the panel data of 10(ten) selected countries observed from 1996-2016. It used descriptive statistics and econometric analysis techniques. Even though the de-jure regime was much smaller than the de-facto, the study found that intermediate regimes dominated other ERRs. Relatively the highest levels of inflation are recorded in Malawi and Zambia while Uganda had the lowest inflation. The analysis also shows that the highest average growth level was that of Mozambique and the lowest was that of Burundi. The study found that both the claim and practice of intermediate regimes are related to lower inflation compared to pegged regimes. In the 'coarse' classification crawling regimes are negatively related to inflation compared to pegged regimes. Moreover, estimation of the 'fine' classification shows de-facto crawling peg and crawling band are negatively related to inflation compared to currency board arrangement. The study also found that de-facto intermediate regimes are negatively related to economic growth. When the 'coarse' classification of regimes is applied all intermediate regimes (i.e. crawling, managed floating and free falling regimes) are negatively related to growth. However, when institutional quality is controlled almost all the regime dummies of the 'fine' classification became insignificant in the growth regression. The result implies that the choice of ERR should be based on whether countries target either inflation or growth. Future researchers could focus on "why countries choose regimes?".
Economic Effects of Progressive Air Transport Liberalization in Africa.
(A.A.U, 2007-07) Abera, Megersa; Estiphanos, Girma (Dr)
Empirical analysis on economic effects of liberalization in the context of African air Transport sector is not much discussed in the literature and the continent's policy makers and The industry operators need such analysis to implement liberalization initiatives. As such, The Purpose of this study is to empirically measure economic effects of progressive air transport liberalization in Africa by taking the case20city-pair routes to/from Addis Ababa for the Period 2000-2005. by employing a Two-stage least square estimation procedure for a Panel data set, passenger demand. fare and departure frequency models are estimated to see the impact of bilateral air service agreement (BASA) liberalization. Liberal policies are assumed to affect the two supply side variables i.e. fare and departure frequency. accordingly, The frequency model indicates that a significant increase in departure frequency is observed in routes that experienced both ' full' and 'restricted ' type of liberalization compared to those governed by restrictive bilateral arrangements. in Addition. Higher increase in the number of departure frequency in routes which experienced restricted liberalization relative to those operated under fully liberalized arrangement is observed. regarding the fare model, a statistically significant negative impact of liberali zation policy on standard economy fare is not found . Finally, It is recommended that liberali zing BASAs, Especially Provisions Pertaining to departure frequency will enhance service quality.
Economy Wide Impact of Direct Tax Reform in Ethiopia: A Recursive Dynamic Computable General Equilibrium Analysis
(Addis Ababa University, 2018-06) Belayneh, Asmare; Mesele, Araya (PhD)
Since at the end of 2016, employment income tax (PIT), rental income tax and corporate income tax has been undergone a policy reform in Ethiopia. With the tax policy reforms in 2016, the rates of direct tax bracket on average reduced by 40%. In this study, we aim to analyze the effects of direct tax reductions on macroeconomic variables, income and expenditures of the government and income distribution and welfare of households. Since a major tax policy change can have considerable impacts on the economic agents, the economic impacts of these changes should be evaluated by taking economy-wide effects into account. For this study, the researcher employed a recursive dynamic computable general equilibrium model developed by IFPRI. The impact of the direct tax reform is different among households and factors. For households, a decrease in the direct tax causes to a higher disposable incomes, especially for urban non-poor households that involve in the labor market. Benefits to rural poor households were lower; because their income is depend on subsistence farming. Due to a reduction in the import and GDP reduction relative to the baseline, households affected by the rise in consumption prices, but for rural and urban non-poor households the disposable income increment out ways the price increment and thus experiencing improvements in their consumption patterns, as a result, their welfare is improved. The reduction in the direct tax creates income variation among factors of production. The sectoral analysis shows that the manufacturing sector tended to benefit more from the reforms than other sectors. Therefore, for countries like Ethiopia, which collects tax revenue below their capacity and unable to cover all the expenditures by their own capacity; increasing the tax base is a good policy measure.

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