A Panel Data Analysis for Bilateral Trade of Ethiopia and East African Community countries: The Gravity Model Approach

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Addis Ababa University


This study tries to explore the trade relations between Ethiopia and East African community countries in general and specifically the Trade Integration for cooperation with the East African Community Partner countries. The study has a main objective of investigating the main determinants of Ethiopia’s bilateral Trade and addresses the question of whether Ethiopia has untapped Bilateral Trade and export potentials with the East African community countries or not. It also Analyze existing Trade agreements and protocols and also explores the unexploited export potentials that the country that may have in the East Africa community countries using the an econometric analysis of augmented gravity model estimation by Generalized Least Square (GLS) estimation technique over the 9 years panel data (2004-2012) of the four bilateral Trade partners. The estimated coefficients then used to analyze the existing bilateral Trade and predict the potential that the country could have in the EAC countries. The paper identifies the significant factors of influence on bilateral trade flows, exports and imports by employing Gravity variables and some supplementary dummy variables to determine the estimated equations of the gravity model. Accordingly, GDP, per capita GDP difference, Nominal Exchange Rate, Inflation and Distance between the Trading Countries from Ethiopia found to have the assigned magnitude and significant impact on Ethiopia’s bilateral Trade. The export potentials of the country are estimated using the estimated coefficients of the gravity model. Accordingly, Ethiopia has the highest unexploited potential in EAC and significant amount in the determining variables by the size of the bilateral economic, Nominal Exchange Rate, Trade Policy of the country and Distance between the Trading Countries and Ethiopia. Empirical studies on Regional Economic Integration process in Africa exhibit sluggish progress and there by limited level of bilateral trade. So the paper explores regional trade integration of the countries involved in Ethiopia and the EAC countries may support bilateral Trade Growth of the state Economies. Keywords: Augmented Gravity model, Export Potentials, Gravity variables, East Africa Community, Trade Integration



Augmented Gravity model, Export Potentials, Gravity variables, East Africa Community, Trade Integration