The Role of Diversification in Reducing Impacts of Export Instability on Ethiopian Economic Growth:: An Empirical Investigation
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Date
2003-06
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Addis Ababa University
Abstract
There has been considerable discussion during the past four decades on
the problems of instability in export earnings and impact of such instability
on economic development in LDCs. There is now universal agreement on
the view that LDCs have in varying degrees of seriousness suffered
comparatively larger magnitudes of short-run fluctuations in their external
proceeds than most developed countries (Fowdar, 2002). One of the
rationales for diversification is the problems associated with export
instability. The hypothesis is that export instability inflicts serious damage
upon the economies of LDCs. The poor performance of exports in Ethiopia
has largely been blamed on the poor domestic policies, deteriorating
terms of trade and export earnings instability. Diversification of the export
base helps to reduce the level of fluctuations in export earnings. Attempt
was made to examine the possible causes of export instability and the
extent to which it affects economic growth in the context of the Ethiopian
economy. The hypothesis, whether concentration of commodities of
markets attributable to the fluctuations was also tested. In this study
more emphasis is given to the cause of export instability, the extent to
which level of export instability Ethiopia has faced and its impact on the
economic growth in causing uncertainty of source of foreign exchange
badly needed for importing capital goods and inputs, and which are
essential for growth, followed by a brief case for a more diversified
economic base.
Finally, based on the empirical result, the study came up with the existing
undiversified export portfolio causes export earnings instability. Moreover,
country’s world market share and proportion of food exports are found to
be significant with the expected signs. Based on the findings of the
research, the following key recommendations are made: To insulate the
economy from adverse terms of trade and instability in export earnings
associated with commodity concentration, there has to be a policy shift to
diversify the country's exports to include non-coffee exports. Moreover,
the country can achieve stable export earnings by exporting food stuffs as
they are low income elastic and help reducing export earnings instability.
Lastly, Government should make deliberate effort to diversify export items
to manufactures which is a sectoral shift in the structure of production and
trade as the existing exports are mainly from agricultural sectors.
Moreover, the result shows short-run export instability causes income
instability implying impact of export earnings instability is severe and the
need for diversifying the existing export portfolio is timely and essential.
Key Words: Export Earnings Instability, Diversification and Economic
Growth
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Keywords
Export Earnings Instability, Diversification and Economic Growth