The Role of Diversification in Reducing Impacts of Export Instability on Ethiopian Economic Growth:: An Empirical Investigation

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Addis Ababa University


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



Export Earnings Instability, Diversification and Economic Growth