BY GETACHEW MINAS
Empirical examination of the contribution of different macroeconomic variables to economic growth would help to formulate policies that enhance economic growth. Studies show that export growth positively and significantly affected economic growth and growth stimulates export in the long run. This provided support for the adoption of growth strategies based on export earnings in Ethiopia. Thus, effort should be directed towards policies that will expand the volume of the country’s exports and at the same time promote the emergence and expansion of domestic industries.
Economic growth can generally be defined as an increase in per capita output or income over a period of time. The process of economic growth is a highly complex phenomenon which is influenced by numerous and varied factors. Among other factors, openness to international trade is considered as one of the very important contributors to growth. International trade significantly played a crucial role in the historical economic growth achievement of the four East Asian Tiger economies: South Korea, Hong Kong, Singapore, and Taiwan. Countries with higher international trade achieve a higher and faster economic growth than those that have lesser international trade.
Many developing countries have attempted to pursue the East Asian growth model in recent decades. This model is widely perceived to have been based on export-led growth. Ethiopia, like other developing countries, pursued the export-led growth strategy after decades of implementing import substitution strategy during the Imperial and Derg regimes. Following the export-led growth strategy, Ethiopia’s economy, as well as, its export composition still remained highly dependent on agriculture, which contributed a major share to the GDP and to export. Its contribution to the GDP was very low when compared with Sub-Saharan African countries.
The low export performance implied that much has to be done in the Ethiopian export sector to achieve the desired level of economic growth. Many studies have been conducted in least developed countries (LDCs) on the contribution of export earnings to economic growth. Although most of the empirical works support the export-led economic growth hypothesis, there is no consensus over this issue. Some economists seem to generally agree that export has a positive and significant impact on the economic growth of developing countries. But, others doubt the existence of any relationship between export and growth. Therefore, the argument regarding export led economic growth is somewhat ambiguous and mixed in general.
Previous studies on this issue in the context of Ethiopia are only a few. Even the limited available ones provide mixed evidences. Some studies supported the contribution of real exports to economic growth in the context of Ethiopian economy only in the short-run, while others pointed out the contribution of real exports to economic growth only in the long-run. Yet, both types of studies did not include import, which is the most important macroeconomic variable when considering the causality between export and growth. However, a few researchers have tried to explore whether there is any long-run relationship between export and economic growth, to check if export growth influences economic growth.
Expansion of the services and agricultural sectors account for most of the recent growth achievements, while manufacturing sector’s performance has been relatively modest. Even though agriculture dominates the country’s economy, strong and robust economic growth is becoming the current history of Ethiopia as the country has been experiencing broad based growth over the past years. Although all sectors contributed to the relatively higher economic growth performance, agriculture is still the leading contributor to overall GDP growth.
Generally, overall economic growth in Ethiopia has been highly associated with the performance of the agricultural sector, which is the major contributor to export. However, the dependence of the sector on the unpredictable rainfall and the influence of other exogenous factors such as drought have made its performance erratic, leading to irregular overall GDP growth. The structure of the export sector, as revealed by economists, is dominated by a few primary products that account for a major share of the country’s export earnings. The share of non-agricultural products in total merchandise exports is almost insignificant.
All the available data and information confirm that dependency on a few export commodities negatively affected the effort of the country to earn a badly needed foreign exchange with which it supports other sectors of the economy. During the Imperial regime, earnings from the export of coffee, probably the largest exportable item had been growing fast. Also, hides and skin and pulses which were the second largest exportable items grew moderately fast.
Other export items have also contributed to foreign exchange earnings to economy. These are chat, fruit and vegetables and meat and meat products that have taken the remaining share in earning of foreign exchange after coffee and oil seeds.
It is pointed out by economists that the growth rate in the real value of total exports had shown a significant improvement during the rule of the EPRDF. This is due to different policy measures taken by the government to promote exports. Revenue from the various export commodities has shown a considerable improvement. However, due to volatility and unpredictability of international markets, growth rate of export had declined. The increase in the value of export contributed a lot to the registered economic growth. In general, the trend analysis show that growth rates of exports in Ethiopia had been very volatile. This is basically attributed to factors related to demand side such as declining prices for exports, with limited destinations. Dependency on few primary products and concentration of exports on few commodities led to low growth of exports.
The export market makes contribution to the different sectors of the economy and vice versa. Though the composition of the export in Ethiopia is dominated by agricultural produces, it still plays a significant role in the growth of the economy. Export has contributed to the growth of GDP in the past decades, and currently its share in the GDP is high. The revenue from export enabled the import of inputs that are crucial for economic development. Export is truly the engine of growth to other sectors of the economy. In some years, the proceeds from export were able to cover the total imports billand register a surplus. Thus, expanding exports enabled the country to reduce the foreign exchange constraint or bottleneck on the growth of the economy.
Studies indicate that labor, capital and exports positively affect output while import is negatively related with output. This shows that the much dependence on import for different activities of the country has negatively affected the growth of the economy. Studies also indicate that in the long run an increase in export would lead to increase in economic growth.
Export contributes to economic growth which in turn stimulates demand for import. According to some economists, if “export causes growth,” export promotion oriented policies are more appropriate but if growth increases export then import substitution policy is advisable. Import substitution policy is designed to promote domestic production that replaces imports. This policy is accompanied with strategies and programs that discourage conspicuous or luxurious consumption, which has nothing to do with domestic production. The achievement of this policy and its strategies is attested, confirmed, verified and approved periodically by local investors in a joint session of officials and other stakeholders. In this process, the bureaucracy has to be devoted to contribute to the Ethiopian economy through facilitating, not hampering, investment for export purposes.
There is an alternative strategy that combines both export and import. Studies indicate that Ethiopia will accelerate its growth if the country focuses on implementing “both” export promotion and import substitution. The same studies reveal that in the long-run, capital, labor and export positively contribute to economic growth of Ethiopia. Import is “negatively” related with domestic output, as consumer goods “outweigh” the imports of capital goods. This in turn slows down economic growth through affecting the country’s international reserves. The relationship of exports and imports are two-way.These is the effect of export and import on economic growth and the effect of growth on import and export. The existence of a two-way relationship and growth necessitate the formulation of both export oriented and import substitution policies.
The challenge Ethiopia is facing today is the capacity to manage liberalized trade. There is a multifaceted global confrontation as the sources of import are infinite. Similarly, export promotion faces the unknown terrain of foreign markets. On both fronts of import and export, there is a need for strong capacity to identify the secret patterns of trading partners. This capacity of economic intelligence could be built around diplomatic missions, who are generally oriented toward diplomacy and politics. Economic diplomacy is the essence of trade liberalization for reaping benefits from exports based on the sweats of labor in agriculture or industry. Similarly, the same liberty should apply to import substitution with domestic resources, labor, capital, tech and entrepreneurship. As a coordinating genius, the latter should be exalted and dignified among others.
The Ethiopian Herald April 15/2021
