HARAMAYA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

DETERMINANT OF EXPORT PERFORMANCE IN ETHIOPIA

RESEARCH PROPOSAL SUBMITTED IN PARTIAL

FULFILMENT OF THE REQUIREMENT FOR THE

BACHELOR OF ART (BA)

NAME: HAYLE DAGNEW ID: 3594/13

ADVISOR : MR. NEGAW

HARAMAYA: ETHIOPIA
 Acknowledgement

First of all, we would like to give unrestricted thanks for’’ GOD’’ through whom giving us
peace, health, unity and other spiritual strength to prepare this graduation paper. Second, we
would like to express our great respect and thanks to our adviser Negaw (MSc). He provides his
unreserved effort to evaluate, correct, adjust and give source of document to prepare this
graduation paper.

Lastly, we would like to give our thanks to all of those who have helped in different way during
the conduction of this graduation paper.
 Contents Page No
Acknowledgement................................................................................................................................................... i
LIST OF ACRONYMS................................................................................................................................................iv
ABSTRACT................................................................................................................................................................v
1. Introduction.................................................................................................................................................... 1
1.1. Background of the Study........................................................................................................................1
1.2. Statement of the problem........................................................................................................................3
1.3. Objective of the study.............................................................................................................................4
1.3.1. General objective...........................................................................................................................4
1.3.2. Specific objective...........................................................................................................................4
1.4. Significance of the study........................................................................................................................4
1.5. Scope of the study..................................................................................................................................4
1.6. Limitation of the Study...........................................................................................................................4
1.7. Organization of the study.......................................................................................................................5
Chapter Two............................................................................................................................................................6
2. Literature Review...........................................................................................................................................6
2.1. Theoretical Literature Review................................................................................................................6
2.1.1. Definition of Export Performance..................................................................................................6
2.1.2. Theory Export Performance...........................................................................................................6
2.1.3. Restraints to Ethiopian Exports Growth.........................................................................................9
2.1.4. Factors Determining Export Performance....................................................................................10
2.2. Empirical Review.................................................................................................................................11
Chapter Three........................................................................................................................................................14
3. Data Source and Methodology......................................................................................................................14
3.1. Data Source and Type..........................................................................................................................14
3.2. Method of Data Collection...................................................................................................................14
3.3. Method of Data Analysis......................................................................................................................15
3.4. Model Specification..............................................................................................................................15
 3.4.1. Theoretical Model........................................................................................................................15
3.4.2. Econometric Model Specification................................................................................................15
3.4.3. The Auto Regressive Distributed Lag (ARDL) Model....................................................................15
3.4.4. Definitions of Variables...................................................................................................................16
3.5. Test of Basic Assumptions...................................................................................................................18
3.5.1. Stationary and non-Stationary Test..............................................................................................18
3.4.2 Unit-roots Test.....................................................................................................................................18
3.4.3 Co-integration Test..............................................................................................................................19
Chapter Four......................................................................................................................................................... 19
4. Results and Discussion.................................................................................................................................19
4.1. A unit root test of stationarity and non-stationarity..............................................................................19
4.1.1. Result of Dickey-Fuller test for stationary at level I (0)...............................................................20
4.1.2. Result of Dickey-Fuller test for stationarity at level I (1)............................................................20
4.2. Bound Co-integration Test in Stata......................................................................................................21
Chapter Five..........................................................................................................................................................23
5. Conclusion and Recommendation................................................................................................................23
5.1. Conclusion............................................................................................................................................23
5.2. Recommendation..................................................................................................................................24
References.............................................................................................................................................................25
Appendices............................................................................................................................................................28
 LIST OF ACRONYMS

ADF -Augmented Dickey Fuller

BOP- Balance of Payment
CSA- Central statistic Agency
DC – Domestic Credit
EG- Engel granger
EXP- Export Performance
FDI- Foreign Direct Investment
GATT-General Agreement on Tariff and Trade
GDP- Growth Domestic Product
GMM- Generalized Method of Moments
ML- Marshal -Learner
NBE- National Bank of Ethiopia
OP- Openness of Trade
REER- Real Effective Exchange Rate
RGDP- Real Growth Domestic Product
TOT- Term of Trade
WB- World Bank
 ABSTRACT

This paper identified some of the main determinants of export performance in Ethiopia for the
period 1984/85-2019/20. To test empirically the relationship between export performance and its
major selected determinants such as terms of trade, trade openness, gross domestic product, real
effective exchange rate, domestic credit over a period.
The results from the econometric analysis revealed that trade openness affect the export
performance in the short run positively and significantly. The rest variables are found
statistically insignificant in affecting export performance. Kye words: export performance,
Ethiopia, export
 Chapter One
Introduction

Background of the Study

1.1 of moder an agen The advent humans ociety gave rise to the idea of international trade. With
the guiding principle of comparative advantage, which states that every country, regardless of its
level of development, can find something that it can produce cheaper than another country,
international trade is an interlocking linkage among various nations involving the exchange of
goods and services, or exports and imports..

According to the orthodox classical economist as well to the modern trade theories view trade as
of economic growth. Export promotion strategy is often in accordance with the principle of
comparative advantage, when a country specializes in a product, which it can produce at low cost
comparing to trading partners. The goods become available to the community of the world at
cheaper prices and the markets are extended. Income and employment levels expand.
Consequently, the process of economic development is facilitated. This means that, emphasis on
the increasing of exports would permit the optimal allocation of world resource ( (Muhammad
and Eatzaz, 2006)).

Export is a function of international trade where by goods produced in one country are shipped to
another country for future sale or use as the intermediate input of other production. The sale of
such goods and the use of these goods as input of other production for importing countries
enhance their production and increase economic growth. Exports are one of the oldest terms of
economic transfer, such as tariff or subside. The term export means shipping the good and
service out of the port of country (Todaro, 2003).
Ethiopian exports are characterized by few raw materials or semi processed agricultural products
which have been the main contributors to the country’s foreign exchange earnings. This feature
is expected to continue without significant change, in the near future, due to the overall
underdevelopment of the country’s economy. The prevailing investment friendly policies and
strategies are not expected to bring about a sound export growth in the short run ( (Hailu, 2012)).
Because of this few and raw product, like other sub-Saharan countries, Ethiopia is typical
example of LDC’s with high balance of payment (BOP) deficit, deteriorated terms of trade
(TOT) and dominance of agricultural sector in terms of employment creation, value added and
export earnings. Furthermore, the economy is characterized by low volume of exportable
products, the limited degree of diversification on exports, unprocessed primary products,
frequent economic crisis which substantially affects the demand for and price of primary
products, artificial trade barriers by trading partners and political factors. scheme the transitional
and current FDRE government has made the export sector more liberal (By using export
financing incentives schemes, export trade duty incentives scheme and duty-free importation
(Alemayehu,1999).
The imbalance of the exports and imports of countries and its deteriorated terms of trade on
economy and social implications are matters of concern to both the public and private sectors.
Thus, it is important for both parties to work together with respect to the contents and marketing
strategies of export items. There is a need to take the trade deficit not only from export side but
also from the import side by identifying products that can be locally produced to reduce foreign
exchange out flows. At the same time, expanding the volume of trade and diversifying of export
products and market destinations need to be investigated in detail to narrow the deficit (Alekaw,
2014).
Determinant of exports performance can be spilt in to external and internal components. External
components are related to market access conditions and other factors affecting import demand
and internal components are related to supply side conditions. The current problem of Ethiopia
export performance includes both supply side (like less diversified commodities and low volume
of exported commodities) and demand side (like low-income elasticity of demand for primary
products and limited destinations of exported commodities) constraints.

Access to foreign markets is a critical determinant of export performance. It relates directly to

the characteristics of the trading partner countries, such as the size of their market and transport
facilities, and inversely to their own internal transport costs. It also depends positively on the size
of the export basket and the number of differentiated items and their prices, which in turn are
affected by market entry conditions, trans-border costs, which also include tariff and non-tariff
barriers, have the expected negative impact on foreign market access (Hailegiworgis, 2011).
1.2 Statement of the problem
In order to maintain a relatively strong international trade base, it is important to diversify
exports as much as possible. This is more relevant to exports of developing countries as
diversification reduces the impact of shocks in certain production sectors. If a certain commodity
dominates the export earnings of a country the shocks occurring in the sector will greatly affect
the foreign exchange earnings of the country as a whole. In order to avoid such shocks from
affecting the whole country it becomes important to diversify (Tewodros, 2012).

Ethiopian export, like many other developing countries, is limited to few primary products which
are mainly agricultural. Studies shows that such commodity concentration could result in
instability of export earning which in turn will affect capital formation. This is due to high
dependence of developing countries on earning from export sector to satisfy their import
requirements. It is argued that instability of such proceeds will significantly influence output by
constraining input and production planning (Fitsum, 2009).

Identifying and examining the factors that significantly affect Ethiopia’s export performance
helps us to know what explains variation in Ethiopian export performance that should facilitate
the design of policies to improve the performance and ultimately overall economic growth.
Ethiopia has trade relationship with many of the nations in the world, especially with nations
from Europe, Africa and South East Asia. The major export markets of the Ethiopia’s are nations
in Europe followed by Asian and African nations respectively. Taking into account the focus
given to export sector, it is a rational to investigate factors determining export flows between
Ethiopia and its trading partners (Alelign, 2014)

Different studies have been undertaken on the factors that determine export performance using
different methods and during different times, their findings shows that there is a contradiction on
the factors that determine exports performance. In this connection, in recent years changes have
occurred in the overall economy of the country Portuga-Perez A. and Willson J. (2010) to induce
a need for further research in the area to identify believable factors determining export
performance of the county, so that information is provided to the concerned authority thus, leads
to the formulation of perspective policies to address the problems.
This study will empirically investigate the factors that determine the country’s export
performance by specifying an econometric model for the period (1984/85-2019/20). Finally, it
will forward policy recommendation based on the results of the study.

1.3 Objective of the study

1.3.1 General objective
The general objective of this study is to identify the effect of key determinants on export
performance in Ethiopia for the purpose of policy implication.
1.3.2 Specific objective
Analyzing factor that determine export performance in Ethiopia.
Suggest a possible recommendation for decision makers regarding factors determining
the export performance in Ethiopia.

1.4 Basic Research Question

1.5 Significance of the study

The study is significant to identify the major factors that determine the exports performance of
the country, by bringing empirical evidence using time serious data analysis. In addition, the
study uses very recent data for empirical analysis. Identifying the determinants of export
performance will help to provide information to the policy makers to enable them come up with
the appropriate policy regarding the factor that determine exports performance and the economy
as a whole and will help broaden the understanding determinants of exports.

1.6 Scope of the study

The research is limited to the study of the factors that determine export performance in Ethiopia,
during the period 1984 – 2023) using annual data.
1.7 Organization of the study
The paper will be organize as follow: The first chapter presents an introduction part containing
the background of the study, the statement of the problem, objective, significance, Scope and
organization. The second chapter will briefly summarize both theoretical and empirical evidence
of the previous studies on export and its determinants. The third chapter is concerned with source
of data, model specification and methods of data analysis. Chapter four is concerned with
analysis and discussion of results. Finally, chapter five will present conclusion and
recommendations of the study.
 Chapter Two

Literature Review

2.1 Theoretical Literature Review

2.1.1 Definition of Export Performance

Definition of export performance addresses two parts: export and performance. Export is the
international marketing related decisions and activities of internationally active firms (Cavugil
and Neviv, 1981). Export is a function of international trade whereby goods produced in one
country are shipped to another country for future sale or trade. The sale of such goods adds to the
producing nation gross output. If used for trade, exports are exchanged for the other products or
service. Exports are one of the oldest terms of economic transfer and occur in large scale
between nation that have fewer restriction on trade, such as tariff or subsidy. The term export
means shipping the goods and service out of the port of the country (Todaro, 2003).
Export performance is defined as: (i) the success or failure of the efforts of a nation to sell
domestically produced goods and services in other nations markets (Zou and stan, 1998); (ii) the
export effectiveness, export efficiency and continuous engagement in exporting (Shoham, 1991);
(iii) the composite outcome a nation ‘s international sales (Shoham, 1996); and (iv) the three
subdimensions which encompasses sales, profit and growth (Madsen, 1987).
2.1.2Theory Export Performance
The performance of the country’s exports is highly dependent on its exchange rate regime and
more specifically the real exchange rate. Various studies have shown that the demand for the
country’s exports increase when its export prices fall in relation to the world prices. The
depreciation of its currency compared to other currencies particularly, the dollars make its
exports cheaper on the international market. For example, (Sharmah, 2001) discovered that the
demand for Indian exports increased when its export prices fell. He also said that the
appreciations of the Indian rupee at one time adversely affected Indian exports. In Uganda an
investigation of the impact of trade liberalizations on export volumes by Kasekende and Atingi-
Ego (1999) found no significant relationship between real exchange rate and export volumes. It
is further argued that a competitive exchange rate is associated with export growth. In Tanzania,
a time series study on non-traditional export (NTE) found a statistically significant relationship
between real devaluations and export growth of NTEs (Berhanu, 2003).

In theory, devaluation promotes exports and aggregate economic activity through the famous
multiplier effect. However, currency devaluation may not produce the desired outcomes for
several reasons:

First, the Marshall-Learner (ML) condition may not hold in the short run. The ML condition is a
theoretical viewpoint that links exchange rate fluctuations and trade performance from the
perspective of elasticity. According to this theory, ceteris paribus, a country will improve its
current account deficit by devaluing its currency provided that the sum (in absolute value) of the
elasticity of demand for its exports and imports is greater than one. But most empirical result
show that short run elasticity is smaller than their long run counterparts and countries may not
achieve increased employment, investment and output following devaluation
(Wondemhunedg,2011).

Second, if we allow for changes in some variables, such as changes in the national income,
devaluation will improve the trade balance only if the improvement in trade balance generated by
currency depreciation more than offsets the improvement in imports brought about by a rise in
the national income. This is called the Lausen-Metzler effect (Wondemhunedg, 2011).

Third, the so-called J-curve effect may dilute the immediate benefits from devaluation for two
major reasons: a) even if the ML condition held, export receipts may not increase in the short-run
due to supply side constraints associated with time lags, which is largely the case for agricultural
commodities that need several months to harvest; b) most imports are less responsive, if not,
non-responsive at all despite the increase in their prices after devaluation. This applies to most
capital goods and raw materials (such as oil) that have inelastic demand in capital-deficient and
oil importing countries such as Ethiopia. As a result, the fall in foreign spending on the country
‘s exports and the increase in domestic spending on imports will cause the trade deficit to get
worse before it improves, which makes the trade balance curve assume the shape of letter ‘J’.

The empirical evidence on the relationship between devaluation and export performance is
generally mixed with the conclusions differing depending on the nature of the economies
investigated, the type of methodology employed, and/or the sample size and data frequency used
in the specific study.

On the flip side, therefore, devaluation may make imports less attractive leading to increased
spending by domestic consumers and investors as measured by domestic currency. Moreover,
inflationary infection induced by currency depreciation could eat up the potential gains from
nominal devaluation. A number of studies have shown that changes in nominal devaluation entail
massive increase in the prices of goods and services, thereby diminishing the international
competitiveness of the economy. In other words, nominal devaluation results in real devaluation
and effectively improves a country ‘s trade performance only if we have net positive change after
adjustment in the price levels (Wondemhunedg, 2011).

Still even more interesting is the impact of devaluation on income re-distribution. According to
Paul Krugman and Lance Taylor (1997), even when devaluation does not affect the country ‘s
terms of trade, it, however, could entail a number of income effects. To this effect, they have
identified three major channels through which devaluation could possibly redistribute income
among various economic factors:
Firstly, when the devaluation measure is undertaken in an environment where trade deficit
prevails, the increase in the prices of traded goods are immediately followed by a reduction in
real domestic income and by a corresponding rise abroad, since export receipts of the devaluing
country are overwhelmed by its swelling expenditures on imported items. Thus, the value of the
home country‘s „foreign savings‟ rise ex ante, while aggregate demand falls ex post, and imports
decline along with it. The bigger the initial trade deficit, the more pronounced the contractionary
effects.

Secondly, even if the country had balanced trade initially, the prices of traded goods increase
relative to domestic goods following devaluation, resulting in windfall profits and rents for
businesses and investors engaged in export and import-competing industries. If wages are rigid
in the short run and if the marginal propensity to save from profits exceeds the one from wages,
ex ante national savings rise. The magnitude of the resulting contraction is a function of the
difference in savings propensities between wage earners and businesses specializing in exports
and import competing industries.

Finally, devaluation can also affect the fiscal position of the national government. Particularly,
assuming that budget was initially unbalanced, the government can raise substantial additional
money if there are progressive taxes on income as well as if taxes on profits are higher than taxes
on wages. Moreover, if exports or imports are subject to ad valorem taxes, devaluation generates
redistribution of income from the private sector to the state coffers, whose saving propensity is
unity in the short run. Once again, the final outcome is reduction in aggregate demand
(Wondemhunedg, 2011).

2.1.3 Restraints to Ethiopian Exports Growth

Ethiopia, like sub–Saharan African countries, has an economic structure that is
characterized by low per capita income, large agrarian economy with relatively low
growth rates, and serious foreign exchange constraints. This is manifested by the
country's export performance.
(Asfaw Abay and Belete Zewdu, 1999) identified the major supply side and demand side factors
that constraints Ethiopian export performance. According to them the demand side problems
usually emanate from the nature of the products that the country exports.
This includes:
• Low level of demand for primary products due to very slow population
growth rate in industrial countries.
• Very low-income elasticity of demand for primary products.
• Production of synthetic products by industrialized countries which decreases
the demand for natural products.
• Restrictive trade policies.
On the other hand, the supply side factors include:
• The exportable items are more of primary products which have low-income elasticity.
• Limited production capacity
• Poor domestic policies perused by previous government such as price
control, gram movement restrictions, overvalued exchange rate,
discouragement of the private sector participation both in production and export.

2.2.4 Factors Determining Export Performance

A rise in export leads to an increase in a natural output. This is the example of what Rostow calls
a leading sector. In a full employment economy, a favorable change in demand abroad or an
innovation reducing cost at home may expand exports; improve the terms of large gain from
trade. And this in turn leads to high income through higher saving. Even though the necessity of
strong export sector is an in evitable pre-condition for economic growth, the export performance
varies from one country to the other and is constrained by different influencing factors.

2.1.4.1 Supply Side Determinants of Export performance

Supply side conditions are fundamental in defining the export potential of the economy and, for a
given level of access to international markets, countries with better supply conditions are
expected to export more. Supply capacity is affected by location related elements; which may for
example; affect access to raw materials and other resources. It also depends on factors cost such
as labor and capital. Beside resource endowment, factor costs are essentially the outcome of
economic policy and the institutional environment. Access to technology, which likely affects
the productivity of the external sectors also, can be an important determinant of exports
performance (Fugazza, 2004).
Key determinants of supply side conditions are classified into four major components: domestic
transport infrastructure, real exchange rate, foreign direct investment and institutional quality.
The real exchange rate can be the important element in determining export performance,
diversification and international competitiveness of goods produced in a country (UNCTAD,
2005).

2.1.4.2Demand Side Determinants of Export performance

The major factors that determine export performance of a country is related to the external
market access condition for its exports. In the case of foreign market access, two dimensions can
be considered. The one is explained through intervention by trading partners, and the second one
is related to the measures implemented by the exporting country to provide its exportable
commodities with a price advantage (Carthy, 2008).

Trading partners influence the export performance of a country through their trade policies (tariff
and non-tariff trade measures). Meaningful market access requires lowering of all kind of
barriers to trade (mold, 2005). However, since 1950 there has been a massive liberalization of
world trade, first under the auspices of the General Agreement on tariffs and Trade (GATT) and
now under the auspices of World Trade Organization (WTO). Due to this and other trade
negations, access to international markets has improved (Thrilwall, 2000).

2.2 Empirical Review

Svedgberg (1990) commented on the sluggish export performance of sub-Saharan Africa
countries from 1980 to 1985. Factors which influence exports were identified and categorized as
external and internal. Unfavorable terms of trade which had a negative effect on the exports and
the limited change in export structure facing sub-Saharan Africa countries were cited as the
major external factors. The internal factors which lead to poor export performance identified
were domestic policies including overvalued exchange rates and high taxes on producers’
exports that reduce export supply.
(Agasha, 2006), conducted study on determinant of the export growth in Uganda for the period
of 1987-2006 using variables; foreign price level, foreign direct investment (FDI), terms of trade,
real exchange rate and gross domestic product (GDP). His result shows that foreign price level
and terms of trade were found to be statistically significant in explaining export growth for
Uganda between 1987 and 2006, whereas foreign direct investment (FDI), real exchange rate and
gross domestic product (GDP) do not significantly affect exports growth.

(Sharmah, 2001) investigated the determinants of exports in India using annual data for 1970-98.
The study used the simultaneous equation framework and the results of study suggested that
demand for Indian exports increased when its export price fell in relation to world prices. The
appreciation of the rupee adversely affects Indian exports and exports supply is positively related
to the domestic relative price of exports and higher domestic demand reduces export supply.

(Naseeb, 2009)using generalized method of moments (GMM) technique on determinant of

exports in Pakistan, his findings reveal that exports of Pakistan are much sensitive to change in
world demand and world demand and world prices. This establishes the importance of demand
side factors like world GDP, real exchange rate and world price to determine the exports of
Pakistan.

Sivri and Usta (2001) conducted a study on the determinants of export growth in Turkey and
found that real exchange rate does not have a significant effect for changes in exports. Oztang
(2000) postulated total exports to be a function of foreign income and real exchange rate and
results revealed that real exchange rate is a statistically significant determinant of export
performance
(Kumar, 1998) conducted a study on the determinants of export performance in the developing
countries and confirmed that GDP has got a significant impact on exports. Increased level of
production is the main cause of export expansion since surplus of output can be exhausted in
international markets. However, in a closed economy, surplus production leads to fall in price
which in turn creates pessimism among the producers whereas in an open economy such
surpluses create foreign reserves through exportation.
Study related to the determinants of export performance in Ethiopia was conducted by (Berhane,
2000). According to his result, the world demand is found to be important determinant of export
performance. In other words, the existence of demand for export from consuming countries
therefore seems to be the driving force behind the growth of our export. He concluded that
economic activities in the major industrial countries remain the overall determinants of export of
Ethiopia. Furthermore, devaluation of birr had improved export performance while domestic
consumption adversely affected its performance.

(Kiros, 2012), Conducted study on determinants of export growth rate in Ethiopia from 1980-
2010 and his findings show that terms of trade and gross domestic product have positive impact
on determining export. But exchange rate has no significant effect on determining export growth.

(Wondaferahu Mullugeta and Belayneh kassa, 2013), in his study of the determinant of export
performance in Ethiopia found that in the long run export performance has found to be positively
influenced real effective exchange rate, openness of trade, real growth domestic product (GDP)
home country, infrastructural development and private credit as ratio of GDP.
(Yishak, 2009), analyze determinants of export performance of Ethiopia trading partners for the
period of 1995-2007 and employed a gravity model for the studies. The model is estimated with
Generalized Two Stage Least Square (G2SLS). The result of his study shows that good
institutional quality and the growth of domestic national income affects Ethiopian exports
positively appear to be the major determinants, whereas real exchange rate and FDI have no
statistically significant effect on Ethiopia’s export performance

(Nega, 2013) conducted study on the determinant of exports performance of Ethiopia, using time
series data. The result of the study revealed that in the short run terms of trade become
insignificant and negative in sign in which was unexpected. But, in the long run (LR) terms of
trade, trade openness and real gross domestic product (GDP) affect export positively.

In summary, when we see the empirical review of different studies conducted at different times
in developing countries there have been obvious contradiction on the factor determining export
performance. There is also a lot change of economy in the overall of a country in the recent
years, so this is the motivation for this research to identify believable determinant of export
performance in order to provide information to the concerned authorities hence, leading to
formulation of perspective policies to address problem.
 Chapter Three

Data Source and Methodology

Data Source and Type

The data used in this study will be secondary data collected from Central Statistics Agency
(CSA), World Bank (WB) and National Bank of Ethiopia (NBE). Regarding the type of the data,
a 35years annual time series data for all is used which covers from 1984/1985 to 2019/2020.
Method of Data Collection
Method of Data Analysis
Model Specification
Theoretical Model
This study focuses on the determinants of Ethiopia's export performance which related to the
dependent variable and the explanatory variables explained. To this regard the study uses five
explanatory variables of the major determinants of the Ethiopian export performance. The
explanatory variables are real gross domestic product, trade openness, domestic credits, real
effective exchange rate, and terms of trade.
Econometric Model Specification
The model used in this study is specified as follows;

Where;
EXP= Export Performance
TOT = Terms of Trade
OP=Trade Openness
RGDP= Value of Real Gross Domestic Product
REER = Real Effective Exchange Rate
DC=Domestic Credit
β ‘s are unknown parameters to be estimated
u= error terms
t = time in years (1984/85-2019/20)
The Auto Regressive Distributed Lag (ARDL) Model
The generalized ARDL (p, q) model is specified as”

where, is a vector and the variables in ( are allowed the be purely I(0) and I(1) or integrated; and
are coefficents, is the constant, i=1,1,,…,k; p, q, are optimal lag orders is a vector of error terms
– unobservable zero mean white noise vector process (serially uncorrelated or independent).

The dependent variable is a function of its lagged values, the correct and lagged values are other
exogenous variables in the model.

the lag lengths for p, q may not necessarily be the same

p lags: used for the dependent variable

q ;lags: used for the exogenous variable

Definitions of Variables
EXP: Represents export is the value of all goods and services provided to the rest of the world.
This dependent variable is representing by the export from Ethiopia, measure total value
of export at constant market price. Export is a function of international trade where by
goods produced in one country are shipped to another country for future sale or trade.
The sale of such goods adds to the producing nation gross output. Ethiopia is one of the
countries whose export performance depends on overseas economic situation. As the
country is a small open price taker economy in the world market forces, generally
determine the prices of its exports.
REER: This stands for real effective exchange rate: In the literature, it is recognized that
depreciation of the real effective exchange rate has positive contributions for increased
exports while real appreciation of the exchange rate is generally associated with a retard
in exports. Thus, the importance of maintaining a realistic real exchange rate is being
propagated as a policy remedy to ensure the competitiveness of exports in the world
market (Prasad, 1992). Index of trade weighted real effective exchange rate is included in
the present study, to empirically test the relationship between this variable and the level
of exports. The expected sign of this variable is positive.
DC: refers to domestic credit: it is the availability of loan, which is source of finance in case,
where there is shortage of capital. If there is high access to the credit, the export
performance will increase and vice versa. In fact, lack of access to pre- and post-shipment
export finance was reported as one of the fundamental constraints on export growth in
Ethiopia (Berhanu, 2003).
Domestic credit is captured by amount of credit which is advanced to the government and
private sector. So, the expected sign is positive.
OP: represented trade openness: Opening economic policies to trade with the rest of the world is
needed for export and economic growth. This is because in recent decades there is no
country achieving economic success in terms of substantial increases in living standards
for its people without liberalizing itself to the rest of the world. Trade liberalization has
generally taken place in LDCs as part of the structural adjustment program. Trade
liberalization implies considerable reduction in tariff and non-tariff barriers, so as to
establish a noticeable open market as compared with the pre- liberalization era. The
empirical researches focusing on the impact of trade liberalization (openness) on export
earnings have exhibited positive results. (Wondaferahu Mullugeta and Belayneh kassa,
2013) Some scholars strongly acknowledge that the more open an economy to the
external world the higher will be its foreign exchange earnings from export. The
implication is that a country needs to integrate to the world market by diversifying its
trading partners. The degree of integration of a country to external market is thus
measured by openness to trade, which is a proxy by the sum of exports and imports of
goods and services to GDP ratio. Thus, an increase in the ratio of exports and import of
goods to GDP (or) implies better integration of Ethiopia to the external world and hence
higher export earnings. In short, an increase in openness will have positive impact on
export performance.
RGDP: represents Real Gross Domestic Product (RGDP): Higher RGDP values in the exporting
country imply increased capacities for export. The increase in real output (RGDP) of
home country affects the export positively. This is due to the fact that output capacity of
an economy has implication of supply capacity by maintaining a country’s
competitiveness in the international market in the long run. For instance, Kumar (1998)
in his study on the determinants of export growth in developing countries confirmed that
 GDP has a significant positive impact export volume. He also underlined that higher level
of production is the main cause of export expansion. So, a higher GDP implies a higher
production and, hence larger volume of exports. Therefore, we expect a positive
relationship between the dependent variable and GDP.
TOT: Stands for terms of trade: This is one of the determinants of export performance in both
developing and developed countries. Terms of trade are the rate at which the commodity
of country is exchanged for the commodity of other. Because of the currency of one
country is not legal tender in other country, every country has to export commodities in
order to import goods. These terms of trade are measured by the ratio of export price to
import prices. Favorable terms of trade are associated with increased export growth rate
and unfavorable terms with low export growth rate.
3.4 Test of Basic Assumptions
3.4.1 Stationary and non-Stationary Test
In the econometric analysis, the problem of non-stationary is highly exposed many of
macroeconomic time series data. Regression on non-stationary variables come to spurious
regression, because of mean and variance are time variant and hence the basic assumption of
OLS will be violated. Therefore, it is important to test the variable using the co-integration and
ECM to solve the problems encountered with OLS regressions. If the mean and the variance of
macro-economic time series data are constant over time and value of covariance between the
two-time periods depends on distance or lag then the data is stationary. When the mean, variance
and auto covariance of individual time series are not time in variant, these time series data are
not stationary (Gujarati, 2004) non-stationary time series will have a time varying mean or a time
varying variance.
If the variables are found to be non-stationary, successfully differencing is applied until the bias
is eliminated. The null hypothesis in this case is that the variable under consideration is non-
stationary. The Augmented Dickey Fuller (ADF) test is used in testing for stationary (Gujarati,
2004)
3.4.2 Unit-roots Test
Unit roots are important to detect the stationary of time series data. Estimating econometric
models using time series variables requires that a stochastic process generating the data series to
be stationary. There are many ways of testing for the presence of unit root. In this study the
series will be tested by order of difference stationary, based on the work of Fuller (1976) and
Dickey Fuller (1979, 1981). The Augmented Dickey-Fuller test is a similar but modified version
of the Dickey-Fuller test which is used when the variables are not stationary at first difference.
3.4.3 Co-integration Test
Co-integration is used to take care of the non-stationary of the variables and to examine whether
there exist long run equilibrium relationships among the variables under consideration. If the
variables have long term equilibrium relationship, they are said to be co-integrated. The co-
integration may occur most of the time when economic variables are non-stationary. The test of
co-integration is thought of as pre-test to avoid spurious regression situations. So, co-integration
relationship existence implies that the regression of non-stationary series in their level yield a
meaningful result (Gujarati, 2004).
There are two common methods for testing co-integration and estimating the relationship among
co-integrated variables. These are Engle-Granger (1987) two step procedure and Johansen (1998)
maximum likelihood methods. But in this estimation, we use Engle Granger method. The Engle
Granger (EG) is the methods of testing for the existence of co-integration among variables.
According to (Gujarati, 2004), while using EG approach, in the first step, the long run model in
the level form which is integrated of order one, I (1), is estimated. In the next step, the residual
form the long run model is tested for its stationary. If the residual is found to be stationary, then
the variables are co- integrated. That is, there exists long run equilibrium relationship among the
variables.

CHAPTER FOUR
BUDGET AND TIME PLAN

4.1. Work Plan

Work plan is budgeting of time for the implementation of the research activities. Before
writing a proposal, some guiding information and extent of the problem in the study area
were collected informally and review of initial literature started from June 2021 and relevant
information will be continued until the final write up the research is completed. The period of
questionnaire preparation, primary data collection, data entry and organizing, data analysis
and final write up activities is indicated in the table below

Table 1. Time Schedule

no Activity Duration
1 Literature review JUNE,01-30,2023
2 Proposal presentation July 15/2023
3 Interview schedule July 20-25/2023
4 Pre-test and explanatory July 25-30/2023
5 Recruitment and trying of August.01-05/2023
enumerators
6 Conducting the primary data August. 06-20/2023
collection
7 Collection of secondary data August. 20-30/2023
8 Data cleaning, coding and August. 26-30/2023
entering
9 Data analysis and write up September. 01-15/2023
10 Completion of fist draft September. 16-20/2023
11 Final these submission 30/2023

4.2. Budget
Budget is required for personnel, per diem, travel, equipment, expendable supplies and
material
and any associated services to conduct the research. Therefore, this research work is carried
out
using the following budget as indicated below.
Table 2. Stationary materials

No description unit quantity unit price in total expanse

Birr in Birr
1 fish desk Pcs 1 330 330
2 pen Pcs 5 15 75
3 pencil Pcs 3 12 36
4 photo copy No 2000 2 4000
5 binding No 20 10 200
6 binder Pcs 9 20 180
7 print No 1000 3 3000
8 Note book Pcs 10 25 250
9 Stepler Pcs ,1 150 150
Supplies sub 8221
total