Ethiopia’s Reforms and Export Performance
2 March, 2011 | By Wondemhunegn Ezezew
---------------------------------------------------------------------------------
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 results show that short run elasticities are smaller than their
long run counterparts and countries may not achieve increased
employment, investment and output following devaluation.
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.
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.
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 actors:
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 cotractionary 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.
Haughton and Kinh (2003), based on disaggregated household
income and expenditure data for Vietnam found that devaluation of
dong has modest effect on redistribution in favour of the poor and
the rich while the middle class was a net loser. Acharya (2010)
investigates the impact of devaluation on the Nepalese economy by
applying general equilibrium model and finds that while devaluation
is expansionary most of the benefits, however, accrue to the rich,
thereby creating unequal income distribution. He attributes this pro-
rich growth to the fact that returns to high-skilled labour and capital
grow faster than returns to their low-skilled counterparts.
Moreover, while the expansion was more concentrated in
agricultural and industrial activities, the service sector actually
suffered contraction following devaluation.
While much of the redistribution literature focuses on income
transfer between domestic agents (workers, firms and
governments), the income transfer could also assume international
dimension. Ciuriak (2010) in diagnosing the demand and supply
side constraints affecting Ethiopia’s export performance observes
that market structure may also diminish the positive impact of
devaluation, working in favour of few omnipotent global firms that
dominate international commodity markets. He notes that
international commodity markets where developing countries sell
their products are dominated by a handful of buyers with
considerable power of influence that enables them to amass
enormous profits and rents. Thus, such asymmetric power of
influence will likely create a situation whereby the devaluation
measure will boost the profits of multinational buyers with little of the
benefit trickling down to the Ethiopian producers.
Reforms and Exports
In May 1991, the Ethiopian landscape was markedly overwhelmed
by major economic and political changes. The military junta that
terrorized the country for 17 years collapsed and a coalition of
liberation fronts assumed political power. Extremely delighted with
and motivated by the fall of the communist regime in the country,
delegates of Western governments and institutions hurried to the
capital Addis Ababa to sell their free market economic policies
toolkits, packaged as Structural Adjustment Programmes (SAP),
sponsored by the International Monetary Fund (IMF) and the
World Bank (WB). Though deeply communist themselves, the new
leaders, desperately in need of resources and foreign exchange,
were easily persuaded to undertake the proposed economic
reforms in exchange for low interest loans and development aid.
Under the new reform program, foreign trade and exchange rate
regimes were liberalized; prices of domestic inputs and finished
goods were decoupled from arbitrary government regulation and
interference; public sector reform that accorded autonomy to the
state owned enterprises (SOEs) was implemented; some enterprises
were privatized; the financial market was reformed to allow private
sector participation in commercial banking, insurance and micro
credit services; export tariffs were abolished; export subsidies to
domestic, export-oriented firms were eliminated and were replaced
by incentives that provided the duty-free importation of raw
materials.
Most important, in October 1992, Ethiopia’s national currency, the
Birr, saw a major free fall when it was devalued by 242% from its
pegged rate of 2.07 per US dollar to 5 per US dollar, signalling the
first major onslaught on the value of Birr which since then has been
virtually in a slippery slope. The authorities defended and justified
such massive, one-time devaluation by pointing to the high premium
on the parallel market which was close to 238% on the eve of the
devaluation measure.
In May 1993, the transitional government also introduced a ‘Ducth
auction’ system for foreign exchange with the objective of
liberalizing the foreign exchange market. The auction system
operated side by side with the official exchange rate until the two
were finally unified in July 1995. Before the unification, the dual-
exchange rate regime was maintained by an amalgam of government
decree (relevant for the official rate) and quasi-market mechanism
(which applied to the auction rate).
It was expected that the new devaluation measure would enhance
domestic production and employment; eliminate the gap between
the official and the parallel market rates, and improve the country’s
foreign reserves by minimizing illegal trade in smuggled goods and
by re-directing much of the unofficial remittance flow towards
official intermediaries.
Though still fragile and vulnerable to the vagaries of nature and aid
money, the export sector in Ethiopia has shown tangible
improvements since the country abandoned the fixed exchange rate
regime in 1991 and implemented a series of macroeconomic
stabilization and adjustment programmes.
For instance, real export receipts have increased fivefold between
1992 and 2009. The export industry has also seen significant
diversification away from its dependence on coffee. In 1991, when
the reform package was launched, coffee brought more than 55%
of the country’s total export revenue but by the end of 2009 its
share declined to less than 35% while the shares of other goods
such as chat, flower, leather and leather products have increased
substantially. The flower industry represents the major success
story, whose share registered remarkable growth from less than 1%
at the beginning of the 2000s to about 10% a decade later. Though
much of this diversification is within the same industry, the over all
result shows a significant departure from the traditional, mono-crop
dominated export sector.
Another way of assessing the performance of Ethiopia’s export
industry is to look at the employment figures that the export sector
generates, particularly in agriculture where almost 90% of the
country’s exportable commodities come from. Because data on
export sector employment for Ethiopia is unavailable, I make a
back-of-the-envelope calculation to arrive at the number of jobs
created each year. To do so, first I calculated the GDP per worker
by dividing the real gross domestic product by the size of the work
force, where I assume the annual unemployment and
underemployment rate to be 20%. The GDP per worker gives the
average annual income that supports the employment of a single
worker. Then to find out the number of jobs created by the export
sector, I divide the annual export value by the corresponding
average worker’s income.
For example, in 1981 the GDP and export value of Ethiopia
measured in 2000 constant dollar were 5.147 billion and 389 million
respectively, while the estimated number of workers for that year
was 12.8 million. So the GDP per worker in 1981 was about 402
dollars. If we divide the value of export by 402, we get the number
of jobs in export-oriented activities (coffee plantation, brokering,
transportation, etc.), which was roughly 967, 400. Following this
line of reasoning, we would find that the number of jobs in 2009
stood at around 3 million, which is a 200% increase compared with
the level of export sector employment in 1981.
Table 1 above shows the five year cumulative growth rates in export
earnings and export sector employment generation for the period
1982-2009. Particularly interesting is the continuous decline in
export growth and employment during the five years (1987-1991)
preceding the downfall of the military junta, a period characterized
by heightened conflict, uncertainty, massive defense spending and
impulsive resettlement and villagization programmes following the
1984/85 famine. During this period, overall exports and export-
oriented jobs shrank by 67% and 62% respectively. Moreover,
though cumulative growth rates are still positive, we observe
simultaneous drop in both exports and export sector jobs in the
period 1997-2001 (a time period flanked by the costly Ethio-
Eritrean border conflict) and 2007-2009 (due to the impact of the
Great Recession that started in mid 2008). Not surprisingly, the
most dramatic improvements occurred in the two five-year periods
following the end of the civil war (1991/92) and the termination of
the border conflict with Eritrea.
Empirical Evidence
Now the key question is, how much of this improvement in export
growth and export sector employment can be attributed to
exchange rate reforms? Does devaluation always enhance export
performance, domestic production and overall national welfare?
In order to answer these questions, I conducted an empirical test to
examine whether or not devaluation encourages export growth by
applying Generalized Method of Moments estimators (econometric
technique) on time series data covering the period between 1981
and 2009. A conventional export demand equation was formulated
and estimated in which export growth is explained by real exchange
rate, imports and world per capita income. The findings?
The coefficient on the real exchange rate was positive (0.09) but it
turned out to be statistically insignificant, indicating that changes in
exchange rate have little or no effect on Ethiopia’s export growth.
Like real exchange rate, imports do not directly impact export
performance which could be due to the fact that the country’s
export portfolio is composed of mostly agricultural goods that
depend more on cheap and surplus labour than on expensive
imported capital. It could also be due to the fact that a large
proportion of the country’s imports comprise non-durable consumer
goods most of which could be produced domestically. This implies
that the country’s limited foreign reserves which could have been
spent on productive capital goods are wasted on low-tech
consumption items (such as biscuits and orange juice) that could be
supplied by homegrown firms. According to the National Bank of
Ethiopia, in the first quarter of fiscal year 2009/10, such consumer
goods accounted for nearly 20 percent of the country’s total import
bill.
Interestingly, only world income was found to positively impact
export performance in Ethiopia. The findings reveal that a 1% rate
of increase in world income induces about 9% rate of increase in
world demand for Ethiopia’s exports and this was statistically
significant at 5% level of significance.
Conclusion and Recommendations
Ethiopia’s export sector has shown certain signs of improvement
since 1991 despite the continued worsening in its current account
balance. While exports and export sector jobs have increased
fivefold and threefold respectively, it is possible that those poor
Ethiopians engaged in labour intensive, tradable goods sector have
benefited from increased export of goods and new market
opportunities. But unlike the widely held view, whatever
improvement was recorded in export growth, there is no evidence
that this improvement is due to exchange rate reforms. Particularly,
the coefficient on the real exchange rate was insignificant suggesting
that real devaluation or overvaluation of Ethiopia’s currency, Birr,
has no discernible association with trends in the country’s export
receipts.
The most important policy implication of this study is that a
developing country like Ethiopia cannot revolutionize its export
industry through exchange rate manipulation.
Even when domestic and external circumstances call for devaluation
measures, such measures will facilitate export growth and enhance
aggregate economic activity when they are accompanied by
conservative monetary policies and fiscal restraints.
In contrast, post-reform Ethiopia has seen consistent increase in
budget deficits along with massively accommodative monetary
policies. While much of the foreign expenditure shortfalls have been
covered with international loans and grants, the Central Bank of
Ethiopia has been the last resort to cover domestic expenditure
shortfalls.
For instance, broad money supply increased, on average, by 11.4%
annually between 1961 and 1974. The average broad money
expansion during the military regime (1974-1991) was only slightly
higher (12.4%), which is essentially marginal, especially in light of
the seemingly incessant civil war and the huge government defense
spending which financed that war. But the post-reform period, and
particularly the period immediately after the conclusion of the Ethio-
Eritrean border conflict (1998-2000) has seen enormous increase in
“quantitative easing” with average broad money growth of over
17% between 2001/02 and 2009. Thus, not surprisingly,
devaluation and inflation spirals went hand-in-hand from 2002
onwards.
Moreover, on top of the need for credible and predictable monetary
policy and prudent fiscal management, concerted efforts should be
directed towards expanding and raising the quality of physical and
institutional infrastructures. For instance, poor transport
infrastructure networks increase the cost of trade and reduce the
country’s international competitiveness while poor institutions
(bureaucratic morass, rampant corruption, lack of transparency in
public resource management and contract, etc.) raise the costs of
starting business, discourage creative entrepreneurship, and thwart
private sector development, which are the engine of economic
growth and prosperity for any economy.
In addition to poorly developed transportation and communication
networks, lack of maritime access has been another factor impeding
the growth of the export industry in Ethiopia. The state of being
landlocked has been costing the country nearly 1 billion dollars
annually in port fees and charges, a staggering amount which is
almost equal to the country’s annual export earnings these days.
Unless the political leadership takes the issue of port services
seriously and champion for Ethiopia’s rightful access to the sea
based on international law, the country will continue to hemorrhage
huge amount of hard currency, a situation which will continue to
dampen the prospect of its export led/supported growth strategy.
The recommendations provided in here concur with the findings of a
recent study by Dan Ciuriak (2010) which investigated the demand
and supply side constraints affecting Ethiopia’s export industry.
Ciuriak identifies a number of domestic and regional factors that
hamper the country’s export growth, among which the most
important ones included inappropriate macroeconomic policy mix,
extremely prohibitive costs in trade administration (such as the lack
of access to the sea and the high costs of port service and massive
fees for cargo transportation); inefficient producer services (such as
finance, transportation and communication); cumbersome customs
procedures; high business concentration, huge costs of entry and
fragile and poorly developed private sector.
Furthermore, Seid Hassen (2010), following the surprise 16%
devaluation of Birr against the US dollar on September 1, 2010, has
written extensively on how recurrent devaluation could not solve
many of the longstanding structural problems associated with the
country’s limited capacity of domestic production. In his explanation
he underscored the malignant consequences of the numerous party-
owned-and-operated business companies that stifle competition and
hinder the development of a vibrant private sector-led economy. He
further emphasized Ethiopia will not be able to gain competitive
edge and devaluation will not be a magic potion for the structural
(political and economic) problems of the country and the continuous
manipulation of the Birr will unlikely correct the general economic
malaise.
Therefore, many of the impediments to Ethiopia’s export growth are
institutional and structural and need to be assessed and addressed
within the wider context of its geographic location, lack of access to
the sea, slow pace of regional integration and limited market
opportunities for its products, as well as its poor technological
progress and increased dependence on agricultural commodities
which are vulnerable to wide price fluctuations, etc.
------------------------------------------------------------------
Wondemhunegn Ezezew can be reached: bishangary@yahoo.com
2 March, 2011 | By Wondemhunegn Ezezew
---------------------------------------------------------------------------------
- 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 results show that short run elasticities are smaller than their
long run counterparts and countries may not achieve increased
employment, investment and output following devaluation.
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.
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.
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 actors:
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 cotractionary 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.
Haughton and Kinh (2003), based on disaggregated household
income and expenditure data for Vietnam found that devaluation of
dong has modest effect on redistribution in favour of the poor and
the rich while the middle class was a net loser. Acharya (2010)
investigates the impact of devaluation on the Nepalese economy by
applying general equilibrium model and finds that while devaluation
is expansionary most of the benefits, however, accrue to the rich,
thereby creating unequal income distribution. He attributes this pro-
rich growth to the fact that returns to high-skilled labour and capital
grow faster than returns to their low-skilled counterparts.
Moreover, while the expansion was more concentrated in
agricultural and industrial activities, the service sector actually
suffered contraction following devaluation.
While much of the redistribution literature focuses on income
transfer between domestic agents (workers, firms and
governments), the income transfer could also assume international
dimension. Ciuriak (2010) in diagnosing the demand and supply
side constraints affecting Ethiopia’s export performance observes
that market structure may also diminish the positive impact of
devaluation, working in favour of few omnipotent global firms that
dominate international commodity markets. He notes that
international commodity markets where developing countries sell
their products are dominated by a handful of buyers with
considerable power of influence that enables them to amass
enormous profits and rents. Thus, such asymmetric power of
influence will likely create a situation whereby the devaluation
measure will boost the profits of multinational buyers with little of the
benefit trickling down to the Ethiopian producers.
Reforms and Exports
In May 1991, the Ethiopian landscape was markedly overwhelmed
by major economic and political changes. The military junta that
terrorized the country for 17 years collapsed and a coalition of
liberation fronts assumed political power. Extremely delighted with
and motivated by the fall of the communist regime in the country,
delegates of Western governments and institutions hurried to the
capital Addis Ababa to sell their free market economic policies
toolkits, packaged as Structural Adjustment Programmes (SAP),
sponsored by the International Monetary Fund (IMF) and the
World Bank (WB). Though deeply communist themselves, the new
leaders, desperately in need of resources and foreign exchange,
were easily persuaded to undertake the proposed economic
reforms in exchange for low interest loans and development aid.
Under the new reform program, foreign trade and exchange rate
regimes were liberalized; prices of domestic inputs and finished
goods were decoupled from arbitrary government regulation and
interference; public sector reform that accorded autonomy to the
state owned enterprises (SOEs) was implemented; some enterprises
were privatized; the financial market was reformed to allow private
sector participation in commercial banking, insurance and micro
credit services; export tariffs were abolished; export subsidies to
domestic, export-oriented firms were eliminated and were replaced
by incentives that provided the duty-free importation of raw
materials.
Most important, in October 1992, Ethiopia’s national currency, the
Birr, saw a major free fall when it was devalued by 242% from its
pegged rate of 2.07 per US dollar to 5 per US dollar, signalling the
first major onslaught on the value of Birr which since then has been
virtually in a slippery slope. The authorities defended and justified
such massive, one-time devaluation by pointing to the high premium
on the parallel market which was close to 238% on the eve of the
devaluation measure.
In May 1993, the transitional government also introduced a ‘Ducth
auction’ system for foreign exchange with the objective of
liberalizing the foreign exchange market. The auction system
operated side by side with the official exchange rate until the two
were finally unified in July 1995. Before the unification, the dual-
exchange rate regime was maintained by an amalgam of government
decree (relevant for the official rate) and quasi-market mechanism
(which applied to the auction rate).
It was expected that the new devaluation measure would enhance
domestic production and employment; eliminate the gap between
the official and the parallel market rates, and improve the country’s
foreign reserves by minimizing illegal trade in smuggled goods and
by re-directing much of the unofficial remittance flow towards
official intermediaries.
Though still fragile and vulnerable to the vagaries of nature and aid
money, the export sector in Ethiopia has shown tangible
improvements since the country abandoned the fixed exchange rate
regime in 1991 and implemented a series of macroeconomic
stabilization and adjustment programmes.
For instance, real export receipts have increased fivefold between
1992 and 2009. The export industry has also seen significant
diversification away from its dependence on coffee. In 1991, when
the reform package was launched, coffee brought more than 55%
of the country’s total export revenue but by the end of 2009 its
share declined to less than 35% while the shares of other goods
such as chat, flower, leather and leather products have increased
substantially. The flower industry represents the major success
story, whose share registered remarkable growth from less than 1%
at the beginning of the 2000s to about 10% a decade later. Though
much of this diversification is within the same industry, the over all
result shows a significant departure from the traditional, mono-crop
dominated export sector.
Another way of assessing the performance of Ethiopia’s export
industry is to look at the employment figures that the export sector
generates, particularly in agriculture where almost 90% of the
country’s exportable commodities come from. Because data on
export sector employment for Ethiopia is unavailable, I make a
back-of-the-envelope calculation to arrive at the number of jobs
created each year. To do so, first I calculated the GDP per worker
by dividing the real gross domestic product by the size of the work
force, where I assume the annual unemployment and
underemployment rate to be 20%. The GDP per worker gives the
average annual income that supports the employment of a single
worker. Then to find out the number of jobs created by the export
sector, I divide the annual export value by the corresponding
average worker’s income.
For example, in 1981 the GDP and export value of Ethiopia
measured in 2000 constant dollar were 5.147 billion and 389 million
respectively, while the estimated number of workers for that year
was 12.8 million. So the GDP per worker in 1981 was about 402
dollars. If we divide the value of export by 402, we get the number
of jobs in export-oriented activities (coffee plantation, brokering,
transportation, etc.), which was roughly 967, 400. Following this
line of reasoning, we would find that the number of jobs in 2009
stood at around 3 million, which is a 200% increase compared with
the level of export sector employment in 1981.
Table 1 above shows the five year cumulative growth rates in export
earnings and export sector employment generation for the period
1982-2009. Particularly interesting is the continuous decline in
export growth and employment during the five years (1987-1991)
preceding the downfall of the military junta, a period characterized
by heightened conflict, uncertainty, massive defense spending and
impulsive resettlement and villagization programmes following the
1984/85 famine. During this period, overall exports and export-
oriented jobs shrank by 67% and 62% respectively. Moreover,
though cumulative growth rates are still positive, we observe
simultaneous drop in both exports and export sector jobs in the
period 1997-2001 (a time period flanked by the costly Ethio-
Eritrean border conflict) and 2007-2009 (due to the impact of the
Great Recession that started in mid 2008). Not surprisingly, the
most dramatic improvements occurred in the two five-year periods
following the end of the civil war (1991/92) and the termination of
the border conflict with Eritrea.
Empirical Evidence
Now the key question is, how much of this improvement in export
growth and export sector employment can be attributed to
exchange rate reforms? Does devaluation always enhance export
performance, domestic production and overall national welfare?
In order to answer these questions, I conducted an empirical test to
examine whether or not devaluation encourages export growth by
applying Generalized Method of Moments estimators (econometric
technique) on time series data covering the period between 1981
and 2009. A conventional export demand equation was formulated
and estimated in which export growth is explained by real exchange
rate, imports and world per capita income. The findings?
The coefficient on the real exchange rate was positive (0.09) but it
turned out to be statistically insignificant, indicating that changes in
exchange rate have little or no effect on Ethiopia’s export growth.
Like real exchange rate, imports do not directly impact export
performance which could be due to the fact that the country’s
export portfolio is composed of mostly agricultural goods that
depend more on cheap and surplus labour than on expensive
imported capital. It could also be due to the fact that a large
proportion of the country’s imports comprise non-durable consumer
goods most of which could be produced domestically. This implies
that the country’s limited foreign reserves which could have been
spent on productive capital goods are wasted on low-tech
consumption items (such as biscuits and orange juice) that could be
supplied by homegrown firms. According to the National Bank of
Ethiopia, in the first quarter of fiscal year 2009/10, such consumer
goods accounted for nearly 20 percent of the country’s total import
bill.
Interestingly, only world income was found to positively impact
export performance in Ethiopia. The findings reveal that a 1% rate
of increase in world income induces about 9% rate of increase in
world demand for Ethiopia’s exports and this was statistically
significant at 5% level of significance.
Conclusion and Recommendations
Ethiopia’s export sector has shown certain signs of improvement
since 1991 despite the continued worsening in its current account
balance. While exports and export sector jobs have increased
fivefold and threefold respectively, it is possible that those poor
Ethiopians engaged in labour intensive, tradable goods sector have
benefited from increased export of goods and new market
opportunities. But unlike the widely held view, whatever
improvement was recorded in export growth, there is no evidence
that this improvement is due to exchange rate reforms. Particularly,
the coefficient on the real exchange rate was insignificant suggesting
that real devaluation or overvaluation of Ethiopia’s currency, Birr,
has no discernible association with trends in the country’s export
receipts.
The most important policy implication of this study is that a
developing country like Ethiopia cannot revolutionize its export
industry through exchange rate manipulation.
Even when domestic and external circumstances call for devaluation
measures, such measures will facilitate export growth and enhance
aggregate economic activity when they are accompanied by
conservative monetary policies and fiscal restraints.
In contrast, post-reform Ethiopia has seen consistent increase in
budget deficits along with massively accommodative monetary
policies. While much of the foreign expenditure shortfalls have been
covered with international loans and grants, the Central Bank of
Ethiopia has been the last resort to cover domestic expenditure
shortfalls.
For instance, broad money supply increased, on average, by 11.4%
annually between 1961 and 1974. The average broad money
expansion during the military regime (1974-1991) was only slightly
higher (12.4%), which is essentially marginal, especially in light of
the seemingly incessant civil war and the huge government defense
spending which financed that war. But the post-reform period, and
particularly the period immediately after the conclusion of the Ethio-
Eritrean border conflict (1998-2000) has seen enormous increase in
“quantitative easing” with average broad money growth of over
17% between 2001/02 and 2009. Thus, not surprisingly,
devaluation and inflation spirals went hand-in-hand from 2002
onwards.
Moreover, on top of the need for credible and predictable monetary
policy and prudent fiscal management, concerted efforts should be
directed towards expanding and raising the quality of physical and
institutional infrastructures. For instance, poor transport
infrastructure networks increase the cost of trade and reduce the
country’s international competitiveness while poor institutions
(bureaucratic morass, rampant corruption, lack of transparency in
public resource management and contract, etc.) raise the costs of
starting business, discourage creative entrepreneurship, and thwart
private sector development, which are the engine of economic
growth and prosperity for any economy.
In addition to poorly developed transportation and communication
networks, lack of maritime access has been another factor impeding
the growth of the export industry in Ethiopia. The state of being
landlocked has been costing the country nearly 1 billion dollars
annually in port fees and charges, a staggering amount which is
almost equal to the country’s annual export earnings these days.
Unless the political leadership takes the issue of port services
seriously and champion for Ethiopia’s rightful access to the sea
based on international law, the country will continue to hemorrhage
huge amount of hard currency, a situation which will continue to
dampen the prospect of its export led/supported growth strategy.
The recommendations provided in here concur with the findings of a
recent study by Dan Ciuriak (2010) which investigated the demand
and supply side constraints affecting Ethiopia’s export industry.
Ciuriak identifies a number of domestic and regional factors that
hamper the country’s export growth, among which the most
important ones included inappropriate macroeconomic policy mix,
extremely prohibitive costs in trade administration (such as the lack
of access to the sea and the high costs of port service and massive
fees for cargo transportation); inefficient producer services (such as
finance, transportation and communication); cumbersome customs
procedures; high business concentration, huge costs of entry and
fragile and poorly developed private sector.
Furthermore, Seid Hassen (2010), following the surprise 16%
devaluation of Birr against the US dollar on September 1, 2010, has
written extensively on how recurrent devaluation could not solve
many of the longstanding structural problems associated with the
country’s limited capacity of domestic production. In his explanation
he underscored the malignant consequences of the numerous party-
owned-and-operated business companies that stifle competition and
hinder the development of a vibrant private sector-led economy. He
further emphasized Ethiopia will not be able to gain competitive
edge and devaluation will not be a magic potion for the structural
(political and economic) problems of the country and the continuous
manipulation of the Birr will unlikely correct the general economic
malaise.
Therefore, many of the impediments to Ethiopia’s export growth are
institutional and structural and need to be assessed and addressed
within the wider context of its geographic location, lack of access to
the sea, slow pace of regional integration and limited market
opportunities for its products, as well as its poor technological
progress and increased dependence on agricultural commodities
which are vulnerable to wide price fluctuations, etc.
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Wondemhunegn Ezezew can be reached: bishangary@yahoo.com
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| Source: Author’s calculation based on World Bank Data. |
| Table 1: Cumulative Export and Export Sector Job Growth Rates 1982-2009 |
| Cumulative Cumulative |
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