Ethiopia’s Export Performance with Major Trade Partners: A Gravity Model Approach

Abstract

A gravity model is very important in the analysis of bilateral trade flows, and has proven to be a useful tool in determining export potential of a country. Accordingly, the purpose of this study is to analyze factors that determine export flows between Ethiopia and its trading partners using a gravity model approach. The research had used secondary data collected from different sources and covers periods from 1995-2010 for 14 importing countries, which implies that the data were panel. There was consideration of the importing capacity of the countries and successiveness of their importing condition for considering the countries as a sample. Different tests were applied in order to select the appropriate model to regress the gravity model. As of those tests, the research had adopted the random effects gravity model. The model result showed that six of the total variables (nine) are significant at different level of significance. Coefficients of per capita GDPs of importer and exporter countries, population size of trading partners, and the distance between nations are significant and as to the expected sign. However, the coefficients of population sizes of Ethiopia and bilateral exchange rate between nations are significant and against the hypotheses. Based on the result, successive enlargement of the foreign per capita GDP directly result into increment in the export revenue of Ethiopia. In addition, the more populous the trading partners of Ethiopia, the higher its export volumes as they imports much to satisfy large domestic demands. Moreover, distance between two countries, which is a proxy for transport costs, affects Ethiopian exports negatively.

Keywords: Export, Gravity model, random effects, Panel data, Demand and Supply side factors