Determinants of Ethiopian Trade Performance to Its Bordering Region: A Gravity Model Approach

Abstract

International trade has increasingly become a keystone of economic prosperity in many countries of the world. Ethiopia is the one which benefits from foreign trade. Therefore, the main focus of this paper is to identify factors influencing Ethiopian trade performance within the bordering countries such as Djibouti, Kenya and Sudan. The gravity model of trade was employed for the purpose. A gravity model based on a panel data for the period of 19 years (1991-2009) of sample countries was estimated by random effect estimators. The coefficients obtained are then used to predict the basic total trade and export trade potentials for Ethiopia. As a result, we found that the total trade flow was determined by Ethiopia per capital GDP, the product of the GDP of Ethiopia and its trading partners, weighted distance between Ethiopia and the bordering region and Per capita GDP differential. Ethiopia total exports trade to the bordering region is also affected by the GDP of the trading partners, per capita GDP of the exporting country and real bilateral exchange rate. The results of this study indicate that a depreciation of the real exchange rate would affect the international competitiveness of Ethiopian exports, therefore, we recommend Depreciation of a country's real exchange rate because it will cause a gain in competitiveness of that country and government needs also to pay adequate attention to destination markets with cheaper transport costs.

Keywords: Gravity Model, Ethiopia Border Trade.