Volume or International Price: Which One Matters More?

Abstract

Ethiopia like many developing countries follow an export-led growth that has been focus of economic policy since 1992. The country works on the role of export to bring the country’s export competitiveness and to achieve higher level of growth. Despite the change in policy, Ethiopia’s exports were less competitive over time due to overvalued currency (Ethiopian Birr), inappropriate pricing policy, lack of economic infrastructure, high bank interest rate and heavy taxation policy (Geda, A. 1996). Moreover, the export structure of Ethiopia still depends on agricultural or primary products, these makes the sector to be vulnerable to external shock. There is a wide view that higher volume of exports on primary merchandises and natural resources can have an adverse effect on a country’s growth prospects (Berrettoni, 2006).

Export is expected to promote economic growth through increased earnings of foreign currencies (thus relaxing balance of payments constraints), economies of scale, and access to new technologies and knowledge (Helpman and Krugman 1985). Though the export sector of Ethiopia is expected to compensate the bill for import, the deficit is still massive. The theoretical association between economic growth and trade, traced back to the classical economic theory that started by Adam Smith (1776), who argued that international trade plays an important role in economic growth and there are economic gains from specialization and subsequently David Ricardo (1817) who emphasized that trade improves efficiency of resource utilization and a positive-sum game which leads to more productive, such that every nation achieves a higher level of national wealth that it could not achieve without trade.

In 1950s and 1960s numerous developing countries pursued import-substitution strategy for growth and development but with the remarkable achievement of the East Asian countries like Taiwan, Hong Kong, South Korea and Singapore over the past decades, many emerging countries made a decisive shift away from import-substitution to export-led growth strategy (Todaro, 1997).