IMPACT OF AGRICULTURAL EXPORTS ON ECONOMIC GROWTH IN ETHIOPIA: THE CASE OF COFFEE, OILSEED AND PULSES

ABSTRACT 
More than 80 percent of the population in Ethiopia lives in rural areas and their main source of income is agriculture. Agriculture accounts for 45 percent of the Gross Domestic Product (GDP) and employs 85 percent of the labour force.Export of agricultural products constitutes 86 percent of the total foreign exchange earnings. The country has taken different measures to diversify and increase the contribution of the export sector to economic growth such as; export trade duty incentive scheme, export credit guarantee scheme and foreign exchange retention scheme to those wholly engaged in supplying their products to foreign markets. Despite the incentives taken by the country, the export sector has depended on a few agricultural products mainly coffee, oil seeds and pulses which are characterized by fluctuations in quantity, price and have low competitiveness on the world market. The objective of the study was to assess the trend and impact of agricultural (coffee, oilseed and pulses) exports on economic growth of Ethiopia over the last forty years by looking at: the existence of long run relationship between agricultural export and economic growth; the speed of adjustment in the long run and the existence of causality between the agricultural export and economic growth. The analysis was done using co-integration model, Error correction model and Granger causality model.The findings of the study showed that Coffee export and oilseeds export have a positive and significant relationship with economic growth. While, pulses export was found to have negative and insignificant effect on economic growth in short run and positive but insignificant in the long run. On the other hand the causality relationship found that there is bi-directional relationship between coffee export, oilseed export and economic growth whereas unidirectional relationship was found between pulses export and economic growth. Based on the findings, it is recommended that policies aimed at increasing the productivity and quality of these cash crops should be implemented. Also additional value should be added to them before exporting. Correspondingly, there is also a need to devote resources on the production of non-export goods in order to increase exports since they have bi-directional relationship. When this is done, it will lead to a higher rate of economic growth in Ethiopia.

CHAPTER ONE 
INTRODUCTION 
1.1 Background of the study 
More than 80 percent of the population in Ethiopia lives in rural areas and their main source of income is agriculture. Agriculture accounts for 45 percent of the Gross Domestic Product (GDP), employs 85 percent of the labour force and generates 86 percent of export earnings (MoFED, 2010). However, Ethiopian farming is largely characterised by peasant holders who grow food mainly for family consumption thus leaving little for commercial purposes. This inadequate volume of production is mainly due to the tardy progress in farming methods and scattered pieces of land holdings. Most of the farm land is cultivated by small scale farmers with traditional agricultural practices. However, the rural and agricultural sector is the foundation of Ethiopian development. Due to this, the sector gets priority in government policies and in the five-year (2003-2007 E.C) development and transformation program. Among others, the rural and agricultural development policy encourages the expansion of large-scale farms, which would have a relative advantage to introduce modern technology and farm management to raise production. The new economic policy resulted in fast economic growth which grew at about 11 percent per annum on average over the last ten years between 2003/04 and 2012/13(MoFED, 2014). 

Ethiopia is following agricultural led industrialization economic policy. In the 2011/12 fiscal year the agricultural sector, service sector and industrial sector contributed 44 percent, 45 percent and 11 percent to real GDP of the country respectively (MoFED, 2013).The share of the agricultural sector to the whole economy is decreasing from time to time whereas the growth in service sectors increasing at high rate while the industrial sector is increasing at a low rate. However, even though the agricultural sector has been showing a decreasing contribution to the country’s GDP, it still contributes 85 percent of employment and 70 percent of raw materials for local industries (MoFED, 2013). 

The economy of the country is mainly dependent on the agricultural sector thus the export sector is also highly dependent on agricultural productivity. Since the export sector is characterized by dependence on primary commodities, the country faces different problems. For instance, in 1983 the provisional government of socialist Ethiopia (Derg) noted that the basic constraints for Ethiopia exports included: the low volume of exportable products, the limited degree of diversification of exports, frequent economic crises and artificial trade barriers by trading partners among others. Moreover, after the downfall of the Derg regime, the transitional government of Ethiopia stated that it is essential to increase and diversify exports (Abay and Zewudu, 1999). Thus, Ethiopia has taken different measures such as export trade duty incentive scheme which incorporates duty draw-back scheme, voucher scheme and bonded manufacturing warehouse, export credit guarantee scheme and foreign exchange retention scheme to those wholly engaged in supplying their products to foreign markets. When compared to the pre-1991period, the trade policy regime has become more liberal (Yishak, 2009). 

Owing to this policy shift, some improvements in export earnings have improved during the post reform period. According to the Ministry of Trade (MOT), the value of export earnings increased from $1.03 billion during the first six years of the Derg regime ((1974- 1980) to $15.48 billion in the last six years of the EPRDF regime ( (2008-2014)).However, the exports of the country contributed only 0.02 percent in 2012 to the world market (WTO, 2013).The country`s export sector has depended on export of a few agricultural products like coffee, oil seeds, pulses, skins and hides(Yishak,2009). 

1.1.1 Overview of agricultural exports in Ethiopia 
The share of international trade of Ethiopia is insignificant and the export sector is dominated by primary products for which the income elasticity of the developed country slowly increases as their income increases when compared to consumer goods and producer goods. Ethiopia is the main producer and exporter of coffee in Africa which is grown mainly in two regions of the country; Oromiya and Southern Nation, Nationalities and People (SNNP) region in the south and west part of the country (Bart et al., 2014). 

Coffee is cultivated by over four million primary smallholder households and a high percentage of coffee is supplied to the local market (CSA, 2013). In 2012 fiscal year, Ethiopia was the major coffee producer and exporter in Africa and ranked tenth of the largest coffee exporters in the world. The country exported 3.2 million bags of coffee and accounted for 3 percent of internationally traded coffee in the same year (Bart et al., 2014). According to Ethiopia Revenue and Customs Authority (ERCA, 2013), coffee contributes a large portion of total exports of the country, has high contributions to the country’s gross domestic product (GDP) and the most crucial source of hard currency. However, since investment in agriculture as a whole is weak in the country, the production of coffee fluctuates from year to year and international coffee market experiences significant price variations. 

On the other hand, oil seed is the second major export earner of Ethiopia. The country produces different types of oilseed varieties such as sesame seed, linseed, niger seed, sunflower seed, soybeans, cottonseed, and rapeseed. From these sesame seed, linseed and niger seed are the major export crops. According to ERCA, in 2011/12 the country exported 367,436.15tons of oilseeds valued at 472.31 million dollars which was an increase of 113,249.69tons from 2010/11 period. 

The other crop that Ethiopia exports in high volume next to coffee and oilseeds is pulses. In 2012/13, the country exported 357,518.77tonsvalued at 233.35 million dollars (ERCA, 2013). The increase in demand for pulse in local and international market created economic incentives which resulted in high production and supply of the commodity. The general overview of these three commodities given in Figure 1 below indicate two things; first, through time, the export of the commodities was increasing in volume as well as in values and highly contributed to the total exports of the country on average. Second, the export volume was fluctuating from year to year depending on different factors such as world market price, climate change which can affect the production of the commodity, change in government policy among others.

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Item Type: Kenyan Project Material  |  Attribute: 70 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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