Ethiopian Export Efficiency. A Stochastic Frontier Analysis Approach


Master's Thesis, 2018

60 Pages, Grade: Excellent


Excerpt

TABLE OF CONTENTS

ACKNOWLEDGEMENTS

TABLE OF CONTENTS

LIST OF TABLES

LIST OF FIGURES

LIST OF APPENDICES

LIST OF ACRONYMS/ABBREVIATIONS

ABSTRACT

CHAPTER ONE
1. INTRODUCTION
1.1. Background of the Study
1.1.1. Overview of Ethiopian Export Structure and Its Performance
1.2. Statement of the Problem
1.3. Objective of the Study
1.3.1. Specific objectives of the Study
1.4. Research Questions
1.5. Hypothesis of the study
1.6. Scope of the study
1.7. Significance of the study
1.8. Limitation of study
1.9. Organization of the Paper

CHAPTER TWO
LITERATURE REVIEW
2.1. Theoretical Review
2.1.1. Mercantilist‟s View on Export
2.1.2. Classical Trade Theory and Export
2.1.3. Export as Heckscher -Ohlin Theory
2.2. Empirical Review
2.3. TRADE EFFICIENCY AND ITS DETERMINANTS
2.4 MEASUREMENT OF EXPORT EFFICIENCY
2.5. Conceptual Framework

CHAPTER THREE
METHODOLOGY OF THE STUDY
3.1. Research Approach
3.3. Research Techniques
3.4. Sample Design
3.5. Data Source and Data Type
3.6. Definitions of variables
3.7.Research Design
3.8. Model Specification
3.8.1. Model Estimation
3.9. Stochastic Frontier Analysis (SFA) Model
3.10. Export Efficiency Measurement

CHAPTER FOUR
4. DISCUSSION AND ANALYSIS
4.1. Data Discussion
4.2. Result Discussion
4.3. Trade Flows (Exports) from Ethiopia to its Major Trading Partners
4.5. Agricultural product Exports from Ethiopia to its Major Trading Partners
4.6. Manufacturing Exports from Ethiopia to its Major Trading Partners
4.6. Estimated Export Efficiency

CHAPTER FIVE
CONCLUSION AND RECOMMENDATION
5.1. CONCLUSION
5.2. RECOMMENDATION

REFERENCE

APPENDIX

LIST OF TABLES

Table 1: List top 49 trade partners of Ethiopia selected for the study

Table 2: Major 49 Trading Partners of Ethiopia Distance from Addis Ababa, Common Border

Table 3: Share of Ethiopian export among selected countries with respect of their Continent

Table 4: Summary Statistics of Selected Variables for Ethiopia (2006-2017)

Table 5: Estimation Coefficients of export determinants, (by aggregating both sectors)

Table 6: Regression result of agricultural sector export

Table 7: Regression result of manufacturing sector export

Table 8: Estimated Efficiency Ethiopian agriculture product Exports to selected countries (%)

Table 9: Estimated Efficiency Ethiopian manufacturing commodities Exports to selected countries (%)

Table 10: Trend of Agriculture and Manufacture sub-sectors Export Efficiency over the last twelve years (2006 to 2017)

LIST OF FIGURES

Figure 1: Conceptual framework

Figure 2: distribution value of Ethiopian export over selected countries in percent

LIST OF APPENDICES

Appendix 1: List of top trade partners countries selected for the study

Appendix 2: STATA result regression of both sectors

Appendix 3: STATA result regression of agricultural sector

Appendix 4: STATA result regression of manufacturing sector

Appendix 5: STATA result summary of prediction export efficiency

Appendix 6 trend of agricultural export over the last 12 years

Appendix 7 trend of manufacture export over the last 12 years

LIST OF ACRONYMS/ABBREVIATIONS

ASEAN Association of South East Asian Nations

CEPII Centre d'Etudes Prospectives et d'Informations Internationales

DEA Data Envelopment Analysis

EDRI Ethiopian Development and Research Institute

EEA Ethiopian Economic Associations

FTAs Free Trade Agreements

GFCF Gross Fixed Capital Formation

GTPI Gross and Transformation Plan One

GTPII Gross and Transformation Plan Two

IMF International Monetary Fund

MOI Minister of Industry

NAFTAs North America Free Trade Agreements

NPC National Plan Commission

ROO Rule of Origin

SFA Stochastic Frontier Analysis

SOEs State Owned Enterprises

TPP Trans-Pacific Partnership

USD United State Dollar

WBO World Bank Organization

WITS World Integration Trade System

ACKNOWLEDGEMENTS

I thank my GOD for allowing me finalizes this study and for everything HE has given me throughout my life HE surrounded me by His glory.

My greatest thank goes to my advisor Dr. Solomon Tsehay for his overall support to come up with this study. Throughout the study period he provided me constructive comments on my progress and he gave me guidance on how to do the study. Moreover, he is generous, considerate, dedicated and friendly. My special thanks also go to my co- advisor Ato Tesfaye who has given me supportive comments and suggestion me during the preparation of this study.

Finally, I would like to thank my family: Mom Fayo and my wife Jitu for motivating me to finalize the study.

ABSTRACT

This study conducted to investigate Ethiopian exports efficiency by using stochastic frontier analysis model with panel data to estimate if countries operated at the frontier with its major trading partners. Export efficiency is defined as the ratio of actual exports to the maximum possible volume. In addition, the study investigates the factors of export efficiency, focusing on Ethiopia’s exports to its major trading partners during the period 2006 to 2017. The arable land, gross domestic product and population of Ethiopia and of the trade partner’s countries, distance between Ethiopia and trade partners’ countries, gross capital formation, and geographical location of trade partner’s countries determines the export flows of Ethiopian export. As a result the estimated coefficient of determinants shows that population and gross domestic product have significantly and positively affect the Ethiopian export sector. The empirical results show that the volume of Ethiopian actual exports is far below the estimated efficient level, and that there is considerable room for increasing Ethiopia’s exports. The trend of agricultural export efficiency shows some improvement over stated years while manufacturing sector shows decreases. Those findings imply that Ethiopia should search the redemption policy that enables the country to maximize the efficiency of the sector by using all possible potential.

Key words: Export, Export Efficiency, Stochastic Frontier Analysis Model

CHAPTER ONE

1. INTRODUCTION

1.1. Background of the Study

Trade is exchange of goods and services which transaction takes place in specific country, domestic trade or between several political economics, international trade. Even tracing back before the evolution of modern economics as science there was trade system as exchange of one good for other good which called barter trade system. From this method which is complex and back warded system today many countries including Ethiopia transformed to modern and open trade system. One of the crucial and concern of every participant in trade system is what they sell, export for other countries as it‟s the main source of foreign currency. Export is the vital component of trade system in which sending the goods and services to other countries for sale. Regarding this, the commodities which are exported between countries based on the development and growth levels of countries, countries export what they have in excess and can produce in least opportunity cost and import the products that they could not produce by existing capacity and/or naturally what they have not. And particular, test and preference can pull and push countries to export and import some kinds of commodities.

As this developed and advanced economy countries produced and export manufacturing products such as machinery, tools and almost all finished products to developing countries. The characteristics price of such products is stable and high in trade system which intern benefits developing countries. On the other hand, many developing countries rely heavily on exports of primary products with associated risks and uncertainty. These products are agricultural products and raw materials and they often experience untamed fluctuations in the prices of their primary exports. This is due to both inelastic and unstable demand and supply. Because of wildly fluctuating export prices, the export earnings of these countries are also expected to vary significantly from year to year. The greater instability of export earnings is not only due to this reason. Also in fact, these nations exported only a few commodities or exported these commodities to only a few nations (i.e., to commodity and geographic concentration of trade) with not advance export method and week infrastructure.

Being developing country, Ethiopia shares the same experience with many other sub Saharan and developing countries regarding the export sector of economic development. The export sector of the country based on primary product and little commodities of finished and semi- finished industrial products which produced by unskilled man power. Trade system, structure and performance of the export sector of the country corroborate this idea.

1.1.1. Overview of Ethiopian Export Structure and Its Performance

To narrow the widen gap of trade deficit and ensure open trade system, the government of the country undertake many strategies and plans that enhance the export sector at different time. As part of its structural adjustment program, Ethiopia, since 1991, has gradually liberalized foreign trade; prices of domestic inputs and finished goods were took away from arbitrary government regulation and interference; public sector reform that accorded autonomy to the state owned enterprises (SOEs) and privates 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 (Wondemhunegn, 2013).

Particularly to stimulate trade policy and total trade liberalization system, the country followed market oriented reform system which embraced initiatives that targeted to facilitate export sector through export promotion. As a result, in the post liberalization period, real export receipts have increased progressively from time to time. The export industry has also seen significant diversification away from its dependence on only 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 overall result shows a significant departure from the traditional, mono-crop dominated export sector.Even though, the export sector of the country dominated by agricultural commodities export; the Ethiopian export sector revenues mostly generated from two sectors, agricultural and manufacturing sectors. Export from service sector is not significant as that of other developed countries. The structure of the export sector of Ethiopia is characterized by few commodity concentrations as is the case with least developed countries, i.e., the sector is dominated by a few primary products that account for a lion's share of the country's export earnings. On average, 78% of export revenue of the country based on only five commodities, namely, Coffee, Flower, Oil Seeds, Hide Skins & Chat as many developing countries. The coffee export continues dominating high share of export revenue, on average 55% to 60% of total value of export annually (Daniel, 2013) as cited in (EEA, 2017). The dependence of export revenues on few commodities has made Ethiopia‟s export performance highly volatile depending on the price fluctuation of primary product in the world market. These products are mainly primary products with fewer linkages in the economy and also declining prices internationally, though there are up swings.

Generally, as stated in (EDRI 2017), above three-fourth, more than 75 percent of the merchandise export revenue in Ethiopian comes from agriculture and manufacturing contributes only below 15 percent of merchandize exports. Fishery and mining (particularly the extraction of gold) accounted for about 5 percent of the total merchandise export receipt over the last ten years. On the other hand, more than 90 percent of the import expenditure is allocated for products of manufacturing activities. However, expenditure on Agricultural imports has shown a declining trend falling to less than 3 percent.

Side to this the government of Ethiopia introduced many plans and strategies such as export-led growth to enhance the revenue generated from manufacturing export sector. Although, these supports, plan and strategies for long time Ethiopian manufacturing exports sub-sector dominated by few manufacturing export items, food, textile and leather which account on average 83.2% of total manufacture export receipts (EEA, 2017).

Regarding the market destination the country shows noteworthy change in product destination in world market which increased from 73 destination countries in years before 2006 to 144 countries on current time.

By aggregate both sectors, as MOI (2015/2016), the country has planned to increase the share of export to GDP to 15.1% on average through diversifying export commodities. But, in contrary to this, the share of export sector in GDP less than this which account only 8% of GDP share (WB, 2016). This gap between planned and actual export performance of the country creates stress on path of strategic development programs which realized earning of the foreign currency that gained from the export sector which need efficiently performance of the sector as it was targeted.

In general, as a result of the above mentioned issues and other related problems, Ethiopian Export sector remained, untouched interest area of study for many researchers and so many papers were published. However, almost all researchers focused on the determinants and potential of Ethiopian export sector. Therefore, this study will focuses on Efficiency of Ethiopian Export by using stochastic panel analysis model for the last 12 years, from 2006 to 2017.

1.2. Statement of the Problem

The Ethiopian export sector structure still remains undiversified as it depends on some primary agriculture products including coffee, oilseeds, fruits and vegetables, pulses, and live animals with little manufacturing sector commodities such as garment and textile, which are have trivial measurement in export efficiency of the country. As a result, reliance of export revenue generation on only few commodities has made country export performance highly unstable (EEA, 2017), which elevated from two critical strategies country had working to achieve the efficiency of the sector: (I) Ethiopia lacks the export diversification needed to raise growth through a broad base of production technologies; this intern spreading risk and reducing aggregate output volatility and (II) primary products are vulnerable to global price volatility and weather-related shocks which show foreign earning fluctuation at different time (IMF, 2018). These primary products are sensitive to world price fluctuation which adversely affects instability of export earnings. IMF, 2016 data confirms this idea, Export revenue stagnated as significant merchandise export volume growth (7.7 percent) was offset by sharp declines in Ethiopia‟s export prices (16 percent for coffee, 33 percent for oil seeds, and 6 percent for gold) IMF report (2016).

The volume of this few commodities exports must highly expand to compensate the high value manufactured goods imports from developed countries. To reduce high gap between exports and imports the country targeted to increase export expansion by 15.1% annually and decrease price by 2.3%, on average, annually. This expansion of primary commodities export suffers the poor in many ways. Over exploitation of resources is the problem that intergeneration economic and property inherent issue. The resource will decline from time to time. As shown on national planning commission data 2016/17, from 2006/07 to 2016/17 the Ethiopian resource balance was in negative of 18.4, on average. Even though the country continues this expansion reforms to reduce the deficit of trade balance, the trade balance is as it was- trade imbalance gap is as widen.

Regarding the efficiency of the sector, the total revenue that generated from these two sectors commodities entered in to the export sector is not encouraged and indicates inefficient performance of the sector when compared with current growth rate of the country as the share of the sector is only 10% of the GDP. Recently as indicated, in data of National Bank of Ethiopia, on average performance in terms of export earnings from merchandise exports stood at USD 3.1 billion annually, which is three –fourth, more than 75% from agricultural sector USD 2.325 million and less than 15 percent, around USD 590 million from commodities of manufacture sector.

Specifically during GTPI, the government of the country by determining the potential of the sector, targeted to generate on average 783.3, 481.0 and 200.3 million USD from the major export items of coffee, oil seeds and cereals, respectively. But, the performance stood at only 61.4 percent, 64.3 percent and 42.4 percent of the planned target, respectively. It was also planned to generate on average 356.2, 371.6, 514.2 and 1,572.2 million USD from exports of flower, fruits and vegetables, live animals and meat products, and textile and garment respectively while the performance stood at only 54.0 percent, 11.5 percent, 48.2 percent and 5.7 percent of the planned target, respectively. It was also planned to increase foreign exchange earnings and broaden the export base through expanding manufacturing exports. It was anticipated to generate USD 2.5 billion from manufacturing exports alone. However, the actual performance turned out to be 13.2% of the target. By commodities sub-sector, it was planned to earn 1 billion USD from textile and garment, 500 million USD from leather and leather products and more than 660 million USD from sugar by the end of the plan period although, the performance remained far below the planned target (NPC, 2016).

By the same manner during this GTP II, currently, to generate more reliable and sustainable foreign exchange that the country needs to finance the rapid economic growth, infrastructure development, private industrial investment, and reduce the country‟s dependence on external resources, the government set a target to bring about a shift in the export sector. The government working to increase merchandize export at an annual average rate of 36.3 percent, and foreign exchange earnings from merchandize export is expected to about 13.9 billion USD. Of this, USD 7.7 billion expected from agricultural products and manufacturing commodities targeted to generated revenue of USD 4.2 billion. And to increase the share manufacturing sector commodities export to GDP by 3% and increase the share of manufacturing export in total merchandise export to 25% by 2019/20 and further to 40% by 2025, which is less than 15% for long time (IBID).

Currently, being middle of the GDP plan period, the performance of sector shows underestimation from the targeted plan. Even though, the government set the target and plan by considering the potential capacity of the country to export the performance of the country far from the target. This means that the country is not trading at its potential, and the sector is not efficient trading with export sector partner which will be explored in this study.

This and all the above facts and evidences shows that the need of study on efficiency of Ethiopian export sector. Many researchers had been conducting studies on the sector for several years in Ethiopia. But they mainly focus is on Export Performance and Determinants in Ethiopia Sisay Menji (2010), export firm level efficiency , Adugna Lemi and Ian Wright (2016), Ethiopia‟s Reforms and Export Performance, Wondemhunegn Ezezew (2013), Determinants and Potentials of Foreign Trade in Ethiopia: A Gravity Model Analysis, (Alekaw Kebede, 2016) etc. Accordingly, until now there is no study focused on the efficiency of Ethiopian export sector, literatures regarding the issue are scanty in Ethiopia. Therefore this study will examine the efficiency of Ethiopian export sector for the last 12 years from 2006 to 2017 by using stochastic frontier analysis (SFA) model.

1.3. Objective of the Study

The general objective of this study will be to investigate Ethiopia‟s export efficiency from 2006 to 2017 with top 49 export partners using stochastic panel analysis model.

1.3.1. Specific objectives of the Study

The specific objectives of the study that are going to assessed in this study will be

1. To determine the efficiencies of Ethiopian exports by sectors i.e. agricultural products export and manufacturing products export sector.
2. To determine the Ethiopian export sector pattern
3. To determine factors of Ethiopian export sector

1.4. Research Questions

The articulated research questions that are going to be answered in this study are:-

- Does Ethiopian export sector is efficient?
- Particularly which sector is better?
- What is the export sector pattern is it stagnant to agriculture or diverting to manufacturing sector?
- What factors influences the Ethiopian export sector in general?

1.5. Hypothesis of the study

Measuring trade efficiency requires a hypothetical trade frontier, maximum trade capacity when free trade is possible. If a country achieves its maximum trade potential, it can be said that the country‟s exports are 100% efficient. Thus since the study focuses on the efficiency of Ethiopian export the hypothesis of the study will be:-

The export efficient is significant and positive sign with trade actual value of export.

1.6. Scope of the study

The study will be limited on the assessment of export efficiency of Ethiopia from 2006 to 2017. To conduct this paper the study focused on top 49 export partners of Ethiopian commodities which selected based on the value of export flow from Ethiopia to those countries. On average from total export value of merchandise export around 98.4% was outflows to these selected countries. As a default 22 countries are selected from Asian. 15 and 8 countries are from Europe and African respectively. The remained 5 countries, 2 from North American and 3 are of the Oceania continent countries. Since the study to analyze the efficiency of Ethiopian export variables incorporated in the study are GDP/ income and population of those selected countries from 2006 to 2017, distance between Ethiopia and these partner countries. The other data that will be included in study are, the export data of Ethiopia from 2006 to 2017, arable land in hector, Gross Fixed Capital Formation (GFCF), GDP data of Ethiopia and that of export partner‟s, distance in kilometers between Ethiopia and trade partners, population data. In the variables such as landlocked and border will be included in the study by using dummy variables.

The model used in the study is stochastic frontal analysis model by using STATA application.

1.7. Significance of the study

Export is a serious issue in foreign trade system in today‟s global market structure, having a high focus from government, exporter/participator, planners, policy maker, academician and researchers. For this reason, all of these bodies had been taking various actions to alleviate the concern; while the country‟s export sector performance failed under question from time. Hitherto, many studies had been conducted on Ethiopian export sector; but none of them focused on the sector efficiency measurement. Therefore, this study expects to help for:-

- Researcher as a reference for future studies on export efficiency.
- Policy makers as key policy indicators in international trade policy.
- Planners as input for export sector strategic formulation.

1.8. Limitation of study

This study has been conducted based on secondary data collected different sources based on the important value for Ethiopian export system. Since the study used panel data of different trade partners it was difficult to access data as wanted due to time and financial limitation. Additionally the there is no study conducted on the topic in Ethiopian context. Besides these mentioned limitations, the paper will play an important role.

1.9. Organization of the Paper

This study is organized in five chapters: The first chapter of the study encompasses introductory concepts, statement of the problem and objectives of the study. In Chapter two relevant theoretical and empirical literatures are reviewed briefly along with conceptual frame work. Chapter three discusses the methodology and sources of data used in the study. Chapter four deal with estimation and interpretation of results. Finally, Chapter five will present the conclusions and recommendation of the study.

CHAPTER TWO

LITERATURE REVIEW

In practice, trade has long history and even has started before the foundation of modern economics. (Roprto, etal.2014), also confirmed this idea, according to them, Trade is the exchange of goods and services across regions and national borders was considered important in improving welfare of people stated before the birth of economics as organized science in 1776 and long history. The development and process of trade system as it has long history, to come to today‟s interested science countenance; it had passed thought many theories and doctrine stages. The theories and empirical views that are relevant for this study are summarized as follows.

2.1. Theoretical Review

2.1.1. Mercantilist’s View on Export

Mercantilists are group that consists of merchants, philosophers and government officials, follows the philosophy of mercantilism. This philosophy gets popular concern through sixteenth to eighteenth centuries, economic doctrine. This economic doctrine is the first dogma that finds out the reason for the existence of foreign trade. Mercantilists believed that a country's prosperity and strength depends on its potential to export more than it is importing. They suggested that a country becomes prosperous (rich) when its exports exceed its imports. Thus, to promote exports and discourage imports tariff and other measures that hinder imports were taken and exports were subsidized leading to trade surplus, which involve the government intervention. The resulting export surplus results in an inflow of bullion, or precious metals mainly silver and gold. At that time a country's power and richness was determined by the amount of gold and silver it had (Salvator, 2001 p.32). The classical economists such as Smith (1776) and Ricardo (1821) as well as recent scholars criticized the Mercantilists in many grounds. However, although not widely applied, the Mercantilists doctrine is still practiced especially in the agricultural trade (Angewandte and Humburg, 2009) as cited in (Gebremedhin, 2013)

2.1.2. Classical Trade Theory and Export

I) Absolute Advantage

According to Smith (1776) trade exists When one nation has absolute advantage between two countries because of absolute advantage. (is more efficient ) in the production of good 'x' and has absolute disadvantage (is less efficient) in the production of good 'y', the two countries benefit each other by specializing and exchanging part of the commodity in which they have absolute advantage for the commodity they have absolute disadvantage(Carbaugh,2005 pp.29-30). This process leads to more efficient resource allocation which results in an increased output of both commodities. The gain from specialization relates to such increased output of both commodities which is to be divided between the two nations through trade (Salvator, 2001 p.32).

As opposed to Mercantilists, Adam Smith and his followers believed in the existence of mutually beneficial trade and advocated the policy of laissez-fair or broadly translated into free trade. The assertion here is that free trade potentially increases the welfare as a result of efficient utilization of resources. The protection of industries that are important for national defense is one of the few exceptions to the policy of laissez-fair or free trade. Moreover, Smith, and his followers believed on the accumulation of human capital stock, physical stock and natural resources rather than dependence on precious metals such as gold and silver for a country‟s prosperity (Debele, 2002).

II) Comparative Advantage

The theory established by Ricardo (1817) which is still one of the most important and accepted assumption of economics with many practical functions. According to him, motivated by price incentives, countries engage in the production and export of the goods in which they have comparative advantage and are more likely to import the goods which they have comparative disadvantage (McAfee and Johnson , 2006 ). The law of comparative advantage explains the existence of mutually beneficial trade even when a country has absolute disadvantage in the production of both commodities over the other country. In this case, the nation which has absolute disadvantage in the production of both commodities specializes in the production of and exports of the good with relatively less absolute disadvantage and import the commodity with relatively greater absolute disadvantage (Krugman, et al. 2012 pp.25-26).

The theory from Ricardo stipulates that agricultural commodities especially those commodities that would require vast land area for cultivation, simpler commodities and natural resources should be mainly exported by developing countries. It also indicates that sophisticated goods should be manufactured in advanced countries and those ought to be produced and exported to developing or less developed countries. Moreover, the theory suggests more trade between developed and underdeveloped countries than among underdeveloped countries or among developed countries. The theory fails in this regard as most of the international trade is undertaken among developed countries. There is no consensus among scholars for this issue and usually politics has a great role to play (McAfee and Johnson , 2006 ).

Furthermore comparative advantage theory based on a number of simplifying assumptions: (1) only two nations and two commodities, (2) free trade, (3) perfect mobility of labor within each nation but immobility between the two nations, (4) constant costs of production, (5) no transportation costs, (6) no technical change, and (7) the labor theory of value. Although assumptions one through six can easily be relaxed, assumption seven (i.e., that the labor theory of value holds) is not valid and should not be used for explaining comparative advantage (IBID).

2.1.3. Export as Heckscher -Ohlin Theory

Heckscher -Ohlin theory was established by and Eli Heckscher(1919) and Bertil Ohlin(1933). The theory argues that the pattern of international trade is determined by differences in available factor of production. So that countries will export those goods that make concentrated use of locally abundant factors and will import goods that make concentrated use of factors that are locally scarce.

It has been widely suggested that international trade serves as a substitute for the movement of factors of production as the goods traded represent factors of production. The reason behind this idea is that when a country, export one commodities, it is like exporting the factor of production in the form of physical product to importing country (McAfee and Johnson , 2006 ).

Earlier it was shown that the differences in relative commodity prices between two nations as the basis for comparative advantage which again also becomes the basis for the existence of mutually beneficial trade. However, what has caused such differences in relative commodity prices was left unanswered. This question is answered by the Heckler-Ohlin or factor endowment theory. This theory states that differences in indifference curves (tastes) and differences in production frontiers are the causes for the differences for relative commodity prices and comparative advantage between the two nations (Carbaugh,2005 P.63-64).

Countries of the world differ in their endowment of both fixed and variable inputs (factors of production). For instance United States, Japan and European countries have higher quality of labor in greater quantity as compared to labor found in other countries. As a consequence, these countries have comparative advantage in the production of goods that need highly skilled laborers such as automobiles, computers and electronic equipments. Some countries of the world like South Korea, Taiwan, Singapore and Hong Kong have enhanced the quality of their labor and are able to produce more complicated goods such as computer parts (McAfee and Johnson , 2006 ).

The Heckscher-Ohlin theory emphasizes on differences in the relative abundance of factors of production in different countries as the main determinant of the difference in relative commodity prices and comparative advantage although there are other factors which determine it. Two theorems namely the Heckscher-Ohlin theorem and factor price equalization theorem are distinguished under the Heckscher-Ohlin theory (Carbaugh, 2005 pp.63-64).

2.2. Empirical Review

Even though there is no conduct paper regarding Ethiopian export efficiency, using Stochastic Frontier model many researcher conducted the study on different countries export efficiency at different time by using panel data. The results estimated from these studies are proxy to the expected sign stimulation with theories.

2.3. TRADE EFFICIENCY AND ITS DETERMINANTS

Among these studies; Roperto Jr Deluna and Edgardo Cruz conducted study on Philippine Export Efficiency in 2014 by an Application of Stochastic Frontier Gravity Model by using panel data of 69 trade partners of Philippine for four years that is from 2009 to 2012 to estimate technical efficiency of Philippine merchandise exports to each trading partners. Albeit, the study estimates export efficiency the main focus the study is to analyze the export flows between the Philippines from 2009 to 2012 based on 69 trading partners of merchandise exports (Roperto and Edgardo, 2014). As proposed by researchers merchandise export flows from the Philippines to its trading partners are significantly affected by income and population of the importing country, and the distance between them.

The estimated sign and degree of significance obtained from the study confirms the assumption and theory of the model, which verifies the existence of the gravitational force on Philippine merchandise exports to trading partners which is reduced by the distance between them. Based on the researchers result, Philippine merchandise export flows capacity has inverse relationship with the distance from the trade partners, as expected. It shows that the markets (destination) of Philippine merchandise exports are concentrated in the countries within the 5 thousand kilometers linear distance from the Philippines. This range account for to around 70% of the total merchandise exports of the country. The next distance range (5 to 10 thousand kilometers) accounted for 7%, while the 10 to 15 kilometers range with 23% market share, which is relatively high share value of export. As justification of the researchers, the facilitation and bilateral agreements on trade between USA and Philippine causes for this boom market share in this range. The market share of the last range (15 to 20 kilometers) accounted 0.1%.

On the other hand, merchandise export flows from the Philippines to its trading partners are significantly affected by income and population of the importing country. Income of the importing country positively and significantly affects merchandise export flows of the Philippines at the 5% level of significance. Population a proxy to market size, revealed a positive relationship between Philippine exports and market size. On the average, 1% increase in the population or market size of the importing country, increases value of export from the Philippines by 0.25% and on average, 1% increase in GDP/income of importing country increase export value from Philippines by 0.69%.

2.4 MEASUREMENT OF EXPORT EFFICIENCY

The efficiency measurement has been done by many scholars on countries export system. For example study conducted by Thang N. and Doan, Yuqing Xing (2017), by using stochastic frontier model to estimate efficiency levels of Vietnam‟s exports with its major trading partners by using panel data of 28 trade partners which account high share value of the country, around 82%. The period used in this study is 18 years, from 1995 to 2013. The focus of this study is to estimate the evolution of the trade efficiency of Vietnam‟s exports the 1990s, and to identify major factors that determining trade efficiency in general and particularly spotlight on roles of free trade agreements and on man-made or „behind the border‟ constraints. The estimates suggest that, if manmade trade barriers, such as tariff and non-tariff barriers, could be removed, Vietnam‟s exports to North America Free Trade Agreements (NAFTAs) countries could grow significantly. The estimates provide indirect evidence that the Trans-Pacific Partnership (TPP), which in principle would abolish all tariffs, would stimulate Vietnam‟s exports to the US and Canada substantially.

Thus trade efficiency of Vietnam with its major trading partners, results indicate that Vietnam‟s exports are far below their maximum potential. While membership in Association of South East Asian Nations (ASEAN) helps increase Vietnam‟s export efficiency, the rules of origin (ROO) of Free Trade Agreements (FTAs) imposes additional costs and thus reduces the trade efficiency.

Also the Barma(2017), conducted study on India‟s Agriculture export efficiency using the panel data in 2017 with 112 agricultural export trade partners by using the panel data of 14 years that is from 2000 to 2013 with stochastic frontier analysis. The result from the study indicated that empirical support for high yet decreasing home country inefficiency or „behind the- border‟ constraints to trade. And the policy implication of developing countries improved the export. Thus, the export efficiency scores help in articulating future policy initiatives for diversification of the country‟s exports according to the significance and level of efficiency of partners.

Peter Drysdale, et al used that methods used to evaluate the efficiency of China's bilateral trade with individual countries. The main focus of the paper is to identify the factor determinants of trade efficiency. Accordingly two policy variables are identified. The two policies are policies adopted by governments themselves and the second is regional agreements between governments.

The export performance has long been a central topic in the literature in international trade and many researchers tried to put its basic concept using data envelopment analysis (DEA) model. But this concept reveals several limitations about its definition or its measurement, in particular the technical efficiency aspect (Mohammed, 2013).

As explained by Greenaway and Kneller, 2007; Wagner, 2007, to increase export at national level; theories of international trade suggest two initiatives: the first is push non-exporters to enter the export markets (self-selection effect) and the second one to encourage exporting sectors to export more (learning-by-exporting).

2.5. Conceptual Framework

The conceptual framework of the study will capture all export determinants stated in paper as inputs in base level- which are selected by researcher decision. These variables will be; GDP/ income, total population, and the distance between Ethiopia and trade partners and other determinates that influence international trade, since the country follows open trade system. The variables that are going to be included under this category, the variables which are beyond of the border origination country Ethiopia - the variables are determined between Ethiopia and export destination of Ethiopian commodities. These variables may include, if countries have the same common border and partners countries are landlocked, all of these variables will be dummies variable.

[...]

Excerpt out of 60 pages

Details

Title
Ethiopian Export Efficiency. A Stochastic Frontier Analysis Approach
Course
Development Economics
Grade
Excellent
Author
Year
2018
Pages
60
Catalog Number
V986216
ISBN (eBook)
9783346352934
ISBN (Book)
9783346352941
Language
English
Tags
ethiopian, export, efficiency, stochastic, frontier, analysis, approach
Quote paper
Shiferaw Gonfa Wakene (Author), 2018, Ethiopian Export Efficiency. A Stochastic Frontier Analysis Approach, Munich, GRIN Verlag, https://www.grin.com/document/986216

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