Ethiopia's foreign trade potential: inferences from a dynamic gravity approach Online publication date: Fri, 29-May-2015
by Gebreyesus Gebrehiwot; Bahre Gebru
International Journal of Economics and Business Research (IJEBR), Vol. 9, No. 4, 2015
Abstract: Ethiopia has poor performance in the global trading system. To draw implications for improvement, this article intends to estimate the country's trade potential with major trading partners. A dynamic gravity approach based on a panel dataset was estimated by system generalised method of moments estimators to first analyse the pattern of trade flows. The coefficients obtained are then used to predict the basic trade and export trade potentials of Ethiopia. The findings revealed that the dynamic gravity model fits the data well indicating the presence of hysteresis in trade. We also found that the traditional gravity variables are all significant. However, Ethiopia's trade potential has yet remained unrealised. The highest magnitude of trade potential was found with Asian, European and African countries. Hence, Ethiopia's unused trade potential can be exploited through export diversification, improvement of infrastructure and bilateral trade negotiations.
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