The Impact of Trade Liberalization In Trade Balance of Ethiopia.

By:-Biruk Ayelign

November,2014

Outline

Introduction Background Statement of the problem Objective of the Study Data source and Methodology Significance of the study

Data Methodology and Model Specification

Cont…

Data Presentation and AnalysisThe Trend of Ethiopian Foreign Trade In Pre and Post liberalization

Economic Analysis Result and Discussion

Conclusion and RecommendationConclusion Recommendation

1. Introduction1.1Background

Liberalization of the world economy has brought in seamless

adjustments throughout the countries in the world.

International trade consists of export and import of goods and

services.

Countries experienced different trade strategies and policies external

trade environment and domestic policies.

Thus relationship between trade liberalization and trade balance

become an important area of study in recent year especially in

developing countries like Ethiopia.

Cont…Ethiopia has tried to implement different trade strategies in the past.

During Imperial period the major policies of external sector were

import substitution and protection of infant industry. It tries to

promote the growth of endogenous industry through protection of

living import tariff quota.

After 1974 the military government era was a heavily state managed

trading system were occurred. There was an intervention in the

transaction of trade activity most industries were nationalized.

Cont…

currently the country experience a market oriented liberalized

strategy which supported by the international financial institution.

Ethiopia mainly adopts the trade liberalization in 1996.

In general as long as trade is the major component of economic

variable, trade liberalization is a key in the development of

favorable trade balance and positive terms of trade.

However this is going to be achieved if there is successful

implementation of macroeconomic policy.

1.2 statement of the problem• Most of least developing countries are characterized by weak performance

of export and high price of import commodity.

• Africa’s share of the world’s export :- In 1980 2.5

In 1989 1.1

Africa’s share of the world’s Import :- In 1980 2.3

In 1989 1.0

In theory, trade liberalization is expected to have a positive influence on

the long-term growth of the economy through a more efficient use of

resources; increased competitiveness flow of knowledge and investment.

Cont…

• Ethiopia implemented several foreign trade reforms with the objective of encouraging of export and liberalizing import trade reform as an integral part of structural adjustment program has been implemented program with the objective of encouraging export foreign exchange auctioning removal of taxes and duties on export devaluation of currency and price decontrol.

• But the above liberalization will not bring some desired result due to lack of exporting opportunity, high cost of transportation , poor quality of production and uncomfortable condition for investment and saving.

1.3 Objective of the study• The major objective of the study is to find the impact of trade

liberalization on the Trade balance of Ethiopian.

specificallyTo investigate the effect of implementation of trade liberalization policies on the trade balance.

To examine foreign trade policies and their effect on import export and trade balance and trade liberalization.

To show how the economic integration affect the trade liberalization.

To investigate the effect of exchange rate and terms of trade on trade balance

1.4 Data source and Methodology - Data source

The data were to be collected from all the possible secondary

sources like

-Books, - Periodicals, - Research articles

- Government publications, -Working papers

-Ethiopian Customs Authority Data

-Occasional papers and publications

-International organizations paper like UNCTAD, WTO, WB IMF,

-Ministry of Finance and Economic Development (MOFED)

-National Bank of Ethiopia (NBE) e.t.c.

• Methodology

• The present research study is uses historical, comparative and

analytical methods to interpret the relevant issues and concerns

related to the topic by extensive use of secondary literature.

• This is a descriptive study and the researcher would use both

descriptive and econometric analysis. Different statistical tests

such as -ADF -Unit root test-Stationarity test -Co-integration test,- Long run and short run equilibrium test

1.5 Significance of the study

By identifying the factor of trade liberalization which affects the

trade balance.

help to policy makers to explore appropriate policy and measure to

progress.

It also single out the impact of trade liberalization and make the

necessary amendment to the countries trade policies.

In addition it examines whether trade liberalization help in

balancing the trade deficit or worsen it

2. Data Methodology and Model Specification

• To capture the effect of road this variables on trade balance, an empirical frame work motivated by long run equation of log- log model is given as:-

Ln TB= B0+B1 Ln BOP+B2 Ln REER+B3 Ln TOT+B4TLB+Ut Where

- TB= Trade balance - BOP= Balance of Payment- REER=Real Effective Exchange Rate- TOT= Terms of Trade - TLB= Trade liberalization

3. Data Presentation and Analysis3.1 The Trend of Ethiopian Foreign Trade In Pre and Post liberalization

• The export structure of a country is determined by its level of development resource endowment, policies and development strategies. Ethiopia is one of the developing countries which its economies heavily depend on the agricultural sector which accounts almost half of the growth domestic product.

• Ethiopian export structure also heavily depends on the agricultural product mainly on coffee, oilseed and hide and skin. These materials are mainly used as raw material for processing production and they have minimum value of earning foreign exchange.

Cont…Commodity Before Liberalization After LiberalizationCoffee 51.93% 41.71%Oil seed 7.59% 12.60%Hide and skin 10.89% 8.33%Pulse 7.41% 5.12%Chat 1.31% 9.6%Fruit and Vegetable 7.33% 1.25%Other 13.52% 21.39%

Cont…

• When we see from the above table from the major commodities only oil seed and chat are increased their share from export amount after liberalization of the trade. Coffee which was contributed almost half of the percentage share of total export decline to 41% after liberalization has been taken.

• Beside the explained export behavior, the direction export of Ethiopia is very limited they are limited they are only few partner to want few countries.

Cont…Destination Before Liberalization After LiberalizationAfrica 10.1% 16.71%Asia 4.8% 30.09%Europe 37.5% 37.2%USA 20.6% 6.76%Other 27% 9.24%

The destination of the Ethiopian total Ethiopian export, we can observe that Europe and United States of America was the major trading partner before the trade liberalization.

But after the trade liberalization, African and Asian countries of destination on Ethiopian export growth at an alarming rate. Because of increase in economic integration between Africa countries is one of the reasons.

Cont…

• The rate of growth grow rapidly after trade liberalization because of government took some measure on trade and related policies like avoidance of tariffs and incentives to export

Period Growth rate of Export

Before liberalization 13.27%

After liberalization 21.04%

• The other thing that we consider in the export trend is the growth rate of export. It show how the change in the increase in export amount

Cont…

When we come to import, Ethiopia has to import those good that are not domestically produced or substitutable by other production which has failed to show any structural change after the EPRDF regime which advocate trade liberalization.

The import structure of a country also depends on its level of development and policies. When we see the trend of import. Ethiopia mainly bought semi finished well, fuel and capital good. These good have a higher amount of value.period Growth rate of ImportBefore liberalization 17.62%After liberalization 23.18.%

Cont…

o As we see from the above table the growth rate of the import grow

rapidly after liberalization due to removal of the quantitative

restriction. The import growth by 23% rate which is more than the

growth rate of export. This will lead to aggravate the trade deficit.Commodity Before liberalization After liberalization

Raw material 3.74 2.59

Semi-Finished product 16.95 15.75

Fuel 13.27 17.91

Capital Good 33.11 32.26

Consumer Durable 11.82 9.19

Non-Durable 20.3 19.35

Miscellaneous 0.78 2.94

Cont… From the above table we can consider that the most materials are capital

good and semi-finished products which take the major value in import

sector. Most of the good which were in pre trade liberalization are

continued with similar percentage share after the trade liberalization.

The paper also tries to evaluate the growth rate trend of import in

Ethiopia trade before the growth rate trend of import in Ethiopia trade

before the trade liberalization and after the trade liberalization has been

taken out.

Cont…period Value of Export as a % of ImportBefore liberalization 47.38%After liberalization 27.45%

When we see from the above table the value of export that cover

the amount of Import is around 47% before the liberalization

period, but this rate drop down to 27% after the trade

liberalization is implemented. As the coverage of export to

import decline the trade deficit is going to increase.

3.2 Economic Analysis Result and Discussion3.2.1Test for Correlation

   LOGBOP LOGREER LOGTB LOGTOT TLB

LOGBOP  Pearson Correlation 1 -.364* .821** -.458** .704**

Sig. (2-tailed)   .027 .000 .004 .000N 37 37 37 37 37

LOGRER  Pearson Correlation -.364* 1 -.495** .495** -.553**

Sig. (2-tailed) .027   .002 .002 .000N 37 37 37 37 37

LOGTB  Pearson Correlation .821** -.495** 1 -.502** .830**

Sig. (2-tailed) .000 .002   .002 .000N 37 37 37 37 37

LOGTOT  Pearson Correlation -.458** .495** -.502** 1 -.673**

Sig. (2-tailed) .004 .002 .002   .000N 37 37 37 37 37

TLB  Pearson Correlation .704** -.553** .830** -.673** 1Sig. (2-tailed) .000 .000 .000 .000  N 37 37 37 37 37

*. Correlation is significant at the 0.05 level (2-tailed).

**. Correlation is significant at the 0.01 level (2-tailed).

Cont…

When we see the result with the correlation of dependent

and explanatory variable we can consider that there is a

high correlation among trade balance and balance of

payment as well as trade balance and trade liberalization.

So it is expected to be the impact of those variables to be

significant on the trade balance of Ethiopia.

3.2.2Test for stationarity Variables  Augmented Dickey Fuller test

LogTB -2.346339

LogBOP -7.704677**

LogREER -2.680812

LogTOT -3.735407*

TLB -2.093154Critical value at 1%

5%

10%

-4.234972

-3.540328

-3.204699

Note: - ** and * represent significance at 1%, 5% and respectivelyAs we can observe from the above table, only logarithm of balance of payment is found to be stationary at 1% significant level. The logarithm of terms of trade is become stationary at 5% significance level.

Cont…• However some of the variables are non-stationary at a level, so

that to get the stationarity our time series data, we will take the

first difference of the time series .

Variables  Augmented Dickey Fuller testLogTB -5.367178**LogREER -4.4320909**TLB -5.84090**Critical value at 1% 5% 10%

-4.243644-3.544284-3.204699

Note: - **, represent significance at 1%,

3.2.3 Co- integration

Variables Coefficient Sta.error t.statistics Prob.

C 5.00 2.362 2.117 0.042

LogBOP -0.524 0.121 4.318 0.000

LogREER 0.8274 0.940 -0.927 0.361

LogTOT -0.659 0.648 1.017 0.317

TLB -0.849 0.222 3.811 0.001

R Square = 0.809 No. Of observation= 37

Adj R-Squared = 0.8371 F (4, 32) = 33.83

Prob>F = 0.00

3.2.4 Result of Regression Long run equilibrium result

Log TB = 5.00 - 0.524LogBOP + 0.872LogREER - 0.659LogTOT - 0.849TLB+ ε t (2.362) (0.121) (0.940) (0.648) (0.222)

(2.117) (4.318) (0.927) (1.017) (3.811)Balance of payment affect the dependent variable trade balance

negatively and it is statistically significant. real effective exchange rate is positive but it founds to be statistically

insignificant.the terms of trade the coefficient of the variables has negative effect

which implies that the terms of trade will lead to higher trade balance deficit.

The coefficient of trade liberalization shows that it has a negative impact on the trade balance and it become also statistically significant.

Short run equilibrium resultvariables Coefficient Sta.error t-statistics Prob.

C 0.060183 0.027203 2.212342 0.0347

D(LOGBOP) 0.012449 0.038722 0.321497 0.7501

D(LOGREER) -0.348229 0.310695 -1.120808 0.2713

D(LOGTOT) -0.020846 0.437877 -0.047607 0.9623

TLB 0.029500 0.041919 0.703732 0.4870

U(-1) -0.141468 0.068407 -2.068022 0.0474

R-Squared 0.176411 No. of observation = 37

Adj R-squared 0.039146 Prob > F = 0.2962

F (5, 26) = 8.37

DLogTB =0.06 + 0.020DLogBOP - 0.348DLogREER - 0.02DLogTOT +0.029TLB- 0.14ε (-1) (0.027) (0.038) (0.310) (0.437) (0.041) (0.068) (2.21) (0.321) (1.120) (0.047) (0.703) (2.068)

4. Conclusion and Recommendation4.1Conclusion

The main objective of the study is to show the composition of Ethiopia trade balance and effect of trade liberalization and other explanatory variable for the period 1974-2010 particularly its emphasis on the impact of trade liberalization during the sample period especially since 1995 when the export promotion policies appeared to have superior development strategy for the country.

This paper also tries to investigate the empirical analysis. Time series econometrics was applied to examine the relationship between trade liberalization and the trade balance .OLS estimation was used to obtain the long run relationship between the variables. The result of the estimated model in the observed period, trade liberalization has had a negative and a significant impact on the trade balance and economic growth of Ethiopia

4.2 RecommendationThere should be effective policies and strategies that are universally

accepted in order to be competent in the global market.

Design appropriate measures to encourage the domestic private

sector. Giving proper facilitation of service could attract investors to

invest and improve manufactured goods

The government should diversify the export commodities,

composition and structure. There must be variety productions which

should be exported that maximize the growth of export.

Integrating the market between the agriculture sectors which

produce raw material for processing with the industries.

Cont…

• Since there is problem of giving good governance and services

delivery, there should be effective and international standard service

delivery in government institution in order to promote the

production of exportable commodities

• Adjust the foreign exchange in a condition which is compatible to

improve the trade balance.

• Substituting the imported machinery and accessories which have

higher value and cost.

Thank You!!!