Title: Ethiopia's foreign trade potential: inferences from a dynamic gravity approach

Authors: Gebreyesus Gebrehiwot; Bahre Gebru

Addresses: Ethiopian Revenues and Customs Authority, P.O. Box 2559, Addis Ababa, Ethiopia ' Department of Economics, Aksum University, P.O. Box 1010, Aksum, Ethiopia

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.

Keywords: Ethiopia; foreign trade potential; dynamic gravity; panel dataset; system GMM estimators; trading patterns; trade flows; hysteresis; export diversification; infrastructure improvement; bilateral trade negotiations.

DOI: 10.1504/IJEBR.2015.069667

International Journal of Economics and Business Research, 2015 Vol.9 No.4, pp.355 - 375

Received: 26 Mar 2014
Accepted: 05 Aug 2014
Published online: 29 May 2015 *

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