THE ROLE OF EXPORTS IN ECONOMIC GROWTH WITH REFERENCE TO ETHIOPIAN COUNTRY

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1 - THE ROLE OF EXPORTS IN ECONOMIC GROWTH WITH REFERENCE TO ETHIOPIAN COUNTRY BY: FAYE ENSERMU CHEMEDA Ethio-Italia Cooperatio Arsi-Bale Rural developmet Project Paper Prepared for the Coferece o Aual Meetig of the America Agricultural Ecoomics Associatio i Chicago (August 5-8, 200) Orgaized by the America Agricultural Ecoomics Associatio (AAEA) Copyright 200 Faye Esermu Chemeda. All rights reserved. Readers may make verbatim copies of this documet for o-commercial purposes by ay meas, provided that this copyright otice appears o all such copies. May 200 ADDIS ABABA ETHIOPIA

2 - Abstract This study applies the Cobb-Douglas fuctio model to aalyze the effects of exports o ecoomic growth i cotext of Ethiopia ecoomy. To determie the relatioship betwee export ad ecoomic growth, a attempt will be made to use ecoometrics techiques of aalysis (co-itegratio system) by usig the RATS software package for the time series data from 950 to 986. The lack of capital stock data is overcome by usig the ratio of real ivestmet to real gross domestic product (I/Y), i a place of capital stock while lack of labour force data is overcome by usig the real gross domestic product per capita. The results suggest that the real export ad (I/Y) are co-itegrated with real GDP per capita. These results of the fidigs support the idea that the rate of growth of real exports has a positive effect o the rate of ecoomic growth i cotext of the Ethiopia ecoomy. Eve strog positive relatioship exists betwee real export ad real growth domestic product per capita i log ru rather tha i short ru whe it is compared real exports with that of (I/Y). Thus, the cotributio of real exports to ecoomic growth i cotext of Ethiopia ecoomy is greater i log ru tha i short ru.

3 - Table of Cotets Page Abstract... Itroductio.... Methodology ad Data Model Buildig Over view of the Model Uit Root Tests Co-itegratio Error Correctio Models Data Empirical result Form Fiite Sample A Fiite Sample Uit Root Test A Fiite Sample Co-itegratio Test Fiite Sample ECM...4 Summary ad Coclusio... 6 Refereces... 7

4 - Itroductio There are two extreme views, which have attempted to assess the relatioship betwee exports ad ecoomic growth, i.e., accordig to the views of the first group export is regarded as it is cotributig positively to the ecoomic growth. The secod group have regarded export, as it does ot have a cotributio to ecoomic growth. Besides these two extreme views, eve some have regarded export as it is cotributig egatively to the ecoomic growth. For example, H.V.Berg ad J.R.Schmidt (994:p:250-5), O.A.Oafwara (996,p:346) ad D.E.A.Giles, J.A.Giles ad E.McCa (992,p:96) suggest that growth of export stimulates ecoomic growth. I other words, there is a positive associatio betwee the growth of export ad ecoomic growth. The reasos give by most of them are: I. export growth may reflect a rise i the demad for the coutry s outputs, ad this i tur will be realised i ecoomic growth. II. by raisig the level of exports, additioal foreig exchage will be geerated, ad this facilitates the purchase of productive itermediate goods. III. a growth i exports may lead to greater productive efficiecy (perhaps through ecoomies of scale or techical improvemets as a result of cotract with foreig competitors ad ehaced output. Productivity growth is also assumed to be the result of specific policy choices, amely policies that expad exports. IV. there are exteralises associated with export sectors; export earigs allow a coutry to use exteral capital without ruig ito difficulties servicig foreig debt. O the other had, argumets have also bee made (see, for example, D.E.A.Giles, J.A.Giles ad E.McCa (992,p:96) i support of the opposite view poit; i.e., it has bee argued that export hiders the developmet of coutry. The reaso some authors give for the fallrity of the export, as the cotributio to ecoomic growth is that the strategy of the coutry may deped crucially o the type

5 - 2 of good that is beig traded like primary commodities exportig. Moreover, D.E.A.Giles, J.A.Giles ad E.McCa (992,p:96) also stated that there is o effect of export o ecoomic growth. Their hypothesis rejected the existece of the effect of export o ecoomic growth. As some of them stated, the positive relatioship betwee real gross domestic product ad real exports does ot exist i developig coutries like Ethiopia, which deped o exportig primary commodities. I geeral the empirical evidece associated with the effect of export o ecoomic growth is mixed. Accordigly, the objective of this paper is to test the validity of the hypothesis, i.e., the effects of exports o ecoomic growth i cotext of Ethiopia ecoomy. I other words, the aim of this study is to ivestigate the existece ad magitude of the lik betwee exports ad ecoomic growth of the coutry i questio. Thus, this paper uses the data o Ethiopia to ivestigate the effects of exports o ecoomic growth usig the Co-itegratio System. Egle ad Yoo(987, p:43) stated that a co-itegrated system ca be represeted i a error correctio structure which icorporates both chages ad levels of variables such that all the elemets are statioary. This error correctio structure provides the framework of estimatio, forecastig ad testig of co-itegrated system. The paper comprises three major parts. The first part discusses the methodology used for the aalysis ad the type of data used while the secod part presets the result from the data. I the third part, summary ad coclusio are preseted.. Methodology ad Data To aalysis this time series data, the followig four stages are followed: The first stage assesses the time series properties of these (logs of these) variables, i particular examies whether each oe is cosistet with I() process ( testig for uit root). The secod stage is to test for co-itegratio, that is, if each of these variables i the questio is I() I assess whether their relatioship is I(0)or ot. A test for co-itegratio meas lookig for stable log-

6 - 3 ru equilibrium relatioship amog o-statioary ecoomic variables. If co-itegratio exists, the specificatio of the error correctio mechaism (ECM) is appropriate. The third stage ivolves the costructio of ECM with the appropriate error correctio terms (residual) derived from the estimated log-term co-itegratio relatioship. If their relatio makes I(0), the evidece is supportive of the view that there is a log ru tedecy for real gross domestic product per capita (RGDPC) ad exports to hold. Other wise, if their relatio makes I(), it exhibits a radom walk behaviour ad implies that they are ot co-itegrated. This would suggest that they do ot have log-ru relatioship. Fially, if the third stage does ot support their log-ru relatio, i the fourth stage their relatioship re-cosidered, i.e., whether there are other factors that should be take i to accout i testig their relatioship hypothesis. Focusig o these stages stated above let I proceed to model buildig.. Model Buildig.. Over view of the Model The model is based o the Cobb-Douglas fuctio, i.e., Y = K b (AL) -b Where Y represets real gross domestic product, K, L ad A deote capital, labour ad productivity, which icludes exports ad others, respectively while b is a parameter. Equatio () idicates that real gross domestic product (RGDP) is a fuctio of capital, labour ad productivity. Takig the logarithm of (), it is obtaied. ly = blk + (-b)l(al) 2 Ad followig more coveiet way of represetig let X, X 2, X 3 ad X 4 deote the logarithm of Y, K, A ad L, respectively. Thus, the above expressio ca be re-writte as: X t = bx 2t + (-b)x 3t + ( - b)x 4t 3

7 - 4 It is importat to ote that, lack of capital stock data is overcome by usig the ratio of real ivestmet to real gross domestic product (I/Y) i a place of capital stock while lack of labour force data is overcome by usig the real gross domestic product per capita. Thus equatio (3) becomes X t = bx 2t + (-b)x 3t 4 To examie the effects of the real export o the ecoomic growth, equatio (4) is cosidered sice the first differece of equatio (4) is a approximatio to the rate of growth i the variables. This expressio is cosidered i the model. This meas that, for example, there is a % icrease i RGDPC is as a result of b% ad (-b)% icrease i real (I/Y) ad real export, respectively...2 Uit Root Tests To examie the effect of export o ecoomic growth, first the time series data of macro-level is assessed to test whether each of these variables are a radom walk, or more geerally, has a uit roots or ot. If the variables are ofte o-statioary, cotaiig stochastic or determiistic treds, the mea of a o-statioary time series with drift is always chagig through time; ad the series has a ifiite variace whe the source of the o-statioary is a stochastic tred (uit root). The stadard method for detectig o-statioary behaviour i a time series is to test for the presece of a uit root. Testig ca be exteded to icorporate the prospect of a determiistic tred as well as the stochastic type of tred represeted by a uit root. Testig for the existece of uit root is ot so simple as such. For example, testig whether a series is I() as opposed to I(0) is that of testig for a uit root i a time series. Baerjee, Dolado, Galbraith ad Hedry (993,p:8) stated the strategies for performig such testig have had to coted with the

8 - 5 problem that I(0) alteratives i which the series is close to beig I() {so that the power of the test is low} are very may ecoomic plausible i circumstaces. They further stated that the form of data geeratio process (for example, the orders of dyamics; the questio of which exogeous variables eter; etc.) is ot kow, ad critical values of test statistics are typically sesitive to the structure of the process. I testig uit root, there is a problem, which restricts us from usig the test statistics of the covetioal t-tests of the hypothesis, sice this test statistics do ot have the stadard asymptotic distributios for the roots greater tha or equal to oe. I additio to this, there is a problem that arises from the derivatios of the distributios, which assumes that ε t is a gaussia white oise. This assumptio is frequetly violated i ecoomic data where the ε t s are ofte foud to be autocorrelated. This makes the Tables provided by Dickey ad Fuller extremely ureliable. A solutio to this problem was provided by Said ad Dickey (987), which proposed a alterative specificatio desiged to white the error process. This latter approach is kow as the Augmeted Dickey Fuller test. Aother problem associated with uit root tests is that the relevat distributios are ot robust to the iclusio of determiistic compoets (costat ad/or time tred) i the ADF regressios. As a result it is looked at differet cases (tables) whe a costat ad /or time tred are icluded. Therefore, the testig strategy is as follows: X t = γx t- + Ρ β i X t-i + ε t a X t = α + γx t- + Ρ β i X t-i + ε t b X t = α + βt + γx t- + Ρ β i X t-i + ε t c I begi with usig equatio (c) of ADF regressio for the time series X t, havig determied the optimal order of augmetatio p. It is tested H 0 : γ = 0 versus H : γ < usig the DF critical value. If

9 - 6 H 0 is ot rejected it is cocluded that X t is I() with tred term ad costat. If H 0 is ot sigificat I reformulate (b) ad test H 0 : γ = 0 versus H : γ < usig the appropriate DF critical value. If H 0 is ot rejected it is cocluded that X t is I() with costat. If H 0 is ot sigificat it is reformulated (a) ad test H 0 : γ = 0 versus H : γ < usig the appropriate DF critical value. If H 0 is ot rejected it is cocluded that X t is I() without costat ad tred term. If H 0 is rejected it is cocluded that X t is I(0). I other words, a rejectio of H 0 implies X t is I(0) while o rejectio implies that it is itegrated of order or higher. I the latter case I the differece X t ad repeat the whole procedure to determie whether the series is I() or I(2), etc. γ The test is similar to a stadard t -test (i.e., the test statistic used is ˆ except that I have to look at δ differet tables. I additio depedig o the specificatio I am cosiderig i.e., (a), (b) or (c), I have to look at differet critical values. ˆ There is a problem cocerig the determiatio of the appropriate lag legth. Walter Eders (995, p: 226) stated that icludig too may lags reduces the power of the test to reject the ull of a uit root sice the icreased umber of lags ecessitates the estimatio of additioal parameters ad a loss of degrees of freedom. Accordig to him, the degrees of freedom decreases sice the umber of parameters estimated has icreased ad because the umber of usable observatios has decreased, i.e.; it is the lose of oe observatio for each additioal lag icluded i the autoregressio. He also oticed that too few la gs would ot appropriately capture the actual error process, so that the coefficiet (γ) ad its stadard error will ot be well estimated. To overcome these problems, let it is assessed first the procedure how to select k. The problem with the implemetatio of the ADF test is the choice of a appropriate lag legth. The choice of p, i.e., the umber of lagged depedet variables to be icluded is typically made usig iformatio criteria such as the AIC though I use BIC for compariso purpose: AIC(p) = Tlog(RSS(p)) +2m BIC(p) = Tlog(RSS(p)) + log(t)m

10 - 7 Where RSS (p) deotes the residual sum of squares whe p lags are fitted ad m represets the umber of estimated parameters. I other words, a upper limit for p is chose, say maxp =5 ad AIC is computed for p =... maxp. The the p s that leads to the smallest value of AIC has bee selected. If each of the variables is I(), it will be proceeded to the ext stage. Otherwise, testig of coitegratio is ot ecessary because the existece of I() is a precoditio for testig co-itegratio...3 Co-itegratio It may seem that data which are I(d) should be differeced d times prior to beig used i a regressio model. There are, however, exceptios to this geeral rule. It is readily established that addig a series that is I(0) to oe which is I() results i a I() series. Similarly, a liear combiatio of two series which are each I() will usually produce aother I() series. However, it may happe that the itegratio cacels betwee series to yield a I(0) outcome: This is called co-itegratio (Hedry (995,p:44)). Moreover, Egle ad Yoo (p: 45) also stated that eve though each elemet i X t is I() with drift so that it has a determiistic tred ad a variace which goes to ifiity with t, the liear combiatio will be statioary. The basic idea is that if, two or more I() series are co-itegrated the there is a tedecy for them to move together i the log ru. If there are shocks, which drive them apart, the they have commo characteristics, which brig the series back together. It implies that equilibrium theories ivolvig ostatioary variables require the existece of a combiatio of the variables that is statioary. I geeral, the cocept of co-itegratio is clearly related to the cocept of log ru equilibrium. Withi co-itegratio literature, the term equilibrium, as K.Cuthbertso, S.G.Hall, M.P.Taylor (992: 932) stated, is that it is a observed relatioship which has, o average, bee maitaied by a set of variables for a log period.

11 - 8 To check the existece of co-itegratio, the log ru equilibrium relatioship eeds to be estimated. Havig decided that each of our three series is I(), it would be ru the followig regressio: X t = α + γx 2t + βx -3t + ε t 5 Sice co-itegratio requires that each of the idividual variables is I(), i.e., X t, X 2t ad X 3t are uit root process the it is estimated the log-ru equilibrium relatioship of equatio (5). Oce equatio (5) is estimated, the the residual, ê t ca be computed. I ca view the ê t as deviatios from log-ru equilibrium. If these deviatios are statioary, X t, X 2t ad X 3t are co-itegrated. It could, therefore, have the followig regressios: ê t = ψê t- + Ρ ρ i ê t-i +u t 6 For testig existece of co-itegratio, Egle ad Yoo (987) obtaied regressio, which is stated o equatio (6). From equatio (6), if it ca ot be rejected the hypothesis that ψ = 0, it ca be cocluded that the ê t cotais a uit root ad therefore X t, X 2t ad X 3t ca ot be co-itegrated. I testig for a uit root i the residuals like (6), I ca t use the stadard Dickey ad Fuller critical values. This is because ê is a geerated repressor rather tha the actual data. The correct critical values have bee tabulated by Egle ad Yoo(987) which was recommeded by Egle ad Grager. Though, i case of (6), there is a problem of determiig maximum value of (ukow lag structure i ê t ) i the ADF test, this value is chose by usig a stadard model selectio procedure based upo some iformatio criterio (AIC). Sice ê t is a residual from a regressio, there is o eed to iclude a itercept term i the DF or ADF regressio.

12 Error Correctio Models Oce I have established the co-itegratio properties, I made estimates of the error correctio model. I a error correctio model, the chages i a variable deped o the deviatio from some equilibrium relatio. For istace, that X t represets the RGDPC ad X 2t ad X 3t are the correspodig real (I/Y) ad real exports of the same coutry, respectively. Assume further more that the equilibrium relatio amog the three variables is give by Z t = X t - γx 2t - βx -3t, the the Error correctio Model (ECM) is writte X t =µ + α (X t- - γ X 2t- - β X -3t- ) + h i X t-i + q i X 2t-i + b i X 3t-i +u t 7 X 2t =µ 2 + α 2 (X t- - γ 2 X 2t- - β 2 X -3t- ) + h 2i X t-i + q 2i X 2t-i + b 2i X 3t-i +u 2t 8 X 3t =µ 3 + α 3 (X t- - γ 3 X 2t- - β 3 X -3t- ) + h 3i X t-i + q 3i X 2t-i + b 3i X 3t-i +u 3t 9 Where u jt, j=,2,3 are zero mea fiite variace ad α j (j=,2,3) are the error correctio coefficiet. As already stated, the first differece of the ecoomic time series meas chagig the data ito the growth rate of the ecoomy. Thus, the growth rates of RGDPC, (I/Y) ad exports are aalysed. Level terms eter the error correctio model. I practice, Egle ad Grager (987) suggested the use of the residuals ê t- ad as a istrumet for X t - γx 2t - βx -3t : X t =µ + α ê t- + h i X t-i + q i X 2t-i + b i X 3t-i +u t 0 X 2t =µ 2 + α 2 ê t- + h 2i X t-i + q 2i X 2t-i + b 2i X 3t-i +u 2t X 3t =µ 3 + α 3 ê t- + h 3i X t-i + q 3i X 2t-i + b 3i X 3t-i +u 3t 2 Sice each equatio cotais the same set of repressors OLS is efficiet. To see the close relatioship betwee error correctio models ad the cocept of co-itegratio supposes that each of X t, X 2t ad X -3t is I() variables. I that case, equatio (0), () ad (2) ivolvig the X t,

13 - 0 X 2t ad X -3t are stable. I additio, u it,(,2,3) are white oise errors which are also stable. Sice a ustable term ca ot equal a stable process, α j ê t- = X jt -µ j + α j ê t- - h ji X t-i - q ji X 2t-i - b ji X 3t-i +u jt (j=,2,3) must be stable too. Hece, if α 0 or α 2 0 or α 3 0, ê t- is stable ad, thus represets a co-itegratio relatio. Here, as usual, the models are chose by usig a stadard model selectio procedure, i.e., based upo some iformatio criterio (AIC)...5 Data The Data that are used i this study based o the aual times series data for the period iclusive. Although Ethiopia s exteral trade statistics are curretly recorded quarterly, due to the shortage of quarterly Data o other variables, I have bee forced to use the data o a yearly basis. The source of data is from the Pe World Table (Mark 5.6- deoted PWT 5.6- is a revised ad updated versio of the precedig (mark 5) versio) ad Iteratioal Fiacial Statistics (Supplemet o trade statistics, IMF, 988). All empirical results have bee obtaied usig the Package of RATS ad the over view of the time series data are also see by usig the package of PcGive though it is ot preseted here. Fially, the methodology that has bee described i this sectio is applied i this paper to time series data of Ethiopia relatig to RGDPC, real (I/Y) ad real exports. Thus, the remaiig parts of this paper illustrate the empirical results i details. 2. Empirical result Form Fiite Sample 2.. A Fiite Sample Uit Root Test I this sectio, it is assessed the existece of uit root by applyig the stadard Dickey-Fuller test statistics desiged above. The DF regressios were cosidered with ad without drift ad tred terms icluded. The iformatio criteria (AIC) are used to test for the order of itegratio. The

14 - results of the three variables are preseted below i Table. For each of the variables, it has bee assessed whether they have uit root: the log of each of the variables. It is followed the testig desig i the model buildig sectio. Startig with a ADF regressio icludig a determiistic time tred by givig differet value of upper limit for k, say kmax but, here, it is reported oly the result of lower two kmax sice all of them give the same results. From Table, it is examied that the t-statistics of ADF correspodig to γ, i.e., the t-test of the ull hypothesis γ = 0, α =0 ad β = 0 gives a value of -2.07, , for log of RGDPC, (I/Y) ad real exports, respectively. Referrig to Table B.6 (for critical values for the Phillips-Perro Z t test ad for the OLS t-statistic, J.D.Hamilto (994,p:763), it is foud that the 2.5% ad 5% critical values, for T= 50, are ad -3.59, respectively. From this, it is cocluded that the ull hypothesis is ot rejected (the existece of uit roots are accepted). Also ote that for kmax = 3, which is used for compariso, the t-test for the ull hypothesis γ = 0, α =0 ad β = 0 gives a value of ad , for log of RGDCPC ad real exports, respectively. From the same Table agai idicates that it ca t be rejected the ull hypothesis of the uit root. But i case of log of real (I/Y), the t-test of the ull hypothesis γ = 0 gives a value of Referrig to the same Table but differet case, i.e., case, it is foud that the 2.5% ad 5% critical values for T=50, are ad -.95, respectively. Now give that it is ot rejected the ull hypothesis that γ = 0. I both cases, i geeral, it is ot rejected the ull hypothesis that γ = 0. Thus, the result of the sequetial testig, which appear i Table, suggest that the logarithm of RGDPC, real (I/Y) ad real exports are each I(). Sice the test statistics do ot lead to rejectio of the ull hypothesis that γ = 0 for the logarithms of the relevat variables, it is cocluded, o the basis of the stadard ADF tests, that the first stage of the procedure is supported by the Data. Therefore, the ext stage is to test for co-itegratio betwee RGDPC ad real (I/Y) ad real exports. Table. 2 2 The result i brackets i this table is the stadard deviatio.

15 - 2 Based o upper limit kmax = 3, i.e., 3 lags: k α β γ t-stat. X (0.9) (0.003) (0.052) X (0.053) X (0.66) (0.02) (0.74) Based o upper limit kmax = 3, i.e., 3 lags: k α β γ t-stat. X (0.9) (0.003) (0.052) X (0.076) (0.004) (0.093) X (0.543) (0.02) (0.57) 2.2 A Fiite Sample Co-itegratio Test Sice it is observed that these three variables are kow to be I(), i.e., each of them cotaiig a uit root, it is possible to assess whether there is a equilibrium relatioship amog the three variables or ot. Two o-statioary variables, each beig I(), are said to be co-itegrated if there is a liear combiatio of them that is statioary. To fid this coditio, I follow the testig strategy desig oted above i model buildig. That is, it is started from the relatioship betwee the three variables by givig differet upper limit, say kmax values. For compariso, testig two by two of the variables, i.e., RGDPC ad real export, ad RGDPC ad real (I/Y), are also doe, by givig differet upper limit values of kmax (for example, kmax = 5, 3,).

16 - 3 The recursive 3 graph of the log of real (I/Y) idicates that there is a structural break i 978. As a result of this, it is icluded the Dummy variables (which cotais the value of ad 0) i the data. By doig this, their log-ru relatioship is ot disappeared (affected) but the coefficiet of log of real (I/Y) became positive, i.e.; what I expected. This structural break may be occurred as a result of the prevailig political problem at that time i the coutry. I other words, the coutry s ecoomy might ot be as such used for productio purpose. Due to the additio of the Dummy variable, the umbers of the variables, which are stated above i model buildig are chaged. Thus, istead of equatio (5), the log ru equilibrium relatioship is estimated by icludig Dummy variable, i.e., X t = α + γx 2t + βx -3t + ϕd t + u t (3) I order to assess the co-itegratio, I estimated the residual, û t, from equatio (3). At the secod stage, the ADF tests are obtaied as the testig strategy desiged i model buildig. The I proceed to test the ull hypothesis of a uit root. Rejectio of this ull hypothesis is evidece i favour of statioary. From Table 2, it is see that the tests of ADF correspodig ˆ ψ of (6) (i model buildig) for the ull hypothesis that these three time series, which were each I(), have the test-statistic values of ad for k equal to ad 3, respectively. These differet k values are selected by miimum iformatio criteria sice it is give differet kmax. Referrig Table 3 of Egle ad Yoo(987,p:58), I fid that the 5% ad 0% critical values for T= 50 ad = 4, are of 3.98 ad 3.67, respectively. Therefore, I coclude that the ull hypothesis is rejected i both cases, which are used for the compariso. Rejectio of this ull hypothesis is evidece i favour of statioary. This implies that the liear combiatio of these variables i questio is co-itegrated sice the RGDPC follows a statioary, i.e., there is a stable relatioship betwee the variables, which ca be called a log-ru equilibrium path. Deviatios from this path i the short ru are trasitory. Thus, our hypothesis is 3 It is ot reported here. I additio, though the result of the three variables idicates the log ru

17 - 4 cosistet that the export has a effect o ecoomic growth positively sice the coefficiet of the real exports is positive ad statistically sigificat i determiig RGDPC at 2.5% ad 5% level of sigificace. Table 2. k α γ β ϕ Res.{} t-stat. (for Res.{}) (0.080) (0.050) (0.046) (0.072) (0.233) (0.080) (0.050) (0.046) (0.072) (0.75) 2.3 Fiite Sample ECM The ECM could be etered at ay lag. Here I adopt oe lags sice the use of Akaki iformatio criterio for lag legth selectio suggested oe lag eve whe it is assessed usig differet values of upper limit, i.e., 5,3 ad (i all case it is suggested oe lag). The I(0) reductio for the idividual equatio geerates the outcomes i Table 3. The statioary of RGDPC implies that the shock to the RGDPC is trasitory, so the effect holds i the log ru as well as i the short ru. I short- ad log- term, the growth of export has a positive effect o ecoomic growth. For example, the error correctio (Z t- ) iduces 9% adjustmet per period i the first equatio of Table 3. From Table 2 above, it is see that the coefficiet of the log of export is sigificat relative to the coefficiet of the log of (I/Y) ad the coefficiet value is while the coefficiet value of log (I/Y) is i the estimatio of co-itegratio (log ru). If this is the case, for small % chage of export has much stroger effect o RGDPC tha (I/Y) whe short-ru adjustmets are separated out. However, the effect of export is isigificat i short ru. I this case, there is a poor performace of the coefficiet. I Table 3 the first differece of X 3 of the first equatio implies that the relatioship betwee export ad ecoomic growth is log-term rather tha short term i ature sice the coefficiet of the real export i level at estimatio stage of co-itegratio is higher tha the coefficiet of (I/Y). relatioship, the coefficiet of (I/Y) is egative.

18 - 5 The positive relatioship betwee iput variables (exports ad (I/Y)) ad RGDPC suggests that RGDPC icreases whe the iput variables are icreasig. The sig of the short ru effect suggests that a icrease i the lag of its ow (RGDPC) will temporarily balace a icrease of other factor iputs. I additio, the rate of growth of RGDPC is more explaied by its ow lag tha the other iputs sice its lag coefficiet is larger tha the other i first equatio. I other words, the high proportio of the lag coefficiet of RGDPC implies that i most case it is determied by other variables rather tha exports ad (I/Y). For istace, if we examie the cotributio of X 3t to the X t, we fid that it is through the disturbace, which iflueces the lag. For example, a shock of u 3t by oe uit icreases X 3t i time (t 0 ) = 0 ad o other shocks, it icreases X t by at time t=. I geeral, the effect of a oe uit shocks i X 3t has respoded i the system with 0.003, ad 0.98 by X t, X 2t ad X 3t, respectively at time t =. Table 3. Error correctio models X t = Z t X t X 2t X 3t D t + u t (0.06) (0.069) (0.54) (0.030) (0.045) (0.05) X 2t = Z t X t X 2t X 3t D t + u 2t (0.098) (0.427) (0.949) (0.86) (0.275) (0.094) X 3t = Z t X t X 2t X 3t D t + u 3t (0.059) (0.259) (0.577) (0.3) (0.67) (0.057)

19 - 6 Summary ad Coclusio From our empirical results, it is see that the rate of growth of real exports has a positive effect o the rate of ecoomic growth i cotext of the Ethiopia ecoomy. I other words, it is tested the validity of the hypothesis which is cosistet to our objective. I log ru, eve it cotributed greater tha the real (I/Y). Thus, export has a role to play i explaiig ecoomic growth although ot large i short ru relative to the role to play by real (I/Y) i explaiig ecoomic growth. This is, sice the occurrece of uit root ad the presece of co-itegratig relatioships supports the use of error correctio models, makig it possible to distiguish betwee the short-ru ad log ru effects of export up o ecoomic growth. From my results of the aalysis, there is a positive log-ru relatioship betwee export growth ad ecoomic growth. Depedig o the model selectio criteria, it ca be see that the growth rate of exports has a isigificat effect o the rate of ecoomic growth of the examied coutry i short ru. This isigificace i short ru may imply that the effect of growth i export is a log ru effect rather tha short ru. I geeral, I ca coclude that the growth of the real exports has a positive effect o ecoomic growth i short ru as well as i log ru. Where as, there is a sigificat effect of real export o ecoomic growth i log ru, its effects i short ru is, however, ot so strog.

20 - 7 Refereces.Berg, H.V., Schmidt, J.R.(994) Foreig Trade ad Ecoomic Growth: Time series evidece from Lati America, The Joural of Iteratioal Trade ad Ecoomic Developmet, 3/3, November. Uiversity of Nebraska Licol, USA 2. Cuthbertso, K, Hall, S. ad Taylor, M. (992) Applied Ecoometric Techiques. Lodo: Philip Alla 3. Egle, R.F., ad Yoo, B.S., (987) Forecastig ad Testig i Co-itegrated System. Uiversity of Califoria, Sa Diego, USA, Joural of Ecoometrics 35, North Hollad 4. Giles, D.E.A, Giles, J.A ad McCa, E. (992) Causality, Uit Roots ad Exported Growth: The New Zealad experiece. Departmet of Ecoomics, Uiversity of Caterbery, the Joural of Iteratioal Trade ad Ecoomic Developmet,/2 November 5. Hamilto, J.D. (994) Time Series Aalysis. Priceto Uiversity Press, USA 6. Hedry, D.F. (995) Dyamic Ecoometrics. Oxford:OUP 7. Oafowara, O.A. (996) Trade Policy, Export Performace ad Ecoomic Growth: Evidece from Sub-Sahara Africa. The Joural of Iteratioal Trade ad Ecoomic Developmet, 5/3, November, Sequehaa Uiversity, Selisgrove, USA