ADDIS ABABA, July 22, 2014 –Rising exports have contributed to Ethiopia’s double digit economic growth over the past decade, but the recent drop in prices has exposed underlying vulnerabilities in the country’s export structure. These gaps highlight the importance of strengthening competitiveness through diversification and value added exports, according to the World Bank’s latest Ethiopia Economic Update report.
Buoyed by favorable external conditions, exports helped create jobs and earn much-needed foreign exchange in Ethiopia. However, the country is vulnerable to price swings because its exports are dominated by unprocessed and undifferentiated agricultural products. While benefitting from upward price trends since 2003, the recent drop in prices of key commodities has led to the worst export performance in a decade. Ethiopia does have encouraging examples of “self-discovery” that should be replicated, including the way it created and nurtured a high-value horticulture industry and expanded its air services exports.
More than “what” is being exported; it is the “how” that is hindering potential. “There is scope for improving the quality of existing commodity exports, through basic value addition, such as coffee wet processing or machine flaying of animal skins,” said Guang Zhe Chen, World Bank Country Director for Ethiopia. Even in products with a revealed comparative advantage, little upgrading or branding has occurred to earn higher value per unit over time. “By starting to compete on the quality of existing commodity exports (and not just on price), Ethiopia can reduce sensitivity to volatile international prices thereby supporting the gradual shift of production and exports into agro-processing and light manufacturing,” Chen said.
Several challenges need to be addressed in order to expand the country’s export sector in order to contribute to structural change, which is vital for sustaining economic growth and development. “Ethiopia’s export sector is currently too small to contribute to structural transformation, unlike in East Asia, where booming exports helped shift economic activity and workers away from low productivity agriculture into higher-productivity manufacturing and sustain high rates of economic growth for decades,” said Lars Moller, World Bank Lead Economist and Program Leader and one of the lead authors of the report.
Although it is the second most populous country in Sub-Saharan Africa, Ethiopia has the lowest ratio of merchandise exports to GDP in the world. It has half as many exporting firms as Kenya (which has half the population of Ethiopia), and the average exporter size is small. The business environment also favors existing firms and deters new export businesses from entering the market, and even so, no multi-product, multi-country “export superstars” are emerging. This is a challenge because rising and dynamic firms often create more new jobs than established firms.
“The expansion of exports is often behind spurts in economic growth. Successful exports also create dynamic efficiency gains by exploiting economies of scale, adopting best practices in foreign technologies and business processes, and by being subject to international competition,” said Michael Geiger, World Bank Senior Economist and one of the lead authors of the report. “Export sectors are also associated with productivity gains leading to wage premiums and job creation. Moreover, there is a foreign exchange element of exports that is important for sustainable growth.”
The report suggests that a more competitive real exchange rate could support export promotion. In the simulation carried out as part of the analysis in the report, it shows that, all things being equal, 10% of devaluation could lead to 5% improvement in export. However, in the presence of macroeconomic trade-offs, the government has to weight in other factors in using the exchange rate as a policy tool, such as its impact on inflation as well as on the import cost of capital and consumer goods.
Furthermore, in order to strengthen Ethiopia’s export performance, the report provides the following policy recommendations:
- Increase value-addition, quality, and branding of exports
- Ease binding constraints related to reliable power supply, credit, and foreign exchange
- Redress bottlenecks in trade logistics
- Establish Industrial Zones that conform to international best practice
- Revise burdensome business rules that obstruct firm entry, especially high start-up capital requirement and pre-registration bank deposits
- Improve regulatory quality, including the implementation of a pro-competition legal framework.