Journal of Economics and Sustainable Development www.iiste.

org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.11, No.3, 2020

Export Performance of Spice Crops and Its Determinants in

Ethiopia: VECM Analysis
Abebe Cheffo Degye Goshu

Abstract
Ethiopia, as the case of many developing countries export has been limited to few primary products which are
mainly agricultural commodities. From the total exports of the country coffee was the dominant export
commodity accounting for about 52.27 per cent of the country's total exports, on average. Spices are essential
oils that give foods and beverages flavor, aroma and sometimes color. Ethiopia has reached to production level
of spice crops 244,000 ton/annum having area coverage of 122,700 hectares. The objective of this study is to
examine spice crops export performance in Ethiopia. In this study, time series secondary data for the period
1992/93 to 2015/16 has been collected from FAOSTAT, IMF database and CoMTRADE data source. The value
of spice exported, real exchange rate (official exchange rate), real income and real GDP of partners and Ethiopia
in respective order, measured in USD, and openness for trade data was collected from the aforementioned
sources. All the data was transformed into natural logarithm form before analysis. The VEC model is very
important in the analysis of spice crop export performance of Ethiopia and has proven to be a useful tool in
determining export potential of the country. STATA software was utilized to analyze the secondary data
obtained from different sources. The time series data that are used in this study are export of spice crops valued
in US dollar, real income of trading partner, real GDP of home country valued in USD and openness for trade.
Accordingly, in the long run log form of real effective exchange rate, openness to external trade and real GDP
are significant at 5 percent level of significant. The short run model output shows these variables are
insignificant. The export of Ethiopian spice crop competitiveness also dependent on the effectiveness of real
exchange rate. Thus, the government should work hard to keep stable the rate of exchange rate.
Keywords: Export, VEC model, time series data, demand
DOI: 10.7176/JESD/11-3-06
Publication date: February 29th 2020

Introduction
Economic development is one of the main objectives of every society in the world and economic growth is
fundamental to economic development. There are many variables that contribute to economic growth. Export is
considered as one of the very important accelerators of growth. The economics literature supports the contention
that development requires economic growth to alleviate poverty, and greater access to world markets is
perceived as a necessary condition for more rapid growth. For example, using cross-sectional regression, Agosin
(2007) finds that export diversification has a stronger effect on per capita income growth. The share of
international trade to this end by many developing countries was raised from below 25 percent to around 33
percent (Bacchetta, 2007). The lion share of developing counties who diversified the export commodities is
taken by China. The same writer also explained that while developing Asia’s share in total world exports
increased from 11.7% in 1985 to 21.5% in 2005, Africa’s share decreased from 4.3 % to 2.9 % over the same
period. Different reasons have been forwarded for the main reasons for Africa’s poor export performance. For
example, Almayehu (2006) and Biggs (2007) stressed that the structure of African exports, which is
characterized by dependence on primary commodities, as the main reason.
Even though the overall growth of export in Ethiopia for four decades (1970/71 to 2010/11) was 15.23
percent, which export sector is still small; evidenced by the lower export/GDP ratio and the declining share of
exports in import financing. By the year 2011, exports of goods in Ethiopia are only about 7 per cent of GDP,
compared to an average of near 30 percent of GDP in Sub-Saharan Africa. Export levels still fall short of what is
registered by other African countries with much smaller populations (Uganda and Tanzania both export more
than $3 billion per year). Growth rates are also very modest if one makes a comparison with Asian countries
over a decades-long time frame. The performance of majority of African countries on export expresses very low
growth as compare with Asian countries. Accordingly, Ethiopia’s total exports were higher than that of Vietnam
in the 1980s but are now just a tiny fraction: $2 billion in Ethiopia versus $65 billion in Vietnam (NBE, 2011).
Ethiopia, as the case of many developing countries export has been limited to few primary products which
are mainly agricultural commodities. The report of World Bank by the year 2014/15 depicted that primary
agricultural commodities took an extreme share of 81 percent of export. In contrast, the manufactures export
share was only 19 percent while China is 94 percent. When we look at the last 3 decades export data of the
country, the export structure has been characterized by greater concentration on few traditional exports such as
coffee, hides and skins, oilseeds and pulses. From the total exports of the country coffee was the dominant export
commodity accounting for about 52.27 per cent of the country's total exports, on average for the last decade.

58
Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.11, No.3, 2020

Spices are essential oils that give foods and beverages flavor, aroma and sometimes color. The term spice
refers to any dried plant product used primarily for seasoning, be it the seed, leaves, bark or flowers. They can be
marketed whole, ground to a powder or in the form of essential oils and oleoresins. Many spices are also used for
other purposes. Plants such as turmeric (Curcuma longa) are increasingly in demand for natural therapies, while
others such as peppers (Capsicum spp.) serve as substitutes for chemical dyes or pesticides (Masresha, 2010).
Ethiopia is a homeland for many spice crops spices, such as Aframonum Korarima (Korarima), Long
Pepper, Black cumin, White cumin /Bishops weed (‘Nech azmud’)/, Coriander and Ginger. As a result, the
history of spice use in Ethiopia is an ancient one and spices have always been and remain as basic food items in
the diet of the Ethiopian people. For instance, Hot Pepper (berebere) of Ethiopia is a must for the traditional and
most staple food 'wot' in many parts of the country. In relation to this, the preparation of Pepper flour also
involves use of mix of different type of spices (Ethiopian Investment Agency, 2013). According to Ministry of
Agriculture report of 2010, the country has reached to production level of spice crops 244,000 ton/annum having
area coverage of 122,700 hectares. The seed spices potentials area are Amhara and Oromiya regions while for
the low land spices dominantly produced and potential in SNNP and Gambella regions; In general the total
potential for low land spices is estimated to be 200,000ha.
The major constraints facing the spices sub sector of Ethiopia covers production and marketing stages. In
the Production Stage, the following are the major challenges: low level of availability of improved and high
yielding varieties; poor quality of processed products in international market; very low involvement of private
investors on commercial spice crop production; the supply of raw spice to processors from forest and backyard is
very low and irregular; high wastage due to poor post harvest handling practice ; lack of incentives for farmers as
well as processors from the government; low effort made to adapt forest species which can help for afforestation;
unavailability of clearly defined farm management practices for species of spices and Lack of appropriate spices
development strategic interventions are the major problems. Similarly, there are several problems in marketing
stages. Among the major challenges: poor storage facility for looking better price; trust losing among actors due
to mixing poor quality products; products of low quality dominate the market because of traditional way of value
adding; mixing water with the product at different stage of market for looking high weight; evils of middlemen
in the marketing are very high; unavailability of price awards for quality products; bulky nature of products
appears in majority of market places which demands value adding activity; irregular nature of demand and
supply which leads to price volatility; information asymmetry on prices at different market places and stages;
loose market research particularly assessing the international demand and poor promotion on marketing are the
major ones are listed based on level of importance (Masresha, 2010). However, the efforts of different local
scholars so far made on identifying different challenges both production and marketing there is a gap on studying
export performance of the country. Thus, this piece of work tried to narrowing this gap.
The objective of this study is to examine spice crops export performance in Ethiopia. This paper is
organized as follows: section 2 provides literature reviews, including theoretical and empirical evidence on
Determinants of spice crop export performance. Section 3 discusses model specification, data source and
description, estimation techniques. Section 4 presents analysis and results of the study. Finally, section 5 presents
conclusion and policy implication based on the estimated results.

Literature review
Least developed countries characterized by low productivity and quality products, poor pre and post harvest
agricultural product handling as well as processing, lack of better market access, poor storage facilities and
transportation logistics, deforestation and gender disparity. Moreover, due to a shortage of income and lack of
access to improved agricultural technologies, the small holder farmers particularly wives of farmers and female
headed household have experienced limited benefit from the annual return of sale of major agricultural
commodities. Besides, the outstripping population growth in major spice and aromatic production regions
exacerbates the socio economic problem and food aid dependency of the smallholder farmers and women (FAO,
2016). In order to reduce poverty and food dependency of these smallholder farmers and women in Ethiopia via
enhancing their purchasing power, it is apt to create competitive, efficient and effective spice, herbs and aromatic
plants value chain service delivery mechanism. Other countries such as China, India, Bangladesh, Nigeria,
Indonesia and Vietnam experiences showed it is conceivable to overcome the multi sectoral constraints of spice,
herbs and aromatic sector through establishing proactive, strong and legitimate membership based platform
(Addisu, 2014).
According to Stephen (2017) Exchange rate has a direct relationship with factors such as foreign direct
investment, inflation, interest rate, and similar macroeconomic variables, but it worth noting that little or no
emphasis has been given to the critical relationship between exchange rate and export growth in the Nigerian
context. Some other research result has also indicated that exchange rate is significant in influencing not only
export growth (Omojimite, 2012) indeed several other economic sectors, interest rate, inflation, FDI, and
agricultural production (Chukuigwe and Abili, 2008; Alao, 2010; Wafure and Nurudeen, 2010; Enoma, 2011;

59
Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.11, No.3, 2020

Ajide, 2014) but EXP growth as a variable was excluded from many of these investigations, hence the present
attempt to fill-in the gap. It is further observed that many of the past studies harped on the agricultural sector as
the largest employer of labour in Nigeria.
The other factor affecting export performance is degree of openness to trade. Opening economic policies to
trade with the rest of the world is needed for export and economic growth. This is because in recent decades
there is no country achieving economic success in terms of substantial increases in living standards for its people
without liberalizing itself to the rest of the world. Trade liberalization has generally taken place in LDCs as part
of the structural adjustment program (Belayneh et al, 2013).Trade liberalization implies considerable reduction
in tariff and non-tariff barriers, so as to establish a noticeable open market as compared with the pre-
liberalization era. The empirical researches focusing on the impact of trade liberalization (openness) on export
earnings have exhibited positive results. For example literatures show that countries which get on liberalization
programs have improved their export earnings (Ahmed, 2000). Similarly, Seyyed et.al (2011), using panel data
evidence for 19 countries found that open trade policy enhances GDP and export growth. Using these results
clearly prefer open trade policy over more trade barrier which enhance GDP and export growth. Conversely,
Giovani and Levencko, (2007) argue that increased trade openness has contributed to rising uncertainty and
exposed countries to external shocks and hence, adversely affects country’s export.
The share of total expenditure of household income of spice was assessed by the central statistics agency of
the country by the year 2005. Accordingly, it took the share of 1.79% of the expenditure of the household which
dominated by paper whole and flour, followed by ginger, fenugreek, and then cinnamon, chilies, long pepper and
mixed spices. Its share of household expenditure for rural Ethiopia was higher at 1.87%, while the share for
Urban Ethiopia was 1.46%. The survey result by CSA shows, spices has 1.08% and 1.11% share of total net and
gross calorie per capita per day. The net calorie per capita per day for rural and urban areas of Ethiopia is 9.69%
and 1.63% respectively, while the gross calorie per capita per day is 0.99% for rural and 1.94% for urban
Ethiopia (CSA,2005).
Export (Xit): The annual values (in USD million) of Ethiopian spice crop exports to each of the 10 main
trading partners are mainly collected from FAOSTAT Data Base. Gross Domestic Product (GDPit and GDPjt):
Data on GDP of Ethiopia and its trading partners (in million US dollars) are collected from World Bank Data
Base. Given that spice crop exports are the difference between domestic supply and domestic demand, they
should be affected by the growth in domestic income. It may be the GDP of the Ethiopia or its trade partner.
GDP of Ethiopia (GDPit) is source of power for increasing the export. Given this, the foreign GDP (GDPit) also
would result into increment in the export of coffee by being source of demand. Both of the two GDP are source
of enlarging the spice export of Ethiopia, implies that two of the variables are expected to have positive
contribution for the expansion of the export. Real Exchange Rate (RERijt) is the real bilateral exchange rate
between country i and country j at time t measured by the formula: RER ijt = (TCN i/$ /TCNj/$) X (CPIj /CPIi )
where TCN is the nominal exchange rate vis -a -vis the dollar and CPI is the price index, notably the GDP
deflator. The data are available from EEPRI Data Base. The negative impact of the real bilateral exchange rate
will be reflected in β2< 0.

Data and Methodology

Data Source and Type
In this study, time series secondary data has been used. The data set has been collected from FAOSTAT, IMF
database and CoMTRADE data source. For the purpose of analyzing the country's determinants of spice crop
export performance, the export equation has been estimated using time series data for the period 1992/93-
2015/16. STATA software was utilized to analyze the secondary data obtained from different sources.
The time series data that are used in this study are export of spice crops valued in US dollar, real income of
trading partner (average real GDP of 10 major trading partners (India,Isreal,Kenya,Norway,Saudi Arabia, the
former Sudan, UAE, UK, USA and Yemen) which accounts about 80 percent of Ethiopia’s spice export
destinations) valued in USD, real GDP of home country valued in USD and openness (calculated using the sum
of export and import of goods and services as a ratio of GDP) are collected from World Bank (2018). Data for
real effective exchange rate is collected from Ethiopian Economic Association(EEA) statistical data base CD-
ROM (2018) and Nation Bank of Ethiopia (2018) and checked to World Bank data for consistency. Government
expenditure for transportation and communication is calculated by taking both capital and current expenditure
for communication and transportation including road. Since the researcher did not find data for such variables
from IMF and WB data source, these variables are collected from both NBE (2018) and EEA statistical data base
CD-ROM (2018).

Econometrics Model specification

This study focuses on demand side determinants of Ethiopia’s spice crop export performance. Therefore, the
study signifies Ethiopia’s spice export performance as a function of real GDP of home country, real effective

60
Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.11, No.3, 2020

exchange rate, and openness for trade, infrastructural development and financial development. The model that
has been used in this paper is adopted from Goldestien and Khan (1985) imperfect substitution model which is
expressed as follows:
EX= f(RGDPTP,REER,OPEN,RGDP,TCEX)-----------------------------------------------------------1
A log-linear form of spice crop export determination model is employed to determine Ethiopia’s spice crop
export performance. The model is therefore similar to the one used by Amin (2007) in estimating determinant of
cut flower export in Ethiopia and Hailegiorgis (2011) in estimating export performance of oil seeds in Ethiopia.
Therefore, the regression equation is given by:
lnEX= α +B1lnRGDPT + B2 lnREER + B3lnRGDP +B4lnOPEN + B5lnTCEX + εt ---------------2
Where,
EX= Spice Export earnings at time t in log form is the dependent variable
RGDPTP= the real GDP of our trading partners (about 80 percent of Ethiopian spice export destination countries)
REER= Real Effective Exchange Rate in log form (which is found by trade weighted Birr/foreign currency)
OPN= Exports plus imports as a percentage of GDP, a proxy for degree of openness in log form
RGDP= Real GDP at home country in log form
TCEX= Public expenditure in transportation and communication as a ratio of GDP as a proxy for infrastructural
development in log form.
εt= Error term
In analyzing determinant of spice export performance based on available literature on demand side, first
three variables in the model are called external. Ethiopia is one of the countries whose export performance
depends on overseas economic situation. As the country is economically a small open price taker in the world
market. World market forces, generally determine the prices of its exports. Therefore, overall income of trading
partner affects spice export performance of Ethiopia directly. That is, all other things remain constant; an
increase in the real GDP of Ethiopia’s major trading partners, which is denoted by , either due to the output
growth of our major trade partners, liberalization measures, or diversification measures increases the demand for
our product and hence increase Ethiopia’s export earnings(B1>0).
The movement in value of spice export also correlates with relative prices. In theory, real effective
exchange rate movements are also negatively correlated with the growth in spice exports performance. Thus, the
expected sign of the REER coefficient is ambiguous. This is because it depends on the exchange rate regime that
the country experiences. According to the Marshal-Lerner condition and Mundel-Fleming model, a decrease in
real effective exchange rate or appreciation of domestic currency will make exportable items costly, then the
demand for our exports in external market is likely to fall and this in turn will reduce foreign exchange earnings.
In such a case, the expected sign of real effective exchange rate (REER) will be positive (i.e B2 > 0). The reverse
is likely to occur (i.e. B2 < 0) if the increase in real exchange rate (devaluation) worsens export by increasing cost
of spice export by decreasing the country’s competitiveness in international market.
The third variable (Real GDP) regarded as internal (supply side) determinants of spice export earnings. The
inclusion of real output of spice in the model is based on the argument that the output capacity of an economy is
an indication for future supply capacity. Thus, an increase in output will enhance export earnings (B3>0).
The impact of trade openness of the country is very much ambiguous as reviewed in literature part of this
article. Accordingly, some scholars argue that there is direct and positive association of trade openness with
getting more volume of foreign exchange. The implication is that a country needs to integrate to the world
market by diversifying its trading partners. The degree of integration of a country to external market is thus
measured by openness to trade, which is proxied by the sum of exports and imports of goods and services to
GDP ratio. Thus, an increase in the ratio of exports and import of goods to GDP (or) implies better integration of
Ethiopia to the external world and hence higher export earnings. In short, an increase in openness will have
positive impact on export performance OPN (or B4>0). However, if openness leads to shocks in the goods
market that declines in export demand, it will decrease exports earnings (B4<0).
Economic theory also strongly acknowledges that the quality of infrastructure is one of the key
determinants of spice export performance. Infrastructure (road, electric power, telecommunication, etc)
development, which is the key determinant factor for the flourishing of any industry especially export sector is
proxy by the ratio of public investment on transportation and communication to GDP (TCEX).Therefore,
expanding infrastructure density of various types with an acceptable level of quality or the increase in public
investment in infrastructure to GDP ratio (TCEX) in Ethiopia will have positive impact on export growth. That is,
the expected sign of (TCEX) is positive (or B5>0).

Estimation Technique
Therefore, the primary task in time series econometric analysis is undertaking unit root test on the variable of
interest. The test examines whether the data series is stationary or not. To conduct the test, the conventional
Dickey-Fuller (DF) and Augmented Dickey–Fuller (ADF) test has been used with and without a trend. Since the

61
Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.11, No.3, 2020

actual data generating process is not known a priori, the test of determining the orders of integration of the
variables has conducted first by including a constant only and then both a constant and a trend. The ADF test is
based on the regressions run in the following forms.
Yt= α1 +BYt-1 + µt ----------------------------------------------------------------------------------------- 3
Yt= α1 + α2t + BYt-1 + µt ---------------------------------------------------------------------------------- 4
Where, t is the time or trend variable. Equation (3) adds a drift, and equation (4) introduces both a drift and
a time trend. In each case the null hypothesis is that B=0, that is, there is a unit root. The null hypothesis (H0) is
thus a series contains a unit-root (non-stationary) against the alternative hypothesis (H1) stationary (deterministic
trend). Even though the individual time series are not stationary, a linear combination of these variables could be
stationary (i.e. they may be co-integrated). If these variables are co-integrated, then they have a stable
relationship and cannot move “too far” away from each other.
The set of variables to be included in a VAR is determined by the economic problem at hand. There should
be test for Stationary of the variables which Pre-test all variables to assess their order of integration. Plot the
variables to see if a linear time trend is likely to be present in the export of spice crops in Ethiopia. You also
need to test for stationarity along the lines of Pantula principle. The lag length can be determined by some of the
information criteria procedures. It is important to avoid too many lags, since the number of parameters grows
very fast with the lag length. Then you should run Deterministic Trend Specification of the VECM.
There is a procedure of testing the actual number of co integrating vectors by using maximum Eigen values
and trace statistics. Estimation and determination of rank is very important. The test of rank is done in specific
order from the largest Eigen value to the smallest. We use the “Pantula Principle” where we test for significance
until you no longer reject the null. The variables may have nonzero means and deterministic and/or stochastic
trends. Similarly, the co integrating equations may have intercepts and deterministic trends. The best way to do
VAR in non-stationary world is to test for co integration using Johansen. After that we have to use the Granger
representation theorem to express the relationship as a vector error correction model (VECM).
A vector Error Correction (VEC) model is a restricted VAR designed for use with non-stationary series that
are known to be co integrated. The VEC has co integration relations built into the specification so that it restricts
the long run behavior of the endogenous variables to converge to their co integrating relationships while
allowing for short-run adjustment dynamics. The co integration term is known as the error correction term. Since
the deviation from long-run equilibrium is corrected gradually through a series of partial short-run adjustments.
As the VECM specification only applies to co integrated series, you should first run the Johansen co integration
test and determine the number of co integrating relations.
There are two common methods for testing co-integration and estimating the relationship among co-
integrated variables. These are the Engle and Granger (1987) two-step procedure and the Johansen’s (1988)
maximum likelihood methods. The Johansen procedure takes care of the above shortcomings by assuming that
there are multiple co-integrating vectors. Thus, testing for co-integration using the multivariate VAR approach
developed by Johansen (1988) is necessary because failure to capture the existence of more than one co-
integrating vector yields misleading long-run coefficients. In which case, the estimated parameters of the long
run coefficient would only be a linear combination of the parameters of the two or more co-integrating long-run
relationship (Harris, 1995). Thus, an unrestricted VAR can be formulated to estimate the long run relationship
among jointly endogenous variables. The co integration regression so far considers only the long-run property of
the model and does not deal with the short-run dynamics explicitly. Clearly, a good time series modeling should
describe both short-run dynamics and the long-run equilibrium simultaneously. Finally, whether the long run
parameters are obtained using the Johansen co integration analysis, the Johansen (1988) Vector Error Correction
Model (VECM) has been estimated (Belayneh et al, 2013).

Analysis and results

The primary task in VAR model analysis is stationary test. It is well known that the VAR analysis may depend
critically on the lag order selection of the VAR model. Usually, different lag order can affect the interpretation of
the VAR estimates when those differences are large enough. The most common strategy in empirical studies is
to select the lag order by some pre specified criterion and to condition on this estimate in constructing the VAR
estimates.
The value depicted in table 1 of Dickey Fuller test clear that the null hypothesis of a unit root is rejected for
value of foreign currencies earned per year (valuepyear) variable with a drift term (constant). The test results of
the other variables are the same as displayed on attached in the annex. Hence the value of test statistics in
Absolute value is less than 5 percent critical value in the same absolute value. Thus, we reject the null hypothesis
of the yearly value of earning has unit root or not stationary. Moreover, the null has been rejected for lag one of
all variables at five percent level of significance. Therefore, it is possible to conclude that the variables are
integrated of order one.

62
Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.11, No.3, 2020

Table 1. Result of Dickey Fuller test for unit root test at the first difference of the variable
Dickey-Fuller test for unit root Number of obs = 24
---------- Interpolated Dickey-Fuller ---------
Test 1% Critical 5% Critical 10% Critical
Statistic Value Value Value
Z(t) -1.120 -3.750 -3.000 -2.630
-------------------------------------------------------------------------------------------------
MacKinnon approximate p-value for Z(t) = 0.7069
-------------------------------------------------------------------------------------------------
D.valuepyear | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+-----------------------------------------------------------------------------------
valuepyear |
L1. | -.1557831 .1390569 -1.12 0.275 -.4441695 .1326033
_cons | 635.4811 494.8384 1.28 0.212 -390.7509 1661.713

Table 2. Results of Augmented Dickey Fuller test for unit root test at the first difference of the variable
Augmented Dickey Fuller
Order of
Variables Lag length 1
integration
Constant Constant & Trend
LEX -4.7899** -4.5714** I(1)
LRGDPTP -4.7862** -4.6597** 1(1)
LREER -4.8491** -4.1311** 1(1)
LOPN -5.2611** -5.3055** 1(1)
LRGDP -4.6614** -5.5437** 1(1)
LTCEX -5.7083** -6.6014** 1(1)
Note: ** denotes rejection of the hypothesis of unit root in the first difference of variable at 1%. Significance
level for ADF statistic
As illustrated in the order of integration results in Table 2 above , all variables are non-stationary and
integrated of order one, I(1). This result is supported by the research finding of Alemu et al (2003) in which
estimating maize supply response using adaptive expectation and partial adjustment models would lead to
spurious regression. They also pointed out that spurious regression and inconsistent and indistinct short-run and
long-run elasticity estimates are the major pitfalls of the traditional Nerlovian supply response models.
The test result obtained by using Johansen (1988) of SBC & AIC criterions showed in table 3 below, the
lags (ρ) of VAR model and other criterion the order of VAR is 1. This result also repeated by other criterion.
Thus, the lag (ρ) of 1 was used in the model as the order of VAR.
Table 3. Lag length Selection
FPE AIC SC HQ LR
0 38.77408 - 3.37e-10 -1.767308 -1.379444 -1.657799
1 373.3145 445.8234* 4.92e-15* -12.51066* -10.67374* -12.29107*
2 318.7098 57.09098 6.88e-15 -13.02036 -8.194538 -11.78940
Note: * indicates lag order selected by the criterion calculated using EViews-7
FPE: Final Prediction Error
AIC: Akaike Information Criterion
SC: Schwarz Information Criterion
HQ: Hannan-Quinn information Criterion
LR: Sequential modified LR test statistic (each test at 5% level)
The Stata result of testing co integration among proposed variables that determine annual return from export
of spice crops revealed that the maximum value is greater than critical value at zero co-integrating vector (r =0)
for both trace test and Maximum-Eigen value test. This indicated the existence of one co-integrating relationship.
Thus, the null hypothesis of no co-integration is rejected at the conventional level (0.05) and the study concluded
that there exists a relationship among the proposed variables in the long run(Table 4). Trace test and Eigen value
test indicates that there are two co-integrating vector. All the variables are co-integrated of order one having the
long run relationship.

63
Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.11, No.3, 2020

Table 4. Johansen’s Co integration Test

Johansen tests for co-integration
Trend: constant Number of obs = 23
Sample: 1994 - 2016 Lags = 2
5%
Maximum trace critical
rank parms LL Eigen value statistic value
0 30 -550.89529 . 88.7233 68.52
1 39 -530.6761 0.82764 48.2850 47.21
2 46 -518.36084 0.65730 23.6544* 29.68
3 51 -509.7596 0.52666 6.4520 15.41
4 54 -506.56775 0.24236 0.0683 3.76
5 55 -506.53362 0.00296
5%
Maximum max critical
rank parms LL Eigen value statistic value
0 30 -550.89529 . 40.4384 33.46
1 39 -530.6761 0.82764 24.6305 27.07
2 46 -518.36084 0.65730 17.2025 20.97
3 51 -509.7596 0.52666 6.3837 14.07
4 54 -506.56775 0.24236 0.0683 3.76
5 55 -506.53362 0.00296
Note: *denotes rejection of the hypothesis at 5 per cent significance level.
The next procedure after identifying order of co integration for each variable that enters the specified model
of spice crops export determination is estimating the long run relationship between Ethiopia’s spice crops export
performance and it determinants using the Johansen (1988) maximum likelihood method. The maximum
likelihood statistics method is important for estimating consistent estimates of the long run parameter which
could be tested using likelihood ratio (LR) statistics.
As displayed in table 5 below, the level of significance varies among parameters for earning from export of
spice crops in the country. Accordingly, real effective exchange rate, openness to external trade and real GDP
are significant at 5 percent level of significance.
Table 5. Normalized co-integration coefficients (Standard errors in parenthesis)
LEX LRGDPTP LREER LOPN LRGDP LTCEX constant
-0.785507 -0.583535 -1.655999 -0.400267
-0.120774 -
1.000000 ** ** ** *
(0.23496) 17.956978
(0.06512) (0.07817) (0.14430) (0.11531)
t-statistics 0.514019 12.062454 7.464948 11.476084 3.471225 -
Note: ** Significance at 5% and * significance at10%.
The impact of increase in per capita income of Ethiopia’s trading partner nations (GDPTP) is insignificant
on demand of spice crop export. Moreover, the finding supports Fugazza (2004), who argued the growth of
trading partner income will not drive movements in developing countries exports.
Different variables were tested for their significance on export of spice crops. Accordingly the effect of real
effective exchange rate had impact on export level of the country as depicted in table 4 a one percent increase of
this variable results a 0.7 percent change in total export earnings. It is well known that exports of LDCs are price
inelastic in the international market due to nature of the product that LDCs produces. The positive and
significant coefficient also shows that export may be influenced by exchange rate policy. This idea is more
elaborated by the concept of devaluation of birr in terms of foreign currency improves price competitiveness of
spice crop export and hence leads to an increased export performance of Ethiopia.
The value of trade openness showed that a one percent trade liberalization (openness) positively influence
by increasing 0.58 percent of Ethiopian spice crop export performance. The theoretical expectation of trade
liberalization has a consistent idea with the result of this research outcome. It also supported by empirical
evidence Mouna(2001) who declared the importance of trade liberalization programs that improved export
earnings.
Export earning and the growth of RGDP move in similar direction in accordance with macroeconomic
theories. The coefficient of real growth domestic product for home country is 1.656 which means that a one
percent change on real GDP of home country results 1.656 percent increase in total export earnings. This is
consistent with Ahmed and Majeed(2006) in estimating developing countries export. They found that GDP of
home country affects their export positively. This is due to the fact that output capacity of an economy has

64
Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.11, No.3, 2020

implication of supply capacity by maintaining a country’s competitiveness in the international market in the long
run.

The Short Run Error Correction Model

The speed of adjustment term (Table 5) is the most important idea in short run. This term depicted that how
much time is required to be reached in long term equilibrium. The sign of speed of adjustment has indication
which Negative sign of speed of adjustment term shows that the economy will converge towards long run
equilibrium. But if it is positive, the economy will not converge to the long run equilibrium.
The Vector Error Correction Model (VECM) result in Table 6 below shows that only one variable affects
the Ethiopian export performance in the short run.That is only openness in the previous year affects current
export in the short run. The more trade liberalization in the previous year the more export would be. This may
due to the fact that the more the economy is integrated to the rest of the world; it has immediate response to
enhance the country’s export. Here the adjustment coefficient is negative which shows that the variable will
converge towards long run equilibrium after taking around 61 percent annually adjustments in the short run. As
can be seen from the diagnostic tests above, the hypothesis of the non-existence of serial correlation, the
presence of normality and the existence of homoscedasticity are not rejected for the Export performance error
correction specification.
Table 6. Results for VECM estimates
lnEX
Variables Coefficient Std Error t-statistics Prob.
DLREER 0.342569 0.193245 1.772719 0.0841*
DLOPN 0.398764 0.139874 2.85088 0.0077**
DRGDP 0.365479 0.357102 1.023458 0.3124
DLTCEX 0.197207 0.122459 1.610392 0.1205
DLEX 0.044671 0.188456 0.237037 0.6755
C 0.033143 0.023145 1.384047 0.1574
ECM_1 -0.605045 Mean dependent VAR 0.083244
R-squared 0.529381 S.D. dependent VAR 0.197699
Adjusted R-squared 0.435370 Akaike info criterion -1.259806
S.E. of regression 0.119950 Schwarz criterion -0.917663
Sum squared residual 0.492021 Hannan-Quinn criter. -1.176471
Log likelihood 32.885467 Durbin-Watson stat 2.379945
F- statistic 5.218824
Prob(F-statistics) 0.000457
Model Diagnostic test
Normality test: = 2.951461[0.284719]
LM test for serial correlation =0.1560[0.0878]
ARCH =0.6097[0.6908]
Note: ECM-1 is the lagged residual saved from the estimated long run equation

Conclusion and Policy Recommendation

The overall analysis of Ethiopian spice crop export performance of the country for the period 1992-2016 was
addressed in this paper. The method applied to assess the impact of spice crop export on economic development
was time series econometric analysis. In this analysis method, Johansson co-integration methodology was
employed in order to know the long and VECM short run determinants. The empirical finding and evidence from
other scholars on export performance of a given country; Ethiopian spice crops export determination model
confirms that, real GDP of home country, real effective exchange rate, and trade are positive and significant
determinants of country’s export of these crops. Variables on trading partners (importers) were assessed for
testing its impact on trading. Accordingly, Real GDP of trading partners was found to be statistically
insignificant to determine Ethiopia’s spice crop export in the long run. Among the abovementioned variables
only trade liberalization (openness) was found to be the only determinant of country’s spice crop export in the
short run. It is found to be positive and statistically significant where as the rest variables are found to be
statistically insignificant.
The export of Ethiopian spice crop competitiveness also dependent on the effectiveness of real exchange
rate. Thus, the government should work hard to keep stable the rate of exchange rate. This can be done by
allowing timely and reasonably depreciation of Birr in the long run for encouraging export. The act of trade
liberalization from the government side plays a significant role base on the minimum requirement of world trade
organization for better involvement of local as well as international investors on spice sector. The overall

65
Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.11, No.3, 2020

infrastructure development like telecommunication service and road should be give due attention to get better
return from export of spice crops. The production level of spice crops nationwide is very low which should be
given a priority by motivating farmers at consecutive levels of production.

References
Addisu Alemayehu ,2014. Spice, Herbs and Aromatic plants subsector platform meeting report, pp 8-9 .
Agosin, R. (2007), “Export Diversification and Growth in Emerging Economies”, Working Paper No. 233.
Departamento de Economía, Universidad de Chile.
Ahmed, E. and Majeed, M. (2006), “Determinants of export in Developing Countries”, The Pakistan
development review. 45: 4 pp.1265-1276
Ahmed, U. (2000), “Export Responses to Trade Liberalization in Bangladesh: A Co-integration Analysis”,
Applied Economics, 32, 1077-1084.
Ahmed, E. and Majeed, M. (2006), “Determinants of export in Developing Countries”, The Pakistan
development review. 45: 4 pp.1265-1276
Ajide, K.B., 2014. Determinants of economic growth in Nigeria. CBN Journal of Applied Statistics, 5(2): 147 –
170. View at Google Scholar
Alao, R.O., 2010. Interest rates determination in Nigeria: An econometric x-ray. International Research Journal
of Finance and Econometrics, 47: 43-52.
Alemayehu G. (2006), “Openness, Inequality and Poverty in Africa”, DESA Working Paper No. 25
Alemu, Z.G., K. Oosthuizen& H.D. van Schalkwyk. 2003. Grain-supply response in Ethiopia: An error-
correction approach.Agrekon, vol. 42, pp. 389-404.
Amin A. (2007), “The booming non-traditional export commodities: The case of cut- flower”, Paper presented
for the 5th annual international conference on Ethiopian economy, EEA, AA.
Bacchetta, M. (2007), “Releasing Export Constraints: The Role of Governments”, AERC Research Project on
Export Supply Response Capacity Constraints in Africa, Paper No. ESWP_01
Belayneh Kassa and Wondaferahu Mullugeta. 2013. DETERMINANTS OF EXPORT PERFORMANCE IN
ETHIOPIA: VAR MODEL ANALYSIS. National Monthly Referred Journal of Research in Commerce &
Management.Volume No.2, Issue No.5. PP 97-99
Biggs, T. (2007), “Assessing Export Supply Constraints: Methodology, Data, and Measurement”, AERC
Research Project on Export Supply Response Capacity Constraints in Africa, Paper No. ESWP_02
Chinn, M. and Prasad, E. (2003), “Medium-Term Determinants of Current Accounts in Industrial and
Developing Countries: An Empirical Exploration, Journal of International Economics, 59(1), 47-76.
Chukuigwe, E.C. and I.D. Abili, 2008. An econometric analysis of the impact of monetary and fiscal policies on
non-oil exports in Nigeria: 1974 – 2003. African Economic and Business Review, 6(2): 59-73. View at
Google Scholar
CSA,2005. The House Hold Income, Consumption And Expenditure Survey –HHICES Report. PP 25-27.
Dana Dascal, Konstadinos Mattas and Vegelis Tzouvelekas (2002), ‘An Analysis of European
Union Wine Trade: A Gravity Model Approach’,Greece.
Engle, R. and Granger C. (1987), “Co-integration and Error Correction: representation, Estimation, and Testing”,
Econometrica. Vol.55 (92), pp.251-276
Enoma, I.A., 2011. Exchange rate depreciation and inflation in Nigeria (1986-2008). Business and Economics
Journal, 28: 1-11.
Ethiopian Investment Agency, 2013. Annual report of spice production and marketing in Ethiopia. Volume I, PP
5-6.
Food and Agriculture (FOA), 2016. Annual Report on World spice crops production and consumption, Rome
Italy. PP 36-37.
Fugazza, M. (2004), “Export Performance and Its Determinants: Supply and Demand Constraints”, Policy Issues
in International Trade and Commodities Study Series No. 2
Giovanni .J. and Levnchenko A. (2007), “Trade Openness and Volatility”, Review of Economics and Statistics,
91:3 (August 2009), 558-585.
Goldstein, M. and Khan, S. (1985), “Income and price effects in foreign trade”, in R. Jones and P. Kenen (eds),
Handbook of International Economics, vol. II, North-Holland, Amsterdam.
Hailegiorgis B. (2011), “Export performance of oil seeds and its determinants in Ethiopia” Journal of serials and
oil seeds, Vol.2 (1), pp.1-15
Harris, R. (1995), “Cointegration Analysis in Econometric Modeling”, London, University of Portsmouth,
Prentice Hall.
Johansen, S., (1988), “Statistical Analysis of Co-integration Vector”, Journal of Dynamics and Control, Vol.12,
pp.231-254
Lehman F. and Zarzeso M. (2002), ‘Augmented Gravity Model: An Empirical Application to Mercosur-

66
Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.11, No.3, 2020

European Union Trade Flows’ (can be accessed at www.lacea.org/meeting2001/kumil.pdf )

Masresha Yimer,2010. Market profile on spices; Ethiopia, to UNCTAD ITC, Addis Ababa, PP 3-4.
Ministry of Agriculture, 2010.Agricultural Investment Potential of Ethiopia, MOARD, March 2010.Assesement
report – PP 8-9.
Mouna, C, and Ahmad R. (2001), “Trade Liberalization, Real Exchange Rate, and Export Diversification in
Selected North African Economies”, First Draft
NBE (2011), National Bank of Ethiopia Annual Report, Addis Ababa
NBE (2016), National Bank of Ethiopia Annual Report, Addis Ababa
Omojimite, B.O., 2012. Institutions, macroeconomic policy and growth of agricultural sector in Nigeria. Global
Journal of Human Social Science, 12(1): 1-8. View at Google Scholar
Seyyed H. Maysam M., Shahab A., and Mehran N., (2011), “GDP, Openness and Export Causality” A Panel
VAR Approach using Commodity Disaggregated”, International Bulletin of Business Administration, ISSN:
1451-243X Issue 12
Stephen Aro-Gordon, 2017. Econometric analysis of exchange rate and export performance in developing
economy. Asian Economic and Financial Review. 7(4): 334-348.
Wafure, G.G. and A. Nurudeen, 2010. Determinants of foreign direct investment in Nigeria: An empirical
analysis. Global Journal of Human Social Science, 10(1): 26-34. View at Google Scholar
World Bank, 2015 . Annual report of the year 2009/2010. PP 3-4.

67