Supply and Demand Side Constraints as Barriers for Ethiopian Exports – Policy Options

Abstract

This study seeks to identify and estimate the relative importance of supply - versus demand - side constraints on Ethiopia’s exports. Ethiopia has tried radically different trade strategies in the past, including a strategy of import replacement/protection for infant industries during the Imperial period, a heavily state-managed trading system during the military government era, and a market-oriented liberalized approach supported by the international financial institutions in the most recent period. It is presently engaged in various trade initiatives, including accession to the World Trade Organization, negotiations with the European Union on an Economic Partnership Agreement discuss and with African regional partners towards a Tripartite Free Trade Area (TFTA). This study finds that the constraints on Ethiopia’s trade performance are mainly domestic, secondarily in its neighborhood, and thirdly in its trade with African partners more generally. Ethiopia’s macroeconomic policy mix and high administrative costs of trade work both to depress the share of trade in economic activity and to widen the deficit on goods trade. At the same time, the high costs of firm formation and the high margins and concentrated market structure of producer services, both a function of domestic policy frameworks, help to explain the evidently under-developed state of Ethiopia’s private sector; unless addressed, this would limit the supply side response to trade liberalization. Optimistically, the paper argues that eminently achievable infrastructure and regional customs cooperation developments, in conjunction with domestic administrative process reforms, would be “game changers” for Ethiopia in terms of its trade performance and industrial development.