DETERMINANT FACTORS OF THE ETHIOPIA’S TOTAL COFFEE EXPORT PERFORMANCE: APPLICATION OF THE DYNAMIC PANEL GRAVITY MODEL COMPARISON

Abstract

Ethiopia’s coffee export earning percentage share in the total export has been rapidly waning over the last decades while it is the first commodity in currency grossing of the country. Since, this thesis analyses the determinants of Ethiopia’s coffee exports (ECE) performance via more realistic model application, dynamic panel gravity model. It commences with disintegration of the Ethiopia’s coffee exports performance (in the dimension of export sales) into supply and demand side factors through a step realistic export gravity model econometrics analysis. It used panel data that comprise 71 countries of the Ethiopia’s coffee importers (ECI) for the period of 11 year from 2005 to 2015. The application of dynamic panel gravity model can reduce several econometric problems that faced researches before. To overcome the problem of spurious regression, the panel unit root test of Harris–Tzavalis was made for each variables and applied first difference transformation for the variables that had unit root. As the result of moment and model selection criteria (MMSC) implied, the endogenous variables were first order panel in the model with their smallest MBIC and MQIC values. The four alternative models: model in first difference (FD), level or forward orthogonal deviation (FOD), system- FD, and system-FOD, estimated with two-step generalized methods of moments (GMM) estimation method. Among the fitted models, model in system-FD had a best average magnitude measure of in-sample prediction ability by RMSE and MAE. The best and selected model results suggest that 1% increase in lagged ECE, real GDP of importing countries, supply side population, supply side real GDP, openness to trade of importing countries, and supply side institutional quality, and 1% decrease in weighted distance, ceteris paribus, turn out were found to increase Ethiopia’s coffee exports performance by around 0.47%, 1.56%, 1.30%, 0.26%, 1.05%, 3.09%, and 0.64%, respectively. The analyses also implied policies that would promote institutional quality or permits favorable market environments, supply capacity, trade liberalization, and relatively cheaper transportation costs in order to progress the Ethiopia’s coffee exports performance.