Export Trade Incentives and Export Growth Nexus: Evidence from Ethiopia

Aims: Export trade is often considered as an engine of economic growth, and this led to attempts by governments in many countries towards promoting the export sector. The Ethiopian government has been taking measures to promote the export sector by introducing comprehensive financial and fiscal incentive schemes since 2002. Hence, this paper attempts to examine the type and trend of export incentive schemes and their effect on export growth in Ethiopia.

Study Design: This is an explanatory study trying to shed light on whether and to what extent financial and fiscal incentives provided by the government have led to export growth in the country using time series data on financial incentives, fiscal incentives, export volume, export value, export diversification, GDP growth rate, and real effective exchange rate covering the period 2003 to 2011.

Methodology: The data were collected from Ethiopian Revenue and Customs Authority (ERCA), Ministry of Finance and Economic Development (MoFED), National Development Research Institute (NDRI) and National bank of Ethiopia (NBE). Three stage analysis has been conducted including graphical analysis of trends of export incentive schemes and export growth, examination of correlation among variables in the data set, and finally, a time series econometric analysis.

Results: The study revealed that there are improvements in the export sector in terms of export value, destination and diversification despite that the share of manufactured exports is still marginal. The study also revealed that while the incentives are positively correlated with export value and export volume, they are negatively correlated with export concentration. In addition, the time series econometric analysis reveals that financial and fiscal incentives have a statistically significant impact on export growth both in the short run and long run.

Conclusion: Incentives to the export sector have robustly improved export value and volume. However, it has been noted that manufactured export is still insignificant which implies that the incentives have played only a partial role in boosting export earnings of the country.