ANALYSIS OF DETERMINANTS AND POTENTIALS OF ETHIOPIAN COFFEE EXPORT: A DYNAMIC GRAVITY MODEL APPROACH

Abstract

This study aimed to investigate the determinants of Ethiopian coffee and examines its potentials with its major 37 partner countries. A dynamic gravity model based on a panel data for the period from 2005 to 2017(13 years) of sampled countries was used. To obtain the best result, the consistent and efficient estimation approach of two step system GMM estimation approach was used. The coefficients obtained from the regression are then used to predict the potentials of Ethiopian coffee export to its partner countries. The result of descriptive analysis shows that on average over the study period more than 50% and 32.36% of Ethiopian coffee export were flow to European and Asian countries particularly 24.8 percent, 16.07 percent and 10.76 percent to German, Saudi Arabia and Japan respectively, the trend was fluctuated over time. The regression result of the model reveals that institutional quality index of Ethiopia, one period lagged values of Ethiopian coffee export, gross domestic product of partners, GDP per capita of Ethiopia, GDP per capita difference and real exchange rate have positively and significantly affected the values of Ethiopian coffee export flow. While, weighted distance has negatively and significantly determine the flow. The other major findings of the study is Ethiopia have high untapped coffee export potential to countries such as Switzerland, Swaziland, Djibouti, Denmark, Norway, Hong Kong, Finland, New Zealand and Singapore. While, Ethiopia have already exhausted its coffee export potential with Egypt and Jordan. The study recommends policy that improves institutional quality, provide favorable market environments, increase coffee export destination with relatively cheaper transportation costs through bilateral trade agreement, and the country also enhance bilateral trade negotiations and integration to exploit Ethiopia's untapped coffee export potential.