**2. The Ethiopia's Horticulture Export Share**

Ethiopia's economy heavily depends on agriculture leading to the structure of Ethiopian exports to be dominated by agricultural products for a long period of time. Consequently, Ethiopia's external trade was characterized by high sectoral (agriculture) and commodity concentration (coffee) dependence. This is clearly seen in Table 1, where the contribution of coffee to foreign earnings played a great role. There were limited attempts to diversify both the commodity concentration and high geographic concentration. Such commodity and geographic concentration were the major causes for the instability of Less Developed Countries' (LDC's) export earnings to which Ethiopia is not an exception. The vulnerability to external shocks was exacerbated by recurrent weather changes, swinging the export value and volume. Consequently, diversification of both commodities and markets for the country are an urgent issue. With regards to commodity diversification, the horticultural sub-sector had recently attracted the attention of policy makers, and had been performing well. In this regard, the export performance of horticulture, on average, nearly accounted for 258.44 million USD over the last five to six years [17]. This had propelled the sub-sector to be the fifth most important generator of foreign earnings [7].


**Table 1.** Average value of export earnings from major export commodities (in Millions of USD).

#### **3. Literature Review**

Analyzing the export performance of the horticultural sub-sector, with a special focus on the determinants of horticultural exports, had attracted the attention of both policymakers and researchers in different parts of the world, particularly in developing countries. This is because the export of horticultural products provides a good opportunity to diversify the export base of many developing countries, which are mainly dependent on exports of tea, coffee, and cocoa [18]. This, in turn, will reduce dependence on a narrow range of primary products by developing countries.

The prospects for export diversification in Ethiopia were assessed empirically to investigate the main determinants of the country's exports (dominated by traditional commodities). Using the Error Correction Model (ECM), the estimation of the export determination model revealed that the real exchange rate was the significant determinant of the country's exports in the long-run [1]. The findings of this study were inconsistent with the results of Reference [11]. However, the work of many researchers in different part of the world had confirmed that the real exchange rate was among the most important determinants of export performance [3,18–24]. In addition, the study by Reference [10] had also stressed the existence of promising opportunities for export diversification in the country. References [3] and [11] had also stressed the need and importance for diversifying the export base of the country and breaking away from the export of traditional agricultural commodities.

The study by Reference [2] analyzed Ethiopia's export earnings instability by employing country-specific models, taking advantage of a sufficiently large sample period from 1962 to 2008. The study tried to identify the contributions of major traditional agricultural export commodities, such as coffee, hides, skins, oilseeds, and pulses. Attempts have also been made to make comparisons between the sub-periods of the Imperial, Derg, and Post-Derg periods, since these sub-periods experienced distinct trade and foreign policies. The study finds that the Post-Derg period was characterized by a higher level of instability and diversification of exports. This calls for the reconsideration of the direction of the diversification policy towards commodities that are negatively correlated with the traditional export commodities of the country.

The study by Reference [11] examined the performance and trend of merchandise (and manufacturing) exports, and its determinants during the period from 1981–2008 in Ethiopia. The findings of the study indicated that merchandise export volumes were significantly influenced by gross capital formation (proxy for production capacity) and share of trade in GDP (proxy for trade liberalization). In addition, manufacturing exports supply was found to be negatively and significantly affected by foreign income and positively affected by gross capital formation. The impact of foreign income was also revealed as negative in References [21,25]. However, many empirical works had obtained a positive impact of trading partners' income on the export performance of the exporting country [20,26,27].

Using cross-sectional data, Reference [16] also described the export performance of fruit and vegetable exporters and found that the sector was in its infancy and there was much to be done to increase gains from the sector. Ethiopian fruit and vegetable exporters were challenged by the lack of managerial and technical skills, and lack of commitment by employees, respectively. Externally, fruit and vegetable exporters were hindered by lack of credit facilities, supply of inputs, followed by lack of infrastructure. Finally, it was recommended that policymakers should design different schemes to enhance export performance, especially of fruits and vegetables. However, for the effectiveness of policy measures, an empirical work on the factors affecting the export performance of sub-sectors is still missing.

In the empirical work, Reference [18] analyzed the export performance of the horticultural sub-sector in Kenya. The findings of the study indicated that agricultural GDP and real interest rates were the important factors that influenced horticultural exports from Kenya. Agricultural GDP had a positive influence on Kenyan horticultural exports, whilst real interest rates had a negative influence on horticultural exports. The implication of the findings were that since real interest rates had a negative relationship with horticultural exports, an increase in real interest rates would lead to a decrease in Kenya's horticultural exports by increasing the cost of borrowing. In addition, it was emphasized that the significance of the cost of borrowing in influencing horticultural exports can be attributed to the fact that the horticultural sub-sector is relatively more capital intensive, compared to other agricultural sub-sectors. A significant amount of capital is required to set up greenhouses, cooling facilities, pack houses, irrigation systems, as well as the purchase of fertilizers, agrochemicals, and other inputs. The result was consistent with the findings of Reference [28], wherein real interest rates were found to have a significant impact on the volume of cotton exports.

Using the cointegration test, Reference [28] examined factors that affected tobacco and cotton exports in Zambia. The results of the study revealed that the factors that affected the growth of exports were crop specific. For instance, foreign direct investment had a significant impact on the volume of tobacco exports, both in the short-run and long-run, though tobacco exports were more responsive to movements in this factor in the long-run, than in the short-run. Consequently, policy measures like scaling up incentives in the form of tax holidays, should be taken to attract foreign direct investment. This result was consistent with References [21,25]. Furthermore, Reference [29] stated that the impact of foreign direct investment (FDI) depends on its motive, whereby export-oriented FDI will promote the export performance of the exported commodities. In addition, the uni-directional Granger causality of agricultural exports to the share of agricultural gross domestic product for both tobacco and cotton in Zambia, implied that the two sectors should be prioritized in terms of increased budgetary allocations, which will raise agricultural GDP and drive the economy towards export diversification [28].

## **4. Econometric Method**

#### *4.1. Description of Data*

The study used time series data from References [9,17,30]. Data on real exchange rates, foreign direct investment, real GDP of Ethiopia, real GDP of trading partners, price, and real interest rates were obtained from References [27], whilst data on horticultural exports was obtained from References [9,17]. These data were analyzed using Eviews Version 9.0 (IHS Global Inc., Englewood, CO, USA).
