*5.5. Factors Affecting the Growth of Horticultural Crops*

Based on ARDL (2, 2, 2, 0, 1, 0, 0, 2), the model results of the short-run and long-run estimates of factors affecting the growth performance of horticultural crops were presented in Tables 8 and 9, respectively. Accordingly, real effective exchange rate, real GDP, FDI, price, and structural break (which occurred in 2005) were revealed as significant, both in the short-run and the long-run. In addition, the result also showed that Foreign GDP was insignificant in the short-run, but significant in the long-run. However, the real interest rate was revealed as insignificant, both in the short-run and long-run.


**Table 8.** Long-run estimates.

Note: \*\*\*, \*\* and \* are significance level at 1%, 5% and 10% respectively.



Note: \*\*\* and \* are significance level at 1% and 10% respectively.

Exchange rate affects the performance of the exports through volatility and depreciation or appreciation in its value. Depreciation in the value of the local currency makes the exports of a country relatively cheaper such that more revenue will be obtained. Consequently, according to the results presented in Table 8, the partial elasticity of horticulture exports to the change in the real effective exchange rate was positive and significant at the 10% probability level. The long-run coefficient value of 9.232 for the real effective exchange rate showed that a 1% increase (depreciation in the value of local currency) in the real effective exchange rate increased the export of horticultural crops by 9.232%. In the short-run, the responsiveness of exports to a 1% increase in the real effective exchange rate was an increase of 14.286%. The lag of the variable also had a significant impact on horticulture exports. This implies that policy measures regarding the exchange rate have paramount importance in improving horticulture exports in both the short- and long-run. Contrasting to the findings of this study, other researchers have found that the impact of the exchange rate in explaining the export performance was revealed as insignificant or weak [10,11,37,38]. However, the findings of several researchers were consistent with the results of this study [3,13,14,19–23,26]. They all concluded that depreciation in the value of money had significantly affected export performance of the respective country. Furthermore, other groups of researchers confirmed that volatility in exchange rates had negatively affected the export performance in both the short-run and long-run [39,40].

The real GDP was another important variable which had significantly affected the horticultural export performance of the country, both in the short-run and long-run. ˙ Its partial elasticity was 9.447 and 25.927 in the short-run and long-run, respectively. This showed that a 1% increase in real GDP of the country will increase the export performance of the horticultural sub-sector by 9.447% and 25.927% in the short-run and long-run, respectively. The lag of the variable also had a significant role in explaining the export performance of the sector. This confirmed that as the real GDP of a country grows, more horticultural exports will be produced which will increase the possibilities of increasing horticultural exports. The results of this study were consistent with the empirical works of different researchers [11,13,18].

The partial elasticity of foreign direct investment was 0.743 and 0.605 in the short-run and long-run, respectively. It was revealed to be significant in both the short-run and long-run. The sign of the coefficient was also positive in both periods in line with the hypothesis of the study. In the short-run, a 1% increase in foreign direct investment will increase horticultural exports by 0.743%. However, the results of the literature reviewed indicate conflicting results regarding the impact of FDI on export performance. The findings of References [21,25] were positive, whilst References [11] and [19] were insignificant, and the results of Reference [29] were negative. However, Reference [29] emphasized that the impact of FDI depends on its motive. Export-oriented investments would generally contribute to export growth, whilst investments aimed at capturing domestic markets would dampen trade.

The income of the importing country was also among the important variables hypothesized to influence the horticultural export performance of the country. Even though it was revealed as insignificant in the short-run, it had influenced the export performance of the country positively at a 10% probability level in the long-run. The long-run coefficient indicated that a 1% increase in foreign income of the importing country would increase the export of horticulture by 7.221% in the long-run. The findings of many researchers are consistent with the results of this study [20,26,27]. However, some researchers had obtained a negative impact [21,25], whilst others obtained an insignificant impact of foreign income on export performance [11,14].

The real interest rate was revealed insignificant in the short-run but significant in the long-run. The price elasticity of export to one percent change in the real interest rate was 0.738% in the long-run. The sign of variable was shown negative in both periods similar to the hypothesis of the study. This result was inconsistent with the result of [21]. However, in the study by [18], real interest rate had negatively influenced the horticulture export performance of Kenya.

The significant structural break that had happened in the year 2005 was also included in the model to test the significance of the break on horticultural export performance of the country. The model results summarized in Tables 8 and 9 showed that the structural break was significant. This shows the importance of policy intervention for the improvement of the sub-sector both in the short and long-run. Thus, it can be inferred that policy development in horticultural sub-sector that had occurred before and after 2005 resulting in structural break in 2005 had significantly affected the export performance of the sub-sector.

The price coefficient was also shown as significant and positive, both in the short-run and in the long-run. An increase in international prices of horticulture exports will increase the export performance of the horticulture sub-sector by 5.539% and 8.614% in the short-run and in the long-run, respectively. The result was consistent with the results obtained in Zambia [21] and in Ghana [19].

According to the model results presented in Table 9, the coefficient of the Error Correction Model (ECM (-1)) was negative and significant confirming the existence of cointegration among variables in the model. The coefficient value of 0.472 showed that a 47% of adjustment will be made in the first year and it takes 2.12 years to return to its long-run equilibrium. After these years, the series will be at its long-run equilibrium. Finally, the stability test results of the cumulative sum of recursive residuals (CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ) showed that the model was correctly specified and stable. The result is shown using Figures 7 and 8. The recursive least squares graphs for the long-run model (Figure 9) also showed that the individual parameters are stable.

*Horticulturae* **2018**, *4*, 34

**Figure 9.** Recursive least squares graphs for the long-run model.

#### **6. Conclusions**

High dependency on traditional primary agricultural commodities and recurrent world market price fluctuations have exposed Ethiopia to export earnings instability. To overcome this problem of detrimental export earning fluctuations, different policy measures were taken to diversify the export base of the country. More importantly, horizontal diversification of trade from primary agricultural commodities into production and processing of high-value horticultural commodities have been placed by the Government of Ethiopia on the list of high priority areas. Various incentives have been provided for both foreign and domestic investors engaged in new enterprises and expansions. In addition, different institutions working in the sub-sector like the Ethiopia Horticulture Producers and Exporters Association (EHPEA) and the Ethiopian Horticulture Development Agency have been established to boost the horticultural sector. These institutions represented the sub-sector in the country, as well as internationally, and they also organized trade fairs. Furthermore, the key institution (Development Bank of Ethiopia) financing the expansion of the sector provided loans with a grace period and at relatively low interest rates. Consequently, this growing sector had recently become the fifth most important foreign earnings source for the country. However, the performance of the sector is far below its potential given the comparative advantage of the country in the region. Consequently, this study had attempted to empirically examine the factors that affected the horticulture export performance of Ethiopia, using the data for the period 1985–2016. The Autoregressive Distributed Lag (ARDL) bound test approach proposed by [35] was chosen to analyze the cointegration between horticultural exports and hypothesized variables. The results of the model showed that the real effective exchange rate, the real GDP of Ethiopia, foreign direct investment (FDI), prices, and the structural break had significantly influenced the horticultural export performance both in the short-run and the long-run. Foreign GDP and real interest rates were revealed significant only in the long-run. These significant variables have an important policy implication in improving the horticultural export performance of the country. The important policy implications of this study included: Flexibility in the exchange rate movements in line with the fundamentals of the economy, strengthening the performance of the domestic economy, attracting export-oriented investments which would contribute to export growth, and diversification of both commodities and importing countries. These are considered important policy measures to improve the horticultural export performance of Ethiopia.

**Author Contributions:** Conceptualization, Methodology, and Investigation of the study were by A.K.D. and B.O.; Writing—Original Draft Preparation by A.K.D.; Writing—Review and Editing by A.K.D., B.O., and R.G. Supervision by B.O. and R.G.

**Funding:** This research received no external funding.

**Conflicts of Interest:** The authors declare no conflict of interest.
