Determinants of Ethiopia’s Coffee Bilateral Trade Flows: A panel Gravity Approach

Ethiopia’s export earning is heavily dependent on primary agricultural commodities and raw materials. Coffee has been the principal export commodity of Ethiopia for many years and continued to be the leading export commodity. The objective of this paper was, therefore, to identify the determinants of Ethiopia’s coffee export to the major trading partners. Eighteen countries were selected based on the importance of the country as Ethiopia’s coffee export destination and availability of the required data. Annual panel data from 2001 to 2016 was collected from FAO database and other relevant sources. After appropriate econometric tests had been applied, random effect model was selected and used to analyze the data. From the seven variables entered into the model, four variables were found to affect Ethiopia’s coffee export significantly. GDP of the importing countries and population size of Ethiopia affect Ethiopia’s coffee export positively as expected. Weighted distance between Ethiopia and its trading partners was also found to have an expected effect, negative, on Ethiopia’s coffee export. Contrary to the hypothesis, foreign direct investment flows to Ethiopia affected Ethiopia’s coffee export negatively. Based on the results, the study draws conclusion and policy implications. To increase Ethiopia’s coffee export, government and other stakeholders should give prime attention to countries where there is high demand for Ethiopia’s coffee. Moreover, coffee exporters should exploit the existing nearest market opportunities. Finally, favourable conditions should be created for the large unemployed labor of the country to increase coffee production and export.