Abstract
This study examines the export led growth (ELG) hypothesis for Sri Lanka on the basis of annual data for the period 1981 to 2012, drawn from the World Bank (WDI) data bank. The period is selected on the grounds that during the period the Sri Lankan economy has been liberalized and in a liberalized economy it is expected that the trade sector plays a key role in national income determination. The hypothesis is tested with simple GDP and GDP net of exports as proposed by Sharma and Panagiotidis (2005). Johansen cointegration (1988) test is used to check the long run association which rejected the hypothesis of any long run association between export and GDP and GDP net of exports. Same results are also revealed by Granger causality (1969) and existence of short run relationship between exports and GDP and GDP net of exports is also rejected by VAR. However, Granger cause between imports and investment is noticed which run from imports to investment and from investment to imports respectively at 5% and 10% level of significance. Unidirectional causality is also recorded, at 05% level of significance, between investment and unemployment which run from investment to unemployment. However, no empirical evidence in support of ELG hypothesis for Sri Lanka is found.
Highlights
Economic growth is the corner stone of all economic policies and export is considered the engine of economic growth since revelation of the theory of comparative advantage
In this case we examine the export led growth hypothesis for the case of Sri Lanka to see whether exports or imports have any impact on the GDP or not
The Johansen cointegration test was applied for testing cointegration and the test results failed to provide any evidence in support of long run relationship among GDP and GDP net of exports and exports and imports
Summary
Economic growth is the corner stone of all economic policies and export is considered the engine of economic growth since revelation of the theory of comparative advantage. The neo-classical export led growth (ELG) hypothesis premise that export promotes economies of scale, technological progress, production of higher quality goods and services eliminate unemployment of labor and other factors of production and reduce economic inefficiencies and promote economic growth (Helpman and Krugman 1985; Kruger 1985, Rodrik 1988 and Voivodas 1973) This thinking has arisen from the observation that exports create income and employment for the domestic factors of production and is based on the macro-economic argument that exports are injunction into the circular flow of income. A third row of economists believe that the relation between economic growth and exports are bi-directional (Helpman and Krugman 1985; Ghartey 1993 and Kunst and Marin 1989 etc) This school of thought believe that trade openness is the best option for the promotion of economic goals like growth and prosperity and elimination of economic inefficiency all over the world. The development of cointegration and especially Granger (1969) causality technique, Johansen (1988) test for cointegration spurred the fashion of testing the export led growth and related hypothesis with stationary data
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