Services Exports and Economic Growth in Sri Lanka: Does the Export-Led Growth Hypothesis Hold for Services Exports?

Abstract

Export-led growth hypothesis (ELGH) claims that there is a positive relationship between exports and long-run economic growth. This research study tests the ELGH in the case of services exports analyzing annual time series data from 1984 to 2013 in Sri Lanka. The study employs Granger no-causality procedure developed by Toda and Yamamoto in a vector autoregressive model (VAR) to identify the causality relationship between services exports and GDP. The findings indicate that unidirectional causality is running from services exports to economic growth in Sri Lanka. Therefore, ELGH holds for services exports of Sri Lanka. The results are remained unchanged in the different lag structures and order of integration. Hence, policies to encourage services exports could be of an important driver of Sri Lanka’s long-run economic growth.