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Growth Empirics: Structural Transformation and Sectoral Interdependencies of Sri Lanka

Publication | April 2017
Growth Empirics: Structural Transformation and Sectoral Interdependencies of Sri Lanka

Globalization has had an impact on Sri Lanka’s economic growth and structural changes, particularly in agriculture.

Even though the impacts of globalization on economic growth and structural changes are inevitable, many developing countries are slowly transformed in the process. We examine the impact of structural transformation of Sri Lanka’s economy on sectoral interdependencies to provide evidence for policy making. We investigate the relationship between agricultural, industrial, and service-related gross domestic product (GDP) under (i) an open economic policy setting, (ii) different government policy regimes, and (iii) major policy eras from 1950 to 2015. We used a time-series econometric method, vector autoregression, including causality analysis, and Gregory-Hansen cointegration, for estimating a long-run relationship in sectoral growth. The empirical investigations revealed an existence of unidirectional causality toward agricultural to industrial GDP, and bidirectional causality between agricultural and service GDP in terms of Sri Lanka’s economy. The effect of Gregory-Hansen co-integration affirmed a long-run nexus in agricultural growth positively with industrial and service growth. Apart from that, the evidence of structural change through open economic policies depicted a significant impact between pre-open economic and post-open economic policies for a drastic economic growth even under structural break. Although none of the policy regimes have prejudiced economic growth, reforms can be initiated to revive economic growth and the promotion of service sector-related economic systems is desirable with reforming policies.

WORKING PAPER NO: 728