Revisiting the Export-led Growth Hypothesis for Liberalised Sri Lanka

The export-led growth (ELG) hypothesis postulates the existence of a strong positive linear relationship between exports and output growth in the long run for a given economy. The empirical nexus between exports and economic growth so far is mixed. Thus, this paper aims to empirically shed more light on the causal relationship between exports and economic growth in the context of a small open economy by re-investigating the validity of the ELG hypothesis for Sri Lanka. Using time series data on Gross Domestic Product (GDP), exports, imports and remittances over four decades from 1980 to 2019 during which Sri Lanka had a liberalised economy regime in place, Johansen cointegration test results provide evidence of a long run association among the variables. However, vector error correction model (VECM) results fail to confirm the long run relationship between exports and GDP. Consequently, this paper finds no evidence to support the validity of the ELG growth hypothesis for Sri Lanka. Hence, the findings raise the question of the efficacy of the trade policies that Sri Lanka has adopted since the early 1980s.