Services Exports and Economic Growth in Sri Lanka: An Anatomy of GDP Components

Abstract

This study examines the causality relationship not only between services exports and overall GDP but also between services exports and GDP components, using annual time series data of Sri Lanka from 1981 to 2013. The results show that (1) export-led growth hypothesis holds for services exports of Sri Lanka, and (2) there exist unidirectional causality from services exports to household consumption, feedback effect of services exports on the gross capital formation and unidirectional causality from government expenditure to services exports. The causality channel of services exports causing economic growth via gross capital formation is empirically supporting current economic growth theory. Therefore, a successful and sustained economic growth for Sri Lanka needs more allocation of earning from services exports towards the gross capital formation.