Impact of trade openness on economic growth in Sri Lanka

Abstract

Introduction The long run linkage between trade openness and economic growth is a debatable economic phenomenon in development economics literature. In contrast, there is a greater acceptance among most of the economists, academicians and policy planners that trade openness potentially enhances economic growth. However, some economists believe that trade openness itself does not matter for economic growth since the level of institutional development determines how countries respond to the situation imposed by international competition (Stensnes, 2006). Sri Lanka is a lower middle income country in the region of South Asia which mostly followed protectionist trade policies in the initial phases of economic development due to the excessive protection of domestic industries, foreign competition and protective balance of payments movements. However, Sri Lanka liberalized its trade in 1977, being the first country to open up the economy in South Asia. In addition to that Sri Lanka started to move forward in the direction of intra-regional and international trade by liberalizing its trade policies to some extent. It is with this backdrop, this paper is an attempt to examine the relationship of trade openness and economic growth in Sri Lanka.