The dynamic linkages between economic growth and sectoral growth : empirical evidence from Sri Lanka

Abstract

Introduction

The Sri Lankan economy has been undergoing a structural change over the last few decades. Agriculture, Industry and Services sectors play an important role in Sri Lanka’s economic growth. The contribution of the agricultural sector to national GDP has been fast declining while industrial and service sectors are dominating and have been showing remarkable improvements. Experiences of the developed economies have shown that the sectoral growth process is highly unbalanced (Sastry et al., 2003). Most early development strategies, advocated by Rosenstein-Rodan, Nurkse, and Hirshman among others, emphasized industrial development as the main source of economic growth (Schiff and Valdez, 1998). The role of agriculture in generating economic growth was shown to be minimal with the experience of the newly industrialized countries and others. The services sector was identified as an emerging sector. Based on this, the key sector would stimulate greater economic activity in other sectors and thus have a large multiplier effect on growth and development. Therefore a proper understanding of sectoral growth is necessary for designing appropriate long run strategies to achieve a sustainable growth rate in real GDP.

While most of the literature mainly focuses on the determinants of aggregate growth, the sectoral growth literature mainly builds on the dual economic model originating in Lewis (1954) and Hirshman (1958). The dual economic model seeks to explain economic growth by emphasizing the role of sectors. Based on this theoretical context, there is no in-depth study on the inter relationship between sectoral growth and economic growth in Sri Lanka. Thus, this study attempts to examine the relationship among sectors and economic growth in Sri Lanka.