Export-led growth hypothesis (ELGH) claims that there is a positive relationship between exports and long-run economic growth. This research study tests the ELGH in the case of services exports analyzing annual time series data from 1984 to 2013 in Sri Lanka. The study employs Granger no-causality procedure developed by Toda and Yamamoto in a vector autoregressive model (VAR) to identify the causality relationship between services exports and GDP. The findings indicate that unidirectional causality is running from services exports to economic growth in Sri Lanka. Therefore, ELGH holds for services exports of Sri Lanka. The results are remained unchanged in the different lag structures and order of integration. Hence, policies to encourage services exports could be of an important driver of Sri Lanka's long-run economic growth.

No 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.

This study examines the asymmetric cointegration between services exports and economic growth in Sri Lanka. A nonlinear ARDL model is employed to analyze on the annual time series data over the period from 1984-2013.The results show that(1) ignorance of asymmetries between services exports and economic growth may lead towards misleading conclusions. (2) there is statistically significant difference in the response of economic growth to positive and negative shocks to the services exports both in long-and short-run. (3) the long-run coefficient of decreasing services exports is-0.65434 and it is six time lager than the coefficient (0.10917) of increasing services exports. Hence, economic growth is more sensitive to the downturn of services exports than upturn. This empirical evidence of asymmetries could be of important in advocating services exports policies in achieving long-run economic growth in Sri Lanka.