Abstract:
This study examine the impact of sectoral growth on economic growth in Sri Lanka from 1990 to
2023, providing empirical insights into the sectoral dynamics shaping the country’s development.
Using GDP per capita as the dependent variable, the analysis employs time-series econometric
techniques, including unit root tests, Johansen cointegration, Vector Error Correction Models
(VECM), Granger causality tests, and diagnostic evaluations to capture both short-run and long-run
relationships among the sectors. The findings reveal that in the long run, all three sectors significantly
and positively contribute to economic growth, with industry and services demonstrating stronger
impacts than agriculture. In the short run, agriculture and industry exert significant positive effects on
growth, while the services sector shows a comparatively modest influence. The negative and
statistically significant error correction term confirms the presence of a stable long-run equilibrium
among the variables. Granger causality analysis indicates bidirectional causality between GDP and
agriculture and unidirectional causality from industry to GDP, reflecting sectoral interdependencies in
driving economic performance. Additionally, inflation and trade openness exhibit short-run negative
effects on economic growth, emphasizing the need for sound macroeconomic management alongside
sectoral development. The results support the structural transformation hypothesis, underlining the
importance of balanced and inclusive growth strategies that leverage sectoral strengths while
addressing evolving economic challenges. By providing robust evidence on the roles and interactions
of agriculture, industry, and services, this study offers practical insights for policymakers seeking to
design integrated development strategies to promote sustainable and resilient economic growth in Sri
Lanka. The findings also contribute to the broader development literature by illustrating how lowermiddle-income economies can navigate sectoral transitions while fostering inclusive growth.
