The impact of sectoral growth on Economic Growth in Sri Lanka

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.