Inter-sectoral dynamic growth linkages: empirical evidence from Sri Lanka

Abstract

The Sri Lankan economy has been undergoing structural changes for the last few decades. The existence of dynamic linkages among the three major sectors- agriculture, industry and services of the Sri Lankan economy are examined in this paper for the period of 1960-2011. We employed graphical analysis including scatter plot, line graph, Confidence Ellipse and Nearest Neighbor fit to identify the basic features and the relationship between selected variables. The dynamic sectoral growth linkage results suggested the existence of inter-linkages across different sectors of the economy. ADF test and PP test were used to test the unit root characteristics of the time series variables. Inter temporal correlation results show that there exists a high positive statistically significant correlation between all sectors. Engel-Granger (EG) co-integration test provides further evidence for this. Error correction model estimates indicate that short run changes in Industry GDP have a positive impact on short run changes in Agriculture and services GDP The results of Granger-causality test suggested that services growth causes agricultural and industrial growth significantly. The findings implied that by developing the services sectors, agricultural and industrial growth can be stimulated.