Impact of trade liberalization on economic growth of Sri Lanka: an econometric investigation

Abstract

This paper examines impact of trade liberalization on economic growth of Sri Lanka. The research problem is expressed as “To what extent does trade liberalization or openness of the economy influence on economic growth of Sri Lanka?” The primary objective of the study is to investigate the causal relationships between the trade liberalization and economic growth of Sri Lanka. The study is mainly based on secondary data. In identifying the impacts of trade liberalization on growth and trade balance, data were collected on a specific time interval before and after the trade liberalization. The time period selected is from 1960 to 2007. To identify the impacts of trade liberalization, total time period is divided into two sub periods of before trade liberalization i.e. (1960 to 1976) and after trade liberalization i.e. (1977 to 20070). Since the study is based on secondary data, basically it is uses data published in annual reports of Central Bank of Sri Lanka. The variables identified in the main objective of the study are tested hypothetically, and quantitative analytical methods are applied to make accurate and reliable conclusions. Therefore, graphical presentations and regression analysis are used to assess the degree of relationships among variables concerned. Further to test the structural changes of the country, the Chow test is applied. Findings of the study confirm a significant positive relationship between trade liberalization and economic growth of Sri Lanka. The result of Chow test proves a clear change of economic growth before and after trade liberalization of the country.