International trade, human capital and economic growth in Sri Lanka

Trade-growth dynamics is a much-discussed issue but still relevant due to its policy implications. Contemporary research in this direction is augmented by assessing the role of human capital, trade openness, exchange rate, in addition to export and import impacting growth in countries concerned. This paper addresses such an issue in the context of a small open emerging economy Sri Lanka. The dynamics of income with export, import, exchange rate, trade openness, and human capital of Sri Lanka are explored for an extended period 1965–2017, and also for the post-reform period 1978–2017. Significant long-run associations of income with these variables for both samples are found. Both the export and import causes a rise in income since 1965, and more prominently in the post-reform period. The exchange rate and trade openness have negatively impacted income. The human capital measures also have some significant impact; however such impacts are not appreciable across the human capital measures and the sample periods. The prominent role of trade accelerating income particularly in the post-reform era signifies a leading role of the external sector of the economy. A trade-driven growth policy may be effective for Sri Lanka.