Structural Analysis of a Developing Economy Using the Conventional and Augmented Input-Output Matrix Methods — A Comparison for Sri Lanka

This paper explains why and how the conventional Input-Output Method should be modified to develop the Augmented Input-Output Matrix Method in order to study the structure of a developing economy using Multiplier and Linkage Analysis. This alternative methodology with an endogenous Household Sector is expected to provide a better picture of the structure of the economy by treating demand as partially endogenous and allowing for induced linkage effects transmitted across various sectors of the economy. In contrast, such induced linkage effects are absent in the conventional methodology which is based on the technical relationships of production alone. Applying the two methods on the economy of Sri Lanka using the Input-Output Tables for 1986 and 1994, we find that the Augmented Input-Output Matrix Method changes the relative importance of the various sectors in terms of their output multipliers and backward linkage strengths, for each of the two years. Overtime, however, the Augmented Input-Output Matrix Method shows less variations in the multipliers, linkages and the resulting key sectors of the economy while rendering the economy more traditional and service-oriented in character. Manufacturing and allied sectors are more often absent than present among the strong or key sectors of the economy. Economic Liberalization was initiated in the 1970’s in Sri Lanka. But the economy has not yet experienced any fundamental change in its structure. The results of the Augmented Matrix Method suggest that the economy should be more diversified and modernized in order to fully reap the benefits of liberalization in terms of economic growth. © 2005, The Indian Econometric Society.