A persuasive theoretical justification for extending foreign assistance to developing countries was provided by the now famous ¡®two gap¡¯ theory. It proclaimed that these countries might not in general be able to achieve a target rate of growth because of persistent balance of payments...

This paper examines the responsiveness of Sri Lanka¡¯s trade deficit to devaluation during the post 1977 period. The results show that notwithstanding persistent devaluation the trade deficit continued to move in the wrong direction suggesting that exchange rate policy was unable to create a...