During the last two decades the role of international trade and flow of foreign capital have received considerable attention in the literature. Various studies have examined the impact of export instability and capital instability on economic growth in less developed countries.1 Empirical evidence supports the hypothesis of a deleterious impact of export instability on economic growth. However, some studies also indicated that the relationship was unstable but positive with economic growth.2 Yet there are no systematic empirical investigations into the implied links between export diversification and long-term economic growth, particularly in the case of South Asian countries. The major concern regarding export instability is that it retards economic growth. The theoretical rationale for the same is that export instability creates uncertainty in the supply of foreign exchange earnings, discourages capital formation and hence hampers economic growth.3 Another notion is that capital instability affects economic growth more significantly than that of exports instability.4 When a country uses other sources to finance development than export earnings, it leads to forced savings and foreign aid for funding investment projects, and then the speed and volume of capital formation determines economic growth, not the instability of export earnings. Thus, if there is instability in mobilising capital itself, it will be pernicious to output growth. As a result, it will affect economic growth more than export earning instability.