Archive




Volume 9, Issue 6, December 2020, Page: 375-381
The Parallel Link Between Economic Growth and the Growth of Government Spending: Wagner’s Law Visited for Liberia: A Vector Error Correction Methodology
Lester Zomatic Tenny, The Graduate School of Business and Public Administration, MBA/MPA Program, University of Liberia, Monrovia, Liberia
Received: Nov. 24, 2020;       Accepted: Dec. 9, 2020;       Published: Dec. 16, 2020
DOI: 10.11648/j.ijber.20200906.12      View  61      Downloads  44
Abstract
The objective of this paper is to investigate the validity of Wagner’s law within the context of whether it informs the growth of public expenditure for the periods 1970 to 2020 in Liberia. This study analyzed the link between economic growth, captured as Gross Domestic Product (GDP) and government spending in Liberia from 1970 to 2020. The data collected was annual time series data from the World Development Indicator (WDI), Ministry of Finance and Development Planning of Liberia and the World Bank Group website. The data on GDP and government spending were used. Vector error correction (VEC) model which shows the presence of a cointegrating equation or the presence of a long run relationship between the growth of the macroeconomy and the growth of public spending in Liberia was adopted as the suitable methodology to conduct the study. Augmented DF test as well as Unit roots to test for stationarity was used. The author used the Johansen cointegration test to test for long run relationship in the economy. Normality test, Heteroskedasticity as well as LM serial correlation tests for diagnostics were applied. The result showed a strong link between economic growths, captured as GDP and government spending in Liberia over the studied periods and therefore showed that Wagner’s Law is valid for the Liberian economy. There are several studies which show the link between the growth of the macroeconomy and the growth of (government spending) in several countries. There has never been any study on the link between these variables (GDP and Government spending) in Liberia. This study is the first of its kind and therefore contributes to the stockpile of existing literatures on Wagner’s Law. The law which is a very significant law in the parlance of public finance is attributed to the Wagner when he observed the existence of a pattern between how economy growth relative to how the public envelop grows [15]. Wagner’s observed a direct parallel relation between the two variables and concluded that the growth of the macroeconomy is directly associated with the growth of government expenditure.
Keywords
Wagner’s Law, Government Expenditure, Economic Growth (GDP), Vector Error Correction Model
To cite this article
Lester Zomatic Tenny, The Parallel Link Between Economic Growth and the Growth of Government Spending: Wagner’s Law Visited for Liberia: A Vector Error Correction Methodology, International Journal of Business and Economics Research. Vol. 9, No. 6, 2020, pp. 375-381. doi: 10.11648/j.ijber.20200906.12
Copyright
Copyright © 2020 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Reference
[1]
Abizadeh, S., Yousefi, M. (1998), “An Empirical Aanalysis of South Korea’s Economic Development and Public Expenditures Growth.” Journal of Socio-economics, Vol. 27, No. 6, pp. 687-701.
[2]
Chletos, M., Kollias, C. (1997), “Testing Wagner’s Law Using Disaggregated Public Expenditure Data in the Case of Greece: 1958-1993.” Applied Economics, Vol. 29, pp. 371-377.
[3]
Gatauwa, J. (2014). The 2008 Global Economic Crisis and Public Expenditure: A Critical Review of the Literature. Advances in Management & Applied Economics, vol. 4, no. 2.
[4]
Henrekson, M. (1993) Wagner’s law: A spurious relationship? Public Finance, 49 (2).
[5]
Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on cointegration with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52, 169-210.
[6]
Johansen, S. (1988) Statistical analysis of cointegration vectors, journal of economic dynamics and control, vol. 12, no. 2-3.
[7]
Olomola, P. A. (2004) “Cointegration analysis-causality testing and Wagner’s law: the case of Nigeria,” Journal of Social and Economic Development, vol. 6, no. 1.
[8]
Musgrave, R. (1969) Theories of fiscal federalism. Public finance vol. 24, issue 4.
[9]
Musgrave, R. A., (1969). Fiscal System. Yale University Press, New Haven.
[10]
Peacock, A. and Scott, A. (2000) the curious attraction of Wagner’s law.
[11]
Ram, R., 1986, Government size and economic growth: a new framework and some evidence from cross-section and time-series data, The American Economic Review 76, 191-203.
[12]
Rowley, C. K. and Tollison, R. D. (1994) Peacock and Wiseman on the growth of Public Expenditure. Public Choice, Vol. 78, pp. 125-128.
[13]
Tang, T. C., Tuck, L. Cheong, H. (2001) Testing the relationship between government expenditure and national income in Malaysia. Analisis, 8 (1&2). pp. 37-51. ISSN 0127-8983.
[14]
Timm, H. (1961) ‘Das Gesetz der wachsenden staatsausgaben’ Finanz Archiv/ Public finance analysis, 21 (2), pp. 201-247.
[15]
Wagner, A. (1883). Classics in Theory of Public Finance. Macmillan, London.
Browse journals by subject