Wagner's Law: An Econometric Test for South Africa, 1960‐2006

Abstract

The main objective for this paper is to test Wagner's law by analysing the causal relationships between real government expenditure and real income for South Africa for the period 1960-2006. The paper tests the long-run relationship between the two variables using the autoregressive distributive lag approach to cointegration suggested by Pesaran "et al." We use the Granger non-causality test procedure developed by Toda and Yamamoto, which uses a vector autoregression model to test for the causal link between the two. Evidence of cointegration is sufficient to establish a long-run relationship between government expenditure and income. However, support for Wagner's law would require unidirectional causality from income to government expenditure. Therefore, cointegration should be seen as a necessary condition for Wagner's law, but not sufficient. This research does find a long-run relationship between real "per capita" government expenditure and real "per capita" income. Results for the short-run causality find bidirectional causality. On the basis of empirical results in this paper, one may tentatively conclude that Wagner's law finds no support in South Africa. Copyright (c) 2008 The Author. Journal compilation (c) 2008 Economic Society of South Africa.

Explaining the Growth of Government Spending in South Africa

“…(1997) find no support for a long‐run relationship between government spending and income for South Africa and two other African countries. In contrast, recent important work by Ziramba (2008) demonstrates a long‐run relationship between income and government spending in South Africa, although he also does not find unidirectional causality between these variables.…”

Explaining the Growth of Government Spending in Ghana

“…The law points to a positive relationship between government spending and per capita income (Musgrave & Musgrave 1984), although for low-growth countries, this relationship could be negative (see Fan et al 2013). Some studies find support for Wagner's law (see Ohene-Manu 2000;Iyare & Lorde 2004;Akitoby et al 2006;Ghartey 2007;Lledo et al 2009;Sakyi 2013), while others do not (see Ziramba 2008;Babatunde 2008).…”

Determinants of government size: evidence from China

“…Akitoby et al (2006) argue that, though there is strong evidence from industrialized countries, Wagner"s law does not hold true in developing countries like China. Recent studies also cast doubt on the existence of Wagner"s law (Halicioglu 2003;Lin and Song, 2002;Iyare and Lorde, 2004;Ram 1987;Sinha 2007;Zhang 2007Zhang , 2008aZiramba 2008). The existing studies usually fail to address the endogeneity issue when they test the validity of Wagner"s law.…”