On the Implications of Trade Openness, Foreign Aid and Democracy for Wagner’s Law in Developing Countries: Panel Data Evidence from West African Monetary Zone (WAMZ)

Abstract

The impact of trade openness, foreign aid and democracy on government expenditure in developing countries has been emphasized in the literature in recent decades. Nonetheless, most recent studies of Wagner’s law have often neglected the increasing role played by these policy variables. This paper provides an empirical analysis of the long run implications of trade openness, foreign aid and democracy for the fulfillment of Wagner’s law in West African Monetary Zone (WAMZ) countries using panel data techniques for the period 1980–2008. The paper finds the existence of Wagner’s law in WAMZ countries, but only when the role of these policy variables has been catered for. Therefore, if these countries are to meet the fiscal convergence criteria and ensure the sustainability of a single currency area, explicit sets of restraint on the national authorities and innovative and efficient ways of domestic revenue generation necessary to ensure that government revenue keep pace with its expenditure become crucial, because monetary union may not necessarily ensure fiscal discipline.