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

doi:10.11648/j.ijber.20200906.12

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.

Highlights

IntroductionWagner Law has never been tested in Liberia and this study is the first of its kind to test the validity of whether the growth of national income facilitates the expansion of the spending envelop of national government in the Liberia economy
Wagner Law has never been tested in Liberia and this study is the first of its kind to test the validity of whether the growth of national income facilitates the expansion of the spending envelop of national government in the Liberia economy.The notion that as economic activities within a country increased, there is a proclivity for national government to increase its spending in order to match the increased in economic activities
The stage of our analysis is to test the system using error correction model since we have established the existence of long run relationship between the variables; that is if non stationary but I(1) series are showing the presence of long run relationship, we can run vector error correction model to examine both short and long run dynamics of the series as indicated by Engle, Granger and Clive (1987)

Summary

Introduction

Wagner Law has never been tested in Liberia and this study is the first of its kind to test the validity of whether the growth of national income facilitates the expansion of the spending envelop of national government in the Liberia economy. Countries pursuing development and transformation usually give birth to the private sector involvement, providing services and goods which were otherwise provided by the public sector This give rise to the expansion of the economy and creates the argument for the growth of the government spending to be redirected to other services, such as increased infrastructure development, the increased in the provision of security and the expansion of the government bureaucracy. This was what Wagner’s envisage when he postulated his law

Literature Examination

Testing for Long Run Relationship Between the Variables

Vector Error Correction Model

C Error Correction

Findings

Conclusion