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.JEL Classification: F35, H11, H50, O55

Explaining the Growth of Government Spending in Ghana

“…The paper introduces foreign aid, public debt, and democracy into the median voter model given their potential impact on government spending in developing countries. We do so because the literature has made it clear that (see Hausken et al 2004;Osei et al 2005;Battaglini & Coate 2006) these variables although ignored by other studies in Ghana (see, for example, Ohene-Manu 2000; Ofori-Abebrese 2012) are important drivers of the growth of government spending in developing countries (Osei et al 2005;Sakyi 2013). Given these considerations, a model explaining the growth of government spending in Ghana that ignores the potential impact of foreign aid, public debt and democracy does not capture fully what determines the growth of government spending.…”

“…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).…”

Desarrollo económico, inversión en transporte y urbanización en México: causalidad y efectos

“…Para Sakyi (2013) no existe relación de cointegración entre el gasto público y el ingreso per-cápita en la Zona Metropolitana de África Occidental durante 1980-2008. En cambio, para Nueva Zelanda la hipótesis que relaciona gasto y producción per cápita sí es válida (Kumar, Webber y Fargher, 2012), pero no se verifica causalidad unidireccional en Australia (Chang, et al 2004).…”