An Examination of the Validity of Wagner’s Public Expenditure Growth and Economic Growth in Nigeria (1990 – 2010)

Topics: Gross domestic product, Government spending, Tax Pages: 47 (12891 words) Published: May 14, 2013


In the nineteenth century, public expenditure under the influence of the classical economists, played a limited role in economic activity. There was neither any sound classification of government expenditure nor any standard laid on which all such expenditures should be based. However, in the latter part of the nineteenth century, Wagner (1883) observed that there exists a relationship between economic growth and public spending. This observation was later formulated as ‘Wagner’s Law of Increasing State Activities’. The fundamental idea behind this relationship is that the growth in public expenditure is a natural consequence of economic growth. In other words, the percentage share of public expenditure increases with an increase in gross domestic product. That is, the growth elasticity of public expenditure is greater than one. According to Wagner, the reason behind the expansion of state activities is a practical approach and is not based upon any formula. Rowley and Tollison (1994) in their study compared the Wagner’s law with the principle of comparative advantage. In their opinion, ‘Wagner’s law explains the complementarity between the growth of the industrial economy and the associated growth in demand for public services of an economic character (such as transport and communication networks, waste disposal, etc.) undertaken ordinarily by the government agencies. When the comparative advantage of government declines, the share of public expenditure in total GDP also declines (quoted in Peacock and Scott, 2000). Nigeria as a country is blessed with an abundance of resources – human and material. Over the years, these resources have been put to use leading to economic growth. In the same vein, government expenditure has also increased tremendously. The researcher thus asks: Is there a long-run equilibrium between economic growth and government expenditure in Nigeria within the period 1990 and 2010? To this end, the null hypothesis is: Ho: µ: There is no long-run equilibrium between government expenditure and economic growth in Nigeria. This work intends to examine these growths and see if they comply with the Wagner’s law of expanding State spending. Theoretical Framework

Wagner (1883) in his law of increasing state activities states that there is a persistent tendency both towards an ‘extensive’ and an ‘intensive’ increase in the functions of the state. New functions are continually being undertaken and old ones are being performed more efficiently and on an extended scale that increases the spending of the Government. Hence, more and more public expenditure is resorted for performing these activities. Thus, social progress brought an increase in state activity which in turn meant more government expenditure (Henrekson, 1993). Wagner had given three main reasons of increasing government expenditure with economic growth. Firstly, with economic growth, industrialization and modernization would take place which will diminish the role of public sector for private one. This continuous diminishing share of the public sector in economic activity leads to more government expenditure for regulating the private sector. For example, saving the labor class from exploitation (in the private sector) would require additional expenditure on contractual enforcement as well as on law and order which will lead to increase in public expenditure. Secondly, the rise in real income would lead to more demand for basic infrastructure particularly education and health facilities and, as Wagner asserts, it is the government that provides these facilities more efficiently than the private sector. Finally, to remove monopolistic tendencies in a country and to enhance economic efficiency in that sector where lumpy investment is required (such as railways), government...
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