Testing Wagner’s Law for sub-Saharan Africa: A panel cointegration and causality approach

Abstract

Wagner’s law relates the positive relation between public spending and economic activity, where greater economic activity leads to increased public spending. Using Panel unit root, cointegration, Fully Modified Ordinary Least Squares (FMOLS) and Granger causality procedures this paper seeks to test the validity of Wagner’s law for a group of sixteen sub-Saharan African countries during the period 2002-2015. The findings show validity for Wagner’s law when “productive” government expenditure is taken as the measure of public spending. Compared to “productive” government expenditure, total government expenditure shows weaker evidence for the validity of Wagner’s law. Therefore governments in SSA should direct more spending towards productive expenditures if they seek to exploit growth benefits in the long run.

Keywords

• wagner’s law
• panel cointegration
• sub-saharan africa
• fmols granger causality