Is Wagner’s Law Applicable for Fast Growing Economies? Brics and Matik Countries

Abstract

This study investigates the causality relationship between public sector spending and economic growth. Although a relationship between these two variables is traditionally accepted, the direction of this causality relationship has widely been discussed. The relationship in which the increase of public sector spending moves together with the growth is called as Wagner’s Law and it is examined through developing countries’ data. As being developing country group, there is a huge literature about “BRICS countries”. The unique contribution of this study is that it defines a new developing country group as “MATIK countries” and it analyzes BRICS and MATIK (BM) countries together. Therefore, the validity of Wagner’s Law is tested on economic growth and public spending figures of these country groups which have significant population and economic size in world economy. As a result of Granger Causality Test for the period of 1961-2013, findings are obtained as Wagner’s Law is not valid for majority of BM countries, which include 10 high growing economies. This conclusion is compared with other studies, which are conducted for developing countries.