Testing the validity of Wagner’s law in the Namibian context: a Toda-Yamamoto (TY) granger causality approach, 1991-2013

Abstract

This paper examines the validity of Wagner’s (1883) hypothesis on the direction of causality between sectoral public expenditures and economic growth in Namibia for the period 1991- 2013. It focuses on public expenditure on education, health and capital goods. Wagner law states that an increase in economic activity would lead to an increase in public expenditure while Keynesian law states that an increase in public expenditure would lead to an increase in economic activity. The bounds testing to cointegration also known as Autoregressive Distributed Lag (ARDL) proposed by Pesaran et al. (2001) is used to test for cointegration between variables while the modified version of Granger Causality test proposed by Toda and Yamamoto (TY) (1995) is utilised to determine the direction of causality. The bounds test to cointegration reveals long-run relationship between economic growth proxied by real Gross Domestic product (GDP) and public expenditure components. The results of TY Granger Causality indicate bidirectional causality between education expenditure and economic growth as well as between capital expenditure and economic growth which validates both the Wagner’s Law and Keynesian Law. Thus, the government of the Republic of Namibia should continue increasing the public expenditure on education and capital goods as there is simultaneous cause and effect between economic growth and public expenditure on both education and capital goods based on the results of this study.

Keywords: Public Expenditure, Economic Growth, Wagner’s law, Namibia, South Africa