TESTING THE APPLICABILITY OF WAGNERS LAW IN NIGERIAS ECONOMY (1981-2013)

CHAPTER ONE

INTRODUCTION

1.1   Backgrounds To The Study

Adolph Wagner (1835-1917) was a German economist, politician, and public finance scholar. He put forward his law of increasing public expenditures in 1893 known as wagner’s hypothesis (WH) or Wagner’s law (WL). Adolph Wagner was perhaps the first to offer a direct economic account of the increasing public expenditures. Musgrave and Musgrave (1988) noted that he anticipated the trends to be realized fifty to hundred years later that development of modern industrial society would give rise to increase political pressure for social progress and a continuous increase in public sector.

Wagner’s law was derived from the historical experiences of the early stages of industrialization in Europe and Germany in particular. Wagner identified three main factors for increased government spending. First, administrative and protective role of government will increase as a country’s economy develops. Secondly, with the expansion of economy, government expenditures on “culture and welfare” would rise, particularly on education and health. Finally the technological progress of the industrialized nations requires government to undertake certain economic services for which private sector is shy (khan, 1990).

Wagner’s law since its emergence has been the subject of intensive and extensive investigations. In particular, after the Second World War (1939-1945), when public consumption declined in favour of the private activities development. In other words, Wagner’s law states that government expenditure grows because there is an increasing demand for public goods and for the control of externalities caused by growth and development of the economy. In effect, the law also suggests that causality runs from national income to public expenditure, indicating that public expenditure is considered endogenous to the growth of national income.

In contrast, Keynesian hypothesis emphasizes that economic growth occurs as a result of rising public expenditure and is considered as an independent exogenous variable to influence the economic growth. The direction of causality runs from public expenditure to national income (Keynes, 1963). Therefore, the Keynesian and the Wagnerian approaches represent two alternative points of views towards the causality between government expenditure and aggregate income.

Thus the growth of public expenditure as a proportion of Gross National product (GNP) has received considerable attention from economists around the world, Nigeria inclusively.

TESTING THE APPLICABILITY OF WAGNERS LAW IN NIGERIAS ECONOMY (1981-2013)