2072-64142411-1406

10.17059/ekon.reg.2024-4-21

Asymmetric Effects of Trade Openness and National Income on Government Size in BRICS Countries: New Evidence for Wagner’s Law

Асимметричное влияние открытости торговли и национального дохода на численность правительства в странах БРИКС

https://orcid.org/0000-0002-6783-0506

Mehta

Dhyani

Мехта

Дхиани

dhyani.mehta@sls.pdpu.ac.in

https://orcid.org/0000-0003-0693-3349

Patel

Nikunj

Патель

Никундж

nikunj@nirmauni.ac.in

Pandit Deendayal Energy UniversityЭнергетический университет Пандита Диндаял

Nirma UniversityУниверситет Нирма

20413001314

2024

Dhyani Mehta, Nikunj Patel

Дхиани Мехта, Никундж Патель

CC BY 4.0

https://www.economyofregions.org/ojs/index.php/er/article/view/806

https://www.economyofregions.org/ojs/index.php/er/article/download/806/393

The growing economic prominence of BRICS nations (Brazil, Russia, India, China, and South Africa) has attracted considerable attention to the macroeconomic dynamics driving their development. As these economies grow rapidly and become more integrated into global markets, it becomes increasingly difficult to balance economic growth, trade liberalization, and sustainable fiscal policies. Government size, a key factor in fiscal management, tends to increase with national income (as suggested by Wagner’s Law) and in response to trade openness (as outlined by the Compensation Hypothesis). Understanding these dynamics is crucial due to the unique fiscal pressures and global competitiveness faced by BRICS countries. This study investigates the validity of Wagner’s law and the Compensation Hypothesis in the context of BRICS. Using a panel nonlinear autoregressive distributed lag model on annual panel data from 1999 to 2023, our findings confirm Wagner’s law, showing a positive relationship between economic growth and government size. Additionally, the results support the Compensation Hypothesis, indicating that trade openness enhances government size. This study underscores the potential trade-offs between promoting economic growth and trade liberalization, as these strategies may inadvertently expand the government sector and affect fiscal stability. As BRICS economies continue to integrate into global markets, this research contributes to the discussion on Wagner’s law and trade openness, offering new insights into sustainable fiscal policies, government expenditure optimization, and the pursuit of global competitiveness and economic growth within the BRICS framework.

Растущее экономическое влияние стран БРИКС (Бразилия, Россия, Индия, Китай и Южная Африка) привлекло значительное внимание к макроэкономической динамике, стимулирующей их развитие. Поскольку эти страны с быстро растущей экономикой все более интегрируются в глобальные рынки, становится все труднее сбалансировать их экономический рост, либерализацию торговли и устойчивую налогово-бюджетную политику. Согласно гипотезе компенсации, чем более открытой становится торговля в этих странах, тем выше национальный доход (как предполагает закон Вагнера) и численность правительства как ключевого механизма управления финансами. Для стран БРИКС, которые сейчас испытывают существенное фискальное давление и борются за глобальную конкурентоспособность, понимание этой динамики особенно важно. Цель настоящего исследования — подтвердить закон Вагнера и гипотезу компенсации в контексте БРИКС. С помощью панельной нелинейной модели авторегрессии с распределенным лагом на основе годовых панельных данных с 1999 по 2023 гг. удалось подтвердить закон Вагнера, продемонстрировав положительную взаимосвязь между экономическим ростом и численностью правительства. Кроме того, результаты исследования подтверждают гипотезу компенсации, указывая на то, что открытость торговли также приводит к росту численности правительства. Это исследование подчеркивает необходимость баланса между содействием экономическому росту и либерализацией торговли, поскольку каждая из этих стратегий может привести к раздуванию государственного сектора и повлиять на финансовую стабильность. Поскольку страны БРИКС продолжают интегрироваться в глобальные рынки, это исследование вносит вклад в дискуссию о законе Вагнера и открытости торговли, предлагая новое понимание устойчивой бюджетной политики, оптимизации государственных расходов, глобальной конкурентоспособности и экономическому росту в странах БРИКС.

Panel NARDL, Trade Openness, Government Size, Wagner’s law, Compensation Hypothesis, BRICS

панель NARDL, открытость торговли, численность правительства, закон Вагнера, гипотеза компенсации, БРИКС

Abdullah, H., Habibullah, M. S., & Baharumshah, A. Z. (2009). Fiscal Policy, Institutions and Economic Growth in Asian Economies: Evidence from the Pedroni’s Cointegration Approach. International Journal of Business and Management, 3 (4), 117–135. https://doi.org/10.5539/ijbm.v3n4p107

Adil, M. H., Ganaie, A. A., & Kamaiah, B. (2017). Wagner’s hypothesis: an empirical verification. IIM Kozhikode Society & Management Review, 6 (1), 1–12.

Afonso, A., & Alves, J. (2017). Reconsidering Wagner’s law: Evidence from the functions of the government. Applied Economics Letters, 24 (5), 346–350. http://dx.doi.org/10.1080/13504851.2016.1192267

Ahsan, S. M., Kwan, A. C. C., & Sahni, B. S. (1996). Cointegration and Wagner’s hypothesis: time series evidence for Canada. Applied Economics, 28 (8), 1055–1058. http://dx.doi.org/10.1080/000368496328182

Akitoby, B., Clements, B., Gupta, S., & Inchauste, G. (2006). Public spending, voracity, and Wagner’s law in developing countries. European Journal of Political Economy, 22 (4), 908–924. http://dx.doi.org/10.1016/j.ejpoleco.2005.12.001

Al-Yousif, Y. K. (1997). Exports and economic growth:some empirical evidence from the Arab Gulf countries. Applied Economics, 29 (6), 693–697. https://doi.org/10.1080/000368497326624

Amadi, S. N., & Dave, O. G. (2022). Government Infrastructure Spending On Growth Of The Nigeria Economy (1981–2019). International Journal of Progressive Sciences and Technologies, 30 (2), 295–303.

Ansari, M. I., Gordon, D. V., & Akuamoah, C. (1997). Keynes versus Wagner: public expenditure and national income for three African countries. Applied Economics, 29 (4), 543–550. https://doi.org/10.1080/000368497327038

Antonis, A., Constantinos, K., & Persefoni, T. (2013). Wagner’s law versus Keynesian hypothesis: evidence from pre-WWII Greece. Panoeconomicus, 60 (4), 457–472. http://dx.doi.org/10.2298/PAN1304457A

Apurv, R., & Uzma, S. H. (2021). The impact of infrastructure investment and development on economic growth on BRICS. Indian Growth and Development Review, 14 (1), 122–147. https://doi.org/10.1108/IGDR-01-2020–0007

Babatunde, M. A. (2011). A bound testing analysis of Wagner’s law in Nigeria: 1970–2006. Applied Economics, 43 (21), 2843–2850. http://dx.doi.org/10.1080/00036840903425012

Bampatsou, C., & Halkos, G. (2019). Economic growth, efficiency and environmental elasticity for the G7 countries. Energy Policy, 130, 355–360. https://doi.org/10.1016/j.enpol.2019.04.017

Benarroch, M., & Pandey, M. (2008). Trade openness and government size. Economics Letters, 101 (3), 157–159. https://doi.org/10.1016/j.econlet.2008.06.016

Benarroch, M., & Pandey, M. (2012). The relationship between trade openness and government size: Does disaggregating government expenditure matter? Journal of Macroeconomics, 34 (1), 239–252. https://doi.org/10.1016/j.jmacro.2011.11.002

Bernauer, T., & Achini, C. (2000). From ‘Real’ to ‘Virtual’ states? European Journal of International Relations, 6 (2), 223–276. https://doi.org/10.1177/1354066100006002003

Bertsatos, G., Sakellaris, P., & Tsionas, M. G. (2022). Extensions of the Pesaran, Shin and Smith (2001) bounds testing procedure. Empirical Economics, 62 (2), 605–634. https://doi.org/10.1007/s00181-021-02041-3

Blanchard, O. (2009). The state of macro. Annual Review of Economics, 1 (1), 209–228. https://doi.org/10.1146/annurev.economics.050708.142952

Breitung, J. (2000). The local power of some unit root tests for panel data. In Baltagi, B. H., Fomby, T. B. and Carter Hill, R. (Ed.), Nonstationary Panels, Panel Cointegration, and Dynamic Panels (Advances in Econometrics, Vol. 15) (pp. 161–177). Emerald Group Publishing Limited. https://doi.org/10.1016/S0731–9053(00)15006-6

Breusch, T. S., & Pagan, A. R. (1980). The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics. The Review of Economic Studies, 47 (1), 239–253. https://doi.org/10.2307/2297111

Buthelezi, E. M. (2023). Impact of government expenditure on economic growth in different states in South Africa. Cogent Economics & Finance, 11 (1). https://doi.org/10.1080/23322039.2023.2209959

Chandran Govindaraju, V. G. R., Rao, R., & Anwar, S. (2011). Economic growth and government spending in Malaysia: A re-examination of Wagner and Keynesian views. Economic Change and Restructuring, 44 (3), 203–219. http://dx.doi.org/10.1007/s10644-010-9099-z

Chang, T., Liu, W., & Caudill, S. B. (2004). A re-examination of Wagner’s law for ten countries based on cointegration and error-correction modelling techniques. Applied Financial Economics, 14 (8), 577–589. http://dx.doi.org/10.1080/0960310042000233872

Chatterji, M., Mohan, S., & Dastidiar, S. G. (2014). Relationship Between Trade Openness and Economic Growth of India: a Time Series Analysis. Journal of Academic Research in Economics, 6 (1), 45–69.

Dixit, V. (2014). Relation between Trade Openness, Capital Openness and Government Size in India. Foreign Trade Review, 49 (1), 1–29. https://doi.org/10.1177/0015732513515987

Dumitrescu, E.-I., & Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic Modelling, 29 (4), 1450–1460. https://doi.org/10.1016/j.econmod.2012.02.014

Funashima, Y., & Hiraga, K. (2017). Wagner’s law, fiscal discipline, and intergovernmental transfer: empirical evidence at the US and German state levels. International Tax and Public Finance, 24 (4), 652–677. https://doi.org/10.1007/s10797-017-9458-z

Gaibulloev, K., Sandler, T., & Sul, D. (2014). Dynamic Panel Analysis under Cross-Sectional Dependence. Political Analysis, 22 (2), 258–273. https://doi.org/10.1093/pan/mpt029

Glasure, Y. U., & Lee, A. R. (1999). The export-led growth hypothesis: The role of the exchange rate, money, and government expenditure from Korea. Atlantic Economic Journal, 27 (3), 260–272. https://doi.org/10.1007/BF02299577

Goffman, I. J., & Mahar, D. J. (1971). The growth of public expenditures in selected developing nations: Six Caribbean countries 1940-65. Public Finance= Finances Publiques, 26 (1), 57–74.

Holmes, J. M., & Hutton, P. A. (1990). On the casual relationship between government expenditures and national income. The Review of Economics and Statistics, 72 (1), 87–95.

Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115 (1), 53–74. https://doi.org/10.1016/S0304–4076(03)00092-7

Islam, M. Q. (2004). The long run relationship between openness and government size: evidence from bounds test. Applied Economics, 36 (9), 995–1000. https://doi.org/10.1080/0003684042000233221

Jain, M., Nagpal, A., & Jain, A. (2021). Government Size and Economic Growth: An Empirical Examination of Selected Emerging Economies. South Asian Journal of Macroeconomics and Public Finance, 10 (1), 7–39. https://doi.org/10.1177/2277978720979889

Jalles, J. (2019). Wagner’s law and governments’ functions: granularity matters. Journal of Economic Studies, 46 (2), 446–466. https://doi.org/10.1108/JES-02-2018–0049

Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90 (1), 1–44. https://doi.org/10.1016/S0304–4076(98)00023-2

Karagianni, S., Pempetzoglou, M., & Strikou, S. (2002). Testing Wagner’s law for the European Union economies. Journal of Applied Business Research (JABR), 18 (4).

Karedla, Y., Mishra, R., & Patel, N. (2021). The impact of economic growth, trade openness and manufacturing on CO2 emissions in India: an autoregressive distributive lag (ARDL) bounds test approach. Journal of Economics, Finance and Administrative Science, 26 (52), 376–389. https://doi.org/10.1108/JEFAS-05-2021–0057

Kargi, B. (2016). Is Wagner’s Law Applicable for Fast Growing Economies? Brics and Matik Countries. Timisoara Journal of Economics and Business, 9 (1), 1–15. https://doi.org/10.1515/tjeb-2016–0001

Kaur, K. (2018). Composition of Public Expenditure and Economic Growth in India: A Time Series Analysis. International Journal of Social Science, 7 (4), 505–514.

Kaur, K., & Afifa, U. (2017). Testing Wagner’s Law in India: A cointegration and causality analysis. Communications in Statistics-Theory and Methods, 46 (17), 8510–8520. http://dx.doi.org/10.1080/03610926.2016.1183788

Keho, Y. (2016). Testing Wagner’s law in the presence of structural changes: New evidence from six African countries (1960–2013). International Journal of Economics and Financial Issues, 6 (1), 1–6.

Kesavarajah, M. (2012). Wagner’s Law in Sri Lanka: An Econometric Analysis. ISRN Economics, 2012, 1–8. https://doi.org/10.5402/2012/573826

Khan, M. S., & Aziz, G. (2011). Neoclassical Versus Keynesian Approach to Public Policy — The Need for Synthesis. MPRA:Munich Personal RePEc Archive, (62856).

Kirsanova, T., Satchi, M., Vines, D., & Wren-Lewis, S. (2007). Optimal fiscal policy rules in a monetary union. Journal of Money, Credit and Banking, 39 (7), 1759–1784. https://doi.org/10.1111/j.1538–4616.2007.00086.x

Kofi Ocran, M. (2011). Fiscal policy and economic growth in South Africa. Journal of Economic Studies, 38 (5), 604–618. https://doi.org/10.1108/01443581111161841

Kónya, L., & Abdullaev, B. (2018). An attempt to restore Wagner’s law of increasing state activity. Empirical Economics, 55 (4), 1569–1583. https://doi.org/10.1007/s00181-017-1339-x

Levin, A., Lin, C.-F., & Chu, C. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108 (1), 1–24. https://doi.org/10.1016/S0304–4076(01)00098-7

Li, Z., Patel, N., Liu, J., & Kautish, P. (2023). Natural resources-environmental sustainability-socio-economic drivers nexus: Insights from panel quantile regression analysis. Resources Policy, 86, 104176. https://doi.org/10.1016/j.resourpol.2023.104176

Ma, R., & Qamruzzaman, M. (2022). Nexus between government debt, economic policy uncertainty, government spending, and governmental effectiveness in BRIC nations: Evidence for linear and nonlinear assessments. Frontiers in Environmental Science, 10. https://doi.org/10.3389/fenvs.2022.952452

Magazzino, C. (2012). Wagner versus Keynes: Public spending and national income in Italy. Journal of Policy Modeling, 34 (6), 890–905. https://doi.org/10.1016/j.jpolmod.2012.05.012

Magazzino, C., Giolli, L., & Mele, M. (2015). Wagner’s Law and Peacock and Wiseman’s displacement effect in European Union countries: A panel data study. International Journal of Economics and Financial Issues, 5 (3), 812–819.

Mahdavi, S. (2011). A re-examination of Wagner’s Law using US total state and local expenditure and its sub-categories. Journal of Economic Studies, 38 (4), 398–413. https://doi.org/10.1108/01443581111160860

Mallick, H. (2008). Government spending, trade openness and economic growth in India: A time series analysis. https://opendocs.ids.ac.uk/opendocs/handle/20.500.12413/3120 (Date of access:)

Mann, A. J. (1980). Wagner’s law: An econometric test for Mexico, 1925–1976. National Tax Journal, 33 (2), 189–201. https://doi.org/10.1086/NTJ41862301

Mazorodze, B. T. (2018). Government expenditure and economic growth in Zimbabwe. African Journal of Business and Economic Research, 13 (2), 183–202. https://doi.org/10.31920/1750–4562/2018/v13n2a9

Mehta, D. (2023). Impact of Trade and Capital Openness on the Government Size of Russia. R-Economy, 9 (2), 173–186. https://doi.org/10.15826/recon.2023.9.2.011

Mehta, D., & Derbeneva, V. (2024). Impact of environmental fiscal reforms on carbon emissions of EURO-4 countries: CS-NARDL approach. International Journal of Thermofluids, 21, 100550. https://doi.org/10.1016/j.ijft.2023.100550

Mensah, B. D., & Abdul-Mumuni, A. (2023). Asymmetric effect of remittances and financial development on carbon emissions in sub-Saharan Africa: an application of panel NARDL approach. International Journal of Energy Sector Management, 17 (5), 865–886. https://doi.org/10.1108/IJESM-03-2022–0016

Mohsin, M., Naidu, C. R., & Kamaiah, B. (1995). Wagner’s hypothesis: Evidence from Indian states. Indian Economic Journal, 43 (1), 76.

Molana, H., Montagna, C., & Violato, M. (2011). On the causal relationship between trade-openness and government-size: evidence from OECD countries. International Journal of Public Policy, 7 (4/5/6), 226. https://doi.org/10.1504/IJPP.2011.043562

Moore, S. (2016). Wagner in Ireland: An econometric analysis. The Economic and Social Review, 47 (1), 69–103.

Musgrave, R. A. (1969). Cost-benefit analysis and the theory of public finance. Journal of Economic Literature, 7 (3), 797–806.

Narayan, P. K., Nielsen, I., & Smyth, R. (2008). Panel data, cointegration, causality and Wagner’s law: Empirical evidence from Chinese provinces. China Economic Review, 19 (2), 297–307.

Nguea, S. M. (2020). Openness and Government Size in Sub-Saharan African countries. Economics Bulletin, 40 (4), 2669–2676.

Nworji, I. D., Okwu, A. T., Obiwuru, T. C., & Nworji, L. O. (2012). Effects of public expenditure on economic growth in Nigeria: A disaggregated time series analysis. International Journal of Management Sciences and Business Research, 1 (7), 1–15.

Odugbesan, J. A., Sunday, T. A., & Olowu, G. (2021). Asymmetric effect of financial development and remittance on economic growth in MINT economies: an application of panel NARDL. Future Business Journal, 7 (1). https://doi.org/10.1186/s43093-021-00085-6

Oxley, L. (1994). Cointegration, causality and Wagner’s law: A test for Britain 1870–1913. Scottish Journal of Political Economy, 41 (3), 286–298.

Patel, N., Kautish, P., & Shahbaz, M. (2023). Unveiling the complexities of sustainable development: An investigation of economic growth, globalization and human development on carbon emissions in 64 countries. Sustainable Development, 32 (4), 3612–3639. https://doi.org/10.1002/sd.2846

Patel, N., & Mehta, D. (2023). The asymmetry effect of industrialization, financial development and globalization on CO2 emissions in India. International Journal of Thermofluids, 20, 100397. https://doi.org/10.1016/j.ijft.2023.100397

Peacock, A. T., & Wiseman, J. (1961). Front matter, the growth of public expenditure in the United Kingdom. The growth of public expenditure in the United Kingdom (pp. 30–32). Princeton University Press.

Peacock, A. T., & Wiseman, J. (1979). Approaches to the analysis of government expenditure growth. Public Finance Quarterly, 7 (1), 3–23. https://doi.org/10.1177/109114217900700101

Pedroni, P. (1999). Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors. Oxford Bulletin of Economics and Statistics, 61 (s1), 653–670. https://doi.org/10.1111/1468–0084.0610s1653

Pedroni, P. (2004). Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory, 20 (03). https://doi.org/10.1017/S0266466604203073

Pesaran, M. H. (2004). General diagnostic tests for cross-section dependence in panels. IZA Discussion Paper, (1240).

Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled Mean Group Estimation of Dynamic Heterogeneous Panels. Journal of the American Statistical Association, 94 (446), 621–634. https://doi.org/10.1080/01621459.1999.10474156

Pesaran, M. H., & Smith, R. (1995). Estimating long-run relationships from dynamic heterogeneous panels. Journal of Econometrics, 68 (1), 79–113. https://doi.org/10.1016/0304–4076(94)01644-F

Qamruzzaman, M., & Jianguo, W. (2020). The asymmetric relationship between financial development, trade openness, foreign capital flows, and renewable energy consumption: Fresh evidence from panel NARDL investigation. Renewable Energy, 159, 827–842. https://doi.org/10.1016/j.renene.2020.06.069

Rani, R., & Kumar, N. (2022). Wagner hypothesis in India: An empirical investigation from pre and post reform period. Journal of Public Affairs, 22 (1), e2395. https://doi.org/10.1002/pa.2395

Rodrik, D. (1998). Why do More Open Economies Have Bigger Governments? Journal of Political Economy, 106 (5), 997–1032. https://doi.org/10.1086/250038

Sahoo, P. (2001). Wagner’s hypothesis: further empirical evidence from India. Journal of Indian School of Political Economy, 13 (1), 45–53.

Samudram, M., Nair, M., & Vaithilingam, S. (2009). Keynes and Wagner on government expenditures and economic development: the case of a developing economy. Empirical Economics, 36 (3), 697–712. http://dx.doi.org/10.1007/s00181-008-0214-1

Şeker, A., & Özcan, S. (2015). The Relationship between high technology exports and economic growth: case of Turkey. Proceedings of International Academic Conferences, 865–884.

Sheikh, U. A., Tabash, M. I., & Asad, M. (2020). Global Financial Crisis in Effecting Asymmetrical Co-integration between Exchange Rate and Stock Indexes of South Asian Region: Application of Panel Data NARDL and ARDL Modelling Approach with Asymmetrical Granger Causility. Cogent Business & Management, 7 (1), 1843309. https://doi.org/10.1080/23311975.2020.1843309

Shelton, C. A. (2007). The size and composition of government expenditure. Journal of Public Economics, 91 (11–12), 2230–2260. https://doi.org/10.1016/j.jpubeco.2007.01.003

Singh, B., & Sahni, B. S. (1984). Causality between public expenditure and national income. The Review of Economics and Statistics, 630–644.

Srinivasan, P. (2013). Causality between public expenditure and economic growth: The indian case. International Journal of Economics and Management, 7 (2), 335–347.

Swank, D. (2001). Mobile capital, democratic institutions, and the public economy in advanced industrial societies. Journal of Comparative Policy Analysis, 3 (2), 133–162. https://doi.org/10.1023/A:1011459927907

Thornton, M., & Ulrich, M. (1999). Constituency size and government spending. Public Finance Review, 27 (6), 588–598. http://dx.doi.org/10.1177/109114219902700602

Verma, S., & Arora, R. (2010). Does the Indian Economy Support Wagner’s Law? An Econometric Analysis. Eurasian Journal of Business and Economics, 3 (5), 77–91.

Wagner, R. E., & Weber, W. E. (1977). Wagner’s law, fiscal institutions, and the growth of government. National Tax Journal, 30 (1), 59–68. https://doi.org/10.1086/NTJ41862113