Does the relationship between public spending and economic growth change with the level of development? Empirical evidence for Ecuador, Chile and the United States

Abstract

The objective of this research is to examine the relationship between economic growth and public spending in Ecuador, Chile and the United States, respectively. We use Wagner’s law (1958) as a theoretical framework, which states that the growth of public spending is explained as a result of the increase in economic activity and should represent a period of growth, industrialization and modernization of the economy. To verify compliance with the law in countries with different levels of development, we used a long sample of time series data from the World Bank (2010) database of Ecuador, Chile and the United States. The results obtained suggest evidence in favor of the compliance of the Wagner law (1958) for the three countries in the study period, presenting statistically significant coefficients and a positive relation between both variables. As GDP increases public spending will also increase. One possible policy implication is that public spending plays a relevant rl of growth regardless of the level of economic development.