The Implications of Openness for Wagner's Law. An International Comparison of 20 Countries, 1971-2000

This paper revitalizes the Wagner's law by integrating to its literature the increasingly essential role played by openness. It has been recently hypothesized that the growing size of the public sector in both developed and developing economies could be explained by the increasing degree of openness. We therefore believe that if this is so, then by simply testing the conventional wisdom whether public expenditure grows as output grows (the Wagner's Law), and isolating the entire process of openness, may clearly lead to specification bias. Consequently, to improve on the robustness of econometric findings pertaining to this law, it is but necessary to control for openness. Thus, in this paper, we test the validity of the law, after controlling for openness, through a panel of 20 mixed economies over 30 years. Using alternative econometric scenarios, we conclude that Wagner's law is not a myth and its validity is robustly supported as and when economies transit to become more open