Wagner s Law in Malaysia: A New Empirical Evidence

Despite the availability of extensive research on Wagner s Law, a systematic empirical testing of the hypothesis in the context of developing countries, especially South-East Asian nations, is still lacking. Thus, the current paper attempts to reduce this gap and chooses Malaysia as a case study to test the existence of Wagner s Law. The Malaysian Government has been playing an increasingly important role in the country s industrialization process as Malaysia is pursuing the target of becoming a fully-industrialized nation by the year 2020. This suggests that Malaysia could be an example of a developing nation where government expenditure grows as the country becomes wealthier. The first to notice such a tendency was a German economist, Adolph Wagner, the author of the so-called Wagner s Law . The most important empirical finding of the present study is that there exists a long-run cointegrating relationship and a short-run but not long-run causality between economic development and government expenditure in Malaysia. This provides an additional empirical evidence to support the existence of Wagner's Law in the context of an Asian developing country, such as Malaysia.